Assessment 2:

“A critical analysis of potential markets for IKEA’s

future expansion”

Student’s Name:

Student’s ID:

Word count:
3093
Abstract:
IKEA is a well-known furniture company serving thousands of customers in several countries of
the world. The company offers a diverse range of products including living room, kitchen, home
decor, and household appliances. Its global expansion is based on the concepts of experiential
learning and psychic distance. Nevertheless, the company is exposed to high competitive
pressure in its existing markets which makes it pertinent to explore new markets. Based on this
background, the suitability of Pakistan and Bangladesh has been assessed in this report and
suitable entry modes have been proposed. For this purpose, secondary data has been collected
from journal articles, books, reports and websites. The findings reveal that Pakistan faces
uncertainty on political and economic but its young consumer base with a huge preference for
international brands can be an untapped opportunity for IKEA. A careful assessment of
Pakistan's external environment, therefore, reveals that the franchising entry mode would be the
most suitable. Bangladesh, on the other hand, also has a supportive regulatory framework with a
growing middle class and multiple infrastructure projects but technological and economic
challenges are there. Therefore, a licensing entry mode has been suggested for entering
Bangladesh. However, to account for challenges in Pakistan and Bangladesh, IKEA should
identify funding sources, create instalment plans, target social gatherings specifically, design
alternative marketing strategies, conduct surveys to identify consumer preferences and design
rigorous licensing agreements to avoid copyright infringement and cyberattacks.
Terms of reference:
This assessment follows the analysis performed on IKEA in Assessment 1. In the first
assessment, a SWOT analysis was conducted to identify strengths, weaknesses, opportunities,
and threats surrounding IKEA. The relevant data for SWOT analysis was extracted from
secondary sources including books, websites, and journal articles. The analysis showed that the
biggest strengths of IKEA are its cost efficiency and strong brand recognition. However, the
company is highly vulnerable to disruptions in the global supply chains. Furthermore, high
competition in its existing markets, economic downturns and shifting consumer preferences are
some of the major threats faced by IKEA. Therefore, the company need to expand into new
markets and harness the potential of growing Middle class, and diversification opportunities. On
these grounds, the suitability of two new markets has been explored for IKEA in assessment 2.
 Table of Contents
Abstract:.................................................................................................................................................2
Terms of reference:...............................................................................................................................3
1.0. Introduction:..............................................................................................................................5
2.0. International Business Theory:.....................................................................................................5
2.1. Selection: why and how?................................................................................................................5
2.2. Assumptions of the theory:............................................................................................................6
2.3. Application of the Uppsala Model to IKEA:.................................................................................7
2.4. Recommendation on entry mode/ market selection:....................................................................8
3.0. Market 1-Pakistan:.........................................................................................................................8
3.1. Selection of market: why and how?...............................................................................................8
3.2. Suitability:.......................................................................................................................................9
3.2.1. Political and legal suitability:......................................................................................................9
3.2.2. Economic and financial suitability:..........................................................................................10
3.2.3. Social and cultural suitability:..................................................................................................10
3.2.4. Technological and infrastructure suitability:..........................................................................10
3.3. Entry Mode:..................................................................................................................................10
3.3.1. Selection: why and how:............................................................................................................10
3.3.2. Discussion:..................................................................................................................................11
3.3.3. Application:................................................................................................................................11
4. Market 2- Bangladesh:....................................................................................................................11
4.1. Selection of market: why and how?.............................................................................................11
4.2. Suitability:.....................................................................................................................................12
4.2.1. Political and legal suitability:....................................................................................................12
4.2.2. Economic and financial stability:.............................................................................................13
4.2.3. Social and cultural stability:.....................................................................................................13
4.2.4. Technological and infrastructure suitability:..........................................................................13
4.3. Entry Mode:..................................................................................................................................13
4.3.1. Selection: why and how?...........................................................................................................13
4.3.2. Discussion:..................................................................................................................................14
4.3.3. Application:................................................................................................................................14
5. Conclusion and Recommendations:...............................................................................................14
6. References:.......................................................................................................................................16
Appendices:..........................................................................................................................................22
1.0. Introduction:
IKEA is a Swedish company that specializes in offering home furnishing solutions. In 2023, the
company generated a revenue of 47.6 billion euros (Statista Research Department, 2024). By
now, it has reached 63 different markets where it employs 219,000 individuals at 473 stores
(Statista Research Department, 2024). IKEA follows a franchising business model (appendix 1)
and operates through 12 franchises (Inter IKEA Group, n.d.). IKEA adopts a global
standardisation strategy. However, little adjustments in products and services are made according
to the local markets (Burt et al., 2011).

Figure 1: IKEA's revenue in 2023 (Statista Research Department, 2024).

2.0. International Business Theory:

2.1. Selection: why and how?
The Uppsala model explains internationalisation as an incremental process in which firms based
on their experiential knowledge expand their activities in foreign markets (Carvalho, 2015). It is
highly flexible, can be applied to all firm sizes, and does not depend on space and time which
offers it a high generalizability in comparison to other models. However, it does not explain the
drivers of internationalisation. In addition, companies no longer follow traditional methods of
internationalisation which is the major disadvantage of using this model (Arvidsson and
Arvidsson, 2019). Nevertheless, this model has been selected due to its simplicity and a
consistent focus on explaining both the state and process of internationalisation making it a
holistic tool for addressing the case of IKEA.

2.2. Assumptions of the theory:

The Uppsala model assumes that the major barrier to the international market expansion of the
firm is the lack of foreign market knowledge (Silva et al., 2012). Companies can acquire this
knowledge only through experience. However, the development of this knowledge is dependent
on psychic distance. Psychic distance describes an uncertainty in decision-making due to a lack
of knowledge concerning foreign markets. As a result, firms expand into those markets first
which are psychically close and then into the distant markets as the firm’s knowledge increases
(Whitelock, 2002).

Another assumption of this model is based on the stepwise process of expansion marked by
sporadic export in the beginning followed by export via agents, establishing foreign sales
subsidiaries, and foreign production units respectively. The firms begin with a low commitment
mode and reach high commitment through experiential knowledge (Johanson and Wiedersheim-
Paul, 1975).
 Figure 2: Stepwise process of expansion (Forsgren & Johnsen, 1975).

2.3. Application of the Uppsala Model to IKEA:

IKEA first of all gained experience and knowledge of the domestic market and expanded in
Sweden between 1950-1959. After gaining experience in the domestic market, IKEA began
expanding in culturally similar markets with low psychic distance such as Norway (1963) and
Denmark (1969). For this purpose, IKEA initially began its operations in collaboration with an
‘export’ company PAGED. Later on, its market commitment increased which led to the
development of the first IKEA store in 1963 (IKEA Museum.com, n.d.).

After acquiring knowledge of culturally similar and nearest European markets, IKEA gradually
increased its commitment to Scandinavian markets and began expansion into distant markets
including Australia, Austria, Canada, and Germany, etc in 1970-1979 (IKEA Museum.com,
n.d.). As per the assumptions of the Uppsala model, IKEA followed a systematic and incremental
approach to internationalisation such that it first established ‘test stores’ in city centres
throughout the 1970s and then developed proper stores. In addition, the company rigorously
focused on ‘experiential learning’. For instance, due to a failed and expensive joint venture entry
into Japan in the 1970s, the company closed its export operations completely and developed Inter
IKEA Systems to acquire more control over its non-owned stores across different markets
(Jonsson and Foss, 2011). This learning experience in Japan led to a successful period from 1980
to 1989 when the company began to replicate its franchising business model in culturally distant
states like Saudi Arabia, France, and Italy and has now reached 63 different markets.

2.4. Recommendation on entry mode/ market selection:

Based on the Uppsala model, IKEA should consider exporting as an entry mode in the new
markets. This is because, at the initial stages, the market knowledge of a firm is very limited.
Under such circumstances, investing significantly in a joint venture or opening a store can be a
riskier approach. Once the company is satisfied with consumer response and acquires
considerable market knowledge, IKEA may then consider developing a foreign or wholly owned
subsidiary in a new market. However, Zekeri and Angelova (2011) argue that entry mode choice
is not straightforward and depends on a range of factors including political, legal, economic,
cultural etc. that IKEA must also consider while choosing an entry mode.

Considering market selection, the Uppsala model guides that IKEA should select those markets
which are psychologically close. In this way, IKEA can gradually manage the uncertainty based
on its experiential knowledge and start moving into the farthest markets. By entering India in
2018 (Gale, 2018), IKEA has acquired a knowledge of the South Asian markets which makes
India’s immediate and culturally similar neighbourhood i.e. Pakistan and Bangladesh the
potential markets for its future expansion.

3.0. Market 1-Pakistan:

3.1. Selection of market: why and how?
Pakistan ranks as the fifth largest population in the world. The biggest proportion of this
population is young who are bilingual and among the fourth largest English speakers around the
world. As a result, the language barrier in Pakistan is very limited for foreign companies like
IKEA. In addition, the country hosts one of the fastest-growing middle classes in the world.
There are also approximately 100 million broadband subscribers in Pakistan who keep an eye on
the latest trends and are highly welcoming of tech-savvy firms like IKEA (McKinsey &
Company, 2022).
Considering specifically the furniture industry, the revenue reaches USD 568.60 million in 2024
which is expected to grow at the rate of 3.09% from 2024-2029. Among different segments,
Home Décor is the largest segment with a revenue of 211.60 million USD in 2023 (Statista,
2024). These statistics reveal a bigger room for penetration for IKEA’s home décor segment. In
addition, in Pakistan, the demand for handcrafted furniture is growing which may become a new
product line of IKEA. Furthermore, per-person revenue in the furniture industry is also high
(USD 2.32) making Pakistan a suitable market for IKEA (Statista, 2024).

Figure 3: Revenue by segment in the furniture industry of Pakistan (Statista, 2024).

3.2. Suitability:
3.2.1. Political and legal suitability:
Pakistan faces political instability and polarization on account of general elections (Afzal, 2023).
In addition, the rates of corruption are also high in Pakistan. Nepotism also rules Pakistan and
foreign companies need to develop relationships with the political elites for successful business
operations. On the legal grounds, the Foreign Investment (Promotion and Protection) Act 1976,
however, offers exemptions on profits and assets but still protectionism remains a challenge in
Pakistan (Khan and Rehman, 2020). Furthermore, legal bodies are failing to protect foreign
companies such as the recent sexual harassment case filed by TRG International (The Express
Tribune, 2023).
3.2.2. Economic and financial suitability:
Despite economic difficulties in the past, the economic position of Pakistan is improving. In the
third quarter of 2024, inflation fell to 20.7% from 35.4% in 2023. The dip in inflation is expected
to improve consumer purchasing power. In addition, foreign direct investment increased up to
89.4% in April 2024. However, the ongoing geopolitical tensions in neighbourhoods like
Afghanistan and Iran can cause disruptions and lead to volatility in prices and exchange rates
(Government of Pakistan, 2024). Furthermore, the economic situation in Pakistan remains very
uncertain with increasing electricity and fuel rates.

3.2.3. Social and cultural suitability:

Pakistani culture emphasizes social relationships which need to be reflected in brand strategies.
The young consumer class is well-aware and very active on social media which prefers trendy
products. This aspect is very encouraging for IKEA which specializes in unique furniture ideas.
In addition, Pakistani consumers love to embody Western ideas and consider Western brand
quality superior to local brands. Such a consumer mindset leads to a rapid acceptance of Western
brand ideas (Shah, 2012). However, Rafi et al. (2012) argue that offering high-quality products
does not guarantee Pakistani consumer loyalty and brands need to offer tangible benefits to retain
customers.

3.2.4. Technological and infrastructure suitability:

Pakistan is on its way to technological advancement and multiple E-commerce websites are
working in Pakistan. However, still, rural areas of Pakistan do not have internet access. In
addition, freelance workers can only work from specified locations in Pakistan. Furthermore,
there exists a digital skills gap and a lack of technical assistance (Iftikhar, 2020). Nevertheless, in
terms of infrastructure, railways, roads, and marine routes are well developed. In addition,
projects like China China-Pakistan Economic Corridor (CPEC) have significantly reduced transit
times.

3.3. Entry Mode:

3.3.1. Selection: why and how:
IKEA should enter Pakistan through ‘franchising’. In franchising, IKEA would issue rights to a
Pakistani company to use its brand name and products. It would be the suitable entry mode as it
would require no developmental costs and the franchisee would bear financial risks making it a
suitable strategy to enter completely new markets. In addition, standardized business operations
would help the company to achieve economies of scale in comparison to devising new
manufacturing, and operational plans in every market (Sun and Lee, 2019).

3.3.2. Discussion:
Franchising would offer IKEA a cost-effective and rapid entry into the Pakistani market. In
addition, this entry mode would require minimum management costs from IKEA as the
franchisee would manage business operations on its own. Furthermore, IKEA would be able to
ensure its quality side by side utilizing the experience and market knowledge of the franchisee to
further accelerate its business growth. However, legal disputes and disagreements with
franchisees can occur that IKEA would have to carefully consider (Tien and Ngoc, 2019).

3.3.3. Application:
An analysis of the external environment of Pakistan showed that nepotism is high in Pakistan
where a wholly owned subsidiary as a new entrant would have faced significant resistance. On
the other hand, selling rights to a Made in Pakistan brand having well-developed political and
social connections would definitely be a safer option. In addition, not every region of Pakistan is
aware of the latest trends due to a non-uniform penetration of the internet and social media.
Therefore, IKEA’s articles would not have been welcomed in conservative regions of Pakistan
that prefer traditional designs instead of a Western touch. On these grounds, building on a market
knowledge of Pakistani companies becomes pertinent to effectively target areas. Opening a
franchise would also make quality-conscious Pakistani consumers comfortable that they are
getting the same product quality. Furthermore, the political and economic environment of
Pakistan is uncertain and experimenting with a new business model would be riskier. The
franchisee on the other hand would get IKEA’s globally tested business model, marketing and
operational plan reducing the risk of failure.

4. Market 2- Bangladesh:
4.1. Selection of market: why and how?
Bangladesh is one of the rapidly growing emerging economies of the world. The annual GDP of
the country jumped up to 6.4% from 2016 to 2021. Bangladesh is already outpacing India in
terms of per capita GDP (2800 USD as of 2022) and is expected to become an upper-middle-
income country by 2030 (Munir et al., 2023). The middle and above middle classes are rapidly
growing in Bangladesh leading to the development of a very active domestic consumer market.
Subsequently, consumer spending is also increasing. Bangladeshi consumers are highly
optimistic. They welcome international brands and significantly rely on the internet for making
purchase decisions. The reason for such a digitally driven consumer base can be attributed to a
high internet penetration rate of 90% making it a big opportunity for brands like IKEA that
actively market and engage their consumers online (Munir et al., 2023).

With the growing middle class and a significant interest in furnishing homes, the demand in the
furniture market is increasing. The furniture market generated a revenue of USD 1.8 billion in
2024 which is expected to grow at a rate of 4.15% till 2029. The market undoubtedly is
monopolistic and open to new brands. However, the living furniture segment dominates the
market (0.31 billion USD revenue in 2023) and IKEA has a broad range of products in this
category to capitalize on it (Statista, 2024):

Figure 4: Revenue by segment in Bangladesh's furniture market (Statista, 2024).

4.2. Suitability:
4.2.1. Political and legal suitability:
Bangladesh also suffers from political violence and political clashes that are threatening the
country’s stability (Ethirajan, 2023). However, regulatory initiatives such as growth strategy,
public-private partnership (PPP) program, and industrial policies aim to attract FDI in the
country. In addition, legal statutes like the Foreign Private Investment (Promotion and
Protection) Act 1980, Export Processing Zone Authority Act 1980, and Bangladesh Economic
Zones Act 2010 are also supportive of foreign businesses (Hossain et al., 2020). However, Hasan
(2021) argues that the Bangladeshi government sometimes favours local companies than foreign
companies. This requires foreign companies to have stronger ties with government bodies.

4.2.2. Economic and financial stability:

In Bangladesh, per capita income has significantly increased from 2019 (643 USD) to 2023
(2765 USD). This 23.24 % increase in per capita incomes means high disposable income which
is a great opportunity for IKEA (Mavis, 2023). However, the floating exchange rate has
remained a major aspect of Bangladesh’s economic policy which increases the risk of volatility
for foreign businesses (Rehman et al., 2020). Nevertheless, in Bangladesh’s market, profits and
dividends are fully transferred to foreign investors and a 100% allowance on the cost of
machinery and plants established in the major cities is provided making it a promising market
(Embassy of the People's Republic of Bangladesh, n.d.).

4.2.3. Social and cultural stability:

Bangladesh’s culture is diverse hosting multiple ethnicities including Bengalis, Biharis, and
Chakmas whose traditional furniture aptitudes and designs can be a diversification opportunity
for IKEA. Bangladeshi society is, however, strangled under several issues such as poverty, child
labour, murders, sexual violence, enforced disappearances, etc. (Hassan, 2022). Nevertheless, the
focus on luxurious life is increasing and people tend to spend more on managing and increasing
their lifestyle (Munir et al., 2023). Since furniture and home facilities are indicative of lifestyle,
IKEA in an urge to improve lifestyle can be welcomed by Bangladeshi society.

4.2.4. Technological and infrastructure suitability:

Technologically, Bangladesh is lagging as most firms use only basic technologies. Handwritten
documentation and manual quality inspection are used by over 40% of firms. However, firms
connected with MNCs use advanced technologies (The World Bank, 2021). Infrastructure
projects such as Dhaka Metro, and bridges over the Padma River are increasing in Bangladesh
(Hasan, 2021). IKEA is, therefore, expected to not face any logistics-related issues in
Bangladesh.
4.3. Entry Mode:
4.3.1. Selection: why and how?
IKEA should consider entering Bangladesh via licensing. In licensing, IKEA (licensor) would
enter into a licensing agreement with a Bangladeshi company (licensee) and allow the latter to
use its intellectual property. It would be a suitable choice as the company would not be exposed
to import barriers (tariffs and duties) while ensuring a rapid entry into the market. In addition,
location economies can be utilized and easy access to market information can be achieved
(Zekeri and Angelova, 2011).

4.3.2. Discussion:
Licensing would help IKEA overcome transportation costs in addition to import costs that are
associated with other entry modes like exporting. In addition, working directly with one of the
local companies would be effective in quickly responding to consumer needs based on the
market information. However, IKEA may not have control over business operations in licensing.
The transfer of tacit knowledge would also be challenging due to negotiable transfer prices and a
need to carefully monitor the results of such a transfer. Furthermore, there is a great risk of
creating a competitor (Zekeri and Angelova, 2011). Therefore, IKEA should design strong
property rights before entering Bangladesh.

4.3.3. Application:
Owing to the risk of exchange rate volatility in Bangladesh, IKEA cannot afford to produce
products internationally and then send those to Bangladesh. In addition, local companies are
favoured where opening a wholly-owned subsidiary would not be a wise choice. Therefore,
licensing a Bangladeshi company to produce IKEA’s products locally while using the production
techniques of IKEA would be a suitable choice. The local craftsmen would be better oriented
with the furniture choices of diverse ethnicities and hence local touch to IKEA’s international
design could easily be given. Furthermore, an increasing disposable income and high spending
on lifestyle management would also be an opportunity for IKEA to keep the prices competitive
side by side helping the licensee to meet the licensing fee. Finally, technology is not well
developed in Bangladesh which would not be sufficient for meeting the design requirements of
IKEA where licensing a local firm to use IKEA’s design and production technology would be an
effective decision.
5. Conclusion and Recommendations:
The analysis showed that IKEA follows the experiential learning and psychic distance
assumptions of the Uppsala model in its international expansion. Based on the cultural similarity,
Pakistan and Bangladesh have been found to be the potential markets for its expansion. The
critical analysis of Pakistan’s external environment revealed multiple challenges on political,
legal, and technological grounds but the infrastructure, economic, and social sides of Pakistan are
very supportive of IKEA’s expansion. In this regard, IKEA should consider entering Pakistan via
franchising entry mode as any local firm would have a better idea of complexities in the external
environment. Bangladesh, on the other hand, presented promising opportunities on regulatory,
social, and infrastructure grounds making it a suitable destination for IKEA. However, the
technology focus is limited and exchange rates remain volatile which makes licensing a local
firm to use IKEA’s design technologies and production techniques a suitable entry mode in
comparison to producing outside of Bangladesh and then exporting products.

In Pakistan, however, the economic situation is very uncertain. Therefore, IKEA needs to first
identify a source of stable funds such as the Boltoro Growth Fund and the Pakistan Catalyst Fund
the promising options. In addition, as Pakistani culture emphasizes social relationships, IKEA
should target social gatherings like marriage ceremonies specifically and consider offering
furniture at special discounts. To account for limited internet access in Pakistan, IKEA must
consider alternative marketing techniques such as billboards, TV commercials, and traditional
print media like magazines and distributing brochures. To attract Bangladesh’s middle class,
IKEA must design payment or instalment plans. In addition, as IKEA plans to license technology
in Bangladesh, rigorous policies should be designed to overcome the risk of cyberattacks, and
copyright infringement. Finally, to analyse consumer product preferences in both countries,
IKEA should conduct online surveys and make localised adaptations accordingly.
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Appendices:
1. IKEA’s franchising business model:

Figure 5: IKEA's franchising business model (Inter IKEA Group, n.d.).

2. Advantages and disadvantages of franchising entry mode:

 Figure 6: Source: Accounting firms.com.

3. Advantages and disadvantages of licensing entry mode:

Figure 7: Source: Slideshare.com.