Question

Internationalization Process ]

1) Take one multi-national firm of your choice between: IKEA, or Carrefour.
Please explain the international expansion strategy (internationalization path) of your company by applying Uppsala model. To what extent do your company follow the Uppsala Model? And to what extent do your company not follow the Uppsala Model?

Answer 1

Business organizations may expand from their home countries to foreign countries by setting up replicas (of parts of) their value chains in those foreign countries. Well-known examples of such organizations are those that expand internationally by replicating a format aimed mainly at distribution, such as McDonald’s (Watson, 1997), The Body Shop (Quinn, 1998), Starbucks (Schultz & Yang, 1999), Hennes & Mauritz (Bengtsson, 2008), and IKEA. The replication of a fixed format is associated with benefits, such as economies of scale and brand recognition (Winter & Szulanski, 2001). However, the international business literature, and notably the integration–responsiveness framework (Bartlett & Ghoshal, 1989; Devinney, Midgley, & Venaik, 2000; Prahalad & Doz, 1987), has long recognized that such benefits often need to be traded off against the benefits of local adaptation. This raises the issues of how and to what extent international replicators combine replication and adaptation, and what explains these choices.

IKEA’S PROCESS OF INTERNATIONALIZATION: EXPLORATIVE INTERNATIONALIZATION, RIGID REPLICATION, AND FLEXIBLE REPLICATION

During its 68-year history IKEA has grown from a small, family-owned home furniture company into a global retailer with 321 stores in 38 countries
(as of April 2011), of which the IKEA group owns 280 stores in 26 countries (the rest, 41 stores in 17 countries, are franchise operations). The company employs 127,000 people. IKEA is a privately held company owned by Stichting INGKA Foundation. Global sales were h23.1 billion in 2010. The Foundation, worth US$36 billion in 2006, and ostensibly created to “promote and support innovation in the field of architectural and interior design” (Economist, 2006), is registered in the Netherlands, and is effectively controlled by the Kamprad family. Beginning almost five decades ago, IKEA has embarked upon a massive international expansion effort, supported by firm-specific knowledge-based assets, notably reputational capital, a distinct marketing offering, and well-developed standard operating procedures for identifying, acquiring, and transferring knowledge between units in the IKEA network. In the following, we detail IKEA’s process of internationalization in terms of three successive stages of development: an initial explorative stage of internationalization, characterized by much trial and error activity (1963 to the end of the 1970s); a stage characterized by heavy exploitation by means of replication of a fairly rigid format for replication (approximately 1980 to the mid-1990s); and the current stage of what we refer to as flexible replication.

Exploitative internationalization

The emphasis on defining the IKEA concept and explicitly begin building a formula for replication that took place in the years around 1980 was strongly motivated by an attempt to realize the cost efficiencies from exploiting massive economies of scale that replication on the basis of a relatively fixed format would entail. The process of conceptualizing the IKEA business idea in the context of internationalization started with an internal document drafted by Kamprad in 1976. This document – the Testament of a furniture dealer – is fundamentally an attempt to codify and document fundamental IKEA values and beliefs. While these had arguably been present since the founding of the firm, they had not yet been explicitly codified. Armed with this (re)statement of fundamental beliefs and values at the end of the 1970s, IKEA moved towards a new phase of its international expansion process, and started to build a well-defined format for replication.

The present ownership and overall organizational structure also emerged as a consequence of the major strategic changes going on at the end of the 1970s towards uniformity and replication of a standardized format. Thus in 1982 ownership of IKEA was transferred to the INGKA Stitching Foundation. IKEA was restructured, and the “three legs” – IKEA Group (the “blue group”), Inter IKEA Systems (the “red group”), and IKANO (the “green group”) – were created. The green group, IKANO,is owned by the Kamprad family, whereas the red and blue groups are owned by INGKA Holding BV. The red group, Inter IKEA Systems BV, is the owner of the IKEA concept (aka the idea concept) and the brand name of IKEA. This part of the organization plays a very important role in IKEA’s replication process, and will be discussed further below. Three percent of all IKEA store revenue is paid to Inter IKEA Systems BV as equity that bolsters IKEA against economic hardship. INGKA Holding BV is the ultimate parent company for all IKEA Group companies, including the industrial group Swedwood, which manufactures IKEA furniture, the sales companies that run the stores, as well as purchasing and supplying functions, and IoS, which is responsible for the design and development of products in the IKEA range.

Excessive exploitation

While IKEA had learned the importance of standardizing its format – uniform stores, promotion, and product range – the hard way, it is arguable that it came to resemble too much the view of a precisely replicating firm in Winter and Szulanski (2001). Explorative efforts became fully concentrated in HQ functions, and there was no awareness of any need to learn from subsidiaries, or transfer experiential knowledge gained by subsidiaries back into the rest of the network. At the very best, individual learning took place as the
IKEA “cowboys” moved from one market to another, setting up new stores, but these lessons were not shared at a corporate level. However, in the 1980s a few notorious failures helped IKEA learn that exploitation in the form of indiscriminate replication would not always work, and that it was necessary to keep an eye on learning experiences in subsidiaries – that is, in the periphery of the organization. One particularly important failure was the 1985 entry into the US market (Torekull, 2006). A typical problem of the US entry was the unwillingness of IKEA to increase the sizes of beds and kitchen cabinets, because part of its concept was to offer a single, global range. These kind of events prompted broader reflections on the viability of the indiscriminate exploitation model that IKEA was following, and amply illustrates the adaptation–replication dilemma.

Towards flexible replication

Eventually, IKEA began to realize that successful international expansion by means of replicationrequired the company to allow for local exploration within the confines of the IKEA concept, alongside the successful sharing of practices and standard operating procedures that embodied experiential learning gained by subsidiaries. A specific lesson learned from the US entry was that IKEA should stick to one product range, but that, when needed, it should adjust its products to the local market, while maintaining, as best as it could, a focus on high volumes.

We conjecture that this approach to replication may be used by other international replicators than IKEA. This reasoning gives rise to our first proposition:
Proposition 1: International replicators will realize a higher performance when they adopt a hierarchical approach to replication rather than a “copy exactly” approach.

Proposition 2: The proportion of fixed to flexible features in a format for replication depends negatively on the heterogeneity and dynamism of the target markets. Thus replicators that target very heterogeneous and dynamic markets will have relatively many flexible features in their formats for replication; and replicators that target very homogeneous and static markets will have relatively few such features.

Proposition 3: International replicators that deploy organizational mechanisms for lateral and reverse knowledge flows will be better able to identify, harvest, and transfer local learning that is useful for the purpose of revising the format for replication.

Proposition 4: International replicators adopt a flexible replication approach only after substantial experience with either one of the alternatives of highly explorative or high exploitative internationalization, or both.

CONCLUSION

International replicators have emerged as important actors in many industries. Replication is clearly a strategy of international expansion. However, little explicit attention has been given in the international business literature to how these organizations build a format for replication; how they trade off the benefits of replicating a format with the benefits of adapting locally; how they modify a format under the impact of experience gained through the internationalization process; how they organize this process; and what determines the proportion of fixed to flexible features of a format for replication.

In terms of managerial implications, the case of IKEA suggests that flexible replication is a viable international expansion strategy that is particularly well attuned to heterogeneous international markets. International expansion may be particularly challenging for retail firms as compared with manufacturing firms because of the particular importance of closeness to end consumers, and it thus requires specific considerations (e.g., Alexander, 1997; Burt & Carralero-Encinas, 2000; Elg, 2003). However, the IKEA case also suggests that flexible replication requires strict management, dedicated organizational units, and a strong corporate culture. There is no doubt in IKEA regarding who controls and maintains the Idea Concept, as well as the Concept in Practice. There
may be sometimes considerable latitude for local experimentation, but such activity is constrained by the concepts and the hierarchical ordering of the format for replication.