Question

IKEA is one of the world's most successful privately-held corporations. The company has followed a greenfield strategy of expansion - building one or two large stores in large cities (Pop. exceeds 2 million).

(a) Organic growth in revenues has come through adding stores around the globe and entering new countries.  Discuss the pros and cons of two other appropriate methods of growth for IKEA a, such as Turnkey Projects, Licensing, franchising, Joint Ventures, Wholly owned subsidiaries, acquisitions

(b) In Thailand (Megabangna Store in Bangkok), IKEA decided to enter the market via a joint venture with S.P.S. Group.  What was the rationale (pros and cons) for this approach to the Thai marketplace?

Answer 1

IKEA is one of the world's most successful privately-held corporations. The company has followed a Greenfield strategy of expansion - building one or two large stores in large cities. Organic growth in revenues has come through adding stores around the globe and entering new countries. Two other appropriate methods of growth for IKEA can be Turnkey Projects, franchising. In both growths method pros and cons are there.

A) In turnkey project the IKEA has to export its process and technology to another country by building a plant in that country. In this method the company hires a contractor who is responsible for the design, construction and installation of a new plant and maintenance of the plant. The main advantage of a turnkey project creates the opportunity to earn great economic profits, where foreign direct investment (FDI) is limited. In this process IKEA reduce the management work, supervising projects for building owners because the contract gives the responsibility of the entire project upon the firm or individual who was awarded the contract. Turnkey project reduces the project timelines. Turnkey projects reduces cost overruns because IKEA will only responsible for the lump sum agreed upon during contract negotiations, increases in costs, rises in the prices of materials, are covered by the contractor. In turnkey project IKEA can face disadvantages too. IKEA will face limited involvement in the various activities that are associated with project. Another company can deny selecting the service providers that IKEA prefer. Turnkey contractors may produce project budgets with higher money, because those budgets are presented before the designs of the project have been finalized.

In franchising a business owner can achieve a rapid expansion of its business with low financial risk. In franchising method IKEA can expand rapidly in different geographical locations. IKEA business growth will be easier and quicker through a wide and constantly expanding network of franchisees than opening its new outlets, branches and employ staff in different locations. IKEA can face a steady flow of financial resources. The franchisees invest to start up their business under your brand, and the royalty fees they pay on a regular basis eliminate the need to borrow from banks or use own capital to expand and develop the business. Franchising has its drawback too. IKEA will face a large initial investment. Due to the steady flow of profit IKEA receives only a small percentage of the enterprise’s revenue in the form of a royalty fee. IKEA will face less control over key business operational processes.

B) In joint venture two or more parties agree to pool their resources to fulfill a specific task, that can be a new project or any other business activity. In Thailand (Megabangna Store in Bangkok), IKEA decided to enter the market via a joint venture with S.P.S. Group. According to Thai foreign business act international companies are not allowed to operate retail business, service businesses, not allowed to own land in Thailand, So IKEA decided to form a joint venture regarding the Mega Bangna project. Both IKEA and S.P.S. Group companies own a 49% share of the Mega Bangna and the last 2% are owned by IKEAs local supplier SB furniture. In this joint venture both companies will get the opportunity to gain new insights and expertise. Joint venture will help them to access resources, such as specialized staff and technology. Both companies will share the market risks and costs. In this joint venture both IKEA and SPS group may face certain disadvantages like Flexibility can be restricted. There is a chance of great imbalance of expertise, assets, and investment, which can have a negative impact on the effectiveness of the joint venture. It may be hard to exit the partnership as there is a contract involved, Clash of cultures can happen. These are few pros and cons can happen at Thai market place.