Question

IKEA’s Global Strategy Walk into an IKEA store anywhere in the world, and you would recognize it instantly. Global strategy standardization is rampant! The warehouse-type stores all sell the same broad range of affordable home furnishings, kitchens, accessories, and food. Most of the products are instantly recognizable as IKEA merchandise, with their clean yet tasteful lines and functional design. With a heritage from Sweden (IKEA was founded in 1943 as a mail-order company, and the first store opened in Sweden in 1958), the outside of the store will be wrapped in the blue and yellow colors of the Swedish flag. IKEA has sales of €34.2 billion euros annually (about $37 billion U.S. dollars) and more than 150,000 employees. Interestingly, IKEA is responsible for about 1 percent of the world’s commercial-product wood consumption.

The IKEA name comes from its founder—the acronym consists of the founder’s initials from his first and last names (Ingvar Kamprad) along with the first initials of the farm where he grew up (Elmtaryd) and his hometown in Sweden (Agunnaryd). Overall, Sweden has 20 IKEA stores, which are only fewer than in Germany (49 IKEA stores), the United States (42), France (32), and Italy (21). Spain also has 20 stores. With 351 stores in 46 countries, IKEA is the largest furniture retailer in the world. Basically, the furniture market is one of the least global markets, with local tastes, needs, and interests much different than for many other products across industries. The largest IKEA store is in Gwangmyeong, South Korea, at some 640,000 square feet.

The IKEA store itself will be laid out like a maze that requires customers to walk through every department before they reach the checkout stations. The stores are often structured as a one-way layout, leading customers counterclockwise along what IKEA calls “the long natural way.” This “way” is designed to encourage customers to see the store in its entirety. Cut-off points and shortcuts exist but are not easy to figure out. It is even difficult to get back out after having a meal in the famous IKEA restaurant with its Swedish food (meatballs anyone?).

Immediately before the checkout, there is an in-store warehouse where customers can pick up the items they purchased. The furniture is all packed flat for ease of transportation and requires assembly by the customer. Value is stressed to a great extent (the price customers pay for the quality furniture they get). If you look at customers in the store, you will see that many of them are in there 20s and 30s. IKEA sells to the same basic customers worldwide: young, upwardly mobile people who are looking for tasteful yet inexpensive “disposable” furniture of a certain quality standard for the price they are willing to pay.

A global network of more than 1,000 suppliers based in more than 50 countries manufactures most of the 12,000 or so products that IKEA sells. IKEA itself focuses on the design of products and works closely with suppliers to bring down manufacturing costs. Developing a new product line can be a painstaking process that takes years. IKEA’s designers will develop a prototype design (e.g., a small couch), look at the price that rivals charge for a similar piece, and then work with suppliers to figure out a way to cut prices by 40 percent without compromising on quality. IKEA also manufactures about 10 percent of what it sells in-house and uses the knowledge gained to help its suppliers improve their productivity, thereby lowering costs across the entire supply chain.

Look a little closer, however, and you will see subtle differences among the IKEA offerings in North America, Europe, and China. In North America, sizes are different to reflect the American demand for bigger beds, furnishings, and kitchenware. This adaptation to local tastes and preferences was the result of a painful learning experience for IKEA. When the company first entered the United States in the late 1980s, it thought that consumers would flock to its stores the same way that they had in western Europe. At first, they did, but they didn’t buy as much, and sales fell short of expectations. IKEA discovered that its Europeanstyle sofas were not big enough, wardrobe drawers were not deep enough, glasses were too small, and kitchens didn’t fit U.S. appliances. So the company set about redesigning its offerings to better match American tastes and was rewarded with accelerating sales growth.

Lesson learned. When IKEA entered China in the 2000s, it made adaptations to the local market. The store layout reflects the layout of many Chinese apartments, where most people live, and because many Chinese apartments have balconies, IKEA’s Chinese stores include a balcony section. IKEA has also had to shift its locations in China, where car ownership lags behind that in Europe and North America. In the West, IKEA stores are located in suburban areas and have lots of parking space. In China, stores are located near public transportation, and IKEA offers a delivery service so that Chinese customers can get their purchases home.

2. IKEA has narrowed down its market entry mode (into Vietnam) to three options i.e. franchising; a joint venture with a host-country firm or setting up a new wholly owned subsidiary in Vietnam. Critically evaluate these options. Which one would you recommend? (1000 words)

Answer 1

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IKEA

Ikea is a multinational European company concerned with furniture design and distribution, home appliances, appliances for kitchens and household services. In 52 countries around the world, there are 424 Ikea shops.
For the success of the international market the market entry strategy is very important. The company needs to take into account so many factors like rules and regulations when it enters the international market, and government business policy attitude towards foreign investors especially with regard to a large multinational company such as IKEA. Market penetration techniques are accessible in several ways.

Franchising

Franchising is a well-known foreign business marketing growth technique. Contract arrangement between franchisors and franchisees takes place here. This is where the franchisor grants the franchisee certain rights and authorities, including the right to use trademark names and their business processes and systems. This right is granted, and the franchise authorities pay one-time fees as well as a percentage of selling revenue. The standard "benefits" associated with the purchase of a franchise can be an illusion if you choose the wrong franchisor.

• This investment is costly.
• A lot of money for the pursuit of investment.
• Strict guidelines for service.
• Continuous use of company name feature.

You might not be in a position to adjust your business locally. After a while, you might find that tracking franchisors is intrusive.

New Wholly owned subsidiary

A business with wholly owned shares is a corporation with wholly owned shares, called a parent company. Usually the subsidiary operates without relation to its parent company. The drawbacks to forming a wholly owned subsidiary are:

• The parent company, through its subsidiary, will make 100 % equity investment.
• Conflicting interests between the subsidiary and the parent company and loss of flexibility are the main drawbacks of the establishment of a wholly held subsidiary.

For example, if an entering company is a wholly owned subsidiary on the international market, it will rely on the subsidiary to establish a distribution channel and attract a salesforce to build a customer base. This implies that success is solely contingent on the execution of the subsidiary. Instead of being spread across various entities, operational risk is focused in one company.

Joint venture.

Joint venture takes place when a relationship is formed between two business entities operating in two or more countries. It is a smart decision when a business joins the global market and does not want to be entirely accountable.Here we analyzed three foreign marketing tactics. I will suggest a co-enterprise with the host country because foreign business is not easy and it is very risky.

By joining the international enterprise the access of the larger resource including specialized parent company employee technology helps. The risk can involve the sharing of operational or marketing costs and the sharing of research and development costs. The risk may be shared. You may use the power of the parenting organization. Contributes to using your database to market our company through your joint venture partners

Geographical constraints: If there is an exciting business opportunity in a foreign market, collaborations with a local company are of interest to a foreign company because it can be difficult to enter a foreign market both because of a lack for that market expertise and because of local challenges for companies operated overseas or internationally.
Joint undertakings provide safe spaces unless the company has a disagreement.

We appear to prefer locals over foreigners, because if you're a 100 percent foreign-owned business, you don't have a local face and you are a outsider who most likely loses in court. If you become a partner in Vietnam, you can deal with conflict. When you have a joint venture, you have a local side, which ensures you have a greater opportunity to go to a court or resolve disputes.

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