NWOSU Philip

CGS

09980340

IKEA TAKES ON CHINA: AN INTERNATIONAL BUSINESS STRATEGY SUCCESS.

1. Introduction: IKEA battles Globalization In this business environment were organisations try to cross over barriers to trade and converge with cultures, taste and preferences of newer markets as to form an integrated global economic system has lead to a general rise in the worlds economy (Hill, Cronk & Wickramasekera, 2008). These acts is regularly referred to as globalisation However, Levitt (1983) suggests otherwise with his views that the current market is not yet global through defining it as a world where culture variations and tastes have converged leading to a homogenized market. Furthermore, with the provision of such markets come with their unique challenges. For example, it creates the dependency of companies on foreign suppliers and markets. To overcome such challenges, company will need to have a strategy, an international business strategy to be precise. IKEA, the Swedish furniture is one company which has successfully created the path to take advantage of globalization and as the world largest furniture retailer with over 263 operating stores in 24 countries and employing over 127,800 people in 2009 has definitely grown within the past decades (Avlstam C& Ivarsson I, 2010; IKEA, 2011; Baraldi E, 2008). The success and global experience IKEA has brought into this business environment is the key reason why it was chosen for this study. With such success and experience other international organisations can learn from them. This creates the grounds for investigation on what international strategy did IKEA chose to be successful. Moreover, IKEAs entry in to the China market differs from other markets which include the European, Australian and North American as factors such as culture, relationships and economy were the main determinants but as a result still lead IKEA to hold the largest market share of Chinas furniture and fitting (Woetzel J, 2004).It can be deduced which strategy IKEA used to succeed in a new and different market through further investigations.
1|Page

NWOSU Philip

CGS

09980340

The paper aims to discover and critically analyse the international business strategy used by IKEA in the China market. In addition, the use of journal, websites and other books and informative data of IKEA has been used in this paper. Furthermore, the paper has been divided into six sections. In the first section, a brief history of IKEA and its visions will be mentioned. In the next section, the types of strategy and implemented international business strategy will be tackled alongside the strategy formulation will also be discussed. Furthermore, the analysis on IKEAs strategy formulation and its internal competencies will be outlined. The fourth section will handle IKEAs international business strategy, its challenges and success factors in the China market will be discussed. The latter part of this paper will be dedicated to the evaluation of the strategy, findings and other related issues of IKEAs success in China. 2. The History of IKEA: A humble journey At the tender of age of 17 years, Ingvar Kamprad had the innovation from selling pens and other petty stationary from the money he received for his success in school to build up a renowned retailer store. The store IKEA was founded in Almhult, Sweden in 1943. The name IKEA is an acronym derived from Ingavar Kampard his initials and Elmataryd Agunnaryd the area in which he was raised in (IKEA, 2011). From a humble beginning, IKEA first started off with pens, pictures, frames and watches and handled things which required a reduction in price. In addition to the product range was furniture in 1948 by I955 IKEA began to design its own furniture (IKEA, 2011). Furthermore with time IKEA has grown little by little into the worlds largest furniture retailer. It can boast owning over 253 stores in 24 countries which are operated by external franchises and in the over the past decade its growth has been exceptional, with sales having tripled to 6.3 billion Euros since 1998 (Avlstam C& Ivarsson I, 2010). These successes can be pinpointed to the companys goals, vision and corporate strategies 2.1 Corporate Strategy: The IKEA Culture

2|Page

NWOSU Philip

CGS

09980340

Corporate Strategy can be seen as the link between the management of the organisations internal resources and its external relationship with its customers, suppliers and completion within its current environment (Lynch R, 2006; Porter M, 1996).However at the business level, it deals with competing for customers and as such IKEA has done a great job in capturing its customers with its goals and visions. IKEA vision and motto is to create a better everyday life for the many people and with that it elevates itself from all other brands for us you buy not only their product, you buy an experience as well (Tarnovskaya & de Chernatony, 2011; IKEA, 2011). Moreover, IKEAs culture can be expressed by its corporate values as shown below:

y y y y y y y y y

Togetherness and enthusiasm; Constant desire for renewal Cost consciousness Willingness to accept responsibility Humbleness and willpower Simplicity Striving to meet the reality Leadership by example Daring to be different and constantly being on the way

((Tarnovskaya & de Chernatony, 2011) Tarnovskaya & de Chernatony (2011) describe IKEAs culture as a sort of clay that holds the IKEA system together as well as acts as a security for guaranteeing the brands longevity. This ambience of positivity and willpower has been spread among the staff with the help of the cultural manifest The IKEA Way which is regarded as the Bible for all employees. In addition, it is enacted by corporate managers who safeguard the concept and work as coaches for key managers across all IKEA markets ((Tarnovskaya & de Chernatony, 2011).

3|Page

NWOSU Philip

CGS

09980340

3. International Business Strategy 3.1 Classifications of International Business Strategy International business strategy as defined by Verbeke (2009) is effectively and efficiently matching an organisations internal activities with the opportunities and challenges found in geographically dispersed environments that cross international borders. However, there is not a specific international business strategy as there a various types and frameworks of strategy. Some other studies such as Harzing (2000) provided indepth variation of international business strategy classifications. Her works on the analysis of Bartlett and Ghosalls (1989) classifications of the four types of international business strategies which are: Multi-domestic, Global, Transnational and International have been influential as it clearly distinguishes the types or categories of international business strategy and sheds more light how to see these strategies have an effect in the business environment as Multi-domestic strategy focuses on building strong local present and focuses on the national differences. Global strategy attempts to build cost advantage through global scale operations. Transnational strategy simultaneously achieves low cost whiles differentiating product offerings and finally International Strategy focuses on transferring core competencies to the foreign market where local competitors lack. In addition, Prahalad (1987) created an Integration-Responsiveness (IR) Grid framework base on Bartlett and Ghosalls classifications of international strategy this framework describes and analyses the strategies of the international firm at a corporate and subsidiary level as it based on the managerial perceptions of the environment along two basic imperatives, these being the pressures for global integration and pressures for local responsiveness (Zhu C. J et al, 2008; Lynch R, 2006). The framework is illustrated below in Figure 1 and highlights the key relation between the market demands of each international business strategy.

4|Page

NWOSU Philip

CGS

09980340

Figure 1: Strategic Implications of Global Integration and Local Responsiveness (Zhu et al, 2008). However, Miles and Snow (1978) outline a different set of strategic typologies: reactors, defenders, analysers and prospectors. Their relationship is based between the company and its current environment. From their viewpoint, Defenders have a conservative view of strategy. In contrast, Prospectors base their emphasis on innovation and change by exploring new market opportunities, emerging trends and technology. Analysers are the combination of prospector and defender orientations. Finally, Reactors lack a consistent strategy (as cited in Hagen, B et al, 2011). As a result, to determine the appropriate strategy for the international business the international strategy formulation must be taken into account. 3.2 International Business Strategy Formulation The strategy of the firms is the match between its internal capabilities and external relationships (Lynch R, 2006 pp 6).Therefore to enable to formulate an efficient business strategy both internal and external factors are required. Gilmore and Fannin (1986) suggest means of formulating a strategy by the firm splitting their concerns into two environment arenas, internal and external where as the internal factors include the assessment of the resources available to the company by paying close attention to its technical expertise, ability to produce
5|Page

NWOSU Philip

CGS

09980340

new technology, managerial ability and financial resources and with the external factors deal with the examination of market opportunities and other threats and furthers argues that the culture of the nation will have an impact on the nature of the demand for particular products . In addition, a strategic analytical framework which includes, setting goals, analysis of the environment, and developing strategic options was provided by Tallaman and Yip (2008). Moreover, other literature suggests for a successful international business strategy the factors really solely on the internal capabilities of the company, its positioning, and corporate culture (Zou& Cavusgil, 1996). Also the ability to change the environment demands has been proven to be one of the success factors (Hill et al, 2008). As a result, for a company to be successful international it cannot rely solely on one specific form of international business strategy but has to implement the right one according to the situation. 3.3. The Strategic Formulation with IKEAs Expansion in China In this section, the strategic decisions IKEA made through the application of the international business strategy formulation are outlined: 3.3.1. Indentifying IKEA key goals IKEA has expanded in its own country and internationally but its main goal to expand in China was of pure innovation to search for new markets. This is because before entry into China in 1999 they were already an established and profitable brand, in particular a very strong brand in Europe and North America (Rugman & Hodgetts, 2001) since China has been touted to be the next economic superpower (Woetzel J, 2004)and as such it is a market that will attract a lot of foreign investment. 3.3.2 Analysing the Environment IKEA idea on expanding to China might have faced some light difficulties due to the change in environment, style and preference for its new consumer. It might face a challenge reaching out to the locals due to their modern European styles which might push them to tailor their designs.

6|Page

NWOSU Philip

CGS

09980340

Also, within Chinas perception of an international brand of high quality which IKEA portrays due to their positioning, they have the concept of high quality goods are expensive (Jonsson, 2008) in which contradicts IKEAs main niche. The difference between the two countries, Sweden and China also proves to be a factor, for Sweden is seen as a developed European economy and China an emerging one which reveals the significant difference with their GDP. Thus entering into a low income economy like China will be another problem faced by IKEA especially its positioning as its customer all over will see their products as affordable and value for money but will not be in the case of China (Capdevielle et al, 2007). 3.3.3 Analysis on Resources and Capabilities IKEA positioning and strong brand image is their main advantage which is summed up by the high quality services, innovative means of retailing plus ensuring their cost of their production is low by means of networking and working closing to its suppliers (Avlstam C& Ivarsson I, 2010; Baraldi E, 2008; Tarnovskaya & de Chernatony, 2011). The lack of expansion in other Asian countries is the weakness of IKEA due to lack of experiences. IKEA first venture into the Japanese market was in 1974 which didnt succeed (Wijers-Hasegawa, 2006) despite possessing 3 stores in Hong Kong which were franchises and not wholly owned (IKEA, 2011). Also the vast cultural difference between China and IKEAs country Sweden is a factor as China has very high Power Distance and long term orientation than that of Sweden. (Capedevielle et al, 2007). This may create problems managing the local employees do to clash of cultures. 4. IKEA International Business Strategy in China 4.1 IKEAs Strategy before China IKEA has been successful through its introduction of differentiated products and cutting down costs as their main focus was on high economic integration and low national responsiveness that is the Global Strategy (Rugman & Hodgetts, 2001) and was able to maintain this strategy before entry into China.
7|Page

NWOSU Philip

CGS

09980340

4.2. IKEAs entry in China IKEA entered China as a test store in Beijing in 1998. It then picked up and opened its first IKEA store Shanghai by 2003. It was the largest store in Asia and attracted a record of over 80,000 visitors on its opening day (Wei & Zou, 2007; Capedevielle et al, 2007). The entry was that of joint venture and wasa noticeable change of their usual market entry this was due to political factors and such a entry provided more communication with the local consumers and competitors providing IKEA a towards the China market. 4.3. Strategic Challenges IKEA Met in China 4.3.1 Pricing Pricing was one of the main challenges IKEA faced when entering China despite their provision of high quality products at an affordable price. That concept didnt work with the Chinese consumers due to the low level of income in China at that time (Wei & Zou, 2007; Jonsson, 2008). 4.3.2. Market Positioning The perception the Chinese had of foreign products as being more expensive than local products deterred them off thus IKEA low pricing strategy was not enough to convince them ( Wei & Zou, 2007 ; Jonsson, 2008). 4.3.3. Business Model IKEAs concept of self-service delivery also didnt go well in China. This was based on the demographics of China as majority didnt use cars or motor vehicles (Wei & Zou, 2007). 4.3.4 IKEAs Response to the Strategic Problems In attempts, to rectify some of their problems, IKEA focused their products on parts of the population who had income. Their attempts didnt blossom as it did not match their core value of providing their products to

8|Page

NWOSU Philip

CGS

09980340

everyone. In addition, instead of switching up their initial business models of self assembling they tried educating the consumers of the IKEA way (Wei & Zho, 2007). After all the current attempts failed instead of tailoring their products to suite the China market, IKEA persevered and reduced their prices still maintaining their high quality products. After lowering their prices, their sales shot up by 35% in 2003(Wei & Zou, 2007; Jonsson2008). Eventually, their business model also changed by charging consumers a fee for deliveries for products bought (Wei & Zou, 2007) and finally according to the research from Capedevielle (2007) the IKEA in China products have been more tailored to suite the Chinese market. On the whole, the transnational strategy which involved achieving low costs and differentiating product offerings was the ideal international business strategy to aid IKEA in dominating the China market. 5. Analysis of IKEA Success Factors in China The ability to switch to the right strategy is one success factor. Nevertheless the ability to implement such a strategy and reap the profit is remarkable. IKEAs ability to stick to their core values of cutting down cost and maintaining high quality was also a factor by staying true to their brands culture. 6. Conclusion In conclusion, it can be derived IKEA success in the Chinese market was by implementing the transnational strategy; their ability to detect the market demands is very credible and is an added value to why the switching from global strategy to transnational was possible as it required organisational capability. Furthermore, their networking and close bonds formed with their suppliers can be suggested for any company willing to enter the China market especially as a joint venture because they provide a unique network with the local market.

9|Page

NWOSU Philip

CGS References

09980340

Avlstam C & Ivarsson I. (2010) Supplier Upgrading in the Home-furnishing Value Chain: An Empirical Study of IKEAs Sourcing in China and South East Asia, World Development Vol. 38, No. 11, pp. 15751587 .University of Gothenburg, Gothenburg Baraldi, E. (2008). Strategy in industrial networks: Experiences from IKEA. California Management Review, 50(4), 99126 Capdevielle, L, Li, M & Nogal, P. (2007) A creation of competitive advantage by using differentiation of companys strategy actions. The case study of IKEA Sweden with experiences on Chinese and French markets, University of Halmstad, School of Business and Engineering. Di Fan, Chris Nyland, Cherrie Jiuhua Zhu, (2008) "Strategic implications of global integration and local responsiveness for Chinese multinationals: An area for future study", Management Research News, Vol. 31 Iss: 12, pp.922 940 Gilmore C B. and Fannin W.R. (1986) Developing a Strategy for International Business, Long Range Planning, Vol. 19, No. 3, pp. 81-85. Great Britain: Pergamon Journals Ltd. Hagen,B.,et al. (2011). International strategy and performanceClustering strategic types of SMEs. International Business Review pp. 1-14 Harzing, A W. (2000) An empirical analysis and extension of the Bartlett and Ghoshal typology of multinational companies, Journal of International Business Studies, Vol. 31, Vo. 1, pp. 101-120. Hill, CWL, Cronk, T, Wickramasekera, R. (2008) Global business today: an Asia-Pacific perspective, 1st edn., McGraw-Hill Irwin, Australia. IKEA. (2011) http://www.ikea.com/ms/en_US/about_ikea/the_ikea_way/history/1940_1950.html IKEA. (2011) http://www.ikea.com/ms/en_CN/about_ikea/the_ikea_way/index.html Jonsson, A. (2008) A transnational perspective on knowledge sharing: lessons learned from IKEAs entry into Russia, China and Japan, The International Review of Retail, Distribution and Consumer Research, Vol. 18, No. 1, pp. 1744. Levitt, T. (1983) The globalization of markets, Harvard Business Review, Vol. 66, pp.2-16. Porter, M. E. (1996) 'What is strategy?', Harvard Business Review, November/December 61-78.
10 | P a g e

NWOSU Philip
th

CGS

09980340

Lynch, R. (2006) Corporate Strategy, 4 edition, Harlow: Pearson Education Limited. Rugman, A M & Hodgetts, R.M. (2001) The end of global strategy, European Management Journal, Vol. 19, Issue 4, pp. 333-343. Tallman, S.B & Yip, G.S. (2008) Strategy and the multinational enterprise, in Rugman, A M, The Oxford handbook of international business, 2nd edition. Oxford: Oxford University Press. Tarnovskaya, V& De Chernatony, L. (2011) Internalising a brand across cultures: the case of IKEA, International Journal of Retail & Distribution Management, Vol.39, Issue 8, pp. 518-618 Verbeke, A. (2009) International business strategy, 1st edition, Cambridge: Cambridge University Press Wei, LQ & Zou, X. (2007) IKEA in China: facing dilemmas in an emerging economy. Asian Case Research Journal, Vol. 11, Issue 1, pp. 1-21. Wijers-Hasegawa, Y. (2006) Furniture giant reawakens in Funabashi: Swedens IKEA back in Japan after 20-year hiatus [online] The Japan Times, Available from: http://www.japantimes.co.jp/text/nb20060425a1.html [11 November, 2011] Woetzel , J.R . (2004) A guide to doing business in China Shangai:McKinsey & Company Zou, S & Cavusgil, ST. (1996) Global strategy: a review and an integrated conceptual framework, European Journal of Marketing, Vol. 30, No. 1, pp. 52-69.

11 | P a g e