IKEA- The Global Retailer
1. How is IKEA profiting from global expansion? What is the essence of its strategy for creating value by expanding internationally?
How is IKEA profiting from global expansion?
According to the Determinants of Enterprise Value, enterprise valuation can be derived from 2 methods, Profitability and Profit Growth. According to the IKEA case, the company expands to other markets in order to get new customers and sales, which is fallen under the Profit Growth method as in figure 1.
Figure 1 Determinants of Enterprise Value
In addition, expanding globally allows firms to increase profits. Firms that operate internationally must be able to (Hill, 2010) :
1. Expand the market for their domestic product offerings by selling those products in international markets.
2. Realize location economies by dispersing individual value creation activities to those locations around the globe where they can be performed most efficiently and effectively.
3. Realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation.
4. Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firm’s global network of operations.
According to the IKEA’s global expansion, the company sells products in 280 stores in 26 countries. In addition, the company leverages the globalization sourcing materials from low-cost location suppliers and sold to high-cost locations’. Therefore, IKEA could increase its profits from expanding the market internationally.
Figure 2 IKEA stores
What is the essence of its strategy for creating value by expanding internationally?
IKEA applies the following strategy in expanding internationally
a. IKEA Franchising. When expanding globally, IKEA has some evaluation criteria based on the market study for selecting franchisees which leads to the its long-term strategic expansion plan which sets priorities of future growth.
Figure 3 IKEA Franchising (Ikea, 2003 - 2010)
b. Finding the right place of manufacturing for each item by leveraging the low-cost suppliers and proper sourcing strategy.
c. Focus on the some core suppliers to enable the long-term co-development.
IKEA has The Swedwood Group, an industrial group within the IKEA Group of companies, as key supplier. The Swedwood’s primary task is to ensure enough production capacity for IKEA since 1991 (Ikea, 2003 - 2010) . Due to the long-term co-development between Swedwood and IKEA, the company came up with many innovations. For example, in 1997, Swedwood has invented a way to produce board on frame products with veneer finish. Birch veneer on KUBIST and LACK is an immediate success. (Ikea, 2003 - 2010) .
d. Localization- adaptation of its offerings to the tastes and preferences of consumers in different nations
The recent example of IKEA adoption of localization can be found here. “Home decor and furniture company IKEA is no longer stocking or selling incandescent light bulbs in its U.S. stores, instead offering longer-lasting and energy-efficient bulbs. The retailer began phasing out the sale of the light bulbs in August. IKEA's action comes ahead of federal legislation that would mandate more efficient light bulbs starting in 2012. The pullout also applies to IKEA stores in Canada. Stores in France and Australia started phasing out the incandescent bulbs last year.” (CONSHOHOCKEN, 2011) .
2. How would you characterize IKEA’s original strategic posture in foreign markets? What were the strengths of this posture? What were its weaknesses?
How would you characterize IKEA’s original strategic posture in foreign markets?
Decrease production cost and mass production
To standardize the Swedish designed furniture to international market. Specifically, IKEA has strategy in order to decrease its production costs since IKEA planned to reduce the price of their products by 2 to 3 percent every year. It can be seen from China news in 2003 here.
"Prices decreased by about 12 per cent in the past financial year," said IKEA China manager Ian Duffy. "Low prices will remain in the coming year to make our products more affordable for IKEA's 8 million customers." (IKEA's low-price strategy remains, 2003)
One design fits all
For several decades, IKEA had looked for international markets, which were culturally as close as possible to the Scandinavian market. The basic assumption behind IKEA's global strategy was 'one-design-suits-all.' Anders Dahlvig, the CEO of IKEA, had once said, "Whether we are in China, Russia, Manhattan, or London, people buy the same things. We don't adapt to local markets." (George, 2001)
What were the strengths of this posture?
IKEA achieved this by focusing on the core suppliers which later resulted in the long-term development and innovations. In addition, IKEA applied the sourcing strategy to source the right manufacturing locations instead of Sweden such as Poland. Therefore, standardization of the design manufacturing processes and ensures the economics of scale or mass production and learning effects results in the affordable products with designed quality.
What were its weaknesses?
IKEA encountered problems while entering to U.S. market where the measurement units, product sizes are different. Even with the store location in China, IKEA learnt a lot on how to place the shops in accordance with customers’ preferences. Therefore, the standardization was no longer applicable in some markets. IKEA needs some customizations on to the customer tastes and preferences, infrastructure and Traditional Practices, Distribution channels and host government demands (Hill, 2010) .
3. How has its strategic posture of IKEA changed as a result of its experiences in the United States? Why did it change its strategy? How would you characterize the strategy of IKEA today?
How has its strategic posture of IKEA changed as a result of its experiences in the United States? Why did it change its strategy?
IKEA had redesigned the products especially for U.S. customers. Specifically, IKEA changed its products measurement units, sizes in order to meet with the customers’ preferences. Some of IKEA’s problems in U.S. market can be addressed here (Bradley Chen, 2003) .
First is with Durability. IKEA’s company slogan is “Low price with meaning”. In order to reach this goal, IKEA has to compromise on its quality of the furniture. IKEA products usually apart after a few years; therefore no one in this company would claim that IKEA furniture was built for longevity. Although IKEA provides lots of choices on style and color, some customers may not want to see the item they bought break down so quickly.
Second is the design for Americans’ Daily Lives. At the beginning of IKEA business in the United States, they discovered that Americans did not like their products. Apparently, its beds and kitchen cabinets did not fit American sheets and appliances, its sofas were too hard for American comfort, its product dimensions were in centimeters rather than inches, and its kitchen wares were too small for American serving-size preferences.
Last, the limitation of style selection from the “Matrix”. IKEA furniture style selection was limited according to the “matrix” which is shown in below chart.
Figure 4 IKEA design Matrix
There were four styles with three price levels which could not meet with a wider customer ranges in the U.S.
Later IKEA issued the Franchising approach or we can call it as Strategic Alliance strategy. There are several reasons why IKEA changed here.
First, strategic alliances help facilitating the entry into the foreign markets. For example, Siam Future Development Plc together with IKEA recently hold a signing ceremony for a joint venture “Mega Bangna”, a Baht 10,000 million project featuring lifestyle home furnishing center, “IKEA Store” first launched in Thailand (Anansitichok, 2009) .
Second, strategic alliance allows firms to share fixed costs and associate risks of developing new products and processes.
Third, an alliance is a way to bring together complementary skills and assets neither company could easily develop or owns it.
Last, it can make sense to form an alliance that will help firm establish technological standards for the industry that will benefit the firm.
How would you characterize the strategy of IKEA today?
The Franchising strategy, a specialized form of licensing, in which the franchiser not only sells intangible property (normally trademark) to the franchisee, is now an IKEA strategy. IKEA has its own partner selection system called Inter IKEA System B.V.
Works Cited
Anansitichok, K. (2009, May 11). Siam Future and IKEA launch new joint venture to develop MEGA BANGNA. Retrieved Feb 2011, from ryt9.com: http://www.ryt9.com/es/prg/79003
Bradley Chen, G. C. (2003). http://www.slideshare.net. Retrieved 2011, from IKEA INVADES AMERICA: http://www.slideshare.net/geechuang/ikea-invades-america-presentation
CONSHOHOCKEN, P. (2011, January 4). IKEA stops selling incandescent light bulbs in US. Retrieved February 6, 2011, from Bloomberg Businessweek: http://www.businessweek.com/ap/financialnews/D9KHI1M80.htm
George, N. (2001, Feb). One Furniture Store Fits All . Retrieved from Financial Times: http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/IKEA%20Globalization%20Strategies-Foray%20in%20China.htm
Hill, C. W. (2010). Global Business Today. Mc Graw Hill.
Ikea. (2003 - 2010). IKEA.COM. Retrieved February 6, 2011, from Inter IKEA Systems B.V.: http://franchisor.ikea.com/showContent.asp?swfId=facts1
IKEA's low-price strategy remains. (2003, Sept 27). Retrieved Feb 2011, from CHINA DAILY.COM: http://www.chinadaily.com.cn/en/doc/2003-08/27/content_258713.htm
Romanian IKEA Franchise was sold to Swedish group. (2010, March 17). Retrieved Feb 06, 2011, from http://www.actmedia.eu: http://www.actmedia.eu/2010/03/17/top+story/romanian+ikea+franchise+was+sold+to+swedish+group+/26240
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