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Ikea - Expanding Global

IKEA: Expanding globally Introduction.3 1. A learning organization: understanding the culture of learning and innovation.3 2.1 General concept of learning organization3 2.2 IKEA a learning organization in various market:.4 2. IKEAs internationalization strategy ..6 3.3 Internationalization strategy from 1974 onwards 6 3.4 From the perspective of internationalization theories: 7 3. Issued considered in international market research and opportunity analysis: .9 3.1The Japanese and Chinese market: 9 3.2 The Brazilian market: ..9 4. IKEAs entry mode strategy: ...12 5.5 Subsidiaries.13 5.6 Franchising.13 Summary Introduction Globalization is now playing an important role in the growth of economies across the world. The rapid growth of its process has led to social, economic, technical, cultural and ecological interdependence among nations. It also provides new and potentially profitable markets, increases firms competitiveness, facilitates access to new product ideas, manufacturing innovations. Thanks to its numerous advantages, the world is moving closer together and a great deal of organizations has great opportunities to expand their market to foreign ones. IKEA, the worlds largest furniture retailer, did not miss the chance when deciding to go global in order to expand its business The report begins with an analysis of a learning organizations characteristics lie behind IKEAs international operations, and with a conclusion that a well-managed organization with a culture of learning and innovation will be successful in international markets. The next part assesses

IKEAs internationalization strategy since 1974 from the perspective of international theories. The following part discusses issues that must be considered in international market research and opportunity analysis, applying to Brazilian market from experience in Japanese and Chinese market. And the final part will analyze the entry modes that IKEA has used since the first time it made effort to enter foreign market 1. A learning organization: understanding the culture of learning and innovation 1.1. General concept of learning organization In task 1, it is said by Doole that in order to be internationally successful, a firm should be well managed and clearly understand the culture of learning and innovation. Generally, a learning organization is a company facilitating the learning of its members and transforming itself continuously (Pedler, Burgoyne & Boydell, 1997). Or in particular, according to Senge (1990: 3), a learning organization is where people continually expand their capacity to create the results they desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are learning to see the whole together. In addition, Wang, C.L. and Ahmed, P.K. (2003) state that learning organizations typically have characteristics of excellent knowledge management structures which is considered a key element in globalization. All these concept means that the willingness to learn and innovate is one of the most important key elements that gives the firm competitive advantages to win over its rivals when the world markets is moving closer. Through characteristics displayed in its globalization process, Ikea proves that it is a learning organization with its well understanding of the culture of learning and innovation. 1.2. IKEA a learning organization in various markets: Founded in 1943, IKEA is now the worlds most successful multinational retailing with 280 stores in 26 countries. To achieve global success, IKEA took some actions, for example, shipping the product all over the world in order to avoid the costs associated. Besides, globalization of market and production are also important factors of IKEAs achievements. Since 1958, IKEAs process of international expansion had been running very well until it entered US market. Although it took a long time for IKEA to make solutions dealing with obstacles in adapting to and understanding US culture and consumer habits, those solutions represent the characteristics of a learning organization mentioned above. According to David Skyrme Associates (1995), a learning organization always seeks new ways of improving its existing products and services, and develops innovation strategies as well. Therefore, IKEA not only improved operation methods and products but also innovated plans to help consumer shop at its store more easily and comfortably. For example, setting up a smoking room at its stores in Spanish and putting water fountains throughout its USs stores raised cutomers satisfaction. Besides, based on lesson and experience from the prior success in US market, IKEA changed its management methods in order to nurture and expand the way of thinking and acting. Therefore, there is no surprise when saying that this innovative method is one of the keys to make the US become IKEAs third biggest country in terms of sales.

Japan is the first country in Asia that IKEA considered to enter. The differences between culture, lifestyle and behavior made IKEA facing failure in the first time it came to Japanese market. However, the later successful of IKEA clearly proved that the company has characteristics of continuously learning from experience. It is considered one of the essential elements leading to success in a learning organizations viewpoint. From experience in US and of prior failure in Japanese market, IKEA did very careful researches before re-entering in to make sure that the products would meet Japanese tastes. And based on learning Japanese culture, IKEA provided home delivery and an assembly service instead of its usual flat packs for extra charges while offered low price products with Japanese standards. The organization also innovated the way of managing inventories to keep cost down. The effort helped Japanese customers have more interest in buying IKEA products. It means that to be successful, an organization has to not only understand the culture of learning but also learn the way of innovation. In the organization context, innovation may be linked to positive changes in efficiency, productivity, quality, competitiveness, market share and others which are great competitive advantages in globalization process. IKEA shows that it has very creative responses to strict policies of governments when entering Chinese market by adopting joint ventures with a local company. Although its brand awareness was relatively high at that time in the local market, IKEA encountered a great deal of problems. However, IKEA proved that they will enhance their capacity to achieve what they want which is one of the important features of a learning organization. IKEA established firms in China to produce its products locally and also came up with the idea that encouraged customers go to IKEA and make their own home. As results, IKEA could offer low price and suitable products which satisfied Chinese customers needs. The new way of operating of IKEA in Chinese market states that innovation played an important role in creating value and sustaining competitive advantage. IKEA are considered as retailer internationalization since IKEA plan in organizing strategic objective, understanding the local nature of markets. The success of IKEA in markets all over the world has well displayed the characteristics of a learning organization with the culture of learning and innovation factors which have great contribution to an organizations success in its globalization process 2. IKEAs internationalization strategy 2.1. Internationalization strategy from 1974 onwards IKEA was founded in 1943 by Ingvar Kamprad and it took 15 years (1958) for the organization to open a store in foreign markets the first time. During the early years of its international expansion, IKEA primarily concentrated on establishing a presence in neighboring countries of Scandinavia such as Norway and Denmark. Germany is the country initiating the retailers internationalization activities from 1974 onwards. This market is an attractive destination due to its geographical, cultural proximity to Sweden. From 1974, people witness the great expansion of IKEA in Europe in particular and in the whole world in general. Just only three years later, IKEA broke into Austria market and continuously penetrated other EU markets such as Netherlands, Canary Islands, France, Iceland. All these countries locate not so far from Sweden so they

might have few differences in culture, income and customers behaviors in comparison with countries in other parts of the world. Hence, it is easier for IKEA to create their position around Europe Also in 1974, due to its rapid growth economy, Japan was the first country in Asia that IKEA. The internationalization strategy that IKEA chose to mark its presence in Japan is to acquire a local chain. IKEAs expansion process in Japanese market was not as successful as the organization expected because of some differences in culture and customers behavior. However, failure in the first round in Japan gave IKEA a great deal of experience for its further expansion in Asia such as Australia in 1975 and Singapore in 1978 In 1998, IKEA decided to go to China market. And with the experience gained both in the domestic and international business in other Asia markets, IKEA is now have a strong position in retailing furniture. IKEA began its expansion in America at Canada at 1976. With developed economy and a market that is not as difficult as the USs, Canada is potential market for IKEA to explore American taste. 9 years later, the organization took first steps to enter the US market. The US market appeared to be very difficult to enter but experience that IKEA gained at this place were worth in the expansion of the organization to North America. Through cultural of continuously learning and innovation, IKEA became more determined to expand its internationalization presence 2.2. From the perspective of internationalization theories: According to Elgar, Eward (2003), the Uppsala model is a theory that explains how firms gradually intensify their activities in foreign markets. The key features of this model are the following: First of all, firms gain experience from the domestic market before they move to foreign. Second, firms start their foreign operations from culturally and/or geographically close countries ad move gradually to culturally and geographically more distant countries. Firms start their foreign operations by using traditional exports and gradually move to using more intensive and demanding operation modes (Sales subsidiaries etc.) both at the company and target country level. It was very rare for companies to enter new markets with sales organizations or manufacturing subsidiaries of their own. However, in comparison with IKEAs global strategy from 1974 onwards, IKEAs process of global expanding is not quite similar to Uppsala model. According to Uppsala model viewpoint, firms should expand nearby markets first and should not break into new markets with sales organizations of manufacturing subsidiaries of their own. However, as analyzed above, from 1974 IKEA continuously entered to new markets which are both nearby and far away from original market such as Germany, Japan, Australia, Canada, Austria, Singapore Besides, export is not the only way for IKEA to break into new markets but the firm also opens its own sales organizations subsidiaries. Since 1974, IKEA has used subsidiaries and franchising as operation methods to expand to international markets. IKEA made a policy to create common characteristics in global market. That means the basic products and services of IKEA stores are similar all over the world no matter what it is franchising business or subsidiaries of their own business. However, depends on each market the products and services may change to fit with market demand depending on each markets features. Like a supply chain, IKEA introduce a two-way value system between customers, suppliers and IKEAs headquarters. Therefore, when entering into a new market,

IKEA not only find customers but also suppliers who can provide valuable input on political and legal, cultural, financial and other issue. IKEA always keep purchasing strategy from 1960s as doing long-term business with suppliers, emphasizing centralized control and standardization of the product mix. IKEA achieves this by carefully concern to its design and purchase strategy as low production and transportation costs. From IKEA's global strategy, it can be easily seen that its suppliers are usually located in low-cost nations, with close proximity to raw materials and reliable access to distribution channels. These have great important role in reducing cost relating to production and shipping products. Throughout the development process of business and also when going to global markets, IKEA always attaches importance to sustainable development is a top priority through the choice of long-term strategic partnership, commitment to quality goods and services to clients, actively supports community and social, improve and create friendly working environment for staff and all the things that turn into a social network called IKEA by creating a culture of learning and innovation. Base on the successful of IKEA expanding international markets, the Uppsala model shows the important and central role of exporting on international processes. Besides, the practice of expanding international markets by many steps to reduce risks is pretty good method when entering to new markets with less market knowledge and experience. However, the model just focuses on manufacturing industries and forgot service firms. It was not analyzed with many factors such as firm size, economic scale or other economic variables. In addition, the model pays no attention to importing, licensing and direct investment which are common methods to penetrate new markets 2. Issued considered in international market research and opportunity analysis: 3.3. The Japanese and Chinese market: Although IKEA, an enormous furniture retailer, intended to overcome this Asian market on the first round when it came to Japan, it encountered the cultural difficulties such as the differences in lifestyle and the way Japanese live and manage their houses. IKEA took about five years to investigate the market and potential partners before re-entering in. For better understanding of Japanese consumers, the organization conducted consumer research with more than 100 Japanese homes. One of IKEAs most important strategies was offering home delivery and an assembly service for extra charges instead of its usual flat packs. Besides, IKEA established firms in Asia countries where have great advantages such as cheap labor to keep its competitive prices By the decision to establish store in the suburb help customers shopping more convenient, IKEA successfully adjust itself to adapt to Chinese market. IKEA also benefit from the advantages of cheap labor, rapid economic growth, the huge demand in domestic market and abundant of raw materials. Hence, the organization can compete with a great deal of firms that produce copy products with cheaper price in Chinese market. With the necessary information on its Chinese customers, competitors and the market environment, IKEA eventually come to an appropriate decision of its market entry strategy and further market development plan as well 3.2 The Brazilian market:

Brazil remains a market that holds great potential for IKEA but to be successful, a company has to carefully investigate related information before getting into this market. The 12C framework for analyzing international markets proposed by Doole &Lowe (2008) is applied to examine the Brazilian market. Table 2: 12C framework for analyzing the Brazilian market 1. Country: | * Brazil belongs to Latin America, the Americas. It is Latin Americas largest market and the worlds fifth-most populous country * The economy of the country is one of the worlds tenthlargest economies in GDP terms * There is a large middle class population which is mainly involved in profession such as retailing, civil services and other skilled occupation * However, earnings is inequality and Brazil is also one of the worlds most unequal countries | 2. Concentration: | * According to geographical position, the Brazilian market can be separate into South-Central and North-East * The South-Central is generally similar to the less rich parts of Southern Europe, whereas the North-East is in contrast * The market can be separated into three main categories: residential (60%), office (25%), and institutional organizations (15%) | 3. Culture/ Consumer behavior | * The country has almost all features of Latin America. * There are problems influencing on Brazilian consumers shopping habits such as energy, bad traffic jams Besides, an important point is that middle-class Brazilians are more conscious of status than middle-class North Americans or Europeans because they are people who serve others. So when opening a store, the firm should not make it as for the rich people or for the poor * Many low-income consumers do not own cars. So like Chinese market, the organization should carefully consider where to locate its stores | 4. Choices: | * From numbers of Brazilian Furniture Association, IKEA will encounter approximately 13500 competitions in manufacture furniture. However, almost of them are merely small companies which are typically family-owned companies. * There are no major distributor chains in Brazil. However, a number of furniture are imported into Brazil by direct importers or furniture stores | 5. Consumption | * With the recent investigations, a huge part of the money was spend in housing improvement, including furniture and other household products (lighting, textiles, mattresses...). It is estimated that in 2011 the Brazilian population will use 1,8% of its total consumption with furniture and home articles |

6. Contractual obligations | * Technical assistance and availability of replacement parts are considered important factors in the purchasing decision | 7. Commitment | * IKEA has not entered Brazilian market yet | 8. Channels | * The organization should place its store where is near populated areas due to Brazilian culture * Traffic jams might be one of the potentially problems in the process of supplying. | 9. Communication | * Brazilian consumers, especially housewives, are accustomed to listen | 10. Capacity to pay | * Price is not the most important factor affecting Brazilian decision-making process of purchasing. | 11. Currency | * Brazil floated its currency in 1999 due to the US dollars appreciation, the Asian financial crisis and the global economic slowdown | 12. Caveats: | * Economies instability, difficulties in obtaining financing at reasonable interest rates and customs barriers for certain imports are things IKEA should consider before deciding to enter Brazil market | The above information about Brazil has clearly stated that Brazil is a very potential market containing numerous opportunities for IKEA entering and developing fur ther: * Because Brazil is fifth largest country in the world, it holds a large market share for IKEA to develop its brand. Brazil also belongs to Latin America, where IKEA doesnt have any store yet. So if IKEA succeed in Brazils market, it will be a great steps to getting into other countries in this area * It will be great opportunity for IKEA to take up the market because Brazil has not yet had major distributor chains or big company dealing in furniture manufacturing.

* There is a very attractive market segment of large middle-class population in Brazil. Although middle-class Brazilians are considered as more conscious of status but from experience when dealing with Chinese market, it seems to be a very potential market. Besides, IKEA can also establish firms in Brazil to supply stores of another countries around America * Major end users of furniture will only purchase from well-known and reliable suppliers. In addition, the most important factors in the purchasing decision of Brazilian are technical assistance and availability of replacement parts. So IKEA should improve its brand awareness through communication channels and should provide great after services for its purchased products 3. IKEAs entry mode strategy: When an organization has made a decision to enter an overseas market, there variety of options open to it such as export, licensing, franchising, joint ventures, establishing wholly owned subsidiaries by acquisition or green-field investment. These options vary with cost, risk and the degree of control which can be exercised. So after analysis all factors, it is necessary for IKA to choose the appropriate modes of entry. In the extent of the case study IKEA has mainly used subsidiaries and franchising to develop its own globalization expansion 1. Subsidiaries: In the first steps, IKEA establishes subsidiaries in stable markets which are identical to the Scandinavian market. These subsidiaries are set-up by an expansion team from the central expansion group located in Sweden. This group is responsible for store location and layout, training, logistics and marketing. All capital requirements are sourced from the headquarters. The primary purpose of the expansion group is to ensure standardization, operational control and provide a smooth entry into to a new market. When everything is properly set-up and functioning, the local operational team will take over the responsibility for running the store. The expansion team, on the other hand, will move on towards new expansion projects. After gaining experience from neighboring countries in Scandinavia market, IKEA enhanced its operation through a lot of new subsidiaries around the world. For its expansion in the US, IKEA decided to open a store. This is a logical strategy because the US is big market. Although this market contains difficulties that can be estimated but it have potential chances for IKEA to establish local chains. In addition, after succeeding in Japan market in the second round it came to that country, IKEA opened subsidiaries outside Tokyo to take up market shares and improve its brand awareness. 2. Franchising: Besides subsidiaries, IKEA approaches unknown, relatively small, and high risk markets by franchising. The expansion group is active in this field as well, as it provides the same preopening activities as in opening firm-owned subsidiaries. Franchisees have to carry basic items, but have the freedom to design the rest of the product mix to fit local market needs. The basic core items amount approximately 12,000, simple and functional products. The centralized head

office is actively involved in the selection processes and provides advice. In addition, all products have to be purchased from Ikea's product lines. In order to maintain service, quality and logistic standards, individual franchisees are periodically audited and compared to overall corporate performance. Extensive training, and operational support is provided from the headquarters. All franchisees pay franchise fees to Ikea holdings. All catalogues and promotional advertising is the responsibility of the headquarters. Franchising has been used as a vehicle to the company's generic focus strategy With its positive performance in foreign business, it could be said that IKEA has cleverly and smartly applied various entry modes to get into various markets since its international expansion. General, the company has applied a suitable mode and a combination of modes depending on each markets requirements in order to explore the opportunities available in those markets Summary The report provides an analysis of some certain aspects of IKEA, the largest furniture retailer in the world, in its internationalization process since the early 1980s. During its operations in different foreign markets the company has well displayed the characteristics of an organization with the culture of learning and innovation factors considered to be one of the elements leading to its international success. Together with innovative changes in the value chain, where consumers become Pro-sumers and suppliers are turned into consumers, the concept of marketing high quality products at low cost through a focused generic strategy, intended for the globally emerging middle-class has served Ikea well. In regard to the internationalization strategy since 1974, IKEA applied the Uppsala model in which the stages during expansion process are carried out through small steps. Before getting into foreign markets, in this case Japan and China, the company conducted market research to obtain the comprehensive information on these two markets, and subsequently applied this information to explore the opportunities available in these markets. In the end, the company has facilitated its international expansion through owned subsidiaries and franchises. This proves that the company has cleverly applied suitable entry modes to get into various international markets