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Prof. B.V. KUMAR
Prepared By
• Pulkit Puri
• Dhaval Muchhala
• Gargi Ganguly
• Karan Singh Bagga
• MVPSS Ananth


IKEA is a privately held, international home products retailer that sells flat pack furniture,
accessories, and bathroom and kitchen items in their retail stores around the world.The
company, which pioneered flat-pack design furniture at affordable prices, is now the world's
largest furniture retailer.
IKEA was founded in 1943 by 17-year-old Ingvar Kamprad in Sweden. Currently, the
company is owned by a Dutch-registered foundation controlled by the Kamprad family.
IKEA is an acronym comprising the initials of the founder's name (Ingvar Kamprad), the
farm where he grew up (Elmtaryd), and his home parish (Agunnaryd, in Smaland, South
INGKA Holding B.V. is the parent company for all IKEA Group companies, including the
industrial group Swedwood, which commissions the manufacturing of IKEA furniture
coming from any manufacturer worldwide (outsourcing), the sales companies that run IKEA
stores, as well as purchasing and supply functions, and IKEA of Sweden, which is
responsible for the design and development of products in the IKEA range. INGKA Holding
B.V. is wholly owned by Stichting INGKA Foundation, which is a non-
profit foundation registered in Leiden, Netherlands. The logistics centre europe is located
in Dortmund, Germany.
Inter IKEA Systems B.V. in Delft, also in the Netherlands, owns the IKEA concept and
trademark, and there is a franchising agreement with every IKEA store in the world. The
IKEA Group is the biggest franchisee of Inter IKEA Systems B.V. Inter IKEA Systems B.V.
is not owned by INGKA Holding B.V., but by Inter IKEA Holding S.A. registered
in Luxembourg, which in turn is part of Inter IKEA Holding registered in the Netherlands
Antilles. The ownership of the holding companies has not been disclosed.
The company which was originated in Småland, Sweden , distributes its products through its
retail outlets. As of August 2009, the chain has 301 stores in 37 countries, most of them
in Europe, North America, Asia and Australia. 2006 saw the opening of 16 new stores. A
total of at least 12 openings or relocations are planned for 2009. IKEA is one of the few
chains to have locations both in Israel and in other Middle Eastern nations. As such, IKEA
brought action in the Supreme Court of British Columbia successfully preventing a
competitor in Victoria from using the name "Idea."
The IKEA Website contains about 12,000 products and is the closest representation of the
entire IKEA range. There were over 470 million visitors to the IKEA websites in the year
from Sep. 2007-Sep. 2008. IKEA is keen to show leadership in adopting
more environmentally friendly measures in its manufacturing processes. In 1990, IKEA
adopted The Natural Step framework as the basis for its environmental plan.
The first IKEA store was opened in Sweden in 1958. The first stores outside Sweden were
opened in Norway (1963) and Denmark (1969). The 1970s saw the spread of stores to other
parts of Europe, with the first store outside Scandinavia opening in Switzerland (1973),
followed by Germany (1974). During the same decade, stores were opened in other parts of
the world, including Japan (1974), Australia and Hong Kong (1975), Canada (1976), and
Singapore (1978). Ikea has expanded further in the 1980s, opening stores in such locations as
France (1981), the Canary Islands (1981), Belgium (1984), the United States of America
(1985), the United Kingdom (1987), and Italy (1989). IKEA has continued expansion into
more countries in the 1990s and 2000s. Germany, with 44 stores, is IKEA's biggest market,
followed by the United States, with 37. At the end of 2009 financial year IKEA group had
267 stores in 25 countries. The first IKEA store in Latin America opened on February 17,
2010 in Santo Domingo, Dominican Republic. However, the company has thus far not shown
much of a presence in the developing countries.

Older IKEA stores are usually very large blue buildings with few windows and yellow
accents (the company's colors are also the national colors of Sweden). They are often
designed around a "one-way" layout which leads customers along "the long natural way.".
This layout is designed to encourage the customer to see the store in its entirety (as opposed
to a traditional retail store, which allows a consumer to go right to the section where the
goods and services needed are displayed) although there are often shortcuts to other parts of
the showroom. The sequence first involves going through furniture showrooms making note
of selected items. Then the customer collects a shopping cart and proceeds to an open-shelf
warehouse for smaller items (Market Hall). Then the customer visits the furniture warehouse
(Self Serve) where they collect previously noted showroom products in flat pack form.
Sometimes they are directed to collect products from an external warehouse on the same site
or at a site nearby. Finally they take their products to the cashier's station to make payment.
Newer IKEA stores, like the one in Mönchengladbach, Germany, make more use of glass,
both for aesthetic and functional reasons. Skylights are also now common in the Self-serve
warehouses. More natural light reduces energy costs, improves worker morale and gives a
better impression of the product. Whilst the original design involved the warehouse on the
lower level and the showroom and marketplace on the upper, today most stores globally have
the Showroom upstairs with the marketplace and warehouse downstairs. Additionally, some
stores are single level. Some stores maintain separate warehouses to allow more stock to be
kept on-site at any given time, although this occasionally results in challenges in finding the
items, as well as a perception of having to queue in line twice. Single-level stores are found
predominantly in areas where the cost of land would be less than the cost of building a 2-
level store – examples include the store in Saarlois, Germany and Haparanda, Sweden. Some
stores also have dual level warehouses and machine controlled silos which allow large
quantities of stock to be accessed throughout the selling day. Most IKEA stores offer an "as-
is" area at the end of the warehouse just prior to the cashiers. Returned, damaged and
formerly showcased products which are not in new condition or taken out of the IKEA
product range are displayed here, and sold with a significant discount, but also with a "no-
returns" policy. Most IKEA stores communicate the IKEA policy on environmental issues in
the "as-is." In the United Kingdom, this is referred to as "Bargain Corner." In Hong Kong,
where shop space is limited and costly, IKEA has opened three outlets across the city, which
are actually part of shopping malls. They are tiny compared to common "large blue box"
store design, but are huge by Hong Kong standard. Most of the outlets still have a "one-way"
layout. An exception is the newest outlet in Telford Plaza, where the three independent floors
can be accessed freely from each. However, following IKEA tradition, the cashiers are only
located on the lowest floor. The vast majority of IKEA stores are located outside of city
centres, primarily because of land cost and traffic access. Several smaller store formats have
been unsuccessfully tested in the past (the "midi" concept in the early 90s, which was tested
in Ottawa and Heerlen with 9,300 m2, or a "boutique" shop in Manhattan). A new format for
a full-size, city centre store was introduced with the opening of the Coventry (UK) store in
December 2007. This is in response to UK government restrictions blocking retail
establishment outside city centre and the format is expected to be used for future IKEA stores
in the UK. The Coventry store has 7 levels and therefore has a flow different from other
IKEA stores. Another feature of many stores are their long opening hours. Many IKEA stores
are in operation 24 hours a day with restocking and maintenance being carried out throughout
the night. However, public opening hours tend to be much longer than most other retailers,
with stores open well into the evening in many countries. In the UK for example, almost all
stores are open past 8pm with opening times often around 9-10am. IKEA Croydon has one of
the longest opening hours worldwide being open from 10am to 11pm Monday to Friday.

Many stores include restaurants serving traditional Swedish food such as potatoes
with Swedish meatballs, cream sauce and lingon berry, although there are variations. In
Kuala Lumpur, Malaysia the usual boiled potatoes have been switched to French fries.
Besides these Swedish staples, hot dogs and drinks are also sold, the latter for around
5 SEK (approx €0.50), along with a few varieties of the local cuisine, and beverages such
as lingon berry juice. Also items such as Prinsesstarta — Princess cake are sold as desserts.
IKEA stores in Saudi Arabia serve chicken shawarma at the exit instead of the traditional
IKEA hot dog. In many locations the IKEA restaurants open daily before the rest of the store
and serve an inexpensive breakfast. In Canada, this breakfast costs $1 and includes eggs,
sausage, and hashbrowns and various add-ons like bacon and pancakes at additional costs. In
the United States, the local variation serves scrambled eggs, bacon, country potatoes and
choice of Swedish pancakes or french toast sticks. In the Netherlands it costs €1 and consists
of a croissant, a small bread roll, butter or margarine, jam, a slice of cheese, a boiled egg,
and coffee or tea. In Australia it costs AU$2.95 - AU$3.5 and consists of hash brown, bacon,
scrambled eggs, a sausage and tomato, with a $2 vegetarian option with baked beans which
omits the sausage and bacon. In Germany this breakfast costs €1.95 and consists of two bread
rolls, one slice of smoked salmon, one slice of cheese, one slice of salami, two portions of
butter, one portion of jam, and coffee. IKEA Canada, for a limited time, served dim sum
alongside its original breakfast menu. Refills of coffee, tea, and soft drinks are free of charge,
even in countries where this is uncommon in other restaurants. Many stores also have a
Swedish Food Market selling Swedish-made, Swedish-style groceries, such as Swedish
meatballs, packages of gravy and various Scandinavian cookies and crackers, as well as
salmon and salmon roe. IKEA also sells lingonberry jam in a wide array of sizes, including
buckets. IKEA has extended its product range with the introduction the IKEA food label. The
new label has various different foods including, chocolates, meatballs, jams, pancakes,
salmon and various drinks.

Many stores have a play area, named Smaland (Swedish direct translation small land, can
mean a lot of things but here it means land for the small ones. Smaland is also the name of
the province of Sweden where Ingvar Kamprad was born). Parents drop off their children at a
gate to the playground, and pick them up after they arrive at another entrance. Parents are
also given free pagers by the on-site staff; the staff will set off these pagers should a child
need his or her parents sooner than expected.

IKEA has a wide range of products for offering. Much of IKEA's furniture is designed to
be assembled by the consumer rather than being sold pre-assembled. IKEA claims this
permits them to reduce costs and use of packaging by not shipping air; the volume of a
bookcase, for example, is considerably less if it is shipped unassembled rather than
assembled. This is also a practical point for many of the chain's European customers,
where public transport is commonly used; the flat-pack distribution methods allow for easier
transport via public transport from the store to a home assembly. IKEA contends that it has
been a pioneering force in sustainable approaches to mass consumer culture. Kamprad refers
to the concept as "democratic design," meaning that the company applies an integrated
approach to manufacturing and design. In response to the explosion of human population and
material expectations in the 20th and 21st century, the company implements economies of
scale, capturing material streams and creating manufacturing processes that hold costs and
resource use down, such as the extensive use of particle board. The intended result is flexible,
adaptable home furnishings, scalable both to smaller homes and dwellings as well as large
houses. Not all furniture is stocked at the store level. For example, while a particular color of
sofa model may be stocked and can be picked up at the store, another color of the same
model that is not available in the store will instead have to be shipped from a warehouse to
the customer's home for an additional delivery charge. Unlike with other retail stores, any
requests for a model to be shipped from the warehouse to the store for pickup would also
incur the same delivery charge to the customer. Delivery charges can easily add another 10%
to 25% to the purchase price.

The IKEA corporate structure is divided into two main parts: operations and franchising.
Most of IKEA's operations, including the management of the majority of its stores, the design
and manufacture of its furniture, and purchasing and supply functions are overseen by
INGKA Holding, a private, for-profit Dutch company. Of the IKEA stores in 36 countries,
235 are run by the INGKA Holding. The remaining 30 stores are run by franchisees outside
of the INGKA Holding. INGKA Holding is not an independent company, but is wholly
owned by the Stichting Ingka Foundation, which Kamprad established in 1982 in the
Netherlands as a tax-exempt, not-for-profit foundation. The Ingka Foundation is controlled
by a five-member executive committee that is chaired by Kamprad and includes his wife and
attorney. While most IKEA stores operate under the direct purview of Ingka Holding and the
Ingka Foundation, the IKEA trademark and concept is owned by an entirely separate Dutch
company, Inter IKEA Systems. Every IKEA store, including those run by Ingka Holding,
pays a franchise fee of 3% of the revenue to Inter IKEA Systems. The ownership of Inter
IKEA Systems is exceedingly complicated and, ultimately, uncertain. Inter IKEA Systems is
owned by Inter IKEA Holding, a company registered in Luxembourg. Inter IKEA Holding, in
turn, belongs to an identically named company in the former Netherlands Antilles that is run
by a trust company based in Curaçao. The owners of this trust company are unknown (IKEA
refuses to identify them) but are assumed to be members of the Kamprad family. In
Australia, IKEA is operated by two companies. Stores located on the East Coast
including Queensland, New South Wales, and Victoria are owned by INGKA Holding. Stores
elsewhere in the country including South Australia and Western Australia are owned by
Cebas Pty Ltd. Like elsewhere, all stores are operated under a franchise agreement with Inter
IKEA Systems.

Affordable solutions for better living


Ikea's mission is to offer a wide range of home furnishing items of good design and function,
excellent quality and durability, at prices so low that the majority of people can afford to buy


The net profit of IKEA Group (which does not include Inter IKEA systems) in fiscal year
2009 (after paying franchise fees to Inter IKEA systems) was €2.538 billion on sales of
€21.846 billion. Because INGKA Holding is owned by the non-profit INGKA Foundation,
none of this profit is taxed. The foundation's non-profit status also means that the Kamprad
family cannot reap these profits directly, but the Kamprads do collect a portion of IKEA sales
profits through the franchising relationship between INGKA Holding and Inter IKEA
Systems. Inter IKEA Systems collected €631 million of franchise fees in 2004, but reported
pre-tax profits of only €225 million in 2004. One of the major pre-tax expenses that Inter
IKEA systems reported was €590 million of “other operating charges.” IKEA has refused to
explain these charges, but Inter IKEA Systems appears to make large payments to I.I.
Holding, another Luxembourg-registered group that, according to The Economist, “is almost
certain to be controlled by the Kamprad family.” I.I. Holding made a profit of €328 million in
2004. In 2004, the Inter IKEA group of companies and I.I. Holding reported combined profits
of €553m and paid €19m in taxes, or approximately 3.5 percent. The Berne Declaration, a
non-profit organization in Switzerland that promotes corporate responsibility, has formally
criticized IKEA for its tax avoidance strategies. In 2007, the Berne Declaration nominated
IKEA for one of its Public Eye “awards,” which highlight corporate irresponsibility and are
announced during the World Economic Forum in Davos, Switzerland.

Furniture industry has changed over the years. It no longer restricts itself to a production of a
chair or a table or a bed but today it includes manufacturing of a range of furniture and home
furnishings and designed interiors which spell class and elegance. There is a boom time for
furniture industry. Every country sport a string of furniture showrooms of all kinds and sizes.
Changing lifestyle, disposable incomes, economy growth, increasing migration to urban areas
have all contributed to the demand for furniture and in turn the growth of the furniture
industry as whole. Furniture industry comprises not only the production of a wide range of
products related to office, living room, bedroom, kitchen , garden, school furniture but also
mattresses, furnishings, upholstery, parts of furniture etc. A wide variety of raw materials are
used in production of furniture like wood, rattan, plastic and metal and more recently silver.
Including various varieties of wood, wooden furniture is the major production and exports of
the furniture industry in almost every country.

Characteristics of the furniture industry

• Furniture manufacturing worldwide forms a regionally centralized competition pattern

under the clustering effect.
• The furniture industry is both a organized and a non-organized sector.
• Utilization of skilled and unskilled workers.
• Utilization of handcrafted tools, machines and CAD/CAM for manufacturing and
• Source of employment for rural workers.
• Employment is spread across many sectors showing the diverse nature of the industry
and a broad product range.
• Consumer expectations and purchasing behaviors have marked regional variations.


As the world economy is developing fast in the past 10 years, the furniture markets have
opened up more and the world furniture industry has been growing fast. Traditional furniture
making countries continue to firmly take up over 70% of the global market. This is possible
because of their their long established production capacity, advancement in science and
technology, solid funds and rich management experiences. Meanwhile, developing countries
and regions like China, Southeast Asia, Poland and Mexico, with China taking the lead, have
built upon their respective competitive advantages and gradually have covered almost 30% of
the world market. The furniture industry in such countries is developing strongly and
showing great potentials. The European Union furniture industry accounts for about half of
the world's furniture production. The production value of this industry in this region is around
€ 82 billion. Considered to be a labor-intensive industry it provides employment for around 1
million people. Among the European countries, Germany takes the lead as the largest
furniture producing country, accounting for about 27% of total EU production. This is
followed by Italy (21.6%), France (13.5%) and the UK (10.4%).The Canadian Furniture
Industry is the 5th largest exporter of furniture in the world. The major furniture producing
countries in South East Asia are Philippines, Indonesia, Malaysia, Singapore, Thailand,
Korea , Taiwan and India. In the context of global furniture trade, Asia shows healthy signs
of growth with respect to its other international competitors. Asian furniture have always
been popular in developed countries like USA, Europe and Australia.
Over 20 years of fast growth, China has been able to bring unlimited business opportunities
and vitality to the global furniture industry. Now, China has today emerged as a furniture
production center, a circulation center as well as an exhibition center in the world. The rise of
China's furniture industry has brought about a new round of restructuring of the global
furniture industry and trade pattern. According to a recent estimate , the Indian furniture
industry is estimated at around Rs 350 billion . Eighty-five per cent of this falls into the
unorganized sector. According to a study by the World Bank, the organized furniture industry
is expected to grow by 20 per cent a year and India, Brazil and Russia will witness a boom.

Power of the Buyers - There is a little power because of the exiting low-price options.
Furniture and other small items have an alternative and consumers have limited alternative
choices that make the IKEA unique among its competitors. In addition, the low price strategy
is another way of the company to response in buyer’s needs.

Power of Supplier - IKEA has its thousands of suppliers that set standards in delivering the
materials. Once in a while, for some products, the IKEA bids for the contracts with multiple
companies to craft the same products. Most of the suppliers work in IKEA and compete with
other suppliers, and they have a little bargaining power. Because of the low-pricing, IKEA’s
profit margin also affects the prices in raw materials than by prices in labor.

Rivalry - The IKEA’s furniture competitors’ offers different styles and functionality. Conrin
targets a new low cost in terms of furniture line; Cratel & Barrel offers a furniture in a box
which is subject in higher prices; Ethan Allen aimed at a more upscale market; Wal-Mart is
equipped in a big box furniture that is categorized under the general store must-have-items,
but don’t have much of a style. IKEA is the most successful in delivering the complete
package for the customers that reflects on weak rivalries.

Substitutes - There is no specific product that can be a substitute for the furniture but IKEA
at least, have to keep up with the latest trends, to avoid becoming out of style. Another
advantage is that, through their cutting and leading technology, IKEA could copy any new
style fairly and move each the product into its stores.
New Entrants - Another furniture company is rolling on a low-cost strategy and should
compete with the IKEA as the excellent company in delivering the furniture and house wares.
IKEA stores do not reach many small towns and this is an opportunity for the new
competitors to move into small and midsize cities with smaller stores and less selection. But
not easier in city because new entrants have to establish a vast supply chain and create a
unique brand name.




 IKEA’s flat packaging reduces its overall costs and makes it easier for customers to
transport it from one place to another.

 The company culture matches its external image – pragmatic, cost-saving


 Product design which is sleek and minimalist design is popular in Europe and it
gained popularity in the U.S.

 Strong in-store experience which is unique, experiential, “modern theme parks”

 Brand reputation in America, Shanghai, people lined to get into newly opened stores.

 Target customers “young people of all ages”, well educated, liberals, white collars
and those unconcerned with status symbol.

 Stores are similar worldwide and stock a huge range of home furnishings within the
same area.


 Foreign company trying to sell to an American audience.

 It’s difficult to understand different countries attitudes and tastes if you’re not from
the country.

 Niche markets – the minimalist design doesn’t appeal to everyone.

 Too strong of an emphasis on cost-saving could lead to cutting corners and negatively
affecting safety.

 Limited manufacturing capabilities mean that IKEA has to depend on subcontracted


 Subcontractors can make their own range of products and compete with IKEA.



 The budget shopper market is growing, especially among college students and in
metropolitan areas.

 In-store restaurants are popular, and even that is attracting lots of customers.

 Now that product design has been tailored to American, Chinese preferences, where
they have an opportunity to add “bonus” services to increase customer service and

 IKEA concept of selling a lifestyle based on good design and value for money is a
major selling point.

 Focus on differentiated products for the Asian market which have the fastest growth
with an affluent middle class.

 IKEA commands only5 to 10% of the retail furnishing market in each of the country
it has outlets, and it has huge potential to increase its market share especially in a
large market such as in North American region.


 Difficult to sustain good design quality products at low cost when the number of
competitors keep increasing, e.g. in US Kmart, Target Corp, Fly in France and Japan
Nitori company in Japan.

 The furniture retail segment is highly fragmented and IKEA is flanked by competitors
in high-end specialty retailers and low-end discount retailers.
 North American market poses a huge challenge because of major differences in size,
colour and lifestyle.

 Discount retailers sell on the basis of price, bringing down margins and making it
difficult to stay profitable.

 Major challenge to keep the core values alive especially when the company becomes
larger and more diverse.

IKEA in Japanese market

First round

Japan overview
After 1950s, Japan economy grew rapidly from less-developed to developed country. On
average, Japan's annual GDP growth was about 10 percent from the 1950s until the 1970s
and became the world second largest in 1986 behind United States. Japan possessed the
competitive strength in industries steadily. The economic growth still kept moving
successfully until in 1973, Middle East oil crisis also occurred, following with a second oil
crisis in 1979 that brought to the economic recession. Later in 1985, the value of yen rose
increasingly which was three times of its value in 1971 under fixed exchange rate system.
Corporate investment, stock prices, new equity turned to rise exceedingly. Finally,
government considered to tighten the value of asset, especially land, with monetary policies
while higher interest rates sent stock prices into a downward curved. Japan encountered
extensive speculation in the real-estate and domestic commodity markets which made Japan
suffering from double-digit inflation. By the end of 1990s, the recession known as the
collapse of the bubble economy occurred.

Characteristics of Japanese Furniture Market

For Japanese wood furniture market, it was reported that the furniture market in retail
furniture market value of $ 10 billion in 1982 and $ 6.7 billion for the wholesale level in
1984. The imports of wood into Japan were only a small part of total market which most of
them are shipped from East Asia such as Taiwan while most wood furniture from Europe and
United States is imported by specialty trading companies and specialty import furniture
stores. Demand for Western style furniture also grew during this period and Japan maintains
no regulatory barriers to import business furniture.
Japan is another major furniture market, second to the United States. Analysis of its furniture
trade trends generally reflects it as another net furniture importer. In 1989, only about 5% of
wood furniture consumption was imported and only about 2% of production was exported,
which reveals that its market was largely served by its domestic industry.
In 1993, the value of furniture imports into Japan was valued at 168,143 million Yen (U.S.
$1.68 billion at 100Yen/U.S. $1). This is a reduction of 7.2% from the previous year.
Japanese furniture imports from the United States decreased by 11% between 1992 and 1993
(Japan Furniture Trade, 1998). The decrease of furniture imports was primarily due to the
economic recession. In 1993, the largest importer of Japanese furniture was Taiwan, followed
by the United States.
U.S. furniture is popular in Japan due to the quality, value, and variety of products. Two
furniture products from the United States that are growing in popularity are ready-to-
assemble furniture, known as “kit furniture” and “home office furniture”. Kit furniture is very
attractive to housewives. Home office furniture is being promoted by the U.S. furniture
suppliers in association with the growing sophistication of communication systems that make
it possible for the Japanese to work from home.
Thailand, Indonesia, Korea, and Malaysia were the next largest furniture exporters into the
Japanese market after the United States.
. These Asian countries, except Korea, enjoyed an increasing value of furniture, reflecting the
popularity of their products, which combine quality and low cost to create value. Export of
Italian furniture into Japan market has been reduced considerably due to greater competition
from Asian furniture producers. China, which was the next largest country after Italy, has
shown tremendous performance as a furniture supplier into this market with a 35% increase
in value of imports between 1992 and 1993.
It is important to note that there is no tariff imposed on the majority of furniture products
imported into Japan. Only a few products, such as furniture using leather, have import duties
ranging from 3.87% to 4.6% and some wooden furniture products up to 5%. This is important
to Malaysia because it will reduce the import price of Malaysian furniture.
Japanese furniture manufacturers use primarily local species of wood. Imported species
include the popular of the U.S. furniture species such as alder and oak, as well as some
tropical species such as mahogany, teak and rubberwood. Japan's furniture industry is at a
poor competitive position in terms of production factors such as raw material and labor cost.
This furniture industry has made tremendous efforts to improve through manufacturing
technology by modernizing plants and subsequently decreasing cost. Its strategy is to produce
high quality furniture for the high-end domestic market and simultaneously to enhance the
competitiveness of Japanese furniture firms in international markets (Smith and West, 1992).

IKEA in Japan
In the mid 1970s, IKEA, Swedish home-furnishings giant company, decided to enter
Japanese market as the economic expansion in Asia emerged by launching a franchising deal
in 1974. However, IKEA have been through a rough time to survive in 1970s and they
eventually decided to pull out of Japanese market in 1986 (Lane, 2007). IKEA encountered
with failure as a result of rush jumping into Japanese market, the size of store as too small
and only few Japanese consumers were willing to assemble IKEA’s do-it-yourself kits. At
that moment, IKEA also needed to deal with strong local competition such as Mujirushi
Ryohin and Nitori.
It was believed that it was a big mistake for IKEA to be launched in Japanese market that
early but it was the appropriate decision to withdraw and wait until they are ready because he
claimed that one of problems occurred as they cannot provide a sufficient supply network.

Japan- overview
In 1990s, Japanese government tried to keep inflation in low rate and restructured the
financial sector in 1996 by producing “Big Bang” reform measures. Later, Asian financial
crisis emerged and was considered as external economic factor of downturn.
Therefore, Japanese economy was recovered with sluggish growth in April 1999 but it was
considered as a temporary phenomenon since investment in factories was weak and Japanese
economy also major relied on foreign demand and communication technologies. During this
period, barriers to foreign consumer goods have been removed but some restriction still
limited the flow of imports.
However, Japanese economy entered into an economic recession over again as an effect of
terrorist attacks in September 11, 2001. Japan encountered long run stagnation of Japanese
economy along with the problem of non-performing loan and economic recession that
hamper economic growth while economic structure was inflexible for economic environment.
Nevertheless, in 2002, Japanese economy moved to a recovery phase though the war in Iraq
had impacted on them. After ending the war in mid 2003, investment in plant and equipment
were increased. Services sector such as financial, retail and tourism is growing continually.
Still, Japan is the world's second largest economic power and the second most
technologically advanced economy after the United States.

Characteristics of Japanese Furniture Market

During this period, Japan’s home furnishings sector has expanding and growing rapidly. This
expansion also gives the opportunity for not only Japanese company but also foreign
company to grasp the chance since in 2001, Japanese government acted the deregulation of
Japanese Large Scale Retail Store Law in order to encourage and enhance the investment in
Japan. This enactment leads to spreading out of Furniture market over again. For customer
side, consumer has changed the way they thought of products in household by encouraged to
search for home management solutions.
Home furnishing stores are emerged enormously and willing to offer the different styles such
as modern style, natural styles and ethnics style that integrates earthy and hand-made
elements to different styles of customers.

IKEA in Japan
Since IKEA are not successful from the first time they entered in Asia, IKEA has planned for
five years in order to return to Japan carefully as “Japan is the second biggest economy and
retail market in the world”, Tommy Kullberg, Last President and CEO of IKEA Japan K.K,
stated (Wijers-Hasegawa, 2006) as Dahlvig estimated that though Japanese market is tough
for entering, Japan is much more open and can lead IKEA to catch a pivotal role as a stronger
company in Japanese market.

Moreover, Lars Petersson, replaced Kullberg and responsible for IKEA Japan K.K. since
September 2005, also believes that the reentering for the second time is possible to achieve
even if the Japanese market is more difficult for companies to establish stores than other
markets in North America or Europe. He also claimed that their failure in Japanese market
has been overstated since there are also some difficulties in some other markets, for instance,
Russia market and Poland market.
Furthermore, IKEA is not the only the company that struggled through Japanese market at
the first time but some other foreign retailers namely Carrefour and Sephora. Carrefour is the
French supermarket while Sephora is a French cosmetic retailer. However, both of them have
all come and gone.
IKEA finally re-entered the Japanese market again in 2001 due to the deregulation of
Japanese Large Scale Retail Store Law which is beneficial for large retailer to enter. This
time it was confirmed is the right time for IKEA to step down in Japan
The new ideal concept of IKEA in Japanese market this time is "making an ideal home”
Go home in time to see your children. That is the concept Ikea inspired in people there. The
center of its new strategy is “small space living” since children in Japan, a country of more
than 127 million, usually live together with parents at home before marriage and also share
pace with grandparents or in-laws.
IKEA believes that Japanese and Swedish designs are similar as both of them focus on clean,
simple design made of wood and natural materials as well as living comfortably in small
In addition, IKEA did marketing survey by visiting more than one hundred homes in order to
figure out how Japanese take a bath, how they cook, how they sleep and how they store
things and what they think of packaging so as to adapt their furniture to Japanese taste since
they live in small and crowed home. Even though size is considered a matter, IKEA has not
changed the size of their products but has selected 7,500 items out of its 10,000 products that
suited to Japanese lifestyle instead (Wijers-Hasegawa, 2006) such as offering two seater
sofas, space-saving storage boxes and sofa beds for studio apartments.
As we know that the prominent style of IKEA is the "flat packs" which disassembled
furniture packed into flat boxes for easy transport and self-assembly by customers since they
think that assembling on their own can bring enjoyment to customers.
However, IKEA provides home delivery and assembly for an extra charge while offer low
price products with Japanese standards. For example, tables start at 1,500 yen, an entire living
room consisting of television, stand, sofa, bookshelf, rocking chair and coffee table total costs
only 85,000 yen which is quite a low price.

Besides, IKEA choose to create supply centers and warehouses in Asia instead of shipping
from Europe which one-third of the 10,000 items in IKEA are made in Asia. Due to saving
transportation cost and avoiding delayed stock, they ship the rest to distribution centers in
Kuala Lumpur and Shanghai before sending them to Japan.
Nowadays, IKEA is directly owned the three new mega-stores in Japan, Funabachi, Kohoku
and Port Island.
IKEA in Japanese market
According to patterns of Internationalization in Uppsala model, there are two patterns of
investment. Firms may invest by starting from nearby countries or invest in specific country
by learning psychic distance in new markets. (Johanson and Vahlne, 1990)
IKEA, the biggest home-furnishing retailer, expand internationally from their nearest
countries such as Norway, Denmark and so on Later, they decided to invest in distance
country in Asia, Japan. Internationalization of IKEA in Japan was shaped by environmental
condition as economic and regulation. In 1950s, Japan economic growth was attractive for
foreigner to invest as the growth of economy expanded rapidly and turns to be the second
largest market in the world as well as the demand of import furniture is higher. Uttermost, the
main support comes from Japanese government who helps by reducing the regulatory barriers
for import furniture companies. IKEA considered that they could gain opportunity and
decided to enter Japan in 1970s.
However, the instability of Asian economic growth in this period impacted investor such as
IKEA because of inflation and the collapse of the bubble economy by the end of 1990s. This
situation brought IKEA into risk as Anders Dahlvig, IKEA group president and chief
executive, stated that IKEA was launch in Japan too early (News Gate NY, n.d.). Therefore,
IKEA chose to withdraw stores out of Japanese market in 1986.
Brown and Burt (1992) described that asset-based advantage is a retail brand and unique
image on their products across borders which IKEA process this advantage since they are
both well-known in flat packs products and an affordable price brand. Asset-based advantage
and the deregulation of Japanese Large Scale Retail Store Law are the driving forces which
treat as Commitment decision for IKEA to expand in Japan directly as well as Japan open
widely and demand of consumer increased. These lead to second try to reenter Japanese
market in 2002 by establishing IKEA Japan K.K. with the assistance of JETRO.
In addition, it is a great challenge for IKEA to overcome differences and maintain their
advantages while using their experiences in the past to conquer lack of foreign market

Influencing factors of IKEA in Japanese market

Since IKEA expanded successfully in European countries and made a decision to enter
Japanese’s market as the first country in Asia, six key effects on what IKEA needs to face as
entering Japanese market at the first round and how they develop to reenter in the second
round are discussed.
1. Psychic distance and learning
The first determinant of IKEA to fail in Japanese market is psychic distance or cultural
distance that impacts lifestyle, size of products in household and behavior of consumers.
Although IKEA, an enormous furniture retailer, intended to overcome this Asian market in
the first round, they encountered the cultural difficulties such as the differences in lifestyle,
the way Japanese live and manage their houses. First, IKEA are well-known in offering self-
assemble kit or “flat packs” while Japanese do not familiar with do it yourself kit that
customers need to assemble from compact box themselves at home. Second, Japan is an
island with limited area. Then, people in this country have to live in small spacein order to
make use of limited area while IKEA offers furniture in the same size with other countries.
As a result, IKEA faced with failure and needed to remove the store out of Japan.
Though IKEA encountered failure because of psychic distance in the first round, it seems to
be successful for the second round since IKEA learnt from their mistakes by gathering market
knowledge (Johanson and Vahlne, 1990), especially marketingspecific knowledge, such as
doing survey in order to understand customers and cultural pattern of Japanese. IKEA finally
provides home delivery with extra charge and still maintains the prominent style “flat packs”
for customers. In this second round, IKEA considers Japanese lifestyle and the size of
furniture in Japanese household by choosing appropriate size of 7,500 items out of its 10,000
Internationalization of IKEA in the products to offer instead such as providing two-seater
sofas or space-saving storage boxes and create the concept as “small space living”. Though,
IKEA sees the cultural difference between Swedish and Japanese, both of these two countries
still agree in the same clean and simple common design.
Besides, psychic distance also influences the behavior of Japanese customers since Japanese
believes in quality oriented products (Wijers-Hasegawa, 2006) while IKEA offers low price
product. However, behavior of Japanese in furniture market tends to change and willing to
accept affordable price product of IKEA increasingly.

Strategic decision making process

Since IKEA acquired too limited information of Japanese market, this impacted the strategic
process of the organization. Strategic decision making process is considered as a factor that
leads to failure of IKEA in Japanese market because of inappropriate planning and poor
understanding in foreign market. For the first time that IKEA entered Japan, they lacked of
research but IKEA perceived the opportunity by using the experiential learning (Forsgren,
2002) that they obtain from doing business in other countries around the world, especially in
European countries, to reduce perceived uncertainty and invest in Japan since they realized
that risk of not investment is much more. By that time, IKEA wanted to gain advantage as a
leader in Japanese furniture market but carelessly rushing into new market cause them to
withdraw the store at last.
Although, strategic decision making process is a factor of failure in the first round, IKEA also
improved their knowledge by entering in the second round. In this second time, IKEA creates
its own Absorptive capacity. IKEA builds the dyadic relationship between IKEA and
Japanese customers by visiting customers in order to decrease lack of knowledge and it took
five years for IKEA to collect all data to reenter Japan over again.

Degree of adaptation of retail offer

Degree of adaptation of retail offer is one of determinants that effects investment in overseas
market of IKEA. Although, IKEA offered commodities quality, fashion, level of services,
price and image as they offered in other countries, they perceived that degree of adaptation is
significant since they were not success in introducing self-assemble in Japanese market from
inception. The low degree of adaptation to the new environment brought IKEA into
Therefore in the second round, IKEA learnt to adapt the level of service by providing home
delivery and service to assemble at home if customer wants but they still maintain their
prominent style, flat packs as they still keep educating Japanese consumers that flat packs can
bring joy, fun and it is quite easy to assemble that furniture. In addition, IKEA also adapt to
the new environment by selecting the appropriate furniture for Japanese consumers and
proposing the new ways of decorating houses in order to suit Japanese taste even they needed
to encounter strong competitors as Muji and Nitori in 1970s and competed with other large
shops in the same area as well as 100 yen stores later on. However, not only do IKEA adapt
the level of service and offer the appropriate products but they also consider the necessary of
understanding by adapting products to local things such as packaging, displays or advertising
in order to learn and adapt to this new market.

Entry strategy
In 1974, IKEA expanded into Japanese market by using franchising as a mode of entry in
order to reduce financial risk in overseas markets (Evan et al, 2000). Nevertheless, IKEA
failed to adjust with this psychic distance country and reentered over again later in second
round by using directly own as a strategy to enter.
Characteristics of organization
Size of company or store is a significant factor in Characteristic of organization. Although,
IKEA is a mass retailer, they opened only a small size of store in Japan in mid 1970s since
Japanese are familiar with small shops. However, they gained too little attention from
Japanese customers. After IKEA accumulated market knowledge of the Japanese behavior
from the first round, they recognized that size of store is matter in selling furniture to
Japanese. Therefore, success or failure also depends on the size of store.
To attract the attention in the second round, IKEA improved the stores by opening the first
new-mega store, 40,000-square-meters (43,000 square feet), in Funabashi for example. They
invited customer in grand opening and displayed a museum with showrooms in Japanese mat
size to appeal Japanese taste. IKEA provided a variety of products in wide range since they
can acquire resources from their suppliers. They offered different kinds of room such as
kitchen room, bedroom, and living room in different styles to suit shoppers and convince that
they understand the style of living in small scale. This outdoor exhibition attracts a lot of
Japanese attention as well. Moreover, a largest home furnishing retailer, IKEA, also support
this mega stores as they offer restaurants, children’s playroom, Swedish food markets and
large area of parking lot in less-expensive location. In addition, Timing entry also influences
on success and failure in entering market which IKEA convince that though they encountered
obstacles in Japanese market.

Management characteristics
Though IKEA possesses a unique design as flat packs and offers products at low prices,
IKEA cannot gain Japanese’s attention since the customers are not familiar with self-
assemble kits and IKEA also encountered the strong competitors such as Muji.
Therefore, IKEA have learned through their international experience that managing suppliers
also play the vital role in business as well since IKEA was lack of connection in providing
products and faced with insufficient suppliers which was difficult for them to lower the price
since they shipped products from European countries at first. To correct their mistake, IKEA
turned to provide supply centers and warehouse in Asia as a Market commitment by
establishing a commitment in raw material such as Kuala Lumpur and Shanghai in order to
send furniture to Japan in low cost and avoid delayed stock in stead of shipping from Europe
and avoid from suffering in lack of supplier. This relationship between IKEA and suppliers
creates the Dyadic absorptive capacity which is the characteristic of IKEA that they learn by
doing in order to develop their knowledge in their past directly.
IKEA in China
IKEA opened its first store of China in Beijing in 1998. Although the company's global
strategy had worked well in the past in most of the markets it had entered, it quickly learnt
that success in the Chinese market required a different strategy in the areas of Marketing and
IKEA also had to alter two of the most important aspects of its time-tested and proven global
strategy when it came to China; while elsewhere in the world, IKEA had always located its
stores in less expensive areas and sold its furniture on the do-it-yourself (DIY) principle,
these elements had to be changed in China. IKEA claimed that it had decentralized most of
its functions including HR and stores management in China, but despite this, there was
criticism that IKEA was far too bureaucratic with many of its operations being globally
controlled and systematized.
But Presently, A new store in Beijing was reconstruction in mid-2004 as the appearance in
term of looks and size was not a ‘real’ IKEA store. The re-opened of IKEA store in Beijing in
2006 made IKEA store in Beijing is the second largest in the world which cover 43,000
square meters.
IKEA opened the next store in Guangzhou in October 2005 and plan to open more than 5
new stores within 6 years. Turnover of IKEA in China in 2004 grew by 40%. The president
of IKEA in China, who is Ian Duffy, claimed that China is becoming important for IKEA in
the future because of fast economic development and increasing people’s living standard. It is
estimated that China will become IKEA’s largest market in 10 to 15 years.
Until 2007 there are four stores in China which are Beijing, Shanghai, Chengdu and
Guangzhou. IKEA prepares to open up to 10 stores in China by 2010. The expansion will
focus on eastern China at the beginning.
IKEA enters China by adopting joint venture with Chinese companies. This is due to the
policy of Chinese government to achieve the principal of equality and mutual benefit.
Therefore, IKEA’s store in mainland of China belongs to IKEA group and operates as joint
venture. Firstly, the customers saw IKEA as an expensive western brand. This happened
during the open of IKEA’s first store in Shanghai. Low price was the major challenges of
IKEA in China as the high import duty tax at the beginning. Furthermore, it was difficult to
reach a large people since the income level is relatively low. Another challenge of IKEA
China is the violent competition with others imitates firms and products. IKEA chooses to
produce their product locally so that it can offer a large volume of products with low price
which enable IKEA to compete with other competitors in the Chinese market.
At present, IKEA has manufacturing factories and some material suppliers in China.
Therefore, IKEA reduced prices by 10% resulting in increasing sales by 50% in the first
quarter of 2004.
In addition, home interior competence which is the key competitive advantage of IKEA in
China has been chosen and promoted to strength the position of IKEA in Chinese market. On
the contrary, there are few furniture firms in China that choosing this positioning strategy.
A survey in China was conducted in 2003 and families earning around US$5,000 a year
became a target of the company.
The strategy of IKEA in introducing their products with Swedish culture everywhere they go
has brought about some problems for the company in China.
Language barrier is one of the challenges that most of western companies faced when they
enter Chinese market. IKEA has used the strategy of pronounce-oriented names by
translating their name to Chinese.
The IKEA’s Chinese name consists of two characters which means comfortable and family
and represents their product and corporate identity.
Family is an important word which connects to collectivist culture of China. Thus, the
character is important as Chinese customers depend more on visual representations.

PESTEL analysis for China

Outlined below is the PESTEL analysis for China as a whole.

1) Political Factors

i. Constitutional System

China or People’s Republic of China adopts socialist system or communism in

their political system in their decision-making processes in governing the country.
The country’s sole political party in power is known as the Communist Party of
China. The government have the sole power to control all activities done by their
citizen as what have been describe in how communism system worked in
governing a country. In other words, the purposes of working in China are to
contribute to the nation and also to the government as the government control on
all activities in the country.
ii. Stability of Government

The stability of the China government is quite moderate and stable because the
administration of the government are not publicize to the public either through the
press or on the internet. So, the degree of the citizen involvement in the politics is
low because of the heavy restrictions impose by the government. However, the
policies impose and the law regulations are quite effective in terms of economy
where China is one of the leading countries in the world. In the recent years (2001),
China has joined the World Trade Organization and results rapid growth in
industrial and manufacturing sectors because of the cheap labor in China. But still
problems such as managing environmental degradation, demographic pressure and
the extreme immigration from rural to urban area must be faced by the

iii. Business Freedom

The business freedom in China is quite tight because of the regulation impose by
the government where they restrict businesses from other countries coming in. But
recently, China government open their gate to the outside world to set up business
in their country. It takes 37 days to start anew business in China compared to the
world average 38 days. While it takes 1.7 years from the filling for insolvency in
court until the resolution of distressed assets. Examples of business freedom in
China are supermarketization and opening market to foreign multinationals
company because of the entry of China into WTO. Supermarketization is where the
government shuts down the traditional “wet market” and transform them into

iv. Trade Freedom

In the past few decades, China loosen their trade policy to the outside world in
their trading, export and import industry. China’s weighted average tariff rate was
3.9 percent in 2008 based from the web (heritage.org). Factors that affect the cost
of trade freedoms are import and export bans and restrictions, import and export
licensing, non-transparent tariff classifications, complex regulations and standards,
subsidies, state trading in certain goods, services market restrictions, issues
involving the protection of intellectual property rights, and inconsistent and
corruption-prone customs administration add to the cost of trade. So, China’s trade
freedom score to account for non-tariff barriers deducted about twenty points.

v. Tax Policies

Below are the economic data for China.

Tariff Rate 3.9
Income Tax Rate 45.0
Corporate Tax Rate 25.0
GDP (billion) 7900
GDP per Capita 5962
Unemployment Rate 4.2
Inflation Rate 5.9
FDI Inflow (millions) 108300
Tax Burden % GDP 18.3
Government Expenditure % GDP 19.9
Population (billions) 1300

Based on the rates and statistic given, we can see that China has moderate
Corporate Tax Rate and high Income Tax rate. The government encourages more
new-technology business in the market besides allowing foreign institution enters
the nation financial institution in providing foreign currency. Because of lower
corporate tax rate, many MNC started to open their business in China and the
numbers of FDI have increased rapidly. Furthermore, on October 2008, new
policies impose where individual income tax is no longer paid on interest on bank
deposits. The overall tax revenue as a percentage of GDP was 18.3 based on what
recorded in the recent years.

2) Economic Factors

Economic Freedom Score – 51.0

Population - 1.3 billion

• $7.9 trillion
• 9.0% growth

• 11.0% 5-year compound annual growth

• $5962 per capita

Tariff Rate 3.9

Income Tax Rate 45.0
Corporate Tax Rate 25.0
GDP (billion) 7900
GDP per Capita 5962
FDI Inflow (millions) 108300
Tax Burden % GDP 18.3
Government Expenditure % GDP 19.9

Unemployment - 4.2%

Inflation (CPI) - 5.9%

FDI Inflow - $108.3 billion

i. Disposable income of buyers

ii. Credit accessibility

The government has directly and indirectly controls their banks and financial
institution. Investment done in China are also control and regulated because of
their judicial system is very vulnerable to the political issues and influence
iii. Unemployment rates

Labor force - 812.7 million

Labor force by occupation -
a) agriculture (39.5%)

b) industry (27.2%)

c) services (33.2%)

Unemployment rate - 4.2% (2008 est.)

*Official data from urban area only.
*Including migrants may boost total unemployment to 9%.
*Substantial unemployment and underemployment in rural areas.
iv. Fiscal Freedom

China has moderate Corporate Tax Rate and high Income Tax rate. The
government encourages more new-technology business in the market besides
allowing foreign institution enters the nation financial institution in providing
foreign currency. Because of lower corporate tax rate, many MNC started to open
their business in China and the numbers of FDI have increased rapidly.
Furthermore, on October 2008, new policies impose where individual income tax is
no longer paid on interest on bank deposits. The overall tax revenue as a
percentage of GDP was 18.3 based on what recorded in the recent years.

v. Monitory Freedom

From 2006 until 2008, the inflation rate is around 5.2% where it is consider
moderate for that particular percentage. As what mention where China economic
freedom score is around 51 from the full score 100. So, we can see that the
economic is a mixture of free market and control market. The price of product sold
can be determined by the quantity demanded of the product. But still the
government intervenes on certain goods and products to maintain stability of the
prices. The government also gives subsidies to small business and industry to
compete with foreign goods where they can sell at lower prices.

vi. Investment Freedom

China’s Foreign Investment Catalogue describe that different foreign investment

are group under different types such as encouraged, prohibited, restricted and
permitted China laws and regulatory are non-transparency, complex and
inconsistently enforced laws and regulations, weak protection of intellectual
property rights, corruption, industrial policies protecting local firms, and a legal
system that cannot guarantee the sanctity of contracts where these must be face by
the foreign investor. Financial transactions are also tightly regulated.
vii. Financial Freedom

The financial systems in China are control directly to the government and it is
tightly controlled. In China, there are supervised roughly 5,600 financial
institutions in 2008 and China has only two private banks while there are four
state-owned banks account for over 50 percent of total assets. This financial system
is control and supervised by The China Banking Regulatory Commission.
viii. Interest rates

Central bank discount rate - 2.79%

Commercial prime lending rate - 5.31%
ix. Inflation

Inflation rate - 5.9% (2008 est.) and -0.7% (2009 est.)

Inflation rate declined vastly from 2008 until 2009 because of the stable currency of China.

3) Technological Factors

i. Science and Technology

Through the period, the achievement of science and technology in China are
remarkable where they manage to achieve many discoveries in the science field.
The major achievements are the discovery of the Daqing Oilfield, building the first
atomic reactor, successful testing of atom and hydrogen bombs, synthesis of
crystalline insulin, positron and negatron electronic collider, nuclear power
stations, carrier rockets, and satellite launching technology. Rapid improvement in
science and technology also create more jobs in the manufacturing industry and
also make the quality of life better and easier.

ii. Research and Development

The government design many plans and strategies in developing the R&D industry.
Many programs to enhance R&D industry are launched such as the “Torch
Program” and the “ Scaling Heights Program”
4) Environmental Factors

i. Environmental Protection Laws

The government takes serious matter on protecting the environment where they
impose many regulations and laws in protecting, preventing and controlling
industrial pollution and improving urban environment. The government also
collaborate with many NGO’s in order to maintain the mother nature.

5) Legal Factors

i. Employment Regulations

China’s labor regulations hinder overall employment and productivity growth.

The non-salary cost of employing a worker is high. Dismissing an employee may
require prior consultation with the local labor bureau and labor union.

6) Socio Culture Environment:

a. Social Factors

Population : 1.34 billion (2009 est.)

Population growth rate : 0.66% (2009 est.)

Population below Poverty Line : 2.00% (2009 est.)

Infant mortality rate : 20.25 deaths per 1,000 live births (2009 est.)

Life expectancy at birth :

total population: 71.44 years

male: 69.71 years

female: 73.26 years

Total fertility rate : 1.79 children per woman (2009 est.)

Ethnic groups : Han Chinese 91.5%, Zhuang, Manchu, Hui,
Miao, Uyghur, Tujia, Yi, Mongol, Tibetan, Buyi, Dong, Yao, Korean, and other nationalities
8.5% (2000 census)

Nationality: noun: Chinese (singular and plural) adjective: Chinese

Religions: Daoist (Taoist), Buddhist, Christian 3%-4%, Muslim 1%-2% note: officially
atheist (2002 est.)

Languages: Standard Chinese or Mandarin (Putonghua, based on the Beijing dialect), Yue
(Cantonese), Wu (Shanghainese), Minbei (Fuzhou), Minnan (Hokkien-Taiwanese), Xiang,
Gan, Hakka dialects, minority languages (see Ethnic groups entry)

Literacy: Total population: 90.92 % male: 95.14 % female: 86.53 %

Distribution of Wealth

Distribution of income or consumption by percentage share :

Lowest 10% : 1.80%

Lowest 20% : 4.66%
Second 20% : 9.00%
Third 20% : 14.22%
Fourth 20% : 22.13%
Highest 10% : 33.06%
Highest 20% : 49.99%

China has an extreme gap between the lowest 20% and the highest 20% after 60
years China change their system in their economy.

i. Changes in lifestyles and trends

Lifestyles and trends in China change in many ways such as the level of
consumption, attitude towards new product especially from the west, changes in
the quality of life, and also changing from quantity satisfaction to quality
satisfaction. Besides that, changes in trends can be seen from the degree of fashion
sense where citizen tend to buy more colourful and striking colours compare dull-
coloured clothes.
ii. Educational levels

The literacy rate for China is around 91.0% was able to read and write at a
specified age. While the average years of schooling is 11.2 year. Education
expenditures in China is about 1.9% of the GDP.

iii. Labor Freedom Ranks

China’s labor regulations hinder overall employment and productivity growth. The
non-salary cost of employing a worker is high. Dismissing an employee may
require prior consultation with the local labor bureau and labor union.

iv. Freedom of corruption

Corruption is perceived as widespread. China ranks 72nd out of 179 countries in

Transparency International’s Corruption Perceptions Index for 2008. Corruption
affects banking, finance, government procurement, and construction most severely,
and there is a lack of independent investigative bodies and courts.

v. Property Rights

China’s judicial system is weak, and many companies resort to arbitration. Local
officials can ignore court decision with impunity. All land is state-owned, but
individuals and firms may own and transfer long-term leases (subject to many
restrictions) as well as structures and personal property. Intellectual property rights
are not enforced effectively. Copyrights, patents, brand names, trademarks, and
trade secrets are routinely stolen.

b. Culture

Culture plays a significant role in influencing consumer’s perception, which in turn

influences their preference and purchase. A marketing mix is effective as long as it is
relevant to their culture. According to culture a company must modified their product.

 Great wall, Grand Canal, Karez irrigation system is the symbol of rich culture
which build 2000 years ago.

 Culture is socially shared: In china culture is socially shared.

o Girl children must have small feet: The preference of wanting their girl
children to have small feet. Large feet viewed as lower class people. So
that parents from upper class bound daughter’s feet tightly.

 Lack of shared common culture common values:

In china due to lack of shared common cultural values, standardized

advertisement may have difficulty in communicating with customers. So due to
that advertising and sales promotion require special attention.
 Culture is enduring:

In most Asian countries also in china culture is enduring. Culture is shared and passed
along from generation to generation. Old habits are hard to break. People tend to
maintain their own heritage. That’s why India and China are overcrowding. In past china
views large family are blessing and assume that children will take care of parents when
grown. Old but modern Chinese government make compulsory of one child per family.
It’s result in numerous death of first born daughter.


Language is a important part of culture and communication is impossible without it.

 Mandarin is national language:

In china mandarin language is uniform; there are hundreds of local dialects. Mandarin is
the national language.

Written language uniform and number if dialects: In china written language is uniform
and numbers are dialects.

Chinese pay more attention to visual information processing as well as the writing of a

Marketer should understand the how customer process linguistic information. East Asian
pays more attention to visual information processing as well as writing of name. As far
as brand name is Concern Company must use visually distinct brand name meaning for
communication or calligraphy and logo design.

Chinese read from right to left:

Writing and reading rules are different in different countries. China read from right to
left and in America they read and write from left to right. This difference usually requires
a product to be adjusted to some contest. For example computer maker must take care
and change their system according to countries. so that computer can produce a printout
reading from right to left.
Chinese are strict punctuality for social occasions & business appointment:

Latin American people are usually late, Asian people are tend to be punctual but the
Chinese observe struck punctuality for social occasion and business appointment. For
Chinese people time is money.

Language of Friendship

China has the unique characteristics of being friendly. They believe that let’s make friend
first and than see if we can conduct a business. General motors’ have learned that in
china. The Chinese meet together first before taking about business.

Language of Religion:

Religion affects people in many ways including work habits. Islamic Indians are seems
as a sign of person’s lack of faith in religion in Buddhism. The emphasis is on the
elimination of desire. Because desire is the cause that worrying marketer must pay
attention to religion activities. The entire month of Ramzan is a religious holiday for
Muslim who fast from down to desk each day during the month. Therefore worker must
use part of normal sleeping time for them so that work production can be affected. Also
Muslim pray five time a day and they stop all work to do so attitude and religion shape
the text and visual image that appear in print advertisement. (Christian, Muslim,
Buddhist, Buddhism, Taoism, Catholicism and Protestantism)

Language of Color

In china red is lucky a color. It is compulsory for all company to put money in red
envelope as gift for employee and children on special occasion. Special on Chinese new
year day. marketing manager should be careful in using certain color with the product
because using wrong color can make or break the deal for example parkers white pen did
not farewell in china where white is color of sorrow and sadness.

Language of Gift

Business people must understand the customer gift giving. It is wise to avoid giving
anything or any item with four in the name to the Chinese because it means death.
Likewise clocks are a choice of gift in china.
Subculture provides an effective basis for market segmentation.

 2 & 4 number are known as “Easy” & Death” respectively

For example one marketer offered one discount coupon of $24with each purchases to
Chinese people. But unfortunately 2 & 4 number in Chinese communities are known
towards, Easy and Death so many consumers do not want to go for the discount coupon.

 In china Green baseball caps were offered to the Chinese people as it is a sign of
premium things to be offered.

 Surname comes first (for e.g. Huang Zhirong addressed as Mr. Huang

 Chinese Opera Performance

The working days are from Monday to Friday. Most people do not work on weekend.
Official hours are from 8:00 am to 17:00pm with one hour for lunch.

Behaviour of Chinese People

 Chinese consumer gives more emphasis on convenience of location, Sales

person’s manner and less emphasis on stores return policy. It is also possible to
identify the personality traits that vary from one region to another within the
same country.

 Each region has different language, heroes, local capital, and different behavioral
traits and tastes, So due to that marketer may want to match the traits of the
product with the audience’s positive traits.


Gavi Nations, Northern, southern, North-western, south-western mandarin nation

Simple, old-fashioned - Frugal themes

Wu & Eastern Mandarin nations - Luxury themes

Hakka - Independence
Northern Mandarin - Gentle humble image

Minan - Adventure

Yu, Wu, Minnan, Hakka - Hardworking, innovative, aggressive

Characteristics of Chinese Furniture Market

The furniture market in China has significant progress and the country is becoming a vital
export base and location for locating furniture factories. Chinese furniture market expands
very fast owing to the economic reformation in China from 1978. However,
Chinese furniture market is not easy to understand as Chinese consumer expectations and
purchasing behaviours are varying in different region.
In 1999, domestic market, of which the total demand is RMB 73.4 billion, is the main market
that Chinese manufacture enterprise competes for. The total furniture demand has been
expected to be rising. Western Chinese furniture market and kitchen furniture market
achieved people’s attention from 1999 to 2000. The development in responsibility for
approving small and medium size foreign invested retail operations from Beijing to local
provincial Ministry of Commerce on 1 March 2006 eased the process for multinational
China is the fourth largest global economy with a total GDP of US$ 2,644 billion, which
exceeds France and Italy and slightly beyond Britain according to 2006 Global GDP report
issued by World Bank (World Bank, 2006). The development of China’s economic policy
during the last twenty years aimed at manufacturing especially export-oriented
manufacturing. The emergence initiated from the central planning system in the mid 1990s
allowed foreign firms to gradually accessing domestic retail and distribution markets. This
was because the government wanted local firms to develop adequately to be able to compete
with foreign firms. The speedy appearance of urban middle class and sophisticated consumer
demand are due to the rapid economic growth of China and increasing openness to the global
The birth of a true property market, the promotion of the construction of residence houses and
the development of relevant industries which are, for example, furniture retailers and
construction raw materials providers were resulted from the alteration of the housing system
and fast urbanization in the 1990s. Most customers have been searched for buying new
apartments where they have to decorate by themselves.
Hence, mid to high end segments of the market is the target of retailers as these buyers tend
to spend large money on decoration of the new apartment. The devolve responsibility in
choosing materials and decoration to homeowner created ‘Buy it Yourself’ market. Furniture
market in China has shown the great potential as it indicates that furniture for the new house
are being bought by 5 million families each year.
Furniture manufacturing has shifted to developing countries which have relatively low cost.
The advantage in scale of market, other fundamentals, such as, low cost with good quality
labor, land and intelligence and more importantly the stable political situation are factors that
lead China to be one of the most suitable markets.

The value of China’s furniture industry production (including non wooden furniture) in 1978
was just $157 million but by 2000, after more than 20 years of development, it had reached
$12.7 billion. By 2001 the output value had risen to over $16.9 billion representing an
average annual growth rate of almost 23% since 1978. During the same period the number of
furniture enterprises grew to more than 50,000 different types of enterprises (predominantly
small and medium sized) with a total of nearly 5 million employees throughout China. The
rapid development of the furniture industry in China over the past years has been due largely
to foreign investment (mainly from US, Taiwan Province of China and other Asian countries)
and joint ventures increasingly attracted by the increased domestic demand accompanying
economic growth, low wages, sufficient raw materials, competitive export tariffs and other
incentives for production and exports. With China’s entry to the World Trade Organization
(WTO) in 2002, foreign investment in the furniture industry is expected to maintain its fast
growth and play a bigger role in development. The pace of trade growth in China The upward
trend in furniture production has been driven by a strong growth in both furniture exports and
domestic consumption.
Figure 1

Figure 1 shows that, from 1995 to 2001, the total value of furniture exports have increased
almost four-fold from $1.1 billion to $3.96 billion at an average annual growth rate of 24%.
Wooden furniture exports, in turn, more than doubled from $932 million to $2.4 billion in the
same period, at an average annual growth rate of 17%. China’s furniture is exported mainly
to the United States (around half of Chinese exports), Japan and Taiwan Province of China
(P.o.C.) with substantial re-exports from Hong Kong Special Administrative Region (S.A.R.)
Markets are gradually being developed in Middle East, Africa, Europe, Southeast Asia and
South America. Manufacturers based in China have been successful in penetrating high value
markets such as Japan and, particularly, the US (the world’s largest furniture market) with
their furniture. China has developed a special ability to provide products well suited to the
changing fashion in the US at highly competitive prices. US imports of Chinese wooden
furniture have increased more than three-fold since 1992. China now competes fiercely with
Canada for dominance of the huge US furniture market.
Figure 2

Figure 2 shows the world’s largest exporters of wooden furniture. In 2000, China overtook
Germany as the third largest exporter globally and now competes with Canada for the second
spot, with Italy being by far the world’s largest supplier of wooden furniture. The impact of
China on the US domestic industry is being seen in the closing or restructuring of furniture
plants and, over the next few years, many US furniture companies will likely shift their
production to the Far East and focus on marketing and distribution at home. From the point of
view of major exporting developing countries such as Indonesia, Malaysia and Thailand,
China is a major competitor in their main export outlets. In fact, China overtook Thailand in
2000 as Japan’s largest supplier of furniture.

Figure 3
China’s furniture export industry is mainly concentrated in the southern province of
Guangdong, located on the Pearl River delta, and the northeast provinces of Beijing,
Heilongjiang and Liaoning. The development of the furniture export industry has taken place
mainly in the southern coastal area of China due to its proximity to large consumer markets
and good trade infrastructure. Guangdong alone, a Special Economic Zone (SEZ), accounts
for more than half of China’s furniture exports and has progressed from being the leader in
China to become the largest furniture production and export base in the Asia-Pacific region.
With total furniture exports estimated at $1.25 billion in 2001, Guangdong looks set to
eclipse former regional leaders Malaysia ($1.3 billion) and Indonesia ($1.1 billion). The cities
of Dongguan and Shenzhen accounted for virtually all of Guangdong’s furniture exports.
Rapid developments have been seen in the furniture export industry of these cities in recent
years because they greatly benefit from commercial and political privileges received under
the SEZ framework; they are closely connected to Hong Kong and Macao S.A.R.s and
Taiwan P.o.C.; and they have well established international marketing network and business
ties. Despite the dominance of Guangdong, wooden furniture exports are also flourishing in
other areas of China. In Hainan Province, an island in south-eastern China, rubber wood is
grown extensively in 330 000 ha of plantations and is being increasingly used for furniture
manufacture for export, earning considerable foreign exchange for the Province (around
$27.6 million in 2001). Hainan’s rubber wood furniture exports go mainly to France,
Germany, Italy, United Kingdom, United States, Japan and Hong Kong.

Despite the booming of the furniture export industry, domestic demand is the engine driving
growth in China’s furniture industry. Together with higher disposal income and improved
living standards, one of the key factors in this growth is housing reform, which seeks to
gradually scrap the systems of state- and workplace-distributed housing in favour of private
ownership with easier access to housing loans. Chinese have recently been allowed to own
their homes for the first time in 50 years. Figure 3 shows that the domestic consumption of
furniture has grown accordingly, almost doubling from $5.8 billion in 1995 to $9.2 billion in
2000, equivalent to about three-quarters of China’s total furniture output. This rapid growth
in consumption has created unparalleled business opportunities for China’s furniture industry.
Shanghai, for instance, has more than 2, 500 high rise buildings recently completed or under
construction. Furniture demand in Shanghai’s urban area amounted to $1.2 billion in 2000
and has been growing at an annual average rate of 20% in the last few years. In 1989, it was
approaching the level of moderate income families in some developed countries. With
expanded living space and improved housing quality, China’s urban residents are spending
more on home interior decoration and improvement. Other factors affecting the medium-term
consumption of furniture and timber products in general are large-scale infrastructure projects
such as the construction of the Three Gorges Dam in Hubei Province (the world’s largest)
and the building of stadiums, gymnasiums, halls, hotels and other facilities for the 2008
Olympic Games. The building of the Dam, to divert the water of the Yangtze River from
south to north, will require the flooding of thousands of villages and hundreds of towns and
cities by 2009 and the resettlement of over one million people. These infrastructure projects
will have associated increases in construction activity and demand for furniture.


IKEA store location can be a problem in China, where the population have no cars, therefore,
IKEA locates its store inside the cities in China. The price is also a problem, where a cheap
price can be an expensive one somewhere else.

Culture is seemed to have been embedded in elements of society, which are religion,
language, history, education, family, arts, entertainment, and education. These elements are
cultural forces that influence the cultural messages as symbols, rules of behavior and
knowledge. These factors are important in the selection of goods and services, the
consumer’s decision process. Therefore the culture influences buyer behavior. Therefore, in
retailing, the strategy of the product, the price, the location, and the promotion is links with
the culture of the country.

IKEA is used to be perceived as having low prices, this also one of the competitive
cornerstones of the whole concept of IKEA (see above). But this is not the case in China;
here the perception is a fairly exclusive western retailer, a store for the higher middle class.
For example, for the Chinese, Billy (the inexpensive, high selling book case) was perceived
as a luxury.

 China is considered to have a high psychic distance from Sweden which is the country
of origin of IKEA.

 The layout, atmosphere and location were required to be reconstructed and change
from its location in mid-2004 to reveal the identity of IKEA
 One of the big differences when it comes to communication with the consumer in
China compared to the rest of the world is the reliance on the catalogue

 IKEA have run many different ads in China, in TV, newspapers and in print. Themes
in campaigns are the same as everywhere in the world but with the Chinese twist (be
different, break tradition)

 Consumers in China are demanding when it comes to service. The self service
concept of IKEA and the DIY is one thing that is hard for Chinese to accept.

 IKEA has another challenge that affects service and that is the fact that many products
despite increased sourcing in China – have huge lead times in terms of shipping from
Europe and other sourcing markets to China.


In the 1990s with the emergence of better public housing, improved incomes and raised
expectations of households, the market has moved beyond the provision of shelter to the
quest to provide pleasant homes tailored to the households needs.

The result of this trend has been for the Chinese government to begin to sell-off state housing
and create a class of homeowners, primarily in the larger cities but gradually throughout the
country. With the future development of a secondary housing market, eventually it is
envisaged that the Chinese housing market will come to resemble that seen in mature private
property markets.

Key Facts

• Home ownership has been the catalyst behind the home improvements market and has
encouraged consumers to engage in DIY and home improvement/ decorating activities.
Additionally, this growth in private housing is attracting domestic and foreign retailers such
as B&Q and IKEA to China.

• The market had grown by 106.4% since 1994, with the opening up of the housing market,
continuing rapid increases in average salaries and consumer spending power and the
improved retail supply of goods all contributing to the strong growth.
As the market opens, so China is becoming increasingly 'house-proud' while the home
improvements industry is becoming an increasingly established part of the Chinese retailing
and consumerist landscape.

Relating and Supporting Industries in China The Chinese translation of IKEA pronounces
"Yijia", which literally means "suits home." IKEA has a 4 prong strategy for China: setting
up commercial offices, opening stores, establishing procurement centres and investing in
setting up factories. It is reported that IKEA has invested US$60 million to build Asia's
biggest furniture market in Shanghai (area 36 000 square metres). The company president is
on record as saying the company also plans to set up 2 new stores every year in China. The
coastal cities and developed inland cities will be its main focus. Currently the company's
commercial office in Chengdu City, Sichuan Province plans to procure furniture valued at
yuan 4 million every year.

The company also invested US$180 million to build an industrial area in Shanghai's Song
Jiang and establish IKEA's production base in China. Today furniture companies in China
have become IKEA's biggest trading partners and 30% of IKEA's products are made in
China. Most of the raw materials also come from China so that product prices are
IKEA has sold US$86 million in products through its own retail outlets by August 26, 2003
in China. This is a new record for the company, and represents 24 percent growth over the
same period last year. IKEA has been expanding its retail network, and sourcing more
production in China.

IKEA won the hearts of Chinese consumers, and the government, by announcing its
expansion plans for China in May, during the SARS crisis, when many international
businesses were re-examining what they would do. Just as China Business Strategy predicted
at the time, China's economy and consumers have quickly bounced back from the SARS
IKEA's new Shanghai store has set a record number of shoppers for one day, with 80,000
visitors in one day. Current estimates are that IKEA sources 15 percent of the products sold
in its stores from China. It is estimated that by 2005, IKEA will source more than US$1
billion of products from China.
IKEA's products have struck a chord with Chinese consumers who like European style
furniture at prices they can afford.

Firm Strategy, Structure, and Rivalry in China There are many furnishing stores in China,
take OBI, ChengWaiCheng as example.

These furnishing stores are always good design and function, or low prices. For the most of
middle class, they trend to choose the reasonable price and good quality.
According to the expenditure level of middle class, common people build their home will
consider ChengWaiCheng furnishing store firstly.

OBI furnishing store is tend to be market niche, only the upper class can afford that price.
Build a comfortable home is harder than a luxury one. Some of the product are not pratical
and short service life.

IKEA's Competition Advantage ---- low-price strategy Swedish home furnishing producer
IKEA said it will maintain its low-price strategy and planned to open new stores in China in
the new financial year.

Prices decreased by about 12 per cent in the past financial year. Low prices remained in the
coming year to make products more affordable for IKEA's 8 million customers.
With more local purchases, lower prices are becoming more possible. China is IKEA's main
purchasing market and 15 per cent of all home furniture sold by IKEA is made from materials
purchased in China, according to Duffy.

The expansion is driven by its robust growth in its mainland operations. IKEA's sales in
China between September 1, 2002 and August 26, 2003 were 713 million yuan (US$86.2
million), 24 per cent more than the previous year. The opening of the firm's Shanghai store,
its biggest in Asia, attracted a record 80,000 visitors within one day. Ikea China manager Ian
Duffy said that the company had achieved double-digit growth in sales every year since
opening in China in 1999.

At the same time, the average price of Ikea's products will be reduced by 10 percent starting
Wednesday as the company continues its aggressive strategy of targeting families with 3,350
yuan (408 dollars) income per month. And the number of people who visited IKEA's two
stores over the last fiscal year grew by 1.8 million to 6.5 million.
In conclusion, the world's largest home-furnishing retailer, Sweden's IKEA has been
expanding sales all over the world by they national competitive advantage, especial in the
increasingly wealthy China. IKEA China main to attract sales as the proportion of China's
middle class grows. In the not so distant future the size of China's domestic furniture market
will be as big as the whole Europe's.

In 1995, it could be said as the exploration phase that IKEA sited first trading office in China
to purchasing some raw materials and limited ranged of articles but there were not any stores
in mainland and no any sales to local customers. Although the logistics part of IKEA in
China was quite simple, it was still confronted with big challenges not only by IKEA’s
requirement for logistics quality in many respects like transparency, cost, flexibility,
competency, quality-control etc, but also Chinese policy and regulation on foreign investment
business before entering into WTO. So IKEA outsourced its whole logistics operation to its
old partner-Maersk logistics. Later on, with its first store opened in Shanghai in 1998 and
second in Beijing in 1999, IKEA accelerated expansion in mainland China and its strategic
center of gravity in Asia.
Pacific began to shift to China. In following years, sales in China rose around 40% per year
continuously and 10% of global purchasing was from China. With the increasing of suppliers
and expanding of sales territory, IKEA required high quality logistics support for its growing
purchasing and services networks from all aspects like inbound and outbound of materials,
products, inland transport, storage, warehousing, and distribution and so on.
Apparently, it required the service providers to offer an integrated planning for the whole
supply chain and it’s hard for just one Logistics Company to handle everything. Then more
service providers were involved into IKEA logistics operation. From 2005, IKEA entered
into its consolidation phase. With IKEA’s DSAP (distribution service Asia-Pacific) moved
from Singapore to Shanghai, IKEA began to take back major function of supply chain
management from its service providers gradually and switched from outsource to insource.
Talking about land transport strategy in IKEA China, there are totally three different land
transportation modes, including truck, barge and railway with their respective percentages are
86%, 13% and 1%. The growth of the volumes during this developing period is so
Meanwhile, the transportation network is becoming more and more enlarged and
complicated. Because of this situation, road transport has been put on a pivotal position.
IKEA are considered as retailer internationalization since IKEA plan in organizing strategic
objective, understanding the local nature of markets and using outlet as a retailer’s product.
Besides, IKEA also has strong relationship of network structure, large number of suppliers
and customers and cost structure in order to internationalize.
To internationalize, there are different driving forces that push IKEA to enter in Chinese
markets. IKEA expanded into Japan because of economic constraint, deregulation and asset-
based advantage while supporting environments which are political and social and economic
conditions as well as transaction advantage are the influences that support IKEA to
internationalize in Chinese market.
The factors that influence the success and failure of IKEA in Asia, Chinese market and
Japanese market, are summed up, namely, psychic distance and learning, strategic decision
making process, degree of adaptation of retail offer, entry strategy, characteristics of
organization and management characteristics. In brief, firstly, psychic distance creates
barriers for IKEA to enter both Japanese market and Chinese market because of differences
in many aspects between European and Asia which lead to learning in different perspectives.
Secondly, strategic decision in planning leads to achievement in Chinese market while
planning and researching are missing in Japanese market. Thirdly, there are too little in
degree of adaptation in Japanese market but the adaptations in Chinese market exist.
Fourthly, though IKEA invested in both Japanese market and Chinese market without
directly owned in order to gain knowledge; there are differences in modes of entry as IKEA
applied franchising in Japanese market but joint venture in Chinese market. Fifthly, size of
store is matter in characteristics of organization since the store of IKEA in Japan is small but
rather big in China. Next, IKEA in Japanese market lacks of supply network while IKEA
owns supply centers in China which lead to different characteristics of management.
Furthermore, though IKEA do not achieve in expanding in Japanese market but Chinese
market later on, internationalization of IKEA in Japanese market for the second round is a big
challenge for IKEA to use their learning and experiences to conquer Japanese market over
again as well as other distance countries.