International Expansion Strategy Of Ikea Economics Essay

This is a current research work which concentrated mainly on the business expansion strategy for Swedish based multinational company IKEA, which is a giant furniture manufacturer and Retailer Company. In this current research, there were few guidelines and suggestions prepared by the depth study on various factors which might helpful for the IKEA in their international expansion to few more countries. These issues might include like legal constraints, country and industry norms, competition from other relevant industries, restriction made by countries on the foreign industries.

In this research work we mainly concentrated on background history of IKEA with its international entry and how it was made its name as a new brand for the quality and product design to others. Carrying with the SWOT and Pestle analysis and entry mode in to the countries India and Pakistan for further expansion and the problems that may arise in the initial stage of the brand entry and what are all the problems and competition they may get from local brands and suppliers. Followed with the necessary suggestion to improve and the way they can enter to make their presence felt with their entry mode.

Chapter 2:

2.1: History and Overview of IKEA

Ingvar Kamprad started IKEA in Sweden in the year 1943. It was started with initial service of selling items like, wallets, jewellery, pens, picture frames and etc. Later furniture joined in their product list in 1947 and followed in 1955 with personally designed pieces. In early days of IKEA establishment, Ingvar used to visit the makers and suppliers of local or independent furniture for having them under his contract for supplying designs based on his order. All most all the models were used to be designed in an innovative manner in comparison to other manufactures and manufacture as mass produce and used to launch in to the European market for early venture and network. At affordable price IKEA used to supply Scandinavian designs with quality furniture. It expanded its stores there on by investing on new stores in 1950’s.

The main theme behind the success and uniqueness of IKEA is supplying furniture’s at a very cheap price in the market with the designer models. And its ideas also have variation of their business with other companies in terms of company culture, business ideas and the entrepreneur. Their business idea was “help create a better everyday life”. Based on this, IKEA use to design the products with good quality, good function and good design at a very low price which makes customers to buy their products again and again, and reducing their competitors share with these kind of strategies.

The IKEA was established when the country of Sweden was transforming into a society that rich and poor people was similarly treated alike and their needs were taken care of. This is also the central theme of the vision of IKEA. The consumer is asked to participate in the proceedings of the concern. The range of the products is also consumer friendly and also caters for the wants of an entire family so that the need of every one in everyday life is taken care of.

IKEA functions via a complicated net of suppliers distributed throughout the world. In the last decade, the IKEA was involved in the acquisition of some of its own factories that are actually units of training that are involved in the setting of standards for the rest of the suppliers so that economy in production, quality of the product and an awareness on the environment are assured. The countries with which the IKEA has partnered are China, Russia, Slovakia, Poland and Romania. The IKEA ensures that the transfer of goods from the supplier to the consumer should be environmentally sustainable, effective in terms of cost and also direct. To eliminate the wastage of space the IKEA encourages flat packs and this plays a significant role in the creation of goods that cost less as it greatly reduces the cost of the logistics.

At present there are over twenty five regional centres of distribution that are spread over 14 nations and they have the responsibility of the supply of products to the stores of IKEA. The success and the competitive advantage of the IKEA is mainly due to it wide experience in the field of retailing and leadership in cost issues and product differentiation.

2.2: International Expansion Rationale

Globalization is a process for increasing the economy by using the international marketing features (Yip 1995). The companies who want them selves as part in the globalization has to maintain certain strategies for reach the expectations of people from all over the world from different nations with different cultures. All of these strategies are intended to meet the companies targets by inter linking one among (Bartlett and Ghoshal 1989).

Ghoshal proposed three main objectives that a firm has to satisfy. They are achieving efficiency, managing risks and learning, global integrations is the another effective objective which was another proposal by Kobrin (Kobrin 1991, Birkinshaw, et al. 1995).

Johnson and Wiedersheim-Paul (1975) introduced a four stage model for the international business as follows no regular export, selling via independent agent, sales subsidiary, and production subsidiary. This model already discussed by Root

(1987) and Anderson (1993).

Most of the work from this paper is based on the study from Korean carmakers’ globalization and global strategy. As part of this research we have developed two case studies on carmakers in Korea, Daewoo and Hyundai. They followed two different approaches for reaching globalization. Hyundai is one of the most popular companies in Korean. It hits the advanced markets for make the globalization process achievement. Whereas Daewoo was diverse method for effecting the market like Hyundai the company trying different approaches to accomplish it’s goals in the global market by attracting more consumers. The company want to target the small budget markets the companies orders increased slowly, according to the demand of the product the company delivered in to the market. In the year 19994 it has high capacity increases drastically. (Bowon)

The present research mainly concentrating on describing the difference between the two approaches for accomplishing the globalization and also the similarities meeting the targets.

Based on the findings of Keith W.Rabin, KWR International’s president and the author of the report, “In order maintain a firm outside of the home country, the organization has to do the research on the available local resources it takes a lot of time, human effort is needed analysing it properly. So this makes every firm to establish a international capital quickly this can available to the organizations who is in the international market for a long-term”. (CMP, 2005)

Robbins says “To achieve this goal the companies will have frequent business trips, seminars and marketing trips for making their firm for a global reorganization. Which can increase their product popularity world wide of their services will have a huge response so the organizations want to implement these strategies for international consumers and the new business achievements”. (CMP, 2005)

Pestle analysis on IKEA.

Opportunities

Threats

Political

Both international and domestic business success

Flat packing of do-it-yourself

Few countries oppose giant companies to enter and become competitor for local organisations.

Economical

Customer loyalty aiming within their strategies.

Grew to Stitching Ingka from the ownership transfer

Lack of strategic direction on market performance.

Social

Opportunity for people and many benefits to employees.

Well a head in charity services

New and local companies with their own designers and strategies

Technological

Using latest technology to serve its customers. Even in the peak timings with support from staffing and management as well.

Optimised supply chain management process.

New E-Commerce websites with their way of delivering products and in marketing strategies.

Environmental

As per their documentation and policies, environmental factor issues will be considering in implementation process.

In few of the countries local management many not follow all the policies to be implemented can affect as drawback.

Legal

Based on their legal policies they were strict with those in implementation with the kind of work conditions, social and environment factors.

In few areas there may be people who can use these laws in getting benefit and refund policies implemented, even if it was mistake of their customers.

SWOT Analysis:

Strengths

Weaknesses

Recognition as a strong brand and image.

Products provider at very low cost.

Good at Their Marketing strategy.

Mass marketing with cheaper price of own designer products.

Fully trained staff and management teams.

Got own group of industries.

Previous product recalls made due to few problems in the product manufacturing.

Shipping to all places with less stores may cause problems.

Opportunities

Threats

Expansion Internationally

E-Commerce sales

Outsourcing from China

From Direct (Furniture stores) competitors and Indirect competitors

Rising price for shipping and product

Chapter 3: Type and Nature of the Investment

The iconic $ 31-billion Scandinavian home products giant, IKEA, has put on hold its plans to set up 25 showrooms across the country for an investment of around $ 1 billion. In an internal communication IKEA told its stakeholders that Indian investment rules do not encourage it to go ahead with its investment plans at least not in the near future.

The country’s norms on foreign investments in retail stipulate that the foreign company can hold no more than a 51% stake and must have an Indian partner. As IKEA’s distinctive showrooms are like sprawling malls, with flat pack furniture, accessories, bathroom and kitchen items, they require high investment. And IKEA has so far been unable to find an Indian partner with not just deep pockets but readiness to invest a matching amount in a joint venture.

It’s learnt that IKEA was hopeful of the rules being relaxed by the new government, but was jolted by Pratibha Patil’s silence on the issue in her presidential address that outlined the UPA government’s agenda. It may have lost heart completely when commerce minister Anand Sharma said that FDI norms are not likely to be changed in the near future, and decided to opt out of India.

When contacted, a top IKEA source confirmed the company’s decision. But they were quick to add that India as a market can’t be ignored by IKEA indefinitely. “In a few years we are bound to reconsider our decision,” they said.

IKEA had planned its first showroom near Dwarka, at a location that’s between Delhi and Gurgaon. It had also hired 25-30 people for this venture. Their fate now is not known. Otherwise, IKEA has been sourcing many materials from India and employs around 11,000 in this operation, while it claims to be indirectly employing another 60,000. This outsourcing business is estimated at around Rs 1,900 crores.

India’s retail market is estimated at over $350 billion, with organized retail accounting for 5% of it. An Indian economic think-tank optimistically projected early last year that the market size could grow to $590 billion by 2012 and organized retail could be a meatier 16% of that market. The economic downturn might have since dampened these projections.

Chapter 4: Country Selection

4.1: India as a New Business Environment:

In order to consider India as one of the new business environment, it’s better to go through the process of business set up in India and how the government was encouraging the foreign companies. India is now one of the fastest developing countries in the world. And it got lot of manpower who are skilled highly when compared to any other country. It is one place where it provides enormous opportunity for the investment that was going to be investing in. According to the research work on the Indian economy and other constraints, Indian stood at tenth place in terms of world’s largest economies, first in terms of democracy, and fourth in terms of purchasing power parity (Embassy of India, 2010a). And India Government system was federal and the power was separated between State and Central Government.

For carrying the business operations in India, it supports with investor friendly, attractive and liberal climate. Among the world’s major economies, India even got policies like transparent and liberal for the FDI (Foreign Direct Investment). With the help of Indian Government prior approval apart from few fields remaining activities/sectors 100% FDI was allowed below automatic direct route. India got simplified and liberalized control over foreign exchange. Under the above automatic direct route, basic requirement for the investors is to intimate the RBI (Reserve Bank of India) for the inward remittance inside 30 days of receipt.

Indian Economy: (Tushar, 2007)

Under current account Rupee was easy to convert as well. (Embassy of India, 2010a)

For non-residents, under capital account Rupee is easy to convert almost fully to their exchange.

For the investment made from outside was given exemption in fully repayable on FDI – dividends, profit earned and proceeds out of sales.

For Indian residents there were few restrictions on incomes earned based on their capital account.

For the year 2007-08 Indian economy average growth rate was 9%. And from past three it was growing at the rate of 8.8% p.a.

Exports increase by 25.8% and imports by 29% for the year 2007-08.

The service industry grew by 12% and manufacturing industry sector by 8.8% in 2007-08 period.

Most percentage of the family comes under middle class and got 55% population under the age of 25.

Indian economy was in prime growth period. The main reason of domestic market growth due to the rise of per capital income and high economic growth.

According to Indian Embassy, many researchers conducted previously on Indian growth and those analyses showed that it was trying to attract many investors as a hot destination for their investment to be made. Based on the study of Goldman Sachs, until 2050 Indian economy will continue to increase it’s grown at the rate of 5%. And it may reach top fourth position by end of 2050 (Goldman, 2009). Few more points which were listed below: (Embassy of India, 2010a) (Tushar, 2007)

Stays at second place in the attractive destination – Based on the Business Confidence Index of ATKEARNEY in the year 2007.

Based on OECD (2007) Indian can achieve the growth rate of 10%.

According to Investment Report 2008 of UNCTAD’s, for foreign direct investment attraction India stays at second place.

By 2050 India can reach 90% of US economy – Prince Water House Coopers Report, 2008.

4.2: Pakistan as a new Business Environment:

Similar to many developing countries, Pakistan also targeting for the foreign investment for its growth of countries economical development. The investment can be through by transnational corporations or any other, but foreign investment is the main thing they looking forward to grow in countries development part. In order to develop their country, Pakistan was looking for the FDI (Foreign Direct Investment) as a main source of capital, marketing access, managerial skills, technology. They are welcoming both foreign and local investors in all most of the sectors to develop further. In order to welcome more investors for setting up their business ventures, Pakistan was following the methods like double taxation avoidance, with fully protection to the foreign investments under the law. For attracting more FDI, the policies were redesigned with the reorientation policies, deregulation and privatization of activities of economic, keeping much more reliance on the marketing force thorough out the country. Recent reforms of Pakistan economic policies were changed to maximum extent to giving benefit for all foreign investors; MNC’s including investors who were based in India as well by offering the conducive and unprecedented business opportunities. (State Bank of Pakistan, 2008)

Pakistan is one among the countries which changed the economic achievement and reforms in recent times and made a friendly environment in the business sector. Due to these changes it created a new situation with win-win for both consumers as well as for the investors.

The process of MNC’s investment will leads to sharing and development of new technology with bit training to expertise those belongs to that particular technical field. This makes effect on other small and supported industries to turn up for delivering few products and service kind of things to the MNC’s. And also supply of people who can contribute towards the company operations which leads to impact in a positive way of development in almost many relevant fields with the help of new rules. For the supporting companies there may be applicable rules like regulations, liberal rules, and not allowed to break the tax structure as well. The process of latest technologies like electrical and electronics make huge impact in developing countries especially by providing huge employment, and it reflects an increase in production with economy modernisation. (State Bank of Pakistan, 2008)

The way of many investors who ever trying do business in Pakistan will think in many angles before starting up. Most of the drawbacks and major concerns were like there will be frequent change of government, and their policies, corruption, government officials and their unfriendly attitude, lack of good decisions, lack of proper maintenance. In addition to these higher priority was to the situation of law and order (Invest in Pakistan, 2006). The current trend was expecting that there will be defiant improvement in their services and attitude to the development with stability in situations. The local, foreign and business community, where keeping their hopes on the situation stability, due to the government repeated assurance by providing the benefits and unchanged policies for their benefits to increase the level at macro-economic. Many foreign investors were targeting mainly the Energy sector. Even we can see from past few years many companies invested in this field majorly.

According to the ADB (Asia Development Bank), the Pakistan’s economy was stable and it was better even after the post global recession and September attack. Even the conditions where improved even after the drought period for the agricultural sector. Even the inflation was reduced by 3% when compared to the previous year’s economies fiscal year. Due to these prices stability took place and started moving towards the development for the future in all forms. (Invest in Pakistan, 2006)

When we take the economic conditions in notice for the financial year 2001-2002 the export market goes downward the revenue was less when compared with the expected price. Once the European Union markets picks up their exports then this situation will be changed for the other markets. This also affects the Pakistan’s high trading business too. This export market will goes to position back once the petroleum prices hikes, investments of the customers increases. The improvement in the oil, textile prices will lead to the GDP of the country and the improvements in the international business. This can also provides high security to the environment of the countries which are developed already economically and technically. (Invest in Pakistan, 2006)

The difference in these figures might be $1.3 billion for the year. The balance can be increased in the first 6 months by asking loan help from the USA. So the next six months probably won’t increase the revenue with not more than $800 millions. The revenue of the country will mostly effected with the initial planning and income from the starting of the year. So the losses in the economy of the first six months of the year can’t be full filled with the benefits of the coming months more over it has to provide the extra investments for the mobilization which was making difference in the Indian budget since 2001. (Invest in Pakistan, 2006)

If the Tax collections of a country can be increased if there are more exports, transportation of the goods happens. Which also have less impact in the budget; this can increase the GDP by 5.5 percent only.

Global Recession has not made its effect on the manufacturing factories, the new policies are invented to over come the drought in the harvesting areas so the economy of the country shown increase with 3.5 percent. The surveys says that there is a growth of the Pakistan economy also this can achieved by the effected new strategies that are implemented in the last quarter of the year. The latest changes in the European Union markets also made some changes in the economic conditions of the courtiers that are depending on them. (Invest in Pakistan, 2006)

INDIA

PAKISTHAN

Political

New policies for FDI in retail industry in India.

Difference between political parties.

Many groups will agitate based on the new policies or statements of government.

Regulation of policies to attract FDI.

Difference between political parties and Army.

Problems with the human bombs and terrorists.

Economical

Variation of Tax across the country based on state.

Inflation

Spending of government and services.

Economy down fall

Inflation variation

Social

Low Income

Importance to local stores

Awareness of consumers

Low income

Local stores

Uncertainty

Technological

Moderate infrastructure

Use of technology but to limited extent.

Poor infrastructure

Distribution of less technology

Environmental

No one will bothers about the process how it goes, until any negative side affected.

Hard to maintain as at each location different rules and regulation under implementation.

Legal

Controlled by the local, state, and central authorities.

Controlled by the courts and army.

Rules will change based on the party that holds the power

Chapter 5: Entry Mode to International Market

IKEA with its brand value can enter the Indian market with either of its ways. This can be like a direct or indirect entry. Direct entry can make it keep all its investment by itself without depending on other major companies. This can lead it little bit tough to handle all its venture as lack of handling things in India even though it got enough international market experience as the rules will vary from the western market. By joining with any organisation will make that entry mode easier with lesser risk. So that it can start working on its own way of marketing strategies to expand. This can minimise the financial risk and will make easier to handle the new distant market (Evans et al 2000). Joint venture can make IKEA stronger in India and will be more towards the win-win situation. Both join partner and IKEA improve the relationship in India and make India as one of the cheap products supply centre of IKEA (Carpell, 2006)

Globalization in the new policy approaches that attracting the companies towards for improving their sales internationally. The changes in the transportation, communication are the part of globalization for making human life more risk free. There are two ways we can step in to the global markets. They are low or shared and the high and full control modes. The companies which wants them selves as part in to the global has to understand the pros, cons of these two methods with special attention. (ICMR, 2009)

The high budget firms have more impact on the market, ready to take the risk while in the process of meeting the complicated needs of the customers, these are also can be self starter of the subsidies any other nations or they can offer services form a third party company. The companies who are ready to challenges are will give the assurance for the user expectations. These firms can also have the control on the market so it can control the fluctuations and are also strong enough for making their own ventures on the market. These companies can also helps in reducing the barriers in between the developed and the developing nations. (ICMR, 2009)

The selection of the mode is based on the different factors of the firm that are influencing the firm internally. The firms who is having more interaction is more with other firms, working groups that firm will have the high resources collecting of the information, the firm get the latest updates very quickly compared to all other. This is the one most special feature for the firms those are involved in the global business. The business process is more confident if there are any common working groups they introduced each of them. (ICMR, 2009)

The companies overall growth and its further existence will be depend on the mode that it entered in to the market. So it is important to selection of mode of a firm while launching it in the global market. Japanese will wait for a long time in selecting the mode for analysing which method is best suitable for their firm to get the maximum benefits for the organization. They estimate the factors that are influence the company for developing business strategies. Most of these companies are select low entry mode for their high invested firms. (ICMR, 2009)

High control mode is adoptable only in very few cases. This can be helpful to the firms whose assets are not exactly defined; the goals are not pre planned. This approach is best suitable for the firms whose tasks involved with less risk factor and where as the high risk tasks are managed by the low control entry mode is applicable. Their are five different forms are available for a firm exporting, licensing, joint venture, mergers and acquisitions, and establishing a subsidiary of their own. More research work has to be done before selecting the mode of a firm which is related to the entire performance levels of the company.

Chapter 6: Challenges/Difficulties in New Country and Necessary Suggestions:

IKEA’s Perception of Indian market:

IKEA thinks that they are some problems in the Indian market about its launching; the company also has an opinion that the market is not still ready to welcome it. But the supplier chain market like Reliance had made some changes on the IKEA’s opinions proofing that the foreign goods will have a high demand and there is an analysis is required for opening the company in India this has to be done when all the circumstances in the country are cooperative.

May be in the next five to six years India will get ready for big retailers. The same opinion is expressed by the “IKEA India Property and Establishment Manager staff” lender in the “Technopak Retail Summit” They also told that they are satisfied with the huge investments that are taking place in the market at present, the companies are getting the pay backs more than investments. There are also some polices that are effecting the Foreign direct investments in the country, IKEA is not ready to change it’s the business plans for a certain country. The lender also stated that it is difficult to understand how an Indian company can open 200 subsides in a year; they may be repeating the same mistakes that were done by a local company called Reliance as giving proper respect to the foreign customers.

Bijou Kurien the CEO and president of Reliance groups have answered all the above mentioned queries from the IKEA lenders. The country will provide diversity in the market by different retailers which is not possible by any other country. He says that we don’t say ourselves a national retailer but still the country offers diversity for foreign consumers. We will provide the business of the country provide products that are demanded over the globe. The same the country will import goods that have high demands from the outside the country. (Business standard, 2008)

Corruption in India

In recent times this problem is discussed by a journal about the existence of Ikea in Russia. (Kramer, 2009)

In Russia there are more chances for corruption and the high bribes will takes place so due to this reason IKEA will cut-off its deals with Russia according to a notice from Kramer (2009).

This Opinion has told by an 83 year old founder of the home furnishings retailer of Swedish company in a radio interview decided not to spend some extra money for selling their products in the country. This will create a terrific situation to the Russian government by encouraging corruption especially for providing market to the products from outside of the country. The decision took across the Russia because IKEA runs the business in several countries it is difficult for firm to spend some amount for selling the goods. It also takes off its new ventures in India due to the policies of store ownership.

Dmitrit A. Medvedev the president of Russia noticed that the corruption is one of the major problems that the country was facing, eliminating this problem is one the important thing he want to achieve in his period of time. Mr Medvedev made some new policies for the fire and health department to make some abrupt moves to find out the bribes in the department, that involves high exports from the company. The president wants to let out the assets, income of the employees, their spouses properties also need to be revealed. (Kramer, 2009)

Karmer point outs that the business executives from the outside of the country have involved in some secrete bribes in Russia. Those companies will hire lawyers who are expertise in solving the legal issues of the firm. The country has a 147th place, out of 180 countries in bonding with countries like Kenya, Bangladesh and Syria for making Transparency International’s corruption perception index.

Usually the cash bribes of the country were caught by the traffic police, the special kind of motor cycle gloves were made for storing the bills that are very huge. The administrative bribes are one dangerous thing happening in the country which is affecting the fire, tax, sanitary and some department which can handle the business demands of the country. So the company expected similar type of problems in the Indian market as the country is facing similar kind of problem of Russia in corruption and bribes in major departments.

Chapter 7: Conclusion and Recommendations:

India has a great value in the retail industry worldwide. So this is the great opportunity for IKEA to launch in India. All positive results discussed in this research makes India becomes a leader in the carpets industry which were handmade that gives more profits to the industry. There is a high competition from other local market as discussed, IKEA can protect its position with implementing new ideas, and there is a great demand from all other countries for Indian products. Which makes the export value increased at all the time compared to other markets. By entering into India it can make its strong presence felt everywhere and geographically it’s