IKEA’s Internationalization Strategies
IKEA, a private international company with its roots in Sweden, is a retailer of home products. Examples of IKEA’s brands include accessories, flat pack furniture, and bathroom and kitchen wares. It is the biggest furniture retailer in the world and trades its products and services at an affordable price. Ingvar Kamprad, the founder of IKEA, started the company in Smaland, Sweden at the age of 17 in 1943. The report will discuss the strategies that IKEA adopts in its internationalization besides comparing these approaches to those of the competitors. It will further explore how IKEA’s corporate strategy fits with the internationalization methodologies besides offering recommendations on how the firm can improve its international operations.
IKEA started its operations in 1943 and maintained its local presence for fifteen years before the firm could establish a branch in a foreign country. When the company made the decision to have an international presence, its efforts did not go past the neighboring countries such as Norway and Denmark (Jonsson & Foss, 2011). From 1974 onwards, IKEA moved its operations to Germany and introduced the internationalization activities. The German market was ideal for IKEA because of its geographical location, and its cultural values and traditions have a close resemblance to those of Sweden.
Jonsson & Elg (2006) mentions that after 1974, IKEA gained global recognition as a brand both in Europe and the entire world. In a span of three years, IKEA had taken its operations to the Austria market. The firm geared its efforts towards establishing itself in the EU markets, for example, Iceland, France, and the Canary Islands. The reasons IKEA chose to experience its operations in these countries is because they are not far from Sweden thus having fewer differences in culture, income, and consumer perceptions compared to other parts of the globe.
According to scholars Jonsson & Elg (2006), in 1974, Japan was experiencing a rapid economic growth that attracted IKEA to invest in the country for the first time in Asia. IKEA penetrated the Japanese market using the strategy of acquiring a local chain strategy. However, IKEA’s performance in Japan did not match the firm’s projections due to the differences in culture and consumer behavior (Jonsson & Foss, 2011). The failure was a learning experience to IKEA as the company picked a few tips regarding expansion into other Asian countries. For instance, the organization opened branches in Australia and Singapore in 1975 and 1978 respectively before moving to the Chinese market in 1998. The company gained extensive experience in both domestic and international business which has necessitated its stabilized position as a furniture retailer.
IKEA took its operations to the U.S. in 1976 when it established a branch in Canada. The country was advantageous to IKEA because of its developed economy compared to the U.S. After nine successful years of operation in Canada; IKEA penetrated the U.S. market which at first was a challenging experience, but IKEA fought hard to stay. As a result, the firm gained sufficient experience to facilitate its entry into North America (Jonsson & Elg, 2006). The firm had already embraced the continued learning and innovation organizational culture that necessitated its internalization process.
The Uppsala model gives a detailed explanation of the gradual advancement of organizations’ operations into the international market. Some of the key elements of the model include firms intending to go global taking valuable time to gain extensive experience from their local markets before penetrating the international scenes (Jonsson & Foss, 2011). Secondly, these companies should first consider penetrating the countries whose cultural values and traditions intertwine with theirs. Moreover, the businesses should first venture into the states neighboring them geographically before considering the distant lands. The model further holds that the local companies should first employ the traditional exports in performing their foreign operations before they embrace an operation mode that is more intensive and demanding, for instance, subsidiaries. The company should maintain these approaches both at home and in the foreign country where they wish to establish.
The model holds that companies which attempted to penetrate international markets using their sales organizations or manufacturing subsidiaries did not record any positive progress. However, the Uppsala model does not apply to IKEA’s global expansion since 1974. For instance, IKEA did not just concentrate on the neighboring foreign markets but ventured even into the distant ones such as Singapore, Japan, Austria, Canada, Australia and Germany (Jonsson & Foss, 2011). Moreover, IKEA did not only rely on exports as its entry strategy but opened sales subsidiaries policies and recorded success.
The methodologies that IKEA has embraced since 1974 in its efforts to have a presence in the international markets include franchising and using affiliates. IKEA developed a policy to maintain standard characteristics in all their products across the world. Therefore, all the IKEA outlets in different parts of the country stock goods and services with similar features regardless of the unit being a subsidiary or a franchising enterprise (Jonsson & Elg, 2006). However, the company leaves room for slight adjustments to the products and services depending on the needs of the particular market.
The company invented a two-way value system that necessitates the smooth flow of operations between the company’s key players namely consumers, vendors, and IKEA headquarters. As a result, IKEA can rely on their customers and suppliers for vital information regarding the political, cultural, legal, and financial limitations and opportunities of conducting business in a foreign target country (Jonsson & Foss, 2011). Moreover, IKEA still employs its 1960s purchasing strategies such as engaging suppliers for long-term business and insisting on the employment of centralized control as well as maintaining the set standards for the product mix.
The firm has succeeded in the maintenance of this strategy through keeping its production and logistics costs at the minimum levels. The company uses vendors from low-cost nations to supply raw materials and ensures they can access the distribution channels with ease which further reduces the transportation and production costs (Jonsson & Elg, 2006). IKEA values sustainable development throughout its domestic operations or international attempts. Some of the means of achieving this priority include committing to manufacturing quality goods and services and choosing their long-term strategic partners wisely. Besides, IKEA participates in community development programs and ensures the workers have a conducive working environment. Moreover, the company has managed to establish and foster an organizational culture that values innovation and continued learning.
When IKEA is venturing into a foreign market, it establishes subsidiaries in the well-established markets who share similar with the Scandinavian market – IKEA’s country of origin. The firm has a central expansion team set in Sweden whose core functions include setting up a subsidiary (Jonsson & Foss, 2011). The group performs other related roles such as determining the location of the new unit, designing its layout, providing training to the new employees and planning the execution of marketing and logistic activities. The headquarters is in charge of the financing role.
The study of Jonsson & Elg (2006) explains the roles of the expansion group, for instance, achieving the standardization of IKEA’s goods and service. Moreover, the team exercises control on the overall operations of the established unit and ensure the process of gaining entry into the new market is smooth and free from unmanageable setbacks. After the expansion group confirms that everything is intact and operations can take off, they hand the responsibilities of running and managing the outlet to the local operational team. The expansion team then goes back to exploring further expansion opportunities in a different locality.
The experience that IKEA gained from the nearby Scandinavian market was vital in enhancing the acquisition of subsidiaries all over the globe. In the U.S., IKEA chose the strategy of establishing a store given the vast size of the U.S. market. The U.S. market poses many challenges to IKEA but is still a potential place for the firm to introduce local chains. Moreover, IKEA did not succeed in the Japanese market during the first round but made a second attempt which yielded positively since the firm opened subsidiaries in regions outside of Tokyo (Jonsson & Foss, 2011). The opportunity helped to increase both market share and brand awareness.
According to Jonsson & Foss (2011), IKEA also relies on franchising to penetrate the small, unstable markets. The franchising responsibility lies with the expansion team and follows the same procedure as when establishing firm-owned subsidiaries. One of the conditions that IKEA places on the franchising firms is to ensure the franchisees possess the essential features (Jonsson & Elg, 2006). However, when the need arises, the business retains the freedom to tailor-make the other segments of the product mix to align with the demands of the target market.
IKEA’s head office offers advice to the franchising entities besides being responsible for the selection process. The franchising outlets must also adhere to IKEA’s policy of making all purchases from the firm’s product lines. IKEA enforces compliance of the franchising entities with the company’s regulations and standards by conducting regular audits. Moreover, the firm besides compares the outlets’ performance with the overall corporate progress. Some of the checklists that IKEA uses to evaluate the franchising businesses include excellent customer service, quality products, and maintaining logistic standards (Jonsson & Elg, 2006). The head office ensures the franchising enterprises receive extensive training besides operational support. They must further ensure they pay the franchise fees payable to IKEA holdings. The headquarters cater for all the marketing activities such as purchasing catalogs and paying for advertising activities.
IKEA’s Internationalization Strategies Alignment with Corporate Strategy
The fundamental corporate strategy of IKEA is to provide clients with affordable, functional, and contemporary designed furniture. The company focuses on selling its products and services at a low price, for instance, the business reduces its prices by 2 to 3 percent annually. The firm sets its prices depending on the cost of the competitors’ goods and services which they cut into half. The company ensures it pays attention to the production process where the focus is on keeping the production cost low and maintaining stable long-term relationships with their vendors (Jonsson & Foss, 2011). As a result, the suppliers understand the required standards of the raw material supplied to IKEA.
The strategy is in line with IKEA’s internationalization approach of sourcing raw materials from low-cost states which further ensures cost cutting in the production process. Moreover, IKEA makes an effort to see the suppliers have access to logistics to facilitate the smooth distribution of raw materials between the vendor and the company. As a result, there is timely delivery of cheap raw materials which further helps in reducing the transportation costs (Jonsson & Elg, 2006). The corporate strategy of using cheaply priced goods and shortened distances between the supplier and the buyer has necessitated the international expansion of IKEA since it promotes internal competitiveness. Moreover, the low cost of production helps the business to achieve maximum profits which the enterprise can invest in venturing more foreign markets.
IKEA has faced various setbacks in building a stable supply network, for instance, some firms in Eastern Europe did not remain loyal to IKEA after the collapse of communism. The new managers who took over the management of the manufacturing companies increased the prices of raw materials, and some tore up the contracts between them and IKEA. In response, IKEA bought a Swedish manufacturer that would continue supplying the enterprise with low-priced raw materials (Jonsson & Foss, 2011). Moreover, the new supplier educated IKEA about the manufacturing process adopted in Europe. The Swedish producer further gave IKEA the chance to have other cheaper vendors through teaching their counterparts to embrace the recent innovations that were cost effective.
The study of Jonsson & Foss (2011) explains that IKEA made efforts to establish healthy relations with the suppliers, for instance, in Vietnam, where the firm has an operational supply base. The vendors in Vietnam sell their raw materials at an affordable price, and labor costs are on the lower side. IKEA has not neglected its initial business concept in its attempt to capture the foreign market. The firm bases all its actions on the corporate concept regardless of the country of operation. Moreover, IKEA values and fosters open communication among the workforce.
In the case of a work-related setback, the IKEA community employs both internal and external networks to find timely resolutions. The value has also helped to necessitate the entry of IKEA into foreign markets (Jonsson & Elg, 2006). For instance, the expansion groups that handle the franchising and subsidiary opening functions rely on the smooth flow of information between themselves and the head office to set up successful foreign units. The firm’s corporate strategy further focuses on several other elements such as the bulk purchase of raw materials at reduced prices.
The business concept embraces a learning organizational culture which further necessitates the employees to master new technologies which ease the production process. IKEA values the employment of effective advertising approaches for its goods and services, an approach that facilitates the internationalization process through increasing consumer awareness of IKEA’s existence in their local markets in different countries (Jonsson & Elg, 2006). The combination of these elements contained in IKEA’s corporate strategy has necessitated the establishment of the firm’s operations across the globe.
IKEA’s Internationalization Strategies Versus Competitors’
IKEA targets the middle-class populations hence its approach in pricing its goods and services at a reduced price. Moreover, the firm has discovered that its target market comprises of characters with similar preferences and behavior. The middle-class earners also portray similar expenditure patterns across all the countries where IKEA has operations. Unlike other firms in the industry, IKEA does not limit its attention to these similarities. The company researches the target country’s stabilization of its domestic market to determine how well its products and services will fair (Jonsson & Elg, 2006).
Every country presents the company with unique challenges and possibilities of financial success, and IKEA ensures it explores these opportunities and pays extra attention to localities that promise more revenue. For instance, in 2005, IKEA took advantage of the year’s rooster’s celebrations to produce 250,000 plastic placements (Jonsson & Foss, 2011). Such a gesture is a show of the company’s understanding and recognition of the local community’s cultural traditions and values which further increases the firm’s popularity with the residents.
IKEA puts into consideration the cultural susceptibilities of the specific countries of operation when designing its marketing messages and activities. The enterprise recognizes that each market has unique cultural values and makes efforts not to show disrespect in the delivery of their marketing communication (Jonsson & Elg, 2006). For instance, during the promotional campaigns in both UK and North America, IKEA used clearer cut billboards and commercials in the UK than North America since the citizens here are humorous in nature compared to those in the UK.
Firms competing in the global markets must demonstrate innovation or else lose their competitive advantage. Work processes keep on changing with variations in the market demands, and employees must thus be current with the recent developments in their profession or risk becoming incompetent in their responsibilities as their skills become obsolete. One of the challenges that confronts IKEA at the international level is the lack of innovation among the workforce which could further translate to employees concentrating on a similar product base (Jonsson & Foss, 2011).
It is a high time the organization considered broadening its selection base during the recruitment process. The firm lacks fresh blood which is important in offering the company new ideas and thus deviating from the old traditions that lose their significance over time. IKEA observes a policy that advocates hiring the same genre of workers. As a result, it gets impossible for the business to achieve diversity and innovation vital in addressing the changing consumer needs and preferences in the target market (Jonsson & Elg, 2006).
The success of firms in the foreign markets partly depends on the leaders who steer the decision-making process. At IKEA, there are inadequate like-minded managers (Swedes) to oversee the smooth management of the stores (Jonsson & Foss, 2011). The company should resolve this challenge in two different ways such as incorporating more Swedes into the workforce who share similar work ethos and cultural values. Alternatively, IKEA can select successful managers from the various countries of operation and promote them to expatriate jobs in foreign locations. As a result, the firm will achieve a stable transplantation of unique abilities displayed by the different individuals. Moreover, it builds global managers who are strong and have the commitment to serve.
In conclusion, IKEA employs different strategies in its internationalization process such as the size of subsidiaries and franchising. The firm goes beyond the guidelines of the Uppsala model which dictates that businesses with a dream of exploring external markets should begin by experiencing the domestic markets of other neighboring countries before reaching the distant lands. IKEA has successfully penetrated both local and international markets at the same time hence proving the model as ineffective.
The corporate concept of IKEA aligns with the internationalization strategy in various ways such as buying raw material in bulk and from low-cost countries thus keeping the production cost low. IKEA has a competitive advantage in the internationalization approaches over its competitors in the industry because of the company’s regard to the culture of the locals that helps in increasing its popularity. Some approach that IKEA can adopt to improve its internationalization process include hiring from a diverse background which fosters innovation.
Jonsson, A., & Foss, N. J. (2011). International expansion through flexible replication: Learning from the internationalization experience of IKEA. Journal of International Business Studies, 42(9), 1079-1102.
Jonsson, A., & Elg, U. (2006). Knowledge and knowledge sharing in retail internationalization: IKEA’s entry into Russia. International Review of Retail, Distribution and Consumer Research, 16(02), 239-256.