Executive Summary
The current report focuses on exploring IKEA’s approach toward internationalisation. From the very beginning of the company’s existence, IKEA has set a goal of international expansion as a component of its strategy. It was found that the multinational enterprise’s efforts align with the process and network theories of internationalisation, as proposed by Johanson and Vahlne (1977) and Johanson & Mattsson (1988).
Prior to entering a foreign market, the company invests in research to discover the peculiarities of the new environment, customer trends, and needs, as well as economic background that would either facilitate or limit the success of the entry. This approach aligns with the process theory, or the Uppsala model, which suggests that the firm builds its presence in the foreign market in small steps.
The network model underlines the importance of creating lasting relationships with entities from foreign environments. IKEA has built such relationships with suppliers in foreign markets that can ensure the availability of key products to be distributed among critical locations quickly and at a lower cost. Moreover, the structure of the organisation, which includes three key sections, allows enhancing the range of products as well as supply and production activities, thus facilitating practical internationalisation efforts.
Introduction
Introduction to the Company
IKEA is a Swedish-founded European multinational company that specialises in designing and marketing furniture, home accessories, kitchen appliances and other useful products and home services. It was initially founded in 1943 by Feodor Ingvar Kamprad in Stockholm. Since 2008, the company has been the leading retailer of furniture around the world (Ciment, 2019). The business is a private company that is owned by Inter IKEA Systems B.V., which is registered in the Netherlands and is currently run by the sons of the company’s founder, Kamprad.
IKEA is known for its modernist and sustainable approach toward design and is associated with an eco-friendly simplicity. The company’s vision is “to create a better everyday life for many people” (About the IKEA group, 2019, para. 2). IKEA’s business idea supports such a vision by allowing the company to offer a broad range of low-priced items that as many people as possible can purchase. With stores available around the world, the company has been able to capture the attention of customers from various social groups. The international strategy of IKEA is concerned with not only capturing the global market of customers but also globalisation of production.
Introduction about Internationalisation Theories
Jan Johanson’s and Jan-Erik’s Vahlne process theory of internationalisation is the most applicable to the case of IKEA. The scholars approached the internationalisation as a learning-based process and studied past empirical research and entry forms. Their model underlines the gradual and incremental character of the national expansion of companies. In order for businesses to reduce their levels of risks on the international market, Johanson and Vahlne (1977) recommend an evolutionary approach. After studying the cases of such Swedish companies as Volvo, Sandvik, Atlas Corpo and Facit, the researchers found that all of the firms had developed their presence in foreign markets incrementally.
According to Johanson and Vahlne (1977), the organisations often expanded their international operations in small steps instead of making sizeable foreign production investments. For example, prior to entering a new market, IKEA would initiate a three-year research and preparation process that would help the company get integrated into a new market (Chu, Girdhar, and Sood, 2013). This aligns with the process theory of internationalisation as the company works on establishing a certain level of commitment to a specific host country as well as developing significant market knowledge to aid in the geographic expansion.
IKEA’s Strategy
The international strategy of IKEA came into effect in the late 1950s – early 1960s. The company needed support from European markets that would facilitate the outsourcing of production. Poland was the first country to provide outsourcing due to the boycott of Swedish suppliers in the 1950s (Easton, 2014). The company gained a significant advantage from cheaper products available in Poland and, therefore, could sustain a lower-cost strategy overall.
In the European market, IKEA used the same products and operational strategies as in Sweden. This represented an intuitive approach, which resulted in the high number of market share and overall sales in the market. What sets the company’s international strategy apart from others is that it uses the same concept in every country. The importance of the concept was attributed to its uniqueness.
The organisation has always stood for something different compared to the local, domestic competition. This uniqueness has given IKEA the same advantage in every country that was initially established in Sweden from the company’s early days. Although, during the expansion of the international strategy, IKEA has also been using home-base exploiting, such as in-house Research and Development, design, production, as well as logistics.
Theoretical Background
Internationalisation Theories
Johanson and Vahlne (1977) developed a process theory, or the Uppsala model, by examining the various degrees of market commitment of firms. At the early stages of internationalisation, it is imperative for companies to understand the details of the market in which they are entering. The internationalisation of companies under the influence of the process theory occurs with the lowest degree of resource commitment possible. After making the first step, companies expand their internationalisation gradually.
The choice of a new market entry mode depends on the level of opportunity, risk association, expansion’s urgency and the size of the prospective market (Johanson & Vahlne, 1977). Resource commitment, in such cases, depends on the degree of dedication and the amount of resources committed. Moreover, companies also consider risks associated with the liability of foreigners, expansion, smallness and newness.
Within the network theory, the internationalisation of firms occurs through the “establishment, maintenance and development of connections with network participants in foreign markets” (Johanson & Mattsson, 1988, p. 303).
Thus, the model underlines the importance of creating lasting relationships with entities from unfamiliar environments (Ratajczak-Mrozek, 2012). Moreover, it is essential to consider the characteristics of foreign environments as related to the process of internationalisation itself “as determined by the entity-diverse foreign environment and the establishment of formal and informal contacts with the entities in it” (Ratajczak-Mrozek, 2012, p. 30). Increasing the degree of network internationalisation is associated with boosting the number of strong relationships between the various members within that network.
International Corporate Strategies
The principal aim of having an international corporate strategy is associated with maximising the value of an organisation for its owners and shareholders. By establishing such an approach, it is expected to develop value, which is measured by the difference between product costs and the quality perceived by consumers. Depending on the needs of an organisation, different types of strategies may be chosen. For example, when implementing a multi-domestic strategy, a firm would sacrifice its efficiency levels in favour or “emphasising responsiveness to local requirements within each of its markets” (Edwards, 2018, para. 5).
This implies the customisation of products or services to the needs of different locations around the world. A global strategy emphasises efficiency, thus sacrificing responsiveness to local requirements. Some minor changes and modifications to products or services can be made in different markets. However, the global strategy underlines the importance of gaining economies of scale by offering essentially the same or very similar products in each market. The global strategy aligns with the approach that IKEA has been implementing (Edwards, 2018). The company offers little variation in products based on global market trends and needs, thus being able to reach the economies of scale.
Foreign Market Entry Theories
Foreign market entry modes, or participation strategies, are based on the degree of risk encountered by an organisation, the control of resources required for the entry, as well as the projected return on investment. In the case of IKEA, the equity market entry modes are the most relevant and include joint venture and wholly-owned subsidiaries. The joint venture represents one of the most widespread ways of entering a foreign market.
The model suggests that two businesses would combine their resources to market products or services overseas. The key limitation of joint ventures is concerned with the difficulties of their management as well as the requirement of splitting profits (BPP Learning Media, 2016). When initially entering the Chinese market, IKEA implemented the joint venture approach. However, experience has shown that the entry mode would limit the capabilities of the company to manage operations independently due to the limitation imposed by the government of the country.
A wholly-owned subsidiary is a mode that implies an organisation entering a foreign market with complete ownership of the foreign entity. Wholly owned subsidiaries can emerge as results of either acquisition or greenfield operations. Acquisition implies the purchasing of a foreign company as a method of entering a new market. A greenfield operation refers to the development of a new company and a legal entity in a foreign environment (Piekkari, Welch, & Welch, 2014).
Therefore, companies that aim at decreasing the range of risks that would adversely impact their entry will choose wholly-owned subsidiaries for maximising their exposures to foreign markets. This is because the acquisition is a process that implies the use of already established brand names and customer bases. It is also important to mention that neither greenfield operations or acquisition are viewed are superior to one another.
The choice of an entry mode depends on the organisational circumstances, objectives and goals that a company is aiming to pursue. If implemented currently and in the right conditions, wholly-owned subsidiaries can result in high profits and overall rewards for a company. Overall it is expected that a wholly-owned subsidiary brings organisations the capacity to reach wide geographic locations, markets, and different industries within those markets.
Organisational Structure
To understand the process of business internationalisation, it is imperative to consider the role that organisational structure plays in making businesses make relevant decisions. Organisational culture represents the system of values and norms that are shared by individuals working toward a mutual goal (Grøgaard, 2011). Culture will also help determine the way in which information would flow between the levels of a company.
For instance, companies may have either centralised and decentralised structures. The benefits of a centralised structure include the coordination and integration of business operations, ensuring that decisions align with organisational objectives, giving top-level managers the resources to facilitate change, as well as avoiding the replication of activities, which take place when similar processes are being carried out by different departments. The benefits of decentralised cultures include giving the top management time to focus on essential issues by means of delegation, implementing motivational research, permitting greater flexibility, as well as increasing overall control.
During the process of internationalisation, companies may develop international divisions, which are responsible for the global activities of a firm. Such divisions can be organised based on geographic location and copy the structure in the home market. In a worldwide area structure, an organisation is divided into a structure under which the global markets are divided into areas. In a worldwide product divisional structure, the structure chosen by a firm is based on product divisions that have a global responsibility. In a global matrix structure, there is dual decision-making because horizontal differentiation is carried out along two dimensions, both areas and product divisions.
Depending on the organisational structure strategy, a company may choose localisation, international, global standardisation, and transnational approaches. In terms of the need for coordination, localisation is low on a scale, the international strategy is moderate on a scale, global standardisation is high, and transnational strategy is very high. Therefore, there is an interplay between the approach chosen by an organisation and the extent to which coordination is needed.
Moreover, both vertical and horizontal differentiation modes of controls differ depending on the strategy. For instance, within the localisation structure, vertical differentiation is decentralised, while horizontal differentiation implies a worldwide area structure. Within the international strategy, horizontal differentiation involves worldwide product divisions while in vertical differentiation, core competency is centralised while the rest are decentralised. Overall, multinational enterprises (MNEs) need different levels of integration, depending on the target markets that they are pursuing.
IKEA Strategy for International Expansion
The path that IKEA has chosen for entering new markets in the international arena aligns with the process theory developed by Johanson and Vahlne. The approach underlines the fact that organisational following the process model usually enter those markets with which they are familiar or move into unfamiliar markets after gaining sufficient knowledge of them. From the very beginning, IKEA has set a goal of international expansion as a component of its strategy (Shoulberg, 2018). Such an approach is vastly different from other retailers that, after saturating native markets, seek new opportunities for capturing new countries (Shoulberg, 2018).
In addition, Johanson and Vahlne (1977) pointed out that the internationalisation process is deeply rooted in the combination of market knowledge and market experiences. For IKEA, the interplay between the two components has been detrimental for successful internationalisation efforts. The process approach to internationalisation within at the company also lies in keeping a consistent business model applied to different cultures and local taste levels.
The network theory proposed by Johanson and Mattsson (1988) can also be applied to IKEA’s approach to internationalisation. The sourcing network that the company has developed includes approximately 2,500 supplies in up to 70 countries (IKEA range & supply, no date). Since the designers of IKEA products work closely in collaboration with suppliers, product development occurs from the outset.
Through building tight relationships with reliable suppliers around the world, the company can acquire information about new markets, which is essential for international expansion. Moreover, the global product-sourcing model implemented by IKEA opens significant opportunities for network expansion. By buying merchandise from different countries around the world, the company has developed a cost-efficient and timely system from getting products from factories to product shelves (Shoulberg, 2018). The more countries there are available for providing the necessary supply, the broader are the opportunities for international expansion.
Supplier support and research on international markets are the essential resources that allowed IKEA to expand internationally. By streamlining operations related to supplies around the world, it is possible for IKEA to reduce operational costs and cater to new target markets. Extensive research has made it possible to pursue a global expansion strategy of predominantly entering markets with periods of high GDP growth, such as in instances of China and Eastern Europe (Harapiak, 2013). Moreover, research allowed to identify target markets with niches available for the home furnishing industry, such as Japan and the United States.
International Corporate Strategy
For IKEA, the key trend for the international corporate strategy is globalisation. In order to gain significant market shares in new areas, such as Asia, IKEA implements corporate and business strategies that would determine its sustainability and competitive advantage. For instance, when entering the Chinese market, the company implemented the joint venture approach with local companies in the country.
This was done because of the unique characteristics of the macro environment, which was characterised by the governmental provision to achieve principles of equality and mutual benefits. Moreover, IKEA tends to limit the adaptation of its localisation strategy to suit the local needs without adapting its product range to specific tastes. The more value the customers may place on the products of an organisation, the higher the price that can be charged. In order to maximise profitability as a result of the increased value, an organisation should choose a position in an efficiency frontier that would facilitate support in that choice.
It is also imperative to configure the internal operations of a company, which range from manufacturing to human resources, which are necessary to support the chosen position. Good decisions associated with strategic positioning are also linked to making sure that the chosen structure is right for a particular company and would provide the capacity for executing the strategy correctly.
What is important to note about the company’s international corporate strategy is that it maintains the same brand in any location around the world, which aligns with the global strategy (Clifford, 2019). The low-cost core products, which are available in IKEA stores, are identical, which means that the company pays attention to maintaining its image consistently. This means that it is ignoring the standard conventions of furniture retailing, in which products are targeted to local preferences, and instead provides a consistent range of typical Swedish products.
The strategic approach of the company has been deemed the “IKEA way,” which entails the development of products that customers can use for prolonged time periods. The “IKEA way” is a strategy that creates excellent economies of scale, which, therefore, would have the potential for capturing new markets around the world. The democratic approach toward design and the pricing strategy allows the brand to deliver functional and high-quality products at low prices.
The corporate strategy is also based on a simplistic approach to design. Uncomplicated forms are easier to manufacture, which means that they would be produced in a shorter amount of time, thus increasing efficiency and decreasing production costs (Clifford, 2019). For example, the iconic IKEA product, the Malm bed, is a bestseller because of the simple shapes and affordable price. Besides, most of the furniture is available in fewer variations, which allows the company to take advantage of the economies of scale. The maintenance of the right corporate image is also made possible with the help of charitable work. The INGKA Foundation, which is governed by IKEA, is the largest charitable organisation with a net worth of around $33 billion (Kinley, 2018). This creates a favourable perception of the brand around the world, thus enhancing the attractiveness of IKEA for customers.
Foreign Market Entry Strategy
A relevant example of IKEA entering a foreign market pertains to its expansion to the Chinese market. As suggested by Johanson and Vahlne (1977), when following the process approach, an organisation first chooses a market location with a high level of GDP per capita and low cultural distance. For IKEA, the process related to the expansion from the eastern coastal area to inland Chinese cities in 1998. Step by step, the company was expanding into the Chinese market.
The gradual internationalisation began with the “joint venture run to the coexisting of a joint venture and wholly-owned subsidiary, and finally run to the wholly-owned subsidiary, as the only entry mode of IKEA in the Chinese market” (Lingxiu, 2017, p. 20). As for the timing of the country’s entry in China, the company has conducted research to determine a favourable opportunity window to accumulate near market knowledge in order to establish an excellent reputation for IKEA in the Chinese target market. Moreover, the example of IKEA’s expansion to China pointed to achieving a gradual process, which started from the area of lower cultural differences to target markets with higher cultural difference such as inland cities.
The entry mode into the Chinese market is also important to consider. According to Hollensen, Boyd, & Ulrich (2010), once an organisation decides to broaden its foreign market share and reach new target audiences, it is imperative to develop an appropriate mode of entry. In the case of China, IKEA used two modes of entry. The joint venture and the wholly-owned subsidiary models. Determining suitable modes of entry relies on the degree of risk, the extent of control, and flexibility (Hollensen et al., 2012). For example, the joint venture entry mode presented the opportunity to capture the local market with the help of a franchise.
However, such an approach offers lower degrees of control, so the company had to learn from the arising issues to collect knowledge and experience of the foreign market, as well as the subsequent advantages offered by its policies. The model of wholly-owned subsidiary was implemented by IKEA later, when the company was opening a retail store in Beijing in 2003 (Lingxiu, 2017). This change in the mode of entry was changed due to the company’s experience with the joint venture and limited control (Lingxiu, 2017). Therefore, five years in the Chinese market allowed IKEA to understand the disadvantages of the primary mode of entry and adjust to its needs. From 2003 onward, IKEA used the wholly-owned subsidiary approach toward expanding its presence in China.
Organisation for the Strategy
From the very beginning, IKEA has been working on developing a unique organisational structure that would both facilitate global expansion and ensure prosperity in the local market. When organising the organisation for entering new markets, the company developed a large number of networks that would operate under IKEA trademarks. At this time, all IKEA franchisees are independent of Inter IKEA Group, while a large number of them are owned and operated by the INGKA group. Both Inter IKEA Group and the INGKA group have the same founder, which points to the fact that all critical organisational operations are subjected to centralised control.
IKEA follows a horizontal organisational structure, with Inter IKEA Holding B.V. being the ruling body in the structure, and governs three divisions. Inter IKEA Systems B.V. is responsible for controlling franchising operations, IKEA Industry Holding B.V. is responsible for industry operations, while IKEA of Sweden AB and IKEA Supply AG deal with range and supply (see Figure 1). The model that IKEA is currently following is the result of the 2016 restructuring initiative intended for clarifying the roles of the company’s decision (Dudovskiy, 2019). The new model was also necessary for enhancing the range of products as well as supply and production activities.
While there is a distinct differentiation between the key operational players at IKEA, it is important to note that the company’s Idea Concept allows for significant degrees of flexibility. The concept includes the main principles, vision, and culture that the higher management of IKEA desires implemented during the process of internationalisation. Since the model implies flexibility, the company’s franchisees across the globe are encouraged to learn from experience and exercise the entrepreneurial spirit, which would allow questioning proven solutions (Jonsson & Foss, 2011).
IKEA has strategically designed its products to cater to its core target market, which includes younger generational families, while further cutting costs by means streamlining operations with local suppliers. The company has organised in such a manner that allows for the global expansion of IKEA within favourable environments. Overall, the example of IKEA shows that a cohesive strategy can be beneficial for facilitating internationalisation. In the instance with entering the Chinese market, the circumstances in which the joint venture was developed were complicated for the company. For example, the Chinese government required foreign companies to create joint ventures with local firms if the former wish to sell their products or services to residents.
Conclusion and Recommendations
The exploration of IKEA’s internationalisation path has shown that the company has always been planning an expansion of the global market. From the inception of the company, IKEA has been following the process approach toward entering new markets.
The organisation is continuously investing in research prior to capturing a new target audience. The step-by-step approach toward global expansion has allowed the company to gain in-depth knowledge of the markets to be entered and cater the strategy accordingly. The Uppsala model suggests that once a firm has acquired the experience from a market, it may use the information to generalise expertise and apply to new target markets. The networking approach is also relevant in the case of IKEA because the company has built a sourcing network around the world to work closely with suppliers.
These networks have allowed IKEA to have the necessary stock available in multiple destinations, thus significantly cutting costs for transportation and handling. Regardless of store location, the supplier network ensures that there are products available for distribution in different destinations. IKEA has also shown to exhibit the global international corporate strategy, which offers limited product differentiation in order to reach economies of scale. This method is highly effective because the company does not have to spend much on diversifying the product range depending on the tastes of its potential customers worldwide.
It is recommended for IKEA to pursue the transnational strategy of foreign market entry, which is a middle ground between a global and multi-domestic strategy. An organisation that uses this approach tries to balance the aim of reaching efficiency and economies of scale with considering the local preferences of customers in different regions. For instance, large fast-food chains such as KFC and McDonald’s have the same core menu items while also adding region-specific products that cater to customers’ tastes. Therefore, the company may balance between the economies of scale and catering to regional tastes to reach profitability.
There is significant benefit in offering products that would be country-specific while also maintaining a core selection of items in order to attract new customer niches that may not have been interested in the company when it has initially entered a foreign market.
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