Influencing Factors in Ikea’s Internationalisation Agenda
Logistics
IKEA looks forward to furthering its internationalization agenda to reach more global markets. Several issues around the firms and the home furnishing retail sector influence this agenda. Firstly, the Company will have to deal with the issue of the complexity of logistics (Svend, 2011). IKEA only produces furniture in countries with a significant presence, such as China and Sweden, and countries that offer production advantages, such as low labor costs (Svend, 2011).
In most countries, the firm has retail stores which get supplies from its global supply chain. As it expands to other countries, it will face logistical challenges in getting its products to those markets. The challenges can include transportation costs, custom regulations, and the availability of local suppliers. For instance, it could not be cost-effective for IKEA to sell its items in a new market if shipping costs were too high. Moreover, it could be challenging for IKEA to import its items into a particular country if customs laws are very stringent.
Cultural Peculiarities
Second, the firm will be influenced by national needs and culturally sensitive issues. Consumers have diverse tastes and cultural practices worldwide (Lindholm, 2022). IKEA must consider local customers’ unique demands and tastes and the cultural and social standards of each new market it enters. For instance, there are cultural taboos about a particular furniture or décor style in some countries (Lindholm, 2022).
Furthermore, some countries have specific laws governing using specific materials or construction techniques. These elements may impact the development and manufacturing of IKEA items and how they are promoted and distributed internationally. For instance, Ikea had to take down a Television advertisement in China that some people found disrespectful (Lindholm, 2022). The business must modify its goods and marketing plans to appeal to local customers. It necessitates thorough investigation and comprehension of the local market.
Franchise Management
Third, the firm will need to consider the issue of managing its franchisees, who may demand more control over operations. With the internationalization agenda, it is very difficult to maintain the central organizational structure (Svend, 2011). IKEA has adopted the franchising idea to enter new but small and high-risk markets. It grants the franchisees the ability to use its name and run its business model in the geographic regions in exchange for a fee or a share of revenues. With more market expansion, the level of control over the franchisees will vary depending on the particular agreement.
Franchisees may ask for more control over their businesses to serve local clients better or adapt to changing market conditions (Svend, 2011). Examples include the right to source their items and set their prices. IKEA and its franchisees may become irritated due to this need for more control, which might also provide logistical and branding difficulties. The potential franchisees may withdraw their contract and start producing competitive products for IKEA’s local customers.
Demographic Needs
Lastly, there is the issue of emerging demographic trends that will require the firm to broaden its focus strategy in order to respond to the varying nation-level consumer groups. The future of the furniture sector will be shaped by several demographic trends, such as the aging population, urbanization, sustainability, technology, and customization (Svend, 2011). For example, millennials and Gen Z customers emphasize sustainability, social responsibility, and personalized experience more than other generations (Svend, 2011). They are also more inclined to shop online and utilize media to research potential purchases. Therefore, IKEA must consider plans and products that appeal to these customers as they make up the better part of the population.
In conclusion, IKEA must address four main issues in its internationalization agenda. First, its agenda will be influenced by the complexity of logistics. As the firm expands to other countries, its supply chain will grow more complex. Second, it will be influenced by the different national needs and culturally sensitive issues which differ from one country to the other. Third, it will be influenced by the different franchisees in different countries. Lastly, it will be influenced by the changing demographic trends.
Evaluation of Ikea’s Exit from the Japanese Market
Company Firm-Specific Advantages
IKEA first set foot in the Japanese market in 1974. However, the firm exited the Market 12 years later due to poor sales. The poor sales in the Japanese market can be attributed to two factors, lack of company firm-specific advantages and lack of location advantages (Lindholm, 2022). Firm-specific advantages are distinctive assets and skills that a company has that provide it an advantage over competitors (Verbeke, 2009). These benefits might be material or immaterial and could consist of exclusive technology, innovative methods, superior marketing, brand recognition, trademarks, knowledgeable staff, or access to specific resources (Lecture 03, n.d.). These advantages enable businesses to comprehend their success in a particular area and how to use their competitive advantage best, and thus very crucial in international business.
IKEA’s firm-specific advantages include a low-cost approach, creative designs, and a strong brand image. These advantages have seen the Company’s success in other regions since it provided fashionable and reasonably priced furniture (Stenebo, 2010). However, these advantages did not do well in the Japanese market.
Creative Designs
The first reason they did not do well was the lack of local Japanese knowledge (Lindholm, 2022). IKEA had not conducted proper organization learning at the pre-entry stage in the Japanese market. Japan has its own culture and sense of style regarding home decor, which diverges dramatically from Ikea’s Swedish design aesthetic. Japanese consumers chose traditional and complex designs over the Company’s sleek and practical aesthetic. Additionally, there were already a lot of domestic and foreign furniture companies in the Japanese market that catered to regional interests.
Low-Cost Approach
The other IKEA’s firm-specific advantage that did not resonate well with the Japanese market was low-cost product approach. Ikea’s products were considered less expensive and of worse quality than those of regional companies by Japanese buyers, who prioritize quality above money (Alenezi et al., 2019). The other part of IKEA’s specific advantages that the Japanese did not receive well was the self-service and self-assembly concepts. IKEA had a tagline that said, “We do our part, you do your part, and together we save money” (Alenezi et al., 2019, p.23). However, the Japanese did not embrace the practice because their culture values a high level of service.
Cultural Features
Additionally, IKEA did not take care of the low living space in Japanese houses with their Scandinavian designs. Residences in Japan are frequently smaller than those in other nations; therefore, IKEA’s massive furniture items were inappropriate for the small rooms. Lastly, several well-established furniture companies in Japan understood the local culture well (Lindholm, 2022). These firms knew cheap imports from neighboring countries such as China, Thailand, Malaysia, and Indonesia. IKEA could not keep up with the competition from these firms.
Locational Disadvantages
Legal Regulations
Furthermore, IKEA’s business in Japan failed due to a lack of locational advantages. Location advantages are the benefits a business receives from operating in a certain place (Lecture 03, n.d.). IKEA ran into several obstacles when it entered the Japanese market. Firstly, Japan’s strict store laws barred IKEA from openly displaying its products (Urata, 2020). The law aimed to ensure fair competition between large and small retailers, promote the sound development of local communities, and prevent negative impacts on the environment and traffic congestion (Urata, 2020). Therefore, the operation of IKEA was restricted to the large store malls and could not openly display its products in the open as it was accustomed to in other countries.
Rental Costs
Second, IKEA faced the challenge of the high cost of land and rent in Japan. Generally, Japan has limited space and some of the highest real estate prices in the world (Alenezi et al., 2019). In addition, Japan’s economy was rapidly growing and there was a great demand for land in the urban areas. As a result, buying and developing land for retail establishments was highly expensive, and renting out commercial premises was similarly costly. IKEA, which relies on huge retail locations with sizable showrooms to demonstrate its items, found this a significant difficulty.
Distribution Channels
Third, Japan had different distribution channels from other countries where IKEA operated (Alenezi et al., 2019). The local furniture sector depended on cheap cost imports from surrounding countries. However, IKEA was unfamiliar with distribution channels and thus had to contract third-party distributors. IT increased IKEA’s cost of operation and decreased its profit margin.
In conclusion, the firm-specific advantages that led to poor sales in Japan and exit included low-cost products, self-service, and self-assembly approaches. Additionally, the Japanese preferred their traditional designs to IKEA’s Scandinavian designs. On the other hand, the lack of location advantages, such as Japanese Large Store Laws, which barred IKEA from conducting open displays, the high cost of land and rent, and the dependent on third-party distributors also led to poor sales.
Geographic Targets and Expansion Patterns
International Expansion History
IKEA opened its first furniture store in Sweden in 1958 in Almhult, Sweden. Currently, IKEA operates in 63 countries with 460 stores around the world. Appendix 1 shows the history of IKEA’s expansion while Appendix 2 shows the distribution of the countries it covers around the world.
Northern Countries
The first internationalization of IKEA was an extension to Nordic countries. It opened its second store in Oslo, Norway, and Stockholm in 1963 and 1965, respectively (Verbeke, 2009). In 1969, the Company opened a store in Denmark, and later in 1973, it opened another store in Spreitenbach, Switzerland (Svend, 2011).
IKEA had one reason for opening the stores in the Nordic countries. The Company was motivated to expand its customer base and tap into new markets. IKEA used a franchise strategy to enter new markets. It chose to use the strategy because it provided the advantage of quick market entry at a lower cost. The franchisees were in charge of opening and running the stores, while IKEA supplied the required assistance, such as training, marketing, and product development.
European Countries
The second phase of IKEA’s expansion was into other European countries. In 1974, IKEA opened a store in Munich, Germany (Verbeke, 2009). In the 1970s, the German market depended on traditional and sturdy furniture hence a good opportunity for IKEA to introduce its modern, useful, and reasonably priced furniture. Ingvar Kamprad, the Company’s creator, had a personal connection to Germany because he had previously lived and worked there. The Company used a direct investment method to enter the German market by establishing fully owned stores. This tactic gave the business complete control over its operations and enabled it to implement its distinctive retail concept. In 1975, IKEA opened its first store in Australia (Verbeke, 2009). IKEA’s entry into Australia was motivated by the booming housing industry in the country during the 1970s. In addition, the Australian market had a taste for Scandinavian designs. Similarly, IKEA applied a direct investment strategy to enter this market.
North American Countries
In the early 1980s and late 1970s, IKEA sought to expand its operation to the North American Market. In 1976, IKEA moved to Canada to capture the North American Market (Svend, 2011). Entry into the Canadian Market was part of the larger scheme of the firm to enter the United States. The Company later entered the US market in 1985 (Verbeke, 2009). IKEA used wholly-owned subsidiaries as its entry mode in North America, which allowed it to have full control over its operations and maintain its low-cost strategy.
IKEA set its first store in Austria in 1977, the Netherlands in 1979, the Canary Islands in 1980, Saudi Arabia in 1983, Belgium and Kuwait in 1984, the United Kingdom and Hong Kong in 1987, and Italy in 1989 (Svend, 2011). Furthermore, it moved to Hungary and Poland in 1990, the Czech Republic and the United Arab Emirates in 1991, Taiwan in 1994, Finland, Malaysia, and mainland Spain in 1996, and 1998 in mainland China. Between 2000 and 2009, IKEA expanded into Cyprus, Greece, Ireland, Israel, Portugal, Romania, Russia, and Turkey (IKEA Museum, 2023). Recently, IKEA has expanded into some African countries, such as Egypt and Morocco.
IKEA used different entry approaches throughout these markets, such as wholly-owned subsidiaries, joint ventures, and franchises. The Company established wholly-owned subsidiaries in countries with a strong presence and wanted more control over its operations (Fragouli and Nicolaidou, 2020). Joint ventures were used in countries where Ikea faced regulatory barriers and needed local partners to navigate the Market (Wu, 2020). Franchising was used in countries where Ikea wanted to enter quickly and at a lower cost (Al-Zghool, 2020). Furthermore, the Company has invested in online markets to embrace E-commerce. The firm first set up a website in 1997 with the World Living Room website (Svend, 2011). It has since grown its online market base.
Applicable Theory
The international expansion trend if IKEA follows recognized theories and ideas about globalization trends. The Uppsala model is the main theory visible from the patterns of IKEA’s expansion. According to the Uppsala model, a firm’s internationalization process will fluctuate due to sporadic resource commitment or no-commitment decisions and adjustments to ongoing knowledge development processes that involve learning, producing, and trust-building (Vahlne, 2020).
The model implies that businesses expand to international markets gradually and sequentially, beginning with nearby nations regarding geography and culture before progressively progressing to markets with a wider range of cultures (Vahlne, 2020). This is the path of IKEA’s growth; it started in the Nordic nations, then moved on to Europe, North America, and eventually Asia and developing markets. The business also employed various entrance strategies, including joint ventures, franchises, and fully-owned subsidiaries.
In general, IKEA’s first store opened in Sweden in 1958 and currently has 460 stores across 63 countries. It has used different market entry techniques such as franchises, joint ventures, and wholly-owned subsidiaries to enter new markets. The pattern of IKEA’s expansion conforms to the Uppsala theory model. It has gradually expanded to the international market, beginning with Nordic countries and other European markets and then to the rest of the world.
Supply Chain Management in International Expansion
Challenges
The challenge of accessing new markets is one of the difficulties IKEA confronts in ensuring its supply chain in its international expansion strategy. IKEA faces challenges when entering new markets since culture, quality, and supply chain standards differ from country to country (Han, 2023). The difficulties in new markets are promoted by competition from a local brand, legal and cultural barriers, and cost.
Poor Competitive Advantage
Firstly, the local brands have a better competitive advantage than IKEA since the brands have knowledge of the local culture. In addition, the local firms have access to local supply, and have competitive pricing (Han, 2023). Sometimes it is difficult for IKEA to create a reliable supply chain in new areas since the local businesses may be able to offer lower pricing due to reduced operational expenses (Han, 2023).
IKEA may feel pressured to discover methods to save expenses or set itself apart via product quality or other means. Moreover, local brands may be better able to negotiate with suppliers since they are more familiar with local customs and business practices. On the other hand, IKEA might have to spend money on networking and learning about regional traditions to establish a trusted supply chain.
Legal and Cultural Challenges
Second, IKEA faces the challenge of legal and cultural barriers when entering a new market. For instance, IKEA wanted to join the Indian Market in 2006, but the legal restrictions of that time could not allow international businesses to do so (Han, 2023). Therefore, IKEA was forced to monitor the market trends over an extended period until the rule was changed in 2011. IKEA later opened its first store in Hyderabad in 2018, marking its first successful entry into the Indian Market (Han, 2023). During the 12-year wait, IKEA almost pulled out of the market but could not because it had invested so much in the market and needed a guarantee of profit.
Expensive Supply Chains
Third, according to its international expansion strategy, IKEA incurs a lot of costs in securing supply chains in new markets. One of the strategies of IKEA in entering new markets is investing a significant quantity of resources in understanding the local Market (Verbeke, 2009). The firm believes that to succeed in a new market, it has to conduct thorough research and examine customer lifestyles. In addition, IKEA conducts community education to position itself as a locally relevant brand (Han, 2023). The company is focused on balancing its vision of providing affordable fashionable products and maintaining the local customer tastes.
This strategy was especially crucial when IKEA joined the fragmented Indian furniture market, in which there was little acceptance for home stores such as IKEA. Therefore, it had to change its tactics to fit the Indian Market. For instance, it worked with regional mattress vendors after learning that Indians prefer hard mattresses. A loss in income resulted from IKEA lowering its pricing, making 7,500 goods less expensive than anywhere else, including 1,000 items priced at Rs. 200 and 500 under Rs (Han, 2023). Despite this, IKEA’s efforts were successful, and in 2018 it established its first location in Hyderabad after being well-known and accepted in the Indian Market.
Opportunities
Despite the challenges, IKEA has several competitive advantages, providing opportunities to secure the supply chain in the international business space. IKEA’s firm-specific advantage is anchored on its sustainability practices. IKEA has a 2030 vision of being a circular company and climate positive, a goal that has seen the firm change its raw material sourcing practices (Yang and Shao, 2019).
One of the firm’s steps to promote a sustainable value chain is the implementation of IWAY (IKEA Way on Purchasing Home Furnishing Products) principles (Han, 2023). According to Han (2023), IKEA has collaborated with approximately 1,600 suppliers, ensuring that products, services, materials, and components are sourced responsibly while safeguarding the interests of suppliers. These principles are based on international conventions and involve working with suppliers to achieve these goals.
The other opportunity from IKEA’s firm-specific competitive advantage is customer focus. The customers are the key people in business, and a good supply chain practice considers their needs, values, and opinions. IKEA uses various methods to measure customer satisfaction, including direct consumer interaction and feedback gathered through its website (Yun. et al., 2022). The business ascertains areas where its goods might be enhanced by examining client complaints, refunds, and recommendations. Recent changes in consumer purchasing behavior result from the influence of digital technologies (Han, 2023).
As a result, online businesses in the home furnishings sector are multiplying. Consumers like to purchase furniture through several channels, which has increased competition, raised prices, and created a demand for specialized design and service. IKEA has modified its business strategy to provide a seamless shopping experience that takes advantage of online and offline channels to meet these changing client expectations.
In summary, IKEA’s firm-specific advantage in managing its supply chain for competitive advantage presents it with several opportunities and challenges. The opportunities include customer focus which enables it to maintain good customer relations and sustainability, which has made it appeal to the Gen Z population. The challenges include legal and cultural barriers, increased costs, and competition from local brands. The company focuses on ensuring a sustainable supply chain which makes it selective in sourcing its raw materials hence the high cost of transportation.
Reference List
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