The following report is based on the international business practices of the organization IKEA-Furniture and Home furnishing company. The global business environment has increasingly been dynamic; thereby, the organization in each sector is seeking to implement the strategies to fulfill the global standards. In addition, another significant organizational characteristic is that company which runs its operation successfully in the domestic environment often intends to expand in global market more profits and growth in the business. The expansion of business into new markets overseas could increase the access of the foreign customers and clients. However, when a company decides to operate in an international environment, it has to implement certain practices that are quite different from the domestic business. This is because the competition in the international market is higher than the local market. The company has to pay equal attention to product quality, pricing, industry benchmark, competitors’ market approach and customer needs. Therefore, to understand the strategies of treating all these business aspects effectively, the report focuses on the current international business practices of IKEA. The purpose of the report is to understand the practices and evaluate them comparing with the relevant theories and models.
IKEA is an international home-furnishing product company that develops and sells ready to assemble furniture appliance as well as other home accessories. The annual sales of the company in 2016 were around 35.4 billion Euros (Hultman et al. 2012). IKEA has 39 trading service officers in 31 countries with 28 distribution channels. As per the statistics, IKEA is probably the first company in the international market that successfully runs its operation with the principle of selling at low price. One of the major strategies of IKEA is to sell the product at low price without compromising with the quality of products. As the global sourcing decision, IKEA focuses on the core suppliers of China and Europe. The company adjusts its reduction cost by expanding the large volume of products (Burt, Johansson and Thelander 2011). However, the company deals with the increasing challenges of satisfying the local responsibility demands. The firm is heavily dependent on its suppliers. In order to establish the business in the international market, it first concentrates on the culture and economy of the country. One of the unique strategies of IKEA is to source the products from low cost supply chain regions such as China and Poland. Therefore, when the company runs the operation in developed countries like Australia or United States, the cost of producing the items remains low. This contributes to the profit generation.
As discussed above, the major strategy of IKEA is to expand the business in the foreign market with cheap suppliers and low unit cost; the company entered the Indian market. However, in the first quarter of 2016, Ikea’s strategies for penetrating all the significant retail market of India hits a boatload of issues, which threaten to prevent company’s efforts (McNamara et al. 2016). The company’s problem appears because of the stipulation by the government that at least 30% company’s inventory needs to be made in India.
This leads the company to a growing controversy involving the poor manufacturing quality, cheap labor standards as well as the miles of red tape (Sharma, Meenakshi and Kavitha 2014). Indian is considered to become fastest growing nation in the world over the coming two years compared to China (Due to their economic slowdown). Therefore, in India, due to the sustained growth in customer spending, it is quite natural that retailers develop the presence in this lucrative market. However, as IKEA follows international criteria of European Union, which constrains the use of chemical content in furniture items, the quality assurance department of the company found that the tabletops from Indian suppliers contained unsafe quantity of formaldehyde and steel plates (Vinayagamoorthy and Kamatchi 2014). In addition to this, the company claims that workers in India prefers to work overtime to earn more pay contradicting IKEA’s internal regular limit of eight hours. Nonetheless, the company has 45 local suppliers in Indian and it expects to add more irrespective of the above-mentioned issues.
With the existing practices of international business, though IKEA gained a tremendous success in global environment, it will be difficult for IKEA to search the type of location size that remains crucial to the success of the business. IKEA is popular as it sells the innovative items at low price as their supply and unit cost is low but when it comes to Indian market, it may not be able to provide the desired quality of products (Jonsson and Foss 2011). IKEA has made all significant adjustment to assure there is no obstacle in its growth ambitious as well as brand promise. In addition to this, IKEA has to stick to the Indian market like other foreign market, as India undoubtedly a growing nation with increasing productivity. This means, the company has a series of opportunities to gain profits from such large market. In this context, Edvardsson and Enquist (2011).commented that as IKEA is a very strong in textile today and focuses on diversifying in other existing varieties such as metal, plastic, lighting. In order to with the above-mentioned event, it is essential for IKEA to build a strong foundation in emerging Indian with its pillars such as supply at low cost, retail, IKEA foundation as well as next generation.
Heartening presence- The next generation initiative of IKEA focuses on starting with the local entrepreneurs through the community as well as skills building projects. The major advantage, the IKEA receives in Indian market is the labor at low and suppliers at low cost; thereby, to build an effective relationship with the suppliers, the company has developed a long-term partnership with the suppliers who share the equal values (Edvardsson and Enquist 2011). The company observes that Indian buyers are same as they experience in other foreign country. Thereby, the company is seeking to provide the same high quality of product at low price but as the market has less number of competitors, the customers are dependent on whatever IKEA provides, when people need furniture items.
As put forward by Jonsson, Rudberg and Holmberg (2013), IKEA’s target market is global middle class, which shares the buying tendency. Some particular furniture items such as Billy Bookcase, lack side table and Ivar storage systems have become best sellers in the international market. In addition, the customers’ spending patter remains similar across the nations where it operates. In spite of these similarities, it is essential to localize. Thus, as the initiative of localization, the company in China produced nearly 250,000 plastic placements in 2016 to honor the year of rooster (Jonsson, Rudberg and Holmberg 2013).
The international standardization strategy of IKEA relies in three significant factors such as RTA (Read to assemble furniture), global sourcing decisions as well as elimination of sales personnel. Thus, to eliminate the sales personnel, IKEA uses a self-service model, which enables the buyers to shop by themselves (Jonsson and Foss 2011). To implement this, the company develops its large stores even in the urban and even in sub-urban areas. They demonstrate all products in the showrooms and they place the items in way that shows how the products can be used at home. This strategy reduces the labor cost of the company.
Figure 1: IKEA’s global market strategy
(Source: Jonsson and Foss 2011)
As put forward by Chan, Finnegan and Sternquist (2011), in order to run the business in the international market or enter the overseas market, the first thing that company needs to do is, gain the understanding of marketplace (culture, political stability, economy, present competitors, etc) and customer’s needs and demands. Thus, the organization needs to examine its customers and marketplace to gather and manage the customer data (Tarnovskaya and de Chernatony 2011). Likewise, the next step of the company is to design a customer driven strategy but the execution of this strategy occurs when the market place and customers are fully understood. Thereafter, the company develops the market strategy when it has gained the understanding of the market. However, Dahlvig (2011) mentioned that marketing strategy remains as the marketing logic based on which the business units expect to achieve its marketing objectives. This sort of art as well as science is often associated with the certain orientation such as product, production, marketing, selling and societal marketing concepts. The enhancement of such concepts is transparently visible in the evolvement of IKEA’s international marketing practices.
The business of IKEA actually started from the production concept, which helps to derive an idea that customers will favor the products that are available as well as easily available. In the initial stage of IKEA’s operation, the product items were sold and bought in the bulk of Stockholm. Likewise, the products were delivered by the local milk van to train station and then to the end-users. Due to competitor’s involvement and market hostility, IKEA had to design its own products and search low cost suppliers in the nations like China and Poland. Even, to maintain the international standard, IKEA is working on quality assurance at low price.
According to McNamara et al. (2016), a new entirely owned subsidiary is also known as “Greenfield Venture”. It occurs when an organization makes investment directly to another country by developing an entirely owned subsidiary. However, this business model is expensive and it involves complex techniques with the risk. Nonetheless, the company has the opportunity to gain highest control and increasing potential return. IKEA follows this strategy of entirely owned subsidiary because of the requirement for high international integration. By implementing the initiative, the company secures a strong presence in the international market. However, Ehsan Ullah, Karlsson and Dada Olanrewaju (2016) commented that besides, the issue of suppliers’ quality of products, IKEA has to deal with other significant market challenges such as lack of availability of retail space in India, vendor negotiation, DIY (Do-it-yourself) and others. In other foreign nations, Ikea develops its store to the downtown of the large cities but in an emerging but competitive market like India, where the government applies strict FDI policies, IKEA might not get the space for such foundation (McNamara et al. 2016). In addition to this, the self-service model used by IKEA in the global market might not be applicable in India, as the buyers in Indian refers to make one-time investment, which means they might not spend money in assembling the furniture items whereas IKEA sells ready to assemble items.
Additionally, besides cost-saving through low cost suppliers and low unit cost, IKEA reduces the operational cost by reducing the employment cost. The company displays all its items in the wide showrooms with their actual use. Nevertheless, in India, in developing a wide store, it has to hire the country labor as the ruling political party seeks to increase employment.
Supply chain issue- People in India have smaller cars as well as compacts home in the city; thereby, if the company has to locate its stores outside the city or prime locations, the consumers might have to face the difficult of driving a long-time to reach the store. Moreover, the poor levels of car ownership as well as patchy road network could make it challenging customers to shop.
Conclusions
In conclusion, it can be mentioned that it is not always possible for a company to implement the same old business model in every context of business expansion. Even though, IKEA gains the majority of its success with low cost business model, it has to deal with the changing market forces. In a competitive market like India , the products of IKEA considered as luxury in India, which is far from what the company and its tagline “affordable solutions for better living”. These luxury items of IKEA might not be keeping with the increasingly expanding middle income earners but it is more directed towards the premium market, which is never IKEA’s conventional target market.
References
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Cavusgil, S.T. and Cavusgil, E., 2012. Reflections on international marketing: destructive regeneration and multinational firms. Journal of the Academy of Marketing Science, 40(2), pp.202-217.
Chan, P., Finnegan, C. and Sternquist, B., 2011. Country and firm level factors in international retail expansion. European Journal of marketing, 45(6), pp.1005-1022.
Dahlvig, A., 2011. The IKEA edge: Building global growth and social good at the world’s most iconic home store. McGraw Hill Professional
Edvardsson, B. and Enquist, B., 2011. The service excellence and innovation model: lessons from IKEA and other service frontiers. Total Quality Management & Business Excellence, 22(5), pp.535-551.
Ehsan Ullah, E., Karlsson, B. and Dada Olanrewaju, D., 2016. Foreign Market Entry Srategies.: A Case study of IKEA entering Indian Market.
Hultman, J., Johnsen, T., Johnsen, R. and Hertz, S., 2012. An interaction approach to global sourcing: A case study of IKEA. Journal of purchasing and supply management, 18(1), pp.9-21.
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Jonsson, P., Rudberg, M. and Holmberg, S., 2013. Centralised supply chain planning at IKEA. Supply Chain Management: An International Journal, 18(3), pp.337-350.
Jonsson, A. and Foss, N.J., 2011. International expansion through flexible replication: Learning from the internationalization experience of IKEA. Journal of International Business Studies, 42(9), pp.1079-1102.
McNamara, T., McNamara, T., Descubes, I. and Descubes, I., 2016. Can IKEA adapt its service experience to India?. Emerald Emerging Markets Case Studies, 6(1), pp.1-14.
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