Business Environment Essay
Yip (1995) describes how the potential for a firm to pursue a global strategy is governed by industry globalization drivers. Yip (1995) groups the drivers into four categories, market drivers, cost drivers, government drivers and competitive drivers. IKEA operates in the retail industry, and anlaysing the globalization drivers for the industry, focusing particularly on the furniture retail industry, can help us to gain a deeper understanding of IKEAs international strategy. The focus shall be on IKEAs entry into the Japanese retail market.
Japan has the second biggest global retail market behind the US and also the second largest furniture retail market worth approximately 14 Billion (JETRO, 2007). Rugman & Hodgetts (2003) explain how Japan has attracted a lot of foreign investment as it has developed globally into a major industrial power and maintained sustained economic growth. However Rugman & Hodgetts (2003) then proceed to emphasise how many foreign retailers have failed after entering the Japanese market like Carrefour and Boots. Market globalization drivers are traditionally weak for the retail industry.
Yip (1995) describes how factors such as common customer needs across different countries contribute to market globalization drivers. However in the retail industry, and particularly in Japan, Jonsson (2007) explains how Japanese
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Despite the development of transport services and the decrease in cargo costs (Bartlett et al., 2008) cost globalization drivers for the furniture retail industry, which involves the transport of bulky products, still remain weaker than the drivers for other more easily transported retail products. Government organisations such as JETRO and the Ministry of International Trade and Industry (MITI) have improved Japans trade relations, and many of its import quotas and tariffs have been removed in recent years (Rugman & Hodgetts, 2003). These are examples of government globalization drivers for the retail industry, however Rugman & Hodgetts (2003) also explain how there are still many non-tariff barriers in place.
They explain how Japan implemented the ‘Large Retail Store Law’ in 1973, which limited the size of retail stores of foreign firms who also required approval from local competitors. Despite the law being slackened in recent years it still remains a barrier for MNEs entering the Japanese retail market. IKEA’s International Strategy Despite the furniture retail industry experiencing relatively low globalization drivers (Yip, 1995), IKEA has managed to expand globally into the largest furniture retailer in the world (Betts, 2006).
Bartlett et al. (2008) describe how various companies can encourage the global evolution of a particular industry by finding ways around the various barriers to globalization. IKEA opened its first retail store in 1951 in Almhult, Sweden and was an immediate success (Bartlett et al. , 2008). However it wasn’t until 1953 that IKEA revolutionised furniture retailing through its “knockdown” concept, which would ultimately be its platform to global success. IKEA “managed to redesign the entire furniture industry” (Arvidsson, 1997, p.
85) through its flat packed product that customers transport home and assemble themselves. IKEA therefore managed to avoid two of the most expensive activities of traditional furniture retailers, assembly and home delivery (Bartlett et al. , 2008). Bartlett et al. (2008) describe how IKEA created a completely new business model which allowed them to transport its products globally more cost-effectively than competing retailers, and one that transformed its value chain. The value chain approach identifies primary and secondary activities in the firm.
Primary activities include inbound and outbound logistics, operations, marketing and after-sale functions. Secondary activities, on the other hand, are identified as support processes to primary activities (Bartlett et al. , 2008). Porter (1985) proposed that firms could gain competitive advantage over its competitors by adding as much customer value in each of the primary activities by performing them at lower cost or in a unique way. Rugman (2000) describes how by providing flat-packed products that consumers transport and assemble themselves integrates the customer in the value chain process (see figure 5).
This obviously saves on transportation and assembly costs, but also means the customers add value to the chain rather than consume it by providing labour and transportation. This added value is visible to the customer in the end product through IKEAs low prices (Arvidsson, 1997). This elimination of costs and added value throughout the value chain allows IKEA to gain competitive advantage by following a cost leadership strategy (Porter, 1985). Finne & Sivonen (2009) explain how particularly in innovative speciality retailiers, such as IKEA, product development is controlled by the retailers but manufacturing is outsourced.
Rugman & Hodgetts (2003) back this up and explain how IKEA have kept tight control over product design and development, but have outsourced manufacturing to subcontracted key suppliers who manufacture standardised components for IKEA. Bartlett et al. (2008) explain how one of IKEA key principals is not to invest in expensive manufacturing facilities and own its production operations, but to “develop close ties by supporting its suppliers in a long-term relationship” (Bartlett et al. , 2008, p. 745). IKEA flourished during its first decade of operations and the company’s sales doubled between 1953 and 1955 (Bartlett et al. , 2009).
Krampard opened a second store in 1965 in Stockholm and it was clear that IKEA was well established in its domestic market but had no regular export activities. This reflects the first stage of the establishment link of the Uppsala model. In the early 1970s IKEA began its expansion abroad to Switzerland and Germany. It first entered the German market in 1974, through a contractual arrangement (Bartlett et al. 2008) but then increased its resource commitment as its knowledge of the market expanded and opened a store on the outskirts of Munich through a subsidiary which was an incorporated German company called IKEA GmbH (Bartlett et al., 2008).
This shares some similarities with progression onto the second and third stages of the Uppsala model. Despite various early obstacles in the German market it soon became IKEAs largest market (Bartlett et al. , 2008), and as the uncertainty of the market decreased IKEA increased its resource commitment by opening ten more stores throughout Germany by 1980 (Rugman & Hodgetts, 2003). This gradual increase of input of resources as knowledge on the foreign market develops is characteristic of the Uppsala model presented by Johanson & Wiedersheim-Paul/Vahlne (1975/1977).
In addition the first four global expansions by IKEA were to Norway, Denmark, Switzerland and Germany (Bartlett et al. , 2008). Despite the resource commitment being larger than expected in the Uppsala model, it follows the thought that firms will enter markets of low psychic distance, where consumer trends are likely to be similar. However in 1974 IKEA strayed from the process of internationalization proposed in the Uppsala model, and expanded into the largely unknown market of Japan via a franchising deal (Wijers-Hasegawa, 2006).
IKEA quickly invested a large amount of resources into a market of high psychic distance from the European countries IKEA was operating in at that time (Hall, 1973). Straying from the Uppsala model of internationalization seemed to cost IKEA dearly as Betts (2006) describes the attempt to enter the Japanese market in 1974 was nothing short of a disaster. And in Wijers-Hasegawa’s (2006) article the CEO of IKEA Japan KK admitted the “company was not ready for the demanding Japanese market”. IKEA ultimately withdrew from the Japanese market in 1986.
Despite this setback, IKEA remained focused on global expansion and Rugman & Hodgetts (2003) explain how IKEA entered the US market in 1985, the UK in 1987 and entered the Chinese market in 1998. The first entry to Japan had been a harsh learning process for IKEA, but with an increasing knowledge bank and international experience, it was able to enter markets quicker than before via foreign direct investments involving large resource commitments. In terms of analysing IKEAs strategic orientation it can be positioned in the I-R framework proposed by Bartlett & Ghoshal (1989).
Rugman (2000) proposes that traditional retailers should operate a multi-domestic strategy, whereby pressures such as differences in cultures and consumer tastes require a more locally responsive strategy. This ties in with Yip’s (1995) weak market globalization drivers for the retail industry. Being a relatively new entrant to the Japanese furniture retail market, coupled with the fact that it is still a private company, means that financial reports on IKEAs performance in the Japanese market are hard to come by.
IKEAs sales in the Asian market contribute under 6% of its total global sales however. The majority of IKEAs competition in the furniture retail industry comes from domestic companies. Competitors such as Nafco Co. Ltd. And Nitori Co. Ltd both have over 700,000m? of sales floor space throughout Japan. Compared to IKEA holding just 200,000m? (IKEA. com). The majority of these domestic competitors focus on high quality products, and expensive prices.
Finne & Sivonen (2009) state how the majority of other international competition may come from exporting companies. Poggenpohl is a German company that manufacture high-end kitchen and furnishings. Poggenpohl has a 75% export ratio (JETRO, 2007) and has been exporting to Japan for 25 years, and has a strong established base. Compared to IKEAs cost leadership strategy, Poggenpohl could be seen to use a differentiation strategy as it is widely renowned for its high-quality, expensive designs (JETRO, 2007).
Despite expanding globally mainly via exporting, Poggenpohl has recognised the demand for quality products in Japanese market, and has opened its first Asian showroom in Tokyo in 2009. (JETRO, 2007) IKEA has undoubtedly experienced global success through its international strategy. Over 90% of IKEAs sales come from markets other than its domestic market, more than any other speciality retailer (Finne & Sivonen, 2009) and it has grown to be the worlds largest furniture retailer.
However considering its current globally integrated strategy and lack of local responsiveness, it has still yet to prove it can survive in the most demanding consumer market, Japan. The experiential learning it will have gained during its twelve years in the Japanese market should have prepared IKEA for its re-entry in 2006. However it seems as though IKEA on the whole is still pursuing with its standardised globalized approach that saw it fail in such an environment before. Conclusions and Recommendations
After considering the work of Yip (1995) on the globalization drivers for different industries it became apparent that drivers for the furniture retail industry appeared weak and there was more evidence of localization drivers. However through the introduction of the “knockdown” concept in 1953 along with the transformation of its value chain, IKEA were able to overcome many of the barriers to globalization that traditional furniture retailers were experiencing (Bartlett et al. , 2008).
Using the Uppsala model of internationalisation, the global expansion process of IKEA into the worlds largest furniture retailer has been analysed. Despite not fitting the theoretical model exactly, many of the key themes and concepts were apparent in IKEAs early expansion. Also the model made some contribution in evaluating IKEAs failure to capture the Japanese market on its first entrance in 1974. Using the I-R framework proposed by Bartlett & Ghoshal (1989) IKEA was found to be orientated towards a global strategy.
IKEA seemed to be experiencing few pressures for local responsiveness, but aiming for maximum global integration of its standardised products to further reduce costs (Rugman, 2000). Twenty-years after exiting the Japanese market, IKEA decided to re-enter in 2006 via a major Greenfield investment and now currently owns four other stores. One would suspect it is still early days to make a judgement on IKEAs performance to date, however some recommendations can be presented to attempt to ensure IKEAs re-entry is sustainable.
Research would suggest that, despite there being some evidence of global convergence of consumers tastes (Levitt, 1983), customer attitudes in Japan are still largely different to that of the Western world (JETRO, 2009). Rugman & Hodgetts (2003) emphasise that successfully foreign owned MNCs appreciate that products must be tailored to suit the Japanese market. It is recommended that IKEA should slightly re-engineer certain products to better suit the Japanese small, uncluttered, minimalist space approach (Betts, 2006).
This could be done by responding more openly to local responsiveness, and slide closer over to a transnational strategy in the I-R matrix. IKEA could also learn from cases such as Toys “R” Us who faced the same problem in transferring their global standardised business model to the Japanese market. Toys “R” Us formed a strategic alliance with Den Fujita, who applied his local cultural knowledge and powerful opinion leader position to shape and streamline the Toys “R” Us strategy to best fit the Japanese market.
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