IKEA is considered as retailer internationalization since IKEA’s plan into entering a new location is organizing strategic objective, understanding the local nature of markets and using outlet as a retailer’s product. A strategic planning is required for IKEA when internationalizing into a new location they are moving into so as to be successful. Psychic distance and Uppsala model should be applied into their strategy and wherever they move into would be a success as IKEA already possess a strong brand image, also has strong relationship of network structure, large number of suppliers and customers would easily associate with them
Implementation of the Recommendations
With respect to the recommendation made, IKEA is proposed to setup and run new facilities in China. The reason behind choosing China is that it is one of the emerging market in Asia and globally. Moreover, IKEA already has its 11 stores in China which is expected to be triple in the next decade. As the IKEA’s main objective is to expand more in China as it becomes more and more global, therefore, it need to acquire more local knowledge to remain successful in achieving its objectives. The first basic element that IKEA needs to consider is the difference between its operations in an international market and in Chinese market. Things work out differently in China; therefore, the company needs to act locally. Thus, IKEA is required to consider the global supply chain issues as they have long term impact on the company’s presence in China. Besides the following important elements regarding international supply chain that will help IKEA to expand in China, the company is also required to pay more importance to other marketing activities that will support the expansion in the region. One of the most important activities is marketing and promotion that need to be carefully planned and implemented as it will help to penetrate in Chinese market that will provide the company with many potential future benefits. Following are the two main characteristics of global supply chain that must be incorporated in their strategy while setting up and running new facilities in China.
Understanding Psychic distance
Psychic distance refers to the perception of a firm to the business and other cultural differences between its home country and the foreign region of expansion. For example, in China IKEA has to cut its price dramatically to meet the local needs. Moreover, the store should be large enough to cater more than 20,000 customers as on average large number of visitors arrive at the store mainly on Saturday. Similarly, the location of the store needs to be near the city center and to public transport. Besides this, the promotion and advertising method is also different (Ivarsson and Alvstam 2010). In China, the local consumers prefer web as a tool to promote the products. Likewise, the service and selling environment is also different i.e., the settings of rooms are adjusted according to the local size of the room, taste, etc., of the Chinese consumers. Chinese customers prefer buying products with strong brand image or symbol. Moreover, they prefer purchasing products that are according to them and do not accept products of other regions easily. One of the main barriers is language as Chinese pays most importance to their language due to which IKEA has to offer products in their language i.e., the company used pronounce-oriented names that are done by translating the name in the country’s language to attract a large number of customers. The Chinese name of IKEA’s contains two characters that mean family and comfortable. This has enabled the company to represent their corporate identity to Chinese customers in their way. Besides this, character is of most important to Chinese customers as they rely more on image and other visual representations before purchasing a product. Thus, IKEA is carefully required to adheres to the taste of local customers to meet their needs while expanding in China
Internationalization by Uppsala Model
In Internationalization with respect to Uppsala model, an organization could internationalize by two different patterns of investment where one is to invest by starting expansion from its nearest country and then gradually expand in other regions; whereas other is to invest directly in specific country through learning and understanding psychic distance in the targeted markets. IKEA has expanding internationally by starting from its nearest country and has expanded globally. IKEA possess few ownership advantages that include technologies, creative concept, experience, perception, leadership and attitudes to grow internationally. One of the main drivers of initiating change in global supply chain is deciding upon the entry method and its strategy. The IKEA’s decision to enter Chinese market comes from the external environments i.e., economic conditions, social conditions and political conditions that have allowed IKEA to successfully exploit potential advantages in China. The adjustment of IKEA to the law and regulations of China, the increasing economic growth, abundant availability of labors and raw materials in Chinese market and large demand of furniture in the domestic market are the pull and push factors that have encouraged IKEA to exploit advantages by entering in the Chinese market. In other words, the location advantage i.e., China has largely influenced IKEA to expand in China.
One of the key advantages that IKEA holds is the asset-based advantage that has led it to internationalize and expand in China. The company has competence in designs of furniture and strong brand reputation that could be transformed and developed across national borders (Hultmana, Johnsenb, Johnsenb and Hertzc 2012). Besides this, the entry of the company in China has given IKEA company transaction advantage that enables it to manufacture its products locally. Due to this, the company offers its products are lower cost as compared to other markets. Moreover, IKEA also competes with other Chinese competitors in furniture market. The ability of IKEA to internalize is largely evidenced by the execution of the company to enter Chinese market as it achieve higher sales growth and also achieve competitive advantage from large volume buying that has resulted from establishing warehouse and supply centers in China. Thus, the successful expansion of IKEA in China encourages the company to expand and set up more new stores in the region.
As IKEA is already using joint venture strategy as an entry strategy to enter and compete in Chinese market, therefore, the company will use the same in future. The reason behind selecting joint venture strategy is because of the policies of the Chinese government that were meant to attract foreign companies to enter the market and join local companies. The use of this strategy has minimized the financial risk and has enabled the company to handle the remote market easily. Besides this, the joint venture has also provided the company with an opportunity to create relationship and partnership with suppliers in Chinese market. This has also enabled the company to emerge as one of the important supply center in Asia.
Adaptation and Standardization
Both adaptation and standardization are largely incorporated by IKEA in China that has enabled the company to successfully penetrate in the region. The location, atmosphere and layout of IKEA in China revealed the real identity of the company; whereas the translation of the name IKEA into Chinese language has led the company to approach target customer easily as the culture of China demonstrates sense of collectivism and belonging (Branch 2008). The same will be considered while expanding in China with more stores.
One of the widely considered issues by IKEA is the logistics while internationalizing in various countries. The international logistics strategy adopted by IKEA is to produce the products in developing nations such as Malaysia and China where the labor and material are available in abundance and then ship to the developed regions such as Europe (Elga, Deligonulb, Ghauric, Danisd and Tarnovskayaa). However for China, the IKEA is not required to engage in large supply chain and logistics process as in China, the raw materials and labor are available in abundance that can easily meet the domestic demands of the country. Therefore, IKEA has built two large factories in Shanghai where the furniture is produced. This strategy has also helped IKEA to avoid high import taxes that are imposed by the Chinese government.
As IKEA is a furniture company, therefore, it is largely dependent on the supply of woods to produce high quality furniture at low cost. The Chinese customers are not to pay higher prices that have left IKEA helpless to produce goods while being environment friendly in China. The company continues producing low cost goods. However, to make its brand image with greener products, IKEA has decided to practice environmental concern to meet its future needs while going green and producing goods at lowest prices in China.
The company has promised to invest about €1.5b in technologies of renewable energy. The expenditure of solar has also become more competitive; therefore, IKEA is trying to reach out to the local suppliers in China to come across efficient systems that have quickest returns on capital investment (Styles, Schoenberger and Galvez-Martos 2012). Adapting to the renewable energy will help to lower the carbon footprint of the company’s supply chain and will help suppliers and IKEA itself to save the utility costs.
The company is also trying to overcome the issue of depletion of natural resource. IKEA is in search of the recommendation of the forestry expertise that is willing to work with the suppliers in educating these regarding practices of responsible wood procurement. The suppliers of IKEA will report the source of the wood at an interval of every three to four months. Moreover, the suppliers will also be audited where they will have only two days time to inform the source of their wood. Besides this, IKEA also carries out supply chain audits at large level so that it could trace the source of wood from its actual forest. Bedsides wood, the company also trains stakeholders and suppliers on the issues that are related to water, energy and waste.
Branch, AE 2008, Global Supply Chain Management and International Logistics, Routledge
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Hultmana, J, Johnsenb, T, Johnsenb, R, and Hertzc, S 2012, ‘An interaction approach to global sourcing: A case study of IKEA’, Journal of Purchasing and Supply Management, Volume 18, Issue 1, pp 9–21
Ivarsson, I, and Alvstam, CG, 2010, ‘Supplier Upgrading in the Home-furnishing Value Chain: An Empirical Study of IKEA’s Sourcing in China and South East Asia’, World Development, Volume 38, Issue 11, Pp 1575–1587
Styles, D, Schoenberger, H, and Galvez-Martos, JL 2012, ‘Environmental improvement of product supply chains: A review of European retailers’ performance’, Resources, Conservation and Recycling, Volume 65, pp 57–78