IKEA's Global Expansion: A Case Study

Ingvar Kamprad, the founder of IKEA, a Swedish furniture retailing giant, expresses concern about the rapid growth of his company at the beginning of 2011. Despite this apprehension, IKEA has a presence on almost every continent except South America and Kamprad contemplates whether Brazil could serve as a potential growth market for IKEA.

Despite being one of Sweden's most recognizable exports, IkEA has not been legally considered Swedish since the early 1980s.

The store's success lies in its ability to provide affordable Scandinavian designs while expanding globally without any setbacks.

In fact, its brand, which represents stylish, eco-friendly designs and affordability, remains just as influential as it has been throughout its six decades in business.

The majority of IKEA stores worldwide (253 out of 287) are operated by Ingka holding, a privately owned Dutch-registered company. Ingka gets its name from the initials of Kamprad's name and is wholly owned by the Stichting Ingka foundation, a tax-exempt organization registered in the Netherlands. Stichtingen, or foundations, are the most common type of non-profit entities in the Netherlands with tens of thousands registered.

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Although most Dutch stichtingen are small, Stichting Ingka foundation stands out as one of the largest companies in the Netherlands based on market value. The primary asset of this stichting is the financially conservative and highly profitable Ingka holding group.

The valuation of the Ingka holding group is difficult to determine due to the absence of global competitors for IKEA. However, shares in Target, a successful US retail chain that generates a significant portion of its sales from home furnishings, are currently trading at 20 times their most recent annual earnings.

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By using this price-to-earnings ratio, an estimate can be made that values the Ingka holding group at €35 billion.

The source of this information is from the website www.ikea.com.

Ingvar Kamprad's personal assistant has informed him that the top management of the IKEA group wants to expand into South America because they see potential for growth in the region. However, Kamprad is doubtful about these plans and has asked his assistant to consult an international marketing specialist, such as yourself, for expert opinion.

IKEA - a synopsis

Founded in 1943 by Ingvar Kamprad, IkEA Svenska AB is the largest global furniture retailer. It is renowned for its affordable and stylish Scandinavian furniture designs. The name IkEA, derived from Kamprad's initials (Ik) and the first letters of Elmtaryd and Agunnaryd – the farm and village where he was raised in Sweden, was officially registered by Kamprad himself.

The internationalization process of IKEA began in 1958 with the opening of its first store in Älmhult, Sweden.

Information regarding corporate IKEA

IkEA, the world's largest furniture retailer, currently operates 313 stores in 38 countries as of 2010. Founded in Älmhult in 1958, the company has grown significantly and employs approximately 127,000 individuals. Notably, IkEA has expanded rapidly into global markets with recent store openings in eastern Europe, Russia, and Asia. In terms of revenue, IkEA generated €23.5 billion in 2010 alone.

IkEA's triumph in the retail sector can be credited to its vast expertise, product distinctiveness, and cost advantage. As a privately-owned corporation, IkEA has emerged as a highly prosperous multinational retail entity worldwide. Its distinctive strategy revolves around selling furniture in self-assembly kits for customers to construct at their own homes.

There are around 12,000 products in the IkEA product range. The selection of these products carried in each store depends on its size, but the core range remains consistent globally.

Despite only holding a 5-10 per cent share of the furniture market in each country it operates, IkEA's brand awareness exceeds its company size. This is due to the fact that IkEA offers more than just furniture – it delivers a Scandinavian lifestyle that customers worldwide eagerly embrace.

IKEA's main objective is to offer a wide range of affordable home furnishings that are both well-designed and functional. The company focuses on providing value to customers who are willing to put in some effort in transporting and assembling the furniture. Their target audience primarily includes young individuals from low- to middle-income families.

IkEA's retailing operates through a franchise system and is owned and franchised by Inter IkEA Systems BV, located in Delft, the Netherlands. The IkEA concept is part of the IkEA group, a private group of companies owned by a charitable foundation in the Netherlands. The IkEA group is engaged in various activities such as developing, purchasing, distributing, and selling IkEA products. However, the IkEA experience goes beyond just products; it is a comprehensive retail concept. In order for this concept to be successful, all aspects must be properly implemented. Therefore, IkEA products are exclusively available in IkEA stores franchised by Inter IkEA Systems BV. However, the majority of global product policy, including product development, and global marketing operations are centralized in the Swedish division of the company known as IkEA of Sweden.

IkEA engages in certain value chain activities internally, but also leverages its relationships with suppliers to enhance efficiency and foster development. For example, products are collaboratively developed with suppliers, taking into account the impact of raw materials, components, and facilities. These resources incur costs and influence quality, design, and function. In addition to cost-effectiveness,

IkEA strives for reasonable quality, appealing designs, and adequate product functionality as its main objectives. These objectives drive the company to constantly develop its products and technology, giving it a reputation as an innovative and fashion-oriented firm. However, achieving these goals heavily relies on the contributions of its entire network of suppliers.

IkEA requires advanced skills in marketing, retailing, logistics, purchasing, product development, and technologies to handle such tasks. The complexity of IkEA's organization reflects this need for competence. However, the complexity of IkEA's organization is overshadowed by the complexity of its industrial network - both internal and external (see figure 1). This network consists of 1,380 direct suppliers and approximately 10,000 subsuppliers spread across 60 countries. Additionally, there are 287 IkEA stores (253 own stores plus 34 franchised stores) located in 30 countries including Europe, Australia, the US, and China.

IkEA's wholesale and logistic operations play a crucial role in linking its stores and suppliers. This network includes 27 distribution centres and 11 customer distribution centres in 16 countries. Although IkEA does not possess any transport facilities, it is connected to this network through approximately 500 logistic partners.

A critical role in this network is performed by 'IkEA of Sweden', which is situated in Âlmhult, Sweden. It is a prominent business unit that not only oversees IkEA's assortment of products, but also oversees the entirety of the IkEA universe and devises enduring strategies for marketing, logistics, and purchasing. IkEA of Sweden has the dual responsibility of managing and coordinating the development, procurement, distribution, and promotion of each individual product.

PRODUCT DEVELOPMENT AND PRODUCTION

The team responsible for each product consists of designers, product developers, and purchasers who collaborate to discuss design, materials, and suitable suppliers. Each member contributes their own expertise. For instance, purchasers leverage their connections with suppliers globally via IKEA trading service offices. The primary goal is to identify the supplier capable of delivering the product at the highest quality, reasonable price, and within the specified timeframe. Moreover, products are frequently developed in close partnership with suppliers, and usually only one supplier is selected to provide all IKEA stores worldwide.

IkEA has its own manufacturing facilities, including sawmills and production plants. In 1991, they acquired these facilities and established the industrial group Swedwood in order to produce wood-based furniture and wooden components. The primary motive for this acquisition was to expand their manufacturing capabilities.

FIGURE 1

IkEA's internal and external network in 2007 (Note: the basic principles in IkEA's supply chain remain the same as of 2013)

It is essential to maintain the production capacity for IKEA, but the majority of the production is outsourced to subcontractors worldwide.

END CONSUMERS

IkEA shoppers are referred to as 'prosumers' because they play a dual role as both producers and consumers, which helps the company keep costs down. This means that they have to assemble the products themselves. To assist with the shopping experience, IkEA offers catalogues, tape measures, shopping lists, and an internet website that aids consumers in fitting the furniture into their rooms. In addition, IkEA provides car roof racks for purchase at cost and offers pick-up vans/mini-trucks for rent. The key to IkEA's success is the simple concept of minimizing costs between manufacturers and customers. They achieve this by controlling costs at the design stage of the value-added chain. Furthermore, IkEA reduces expenses by packing items efficiently in flat standardized packaging and stacking them as high as possible, thereby minimizing storage space during and after distribution.

Attracting customers through effective marketing via catalogues is typically the initial appeal, while good service is what ensures their return. IKEA recognizes that maintaining a strong inventory position is essential in satisfying customers, as it accurately predicts the most popular style and design trends. To achieve this, IKEA relies on advanced technology and has established its own worldwide distribution network. This enables the company to guarantee timely product delivery to retail stores across the globe by strategically implementing control points in the distribution cycle.

IkEA believes that consumer preferences are becoming more similar worldwide. For instance, they have been exporting the distinct 'streamlined and contemporary Scandinavian style'.

Since 1985, IKEA has understood that there are export opportunities to bring US-style furnishings to Europe, based on the fact that Europeans have embraced specific US furnishing concepts. As a response to this emerging demand, IKEA currently promotes 'American-style' furniture in Europe.

IKEA STRATEGY

At all levels within the organization, the fight against bureaucracy is emphasized. According to Kamprad, planning and strategic direction should embody simplicity and common sense. The culture also prioritizes efficiency and low cost, without compromising quality or service. Symbolic policies, like flying economy class and staying at economical hotels, employing young executives, and sponsoring university programs, have become part of the corporate culture and have further encouraged entrepreneurship within the organization. For instance, design teams are granted full autonomy in their work but are expected to consistently create new and attractive products.

IkEA has enhanced its value chain by prioritizing collaboration with both suppliers and customers. The company emphasizes the importance of centralized control and standardization of the product mix.

To maintain cost leadership in the market, there is a need for internal production efficiencies that surpass those of competitors. As part of IkEA's global strategy, suppliers are typically situated in low-cost nations and have easy access to both raw materials and distribution channels. These suppliers manufacture standardized products meant for the global market. The scale of these products enables the firm to benefit from economies of scale. IkEA plays the role of not only integrating operations globally and designing products centrally but also discovering a successful blend of low cost, standardization, technology, and quality.

In the case of IKEA, a standardized product strategy does not imply cultural insensitivity. Instead, the company adapts to global consumer tastes and preferences. Retail stores worldwide offer the standard range of products that are widely accepted, but also prioritize product lines that cater to local customer preferences.

IkEA has revamped the value chain methodology by incorporating the customer in the process and establishing a dual-value exchange system among customers, suppliers, and IkEA's headquarters. As part of this global sourcing approach, customers contribute time, labor, information, knowledge, and transport as suppliers. Conversely, suppliers are regarded as customers who benefit from IkEA's corporate technical headquarters' support through diverse business services. The company strives to communicate to customers that their role transcends mere value consumption and encompasses value creation.

IkEA's role in the value chain is to engage suppliers and customers to enhance the value of the system. In the catalogues, customers are provided with clear information about the firm's business systems and their expected contribution to the final process.

In order to provide customers with affordable and high-quality products, the company needs to establish relationships with suppliers who can deliver items of high quality at a low unit cost. The company's headquarters supports chosen suppliers by offering them technical assistance, leased equipment, and necessary skills to manufacture superior items. This long-term relationship benefits both parties as it not only ensures the production of superior products but also adds value to the suppliers. This modification in the value chain sets Ikea apart from its competitors.

IkEA has built its cost leadership position on processes that are directly linked to its mission statement. The company furnishes customers with quality products, using components from various locations around the world. It achieves this through leveraging multilevel competitive advantages, employing low-cost logistics, and operating large, simple retail outlets in suburban areas. Additionally, IkEA has effectively incorporated cost leadership into its organizational culture through the use of symbols and efficient processes.

IkEA accepts low profit margins in exchange for high sales volumes, while also emphasizing budget prices and good value in its marketing approach to convey cost leadership to customers. This strategy challenges the perception that cost leadership is synonymous with poor quality products and services. Instead, IkEA associates high quality with input and process variables. The company achieves cost reduction not by compromising the quality of these variables, but by improving and streamlining operations. Cost leadership is ingrained in IkEA's management process and culture, effectively catering to the needs of its target market segment. Differentiation, evident in the adjustment of the value chain, also targets this specific segment.

THE GLOBALIZATION OF IKEA

IKEA has taken a cautious approach to internationalization. In most cases, they do not expand into new markets by opening retail stores. Instead, they focus on establishing supplier connections in the host country. This strategy helps reduce risks and allows local suppliers to offer important insights on political, legal, cultural, financial, and other matters.

Opportunities and/or threats to the IkEA concept have arisen over the years. Initially, IkEA focused its international expansion in Europe and north America during the 1970s and 1980s. This was mainly accomplished through company-owned subsidiaries and stores. In the 1990s and 2000s, the internationalization process shifted towards Russia and the far East. However, IkEA has not yet established a significant presence in developing countries. On 17 February 2010, the first IkEA store in Latin America opened in the Dominican Republic.

Is Brazil a potential future opportunity? (Refer to later sections for information on the Brazilian furniture market.)

Expansion through the use of franchising.

IkEA primarily enters unfamiliar, comparatively small, and high-risk markets through franchising. Thorough research and evaluation are conducted on potential candidates, and franchises are only awarded to companies or individuals who demonstrate strong financial support and a successful retail background. Franchisees are required to stock essential items, but they have the flexibility to customize the remainder of their product assortment according to local market demands. The fundamental product range comprises around 12,000 straightforward and utilitarian products. The centralized headquarters actively participates in the selection process and offers guidance. Additionally, all products must be sourced from IkEA's line of products.

To uphold service, quality, and logistic standards, individual franchisees undergo regular audits and are compared to corporate performance as a whole. The headquarters offers extensive training and operational support. All franchisees pay franchise fees to IkEA holdings, while the responsibility for catalogues and promotional advertising lies with the headquarters. Franchising has been employed as a means to pursue the company's generic focus strategy.

Balance between autonomy and strategic direction is essential.

As IKEA expands its presence abroad, the importance of having a centralized strategic direction will grow. The rapid internationalization process will naturally bring about various challenges for the headquarters, which include the following:

The logistics system will become more complex.

It will be challenging to respond to national needs and cultural sensitivity issues. Also, the organization will need to broaden its focus strategy to address the changing consumer groups at a nation-level due to emerging demographic trends. Maintaining a central organizational structure in the face of these challenges may prove difficult. The best approach to tackle these challenges is to strike a balance between country-level autonomy and centralized intervention. In terms of IKEA's supplier relationships, having control over them in exchange for quality assurance, technology transfers, and economies of scale can motivate suppliers to produce competitive products for local competitors of IKEA. Due to logistics complications and long lead times, IKEA has to maintain high levels of control over its suppliers. For example, if the supplier responsible for providing screws for a table fails to deliver on time, the supplier responsible for the table-top production will have to adjust its production accordingly. Without IKEA's centralized logistics system, such a situation could result in severe store shortages and loss in sales. From 2006 to 2010, Brazil experienced an average yearly GDP growth of 5.5%, as discussed in Section 6.5 on the BRIC countries.The Brazilian furniture market, estimated to be around US$4.5 billion in 2008 with US$150 million imports, can be categorized into residential (60%), office (25%) and institutional organizations (15%). With 4.6 million hectares of planted forests, mainly in the south, wood from these forests is used for furniture, pulp, and paper production. The main production centers and markets are also located in the south. As the Brazilian furniture market focuses more on exports, production is tailored to meet niche demands. Investment in design and development is increasing, albeit smaller compared to the US, Italy, and Germany. To meet quality standards for foreign markets such as the US, Italy, and Germany, state-of-the-art equipment is imported. This includes wood-drying machinery, finishing machinery, and tools. According to the Brazilian Furniture Association, there are approximately 14,500 small Brazilian furniture manufacturers.These firms are typically family-owned companies whose capital is exclusively Brazilian. Historically, the majority of Brazilian manufacturers have been concentrated in densely populated areas of southern Brazil. In a case study about Ikea, it was found that trade liberalization reforms implemented in 1990 brought significant changes to Brazil's trade regime, leading to a more open and competitive economy. Specifically, US exports of furniture to Brazil reached $50 million in 2008, accounting for 35% of total Brazilian furniture imports. The US excelled in exporting seats, new-design office furniture, and high-end residential furniture with high added value. Market analysts predict a considerable increase in imports of institutional furniture, particularly from the US, over the next three to four years. In 2008, Brazilian furniture imports amounted to a total of $150 million, representing 3% of Brazil's overall furniture market. The US holds the largest share in the imported furniture market with 35%, followed by Germany with 30%, Italy with 20%, and other countries with 15%. Within the Brazilian market, different industry segments consisting of residential, commercial, and institutional sectors contribute to the overall demand for furniture. Each of these areas has its own unique purchasing approach.In Brazil, public institutions have the option to import directly from their headquarters. The furniture industry also relies on importers or store chains as the end user. It should be noted that major distribution chains are not prevalent in Brazil. Furniture imports mainly occur through direct importers or local manufacturers looking to expand their product line. High-end furniture and mattresses are typically imported by direct importers or furniture stores. Decision-makers, such as interior decorators and architects, play a significant role as they recommend brands and styles to their clients. When it comes to import climate, Brazil follows a tariff-based import system. The process of obtaining import licenses has been simplified. Import tariffs are assessed ad valorem based on the cost, insurance, and freight value of the imports. The import tax for furniture, known as IPI, ranges from 5 to 10 percent. IPI is a federal tax applicable to both domestic and imported manufactured products. It is collected at the point of sale for domestic goods or at customs clearance for imports. The tax rate varies depending on the product and is calculated based on the CIF value of the product including duties.Interest rates in Brazil have declined from 2008 to 2010, estimated at 8.0% per year in June 2010. However, they still remain relatively high, which discourages demand for bank loans. The main sources of long-term financing available are provided by the national Bank for Economic and Social Development (BnDES), through leasing operations, and foreign government export agencies. Distribution and business practices in the furniture industry are focused on purchasing from reputable suppliers. Major end users of furniture prioritize well-known and reliable suppliers. While large end users may import directly from foreign suppliers, they prioritize after-sales service. Technical assistance and availability of replacement parts play a crucial role in their purchasing decisions. In certain segments such as commercial and institutional, the availability of these factors may determine the supplier choice. Having a physical presence in the market, either through an agent or manufacturing plant, increases the end user's trust in the supplier's commitment to the market and facilitates sales. In Brazil, there was a belief for many years that shopping malls were only for wealthy individuals. However, the opening of the Center Norte mall in São Paulo in 1984 changed this perception. The mall strategically positioned itself next to a subway and bus terminal, recognizing that proximity to mass transit is crucial as many low-income consumers do not own cars.Until now, IKEA's international marketing strategy has been tightly and centrally controlled by corporate headquarters. Center Norte was followed by other shopping malls in different cities in Brazil, including Rio de Janeiro and Belo Horizonte. The entry of foreign retailers to Brazil has been slowed down by economic instability, difficulties in obtaining financing at reasonable interest rates, and customs barriers for certain imports. However, international chains such as JC Penney, Zara, and C&A have been attracted by Brazil's 80 million consumers. In the fashion sector, C&A leads the market. Several international franchisors like Benetton, Lacoste, Hugo Boss, Polo Ralph Lauren, and McDonald's operate in Brazilian shopping centers, some on a large scale. The success of these retailers in Brazil is directly related to their ability to adapt to local conditions. For example, Sears had extremely negative results due to the centralization of decision-making in Chicago. Zara also faced poor financial results initially when it tried to apply its European management policy and market approach to Brazil. In contrast, C&A had excellent performance by defining policies and procedures specifically for the local market. JC Penney acquired a local chain called Renner and achieved good results by accelerating its expansion in Brazil.Despite potential pressures from local demographics and cultural differences, IkEA's local shops may need to take strategic initiatives to cater to the specific needs of their respective markets. Additionally, the topic of regional headquarters and transnational organization as hierarchical entry modes, as discussed in Chapter 12, arises as alternatives to the predominantly centralized strategy executed by IkEA's headquarters. It is worth noting that IkEA has yet to explore joint-venture and strategic-alliance strategies and it is important to evaluate their advantages and disadvantages in comparison to IkEA's traditional entry modes such as establishing own stores and franchising. Moreover, within the context of penetrating the South American market specifically by opening a shop in Brazil, considering the political and economic situations prevalent in South America, it is crucial to outline the implementation of a sourcing concept that aligns with the unique market conditions of the region.

Updated: Feb 16, 2024
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IKEA's Global Expansion: A Case Study. (2016, Aug 08). Retrieved from https://studymoose.com/ikea-expanding-through-franchising-essay

IKEA's Global Expansion: A Case Study essay
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