IKEA Group on the International Stage

Transcription

1 IKEA Group on the International Stage Omid P. Panahi Asia Pacific University of Technology and Innovation I

2 Table of Contents 1.0 Introduction to IKEA Group IKEA Group s Entry into the United States The Challenges Facing IKEA Group on the International Stage The Prospect for IKEA Group s Expansion through International Acquisitions Conclusion References... 7 II

3 1.0 Introduction to IKEA Group IKEA Group, commonly known as IKEA, is a global retailer of Scandinavian-designed furniture and accessories, which is headquartered in Delft, the Netherlands (MarketLine, 2015). The company offers a wide variety of furniture for living rooms, bedrooms, children s rooms, and kitchens. Most IKEA franchises operate a Swedish restaurant that offers various Swedish delicacies such as meatballs, crisp bread, pickled herring, and lingonberry jam. As of August 31, 2013, IKEA had operations in 43 countries across North America, Europe, Asia, and Australia; and had 135,000 people employed (Schellenbaum, 2014). IKEA had a total revenue of approximately $37,280.1 million for the financial year of 2013 (Statista, 2015). IKEA Group was founded by Ingvar Kamprad in 1943, originally offering pens, picture frames, wallets, table runners, jewelry, watches, and nylon stockings, for sale (MarketLine, 2015). Kamprad created the brand name IKEA using his own name s initials ( I and K ) and the initial letters of Elmtaryd ( E ) and Agunnaryd ( A ), the farm and village where he grew up (Inter IKEA Systems B.V., 2016). IKEA began stocking furniture produced by local manufacturers in 1947, launched its first furniture catalogue in 1951, set up its first furniture warehouse in 1953, and introduced furniture designed by itself in 1955 (Advameg, 2015). The company s global growth began in 1974 when it started expanding its business into the rest of Europe and global markets. By the year 2000, IKEA had stores in the Americas, the Middle East, Mainland China, and throughout Europe. IKEA Group s mission, to which the company refers as its business idea, is to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them (Inter IKEA Systems B.V., 2016). Through optimizing its value chain, building long-term relationships with suppliers, investing in highly automated production, and producing in large volumes, IKEA Group aims to deliver highquality products to its customers at affordable prices (Inter IKEA Systems B.V., 2016). IKEA Group has a rather simple vision, which is To create a better everyday life for the many people (Inter IKEA Systems B.V., 2016). This vision is the foundation of the company s growth, and guides every aspect of its business, from design to production (Inter IKEA Systems B.V., 2016). IKEA Group claims to regularly re-invest a majority of its profits in existing and new IKEA stores, product development, and sustainable solutions, in order to make IKEA accessible and create a better everyday life for as many people as possible. IKEA represents its 1

4 business idea and vision together called The IKEA Concept through its stores worldwide, in the IKEA catalog, via the web and mobile applications, and in millions of homes around the world (Inter IKEA Systems B.V., 2016). 2.0 IKEA Group s Entry into the United States In 1985, IKEA Group expanded its international presence into the United States, establishing its first store in Philadelphia, Pennsylvania (Inter IKEA Systems B.V., 2016). IKEA Group s strategy for entering the United States did not differ, in any meaningful way, from the strategy it had adopted to penetrate new markets across Europe, such as those of Norway and France (Inter IKEA Systems B.V., 2016). The company aimed to offer its standard, high-quality products to American consumers at relatively affordable prices (Suwaris, 2012). Prior to entry into the U.S., IKEA had forgone some of the conventional practices that are nearly ubiquitous among internationally-expanding corporations such as entering a new market only after exhaustive research, and tailoring products to domestic tastes and preferences and managed to be fairly prosperous, perhaps due to the high appeal of its offerings (Sjolander, 1995). However, upon establishing operations in the U.S., the company was confronted with significant problems and challenges as a result of this negligence. For instance, its stores weren t sufficiently large and were in remote locations; the sizes and dimensions of its bedroom, living room, and kitchen furniture did not match those of standard American products; the dimensions of its products were indicated in centimeters instead of inches; and its stores were frequently faced with problems such as long checkout queues and unavailable stocks (Jonsson & Foss, 2011; Harapiak, 2013). Issues of this sort significantly impeded the early U.S. IKEA outlets in reaching their full potential in terms of sales and profitability. Having recognized that its reluctance to make the necessary adaptations to the American market was at the root of its difficulties, IKEA Group embarked on a series of initiatives to address its shortcomings. As Sjolander (1995) explains in a case study, IKEA redesigned about a fifth of the products that were being offered in the United States (which immediately resulted in a 30- to 40-percent increase in sales); forged contracts with American suppliers to reduce its reliance on imports; installed modern cash registers capable of accelerating throughput by up to 20 percent; altered the layouts of its stores to conform to American aesthetic and shopping preferences; and implemented a next-day delivery service and a more generous return policy. 2

5 Ever since, IKEA Group has more than doubled the revenue generated by its U.S. outlets alone (Harapiak, 2013), and currently operates 40 stores in the country (Kim, 2015). Perhaps the most important lesson that IKEA Group learned from its experience of entering the United States market, as Jonsson and Foss (2011) write, was that it should stick to one product range, but that, when needed, it should adjust its products to the local market, while maintaining, as best as it could, a focus on high volumes. 3.0 The Challenges Facing IKEA Group on the International Stage IKEA Group represents an ever-growing corporation with a comprehensive strategy for international expansion. Jonsson and Foss (2011) characterize this strategy as a combination of format standardization [and] local adaptation, and refer to it as flexible replication. This international expansion strategy, the authors note, enables IKEA Group to harness the advantages of both standardized replication and domestic adaptation, as well as the inherent advantages of knowledge development and its incorporation into the corporation s global strategy. Perhaps IKEA Group is best described as a concept-driven corporation, one that manages its operations and shares knowledge through its own unique means, regardless of the locations of its retail outlets (Harapiak, 2013). However, as alluded to in the previous section, IKEA Group s global expansion strategy per se has not been sufficient for tackling the unique challenges presented by individual markets around the world. This shortcoming on the part of IKEA has been particularly brought to attention in a number of cases, among them the company s penetration into, and subsequent operations in, the Japanese market. Following its failed attempt of entering the Japanese market in 1972, IKEA Group finally established its first Japan-based store in 2002 (Jonsson, 2008). Upon the commencement of its operations in Japan, the company faced significant difficulty differentiating its brand and products from domestic furniture retailers such as Mujirushi Ryōhin and Nitori, who were popular and well-entrenched among the Japanese, and offered similarly inexpensive products (Capell, 2006). Moreover, Japanese consumers had traditionally equated high prices with high quality, which further complicated the matters for IKEA, considering that the company s competitive edge had been largely defined by its lowpriced offerings (Harapiak, 2013). In order to maintain its competitive advantages and guarantee its long-term success in the Japanese market, IKEA Group took a number of measures in response to these challenges. The 3

6 company expanded its product range to include furniture made of richer and darker woods; began packaging its furniture in aesthetically attractive boxes to appeal to Japanese consumers; transformed a boulevard in Tokyo s shopping district of Aoyama to fifteen customized showrooms displaying fitted IKEA furniture; started offering home delivery and assembly services to Japanese customers; and developed a customer service where old and redundant furniture are transported away to make room for new IKEA furniture (Capell, 2006; Jonsson, 2008). China is another country where IKEA Group has had to overcome a number of substantial challenges, following its entry in 1998 (Harapiak, 2013). Initially, IKEA partnered with a Chinese party to establish its first store in Shanghai as a joint venture, since the Chinese government s then-stringent corporate regulations prevented multinational corporations from operating in the country independently (Suwaris, 2012). China s joining the World Trade Organization in late 2001, and subsequent relaxing of its trade restrictions, allowed IKEA Group to take full ownership of its subsidiaries and further expand its operations within the country (Jonsson, 2007). In selecting the geographical locations of its outlets, IKEA had to take into consideration the fact that the majority of the Chinese travel by public transportation means (Johansson & Thelander, 2009). Moreover, the company launched home delivery and assembly services due to high demand, and customized its showrooms to reflect Chinese living standards and patterns, placing more emphasis on furniture designed for small apartments and balconies. 4.0 The Prospect for IKEA Group s Expansion through International Acquisitions There are several ways in which IKEA Group could expand the span of its operations on a global scale, among them the acquisition of existing firms located in foreign countries. Acquisition refers to the transfer of ownership from one firm to another, whereby the acquiring firm purchases the totality of the acquired firm s assets and stocks, and takes full ownership of the enterprise (Ross, et al., 2012; Clements & Schafer, 2014). In the academic literature, crossborder acquisitions have been traditionally viewed as a means of internationalizing a business, reducing production costs, acquiring new knowledge, diversifying risks, and securing customers in new geographical areas (Öberg, 2014). According to the United Nations latest World Investment Report (2015), mergers and acquisitions accounted for approximately 60 percent of all foreign direct investment flows from 2003 to 2014 (UNCTAD, 2015). 4

7 Markides and Ittner (1994) empirically examined 276 international acquisitions made by U.S.- based corporations from 1975 to 1988, and found that cross-border acquisitions are, on average, beneficial to the acquiring firms, in that they create substantial value for them. Domestic acquisitions, on the other hand, were found to result in zero or negative returns for the acquiring firms. These findings clearly demonstrate the benefits of cross-border acquisitions, adding to the certainty that IKEA Group would gain significantly from acquiring firms located in other countries. In another study, Barkema and Vermeulen (1998) used data from 829 instances of international expansion undertaken by 25 Dutch firms over a time period of almost three decades, and showed that the two qualities of multinational diversity and product line diversity put corporations in a stronger position to set up new ventures in foreign countries rather than to acquire existing companies. Considering IKEA Group s expansive international presence and wide range of product offerings, this could mean that the start-up expansion strategy is the more desirable option in comparison to international acquisition. In a bibliometric review of 90 academic papers published from 2000 to 2009 on mergers and acquisitions, Santos et al. (2011) identified a number of studies that found acquisitions to have a positive impact on the liquidity, leverage, profitability, and performance of acquiring firms. The majority of the examined studies, however, showed mergers and acquisitions to have a neutral or detrimental effect on the post-acquisition performance of acquiring firms. These results underscore the fact that a multitude of factors determine the outcome of an acquisition, and no definitive generalizations could be made as to the benefits and drawbacks of this mode of international expansion. In her paper, Öberg (2014) identifies three challenges that almost all expanding corporations face following a cross-border acquisition: (1) internal competition within the acquired enterprise, (2) the acquired party s reluctance to lose independence, and (3) domestic customers lack of interest in the acquiring firm s business. Thus the success of a cross-border acquisition is, in part, contingent upon the acquiring firm s ability to coordinate with the acquired party and local customers. Elango (2006) conducted an analysis of 52 cross-border acquisitions undertaken by American insurance firms, which revealed that entry into countries with large-sized markets and extensive trade relations with the United States (the firms home country) was likely to yield higher-than-average returns for the acquiring firms. The study also highlighted the substantial risks associated with expansion into countries that notably differ in terms of their culture, environment, and legal system from acquiring firms home countries. Another study by Zou and Ghauri (2008) examined four cases where Chinese companies were acquired by 5

8 multinational corporations, and found that the post-acquisition performance of the acquiring firms was largely determined by their aptness at developing practical knowledge in the Chinese environment, and incorporating that knowledge into their domestic operations. A managerial implication of these findings is that, prior to embarking on a cross-border acquisition, it is imperative that IKEA Group thoroughly evaluate the domestic environment of a targeted foreign firm, and identify the strategic and operational adjustments that need to be made in order to ensure success in that environment. 5.0 Conclusion This assignment was conducted on the Swedish furniture retailer IKEA Group, primarily examining the company s international expansion strategy, the challenges it has faced in various countries around the world, and the prospect for its entry into new markets through cross-border acquisitions. A brief introduction to IKEA constituted the first section of the paper, and provided information regarding the nature of the company s business and its span of operations, as well as its history, mission, and vision. The second section examined the case of IKEA Group s entry into the United States market, discussing the challenges the company initially faced in the country, its systematic shortcomings, and the manner in which it went about addressing them. In the subsequent section, the broad international expansion strategy adopted by IKEA Group was explored, along with its implementation for the company to expand into the Japanese and Chinese markets. Some of the problems the company s operations were faced with in the two countries were identified, implying that strategic and operational adjustments often need to be made to overcome the unique challenges posed by individual markets. The last section considered the prospect for IKEA Group s expansion through crossborder acquisitions. After an evaluation of the academic literature on the subject, it was concluded that, if IKEA has sufficient knowledge regarding the domestic environment of a potential acquired firm and is prepared to take the necessary measures to adapt to it, an acquisition is highly likely to be successful. 6

9 6.0 References MarketLine, Company Profile: Ikea Group, London, United Kingdom: MarketLine. Schellenbaum, A., Years of Ikea, as Told by What Else? Show Apartments. [Online] Available at: [Accessed 24 June 2015]. Statista, Annual Revenue of Ikea Worldwide (Fee-based). [Online] Available at: [Accessed 24 June 2015]. Inter IKEA Systems B.V., History. [Online] Available at: [Accessed 12 June 2015]. Advameg, IKEA International A/S - Company Profile, Information, Business Description, History, Background Information on IKEA International A/S. [Online] Available at: [Accessed 24 June 2015]. Inter IKEA Systems B.V., IKEA Group Yearly Summary [Online] Available at: pdf [Accessed 18 February 2016]. Inter IKEA Systems B.V., About the IKEA Group. [Online] Available at: [Accessed 18 February 2016]. Inter IKEA Systems B.V., The IKEA Concept. [Online] Available at: [Accessed 18 February 2016]. Inter IKEA Systems B.V., History. [Online] Available at: [Accessed 12 May 2016]. Inter IKEA Systems B.V., History. [Online] Available at: [Accessed 12 May 2016]. 7

10 Suwaris, S., IKEA Case Study. [Online] Available at: [Accessed 12 May 2016]. Harapiak, C., IKEA s International Expansion. International Journal of Business Knowledge and Innovation in Practice, 1(1), pp Jonsson, A. & Foss, N. J., International Expansion through Flexible Replication: Learning from the Internationalization Experience of IKEA. Journal of International Business Studies, 42(9), pp Sjolander, R., IKEA's Global Strategy: Furnishing the World. [Online] Available at: [Accessed 12 May 2016]. Kim, S., What the 1st American IKEA Catalog Looked Like in [Online] Available at: looked- 1985/story?id= [Accessed 12 May 2016]. Jonsson, A., A Transnational Perspective on Knowledge Sharing: Lessons Learned from IKEA's Entry into Russia, China and Japan. The International Review of Retail, Distribution and Consumer Research, 18(1), pp Capell, K., IKEA's New Plan for Japan. [Online] Available at: [Accessed 4 June 2016]. Jonsson, A., Knowledge Sharing Across Borders - A Study in the IKEA World. Lund Business Press, Volume 97. Johansson, U. & Thelander, Å., A Standardised Approach to the World? IKEA in China. International Journal of Quality and Service Sciences, 1(2), pp Ross, S., Westerfield, R. W. & Jaffe, J. E., Corporate Finance. 10th Edition ed. New York City: McGraw-Hill Education. Clements, B. & Schafer, J., Reexamining Corporate Acquisition Strategies. The CPA Journal, 84(11), pp Öberg, C., Customer Relationship Challenges Following International Acquisitions. International Marketing Review, 31(3), pp UNCTAD, World Investment Report 2015: Reforming International Investment Governance, Geneva: United Nations Publication. 8

11 Markides, C. C. & Ittner, C. D., Shareholder Benefits from Corporate International Diversification: Evidence from US International Acquisitions. Journal of International Business Studies, 25(2), pp Barkema, H. G. & Vermeulen, F., International Expansion through Start-up or Acquisition: A Learning Perspective. Academy of Management Journal, 41(1), pp Santos, J. C., Ferreira, M. P., Reis, N. R. & Ribeiro Serra, F. A., Mergers & Acquisitions Research: A Bibliometric Study of Top Strategy Journals, , St. Louis: Federal Reserve Bank of St. Louis. Elango, B., When Does Cross-border Acquisition of Insurance Firms Lead to Value Creation?. The Journal of Risk Finance, 7(4), pp Zou, H. & Ghauri, P. N., Learning through International Acquisitions: The Process of Knowledge Acquisition in China. Management International Review, 48(2), pp