364 VIDEO Opening case IKEA's international strategy FOUNDATIONS OF STRATEGY IKEA is one of the largest furniture makers and retailers in the world and is well known for its low-cost, stylish furniture and bold, sometimes controversial, advertising campaigns. Established by Swedish entrepreneur, Ingvar Kamprad in 1943, by 2010 the company had an estimated turnover of €23.1 billion, net profits of €2.7 billion IKEA and around 300 stores in 26 countries.? Whilst IKEA has undoubtedly succeeded in foreign markets, establishing stores in countries as far apart as Australia and Romania, 80% of its sales still come from Europe and its overseas expansion has not always progressed as smoothly as it would have liked. Most recently it has sacked two of its senior executives in Russia for allegedly turning a blind eye to bribes paid to a sub-contractor and has been involved in acrimonious disputes with labour unions in France over its pay offers. IKEA A brief company history Brought up in a small farming community in southern Sweden, Kamprad was an enterprising individual who even as a boy sold small items like matches and Christmas cards to his neighbours. He came up with the name, IKEA, by combining his initials (IK) with the first letters of the name of the farm and village in which he grew up (Elmtaryd, Agunnaryd). At first IKEA was a vehicle for Kamprad's trading and mail-order activities. He added furniture to his product lines in 1947 mainly by accident but quickly recognised that there was a growing demand in post- war Sweden for inexpensive household goods. Due to problems with Swedish manufacturers, the company started to procure furniture from Poland and found this to be a cost-effective strategy. By 1951 Kamprad decided to discontinue sales of other products and focus exclusively on furniture. The first IKEA showroom was opened in Sweden in 1953 to allow mail-order customers to establish the quality of the items they were ordering by seeing and touching them. In 1955 the company started designing its own products and a few years later opened retail stores. 365 The company offered well-designed, stylish items that drew on Swedish design traditions at inexpensive prices. Costs were kept down by designing furniture with a target price in mind. Furniture was flat-packed to minimise transportation costs, assembled by the customer to keep operating costs low and production was sourced from low-cost locations. IKEA became known for its cost-minimising approach and its associated capabilities in cost-efficient design, sourcing and logistics. The founder's passion for making his company's products affordable is still reflected in the company's mission which 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! CHAPTER 8 GLOBAL STRATEGIES AND THE MULTINATIONAL CORPORATION Pattern of internationalisation The company's forays into international markets began first by opening stores in nearby Scandinavian countries but, as Table 8.1 indicates, the company quickly moved farther afield. In the early years the formula for international expansion was a simple one. The company identified markets with the potential for high sales volumes and then purchased cheap land on the outskirts of a big city to establish a base. A tight-knit team of trusted and experienced Swedish managers (sometimes referred to as IKEA missionaries) relocated to the country in question and supervised the building of the new store, led the operational team and ran the business until it was deemed mature and could be handed over to local managers. Once a beachhead was established, IKEA tended to cluster further stores in the same geographical area. In its first phase of internationalisation IKEA entered new markets by keeping its product catalogue and its management processes the same. There were sometimes minor adjustments to items to reflect national differences, for example standard bed sizes tended to differ between countries, but the overwhelming majority of the products sold by IKEA were common across countries. The Swedish roots of the company were celebrated as a source of distinctiveness not only in the design of the firm's products but also in its management style. Managers across the organisation were strongly encouraged to adopt a Swedish, open and non-hierarchical management style because Kamprad felt that this mode motivated employees and had universal appeal. A pragmatic problem-solving style and egalitarian approach to decision making became the cornerstone of IKEA's unique culture and was referred to by the founder and his team as the 'IKEA way! 366 Table 8.1 Year in which the first IKEA store was opened Year Country Location 1958 Sweden Älmhult FOUNDATIONS OF STRATEGY 1963 Norway Oslo (Nesbru) 1969 Denmark Copenhagen (Ballerup) 1973 Switzerland Zürich (Spreitenbach) 1974 Germany Munich (Eching) 1975 Australia Artamon 1975 Hong Kong Hong Kong (Tsim Sha Tsui) 1976 Canada Vancouver (Richmond) 1977 Austria Vienna (Vösendorf) 1978 Netherlands Rotterdam (Sliedrecht) 1978 Singapore Singapore 1980 Spain Gran Canaria (Las Palmas) 1981 Iceland Reykjavik 1981 France Paris (Bobigny) 1983 Saudi Arabia Jeddah 1984 Belgium Brussels (Zaventem and Ternat) 1984 Kuwait Kuwait City 1985 United States Philadelphia 1987 United Kingdom Manchester (Warrington) 1989 Italy Milan (Cinisello Balsamo) 1990 Hungary Budapest 1991 Poland Platan 1991 Czech Republic Prague (Zlicin) 1991 United Arab Emirates Dubai 367 1992 Slovakia Bratislava 1994 Taiwan Taipei 1996 Finland Esbo 1996 Malaysia Kuala Lumpur 1998 China Shanghai 2000 Russia Moscow (Chimki) 2001 Israel Netanya 2001 Greece Thessaloniki CHAPTER 8 GLOBAL STRATEGIES AND THE MULTINATIONAL CORPORATION 2004 Portugal Lisbon 2005 Turkey Istanbul 2006 Japan Tokyo (Funabashi) 2007 Romania Bucharest 2007 Cyprus Nicosia 2009 Ireland Dublin 2010 Dominican Republic Santa Domingo 2011 Bulgaria Sofia 2011 Thailand Bangkok Source: IKEA's website: http://franchisor.ikea.com/worldmap/interactive.html. Accessed 9 June 2011. The challenges of internationalisation As the company moved further from its Scandinavian base and became moi dependent on overseas operations so the pressure for the company to be more nationally responsive grew. One of IKEA's biggest challenges came when it entered the US market. The company expected its standard range to sell as well as it did in Europe but that was not the case. American tastes were different. Americans were used to purchasing furniture from high-end retailers who offered free delivery, interior design advice and other value-added services and many found the design and dimensions of the furniture a poor fit with their requirements. Whilst recognising the need to adapt some of its products to local demands, 368 FOUNDATIONS OF STRATEGY IKEA's low-cost business model depended on the high volume sales that came from standardisation. The IKEA headquarters team recognised the need for some country-specific adaptations and made it possible for area managers to put forward suggestions but to achieve economies of scale, the extent of adaptation was limited to 5-10% of the product range. As well as adapting the company's product lines, there was also pressure to adapt the management style. The democratic approach to management characteristic of Swedish organisations was not perceived as favourably as the top team expected. Grol and Schoch, for example, point out that in Germany Swedish management was considered peculiar. Older workers felt uncomfortable calling managers by their first names and employees, in general, disliked the lack of formality. Similarly in France rather than seeing IKEA's flat organisation structure as enabling, many employees saw it as stripping them of status and removing opportunities for promotion. The fact that the key decision-making and training centres were located in Sweden (and required managers to be fluent in Swedish) made it very difficult for non-Scandinavians to progress to the higher echelons of management. More recently IKEA has faced a different set of challenges in its entry into China.' The company has always positioned itself as a low-cost provider but in China it is seen as an expensive brand by its target market of young professionals. Import duties and exchange rate fluctuations make it difficult for IKEA to compete with domestic furniture producers on cost and IKEA's designs are quickly copied and products undercut by local producers. Whilst China has a huge market potential for IKEA because of its population's growing affluence and a surge in home ownership, it is very difficult to maintain a low-cost market position in this environment. Faced with this dilemma IKEA has cut its prices significantly and sacrificed short-term profitability for long-term growth. In China some IKEA products sell at prices 70% lower than in other countries and some tables cost less than a Starbucks' latte. A number of commentators have doubted the wisdom of this move. Rein, 10 for example, suggests that, in China, IKEA has become an entertainment destination rather than a serious place to shop for furniture. The stores are crowded and consumers pick up free catalogues, get ideas for home decoration and enjoy the benefit of their children playing in an air-conditioned environment but make few purchases. Those that do shop buy only low-value items like drinking glasses or bathmats. The middle-class consumers that might spend money in the stores are deterred by the crowds so as Rein puts it, in China 'IKEA is too expensive for the majority of consumers but too cheap for the real spenders!
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