Question 1:

Based on the case given above, discuss TWO (2) external and TWO (2) internal

situations affecting IKEA during its international expansion. Support your answer

using the various analytical tools you learned in this course.

[Total:50 marks]

Introduction

1. Ingvar Kamprad, only 17 years old, founded IKEA in 1947. The business has locations in 29 nations,
giving it a considerable worldwide reach. Only 6% of its sales are made in Sweden which is also the
company's native country. In 2017, IKEA's low-cost, finely designed products, on display in big
warehouse shops, brought in €31.4 billion. One of the most prosperous retail businesses in the world
is IKEA. By building on its accomplishments and learning from its mistakes, it has grown into various
overseas markets. IKEA wants to expand further by adding 10 to 15 new shops annually. It would
take an expansion into non-Western markets like China and India to achieve that growth.

2. IKEA is known as the world’s largest furniture retailer that was founded in 1947 at Sweden. It
offers well-designed and functional furniture to its mass market, which is the young consumers at an
affordable prices, aiming to help the consumers achieve a better lifestyle. This shows that the
company has adopted focused low-cost strategy where it targeted the young customers by offering
low-cost furniture. Besides, IKEA has also expanded its business internationally to countries such as
United States, China, and India.

3. IKEA is a well-known largest furniture retailer in the world and was established by Ingvar Kamprad
in 1947. IKEA has expanded its business in 29 countries including China, the US, and India, and
generated a net profit of 2.4 billion euros in 2017. IKEA was focused on the low-cost strategy and
mass-market approach as it targeted young age consumers and offered the well-designed furniture
at an affordable price.

First External Situation

1. Based on the case study, IKEA recognised a business opportunity when they noticed a
transformation in American society. Americans were starting to care more about design and were
also starting to accept the concept of disposable furniture. Younger individuals had a greater
appetite for elegant, high-quality design and were more prepared to take chances and experiment.
Starbucks, Apple Computer, and IKEA were all utilising this. Therefore, IKEA needs to take decisive
actions to change its current business operations to emerge in American market. To meet American
requirements, several products needed to be changed. The locations of newer, bigger stores were
picked. Products were acquired from less expensive regions and priced in dollars to cut pricing. To
cut down on transportation expenses and reliance on the value of the dollar, IKEA started sourcing a
few goods from American manufacturing.
2. The first external situation affecting IKEA during its international expansion is the existing of rivalry
in the local market. This can be seen from the case, for example when IKEA expanded its business to
China, it has faced an intense competition with the Chinese local furniture makers in the local
market. This is because the Chinese furniture retailers are able to gain benefits from the access to
cheap labour and raw materials, which allow them to offer their products in lower prices compared
to IKEA. Besides, the local furniture makers also lack awareness on copyright and patent. They simply
copied the furniture designs of other company including IKEA, which further allows them to lower
their prices as they can save their design costs on product innovation and development. Hence,
referring to Porter’s 5 Forces analysis, this has proven that IKEA has faced high threat of competitive
rivalry due to the existence of local furniture makers who offer substitute products at lower cost that
increase the competitiveness of the market. IKEA is likely to lose its customer base and turns out to
have lower profitability. As a result, this will affect IKEA’s operations in the international market.

3. The key success factor that is needed in this industry. First, the ability of a redesigned product to
meet different consumer's needs as in the US, IKEA observe the changes in culture and redesigned
its product. Next, manufacturing capability, in this case, IKEA was trying to reduce costs by building
factories in a foreign country which can help to reduce the transportation cost and traffic imposed
by local governments. Besides, the financial resources, it is necessary to expand worldwide and used
to built factories, sales, and marketing, hire talented employees, and open a large number of stores
worldwide. Furthermore, the relative costs position is to pursue the mass-market approach and
compete with other competitors by having lower prices with a well-designed product. IKEA does
have well-known for its cost structure, lowering its cost, and offering its product at low prices to
attract its target consumer which is young people that typically with low income.

Second External Situation

1. According to the case study, there was a threat to IKEA. Local furniture manufacturers had access
to inexpensive labour and unfinished furniture designs from other businesses, and their design
expenses were typically nothing because they just copied IKEA furniture designs. IKEA had to cope
with furniture import taxes into China that were relatively expensive and with materials. IKEA
originally established itself throughout Europe and North America in the 1990s and early 2000s, and
then moved into Asia. For instance, in China, many Chinese homes have the same layout as stores,
and many flats have balconies. Customers may order things for delivery so they can bring them
home from stores that are conveniently positioned near public transit. Henceforth, IKEA constructed
many plants in China and raised the percentage of materials sourced locally from 30 to 65% in order
to address these issues. These actions allowed it to reduce the price of numerous things by as much
as 60%.
2. The second external situation is where IKEA is being affected by the regulatory influences and
government interventions in the local market. For instance, when IKEA expanded to India, the Indian
government denied IKEA’s request to sell certain products in locations where they think are
politically sensitive and for the sake of protecting the local retailers. These products include IKEA
store’s standard feature of food and beverage outlets, and 18 of the 30 product categories it applied
such as gift items, fabrics, books, toys, and consumer electronics. Besides, the Indian government
also required IKEA to practice local sourcing. Fulfilling these demands will take time and is likely to
slow down its expansion rate to the market. Additionally, according to the driving forces analysis, it
was found that the political factor which is the government interventions are the driving forces that
will affect the firm’s international expansion. In this case, this situation will make the international
furnishing industry less attractive as it will cause a reduction in consumers’ demand for IKEA’s
products since they can also purchase it from local retailers; make the competition more intense in
the local market as IKEA is unable to differentiate themselves from local rivals using its wide range of
products; as well as reducing the company’s profitability in the industry. As a result, the government
regulations will restrict IKEA’s international expansion, thus they have the need to adjust their
strategies to cater this issue, perhaps by implementing diversification strategy to further expand the
approved product categories by introducing more new items.

3. One of the external driving forces is the changing societal concerns, attitudes, and lifestyles. In this
case, there was a change in American culture that the Americans were becoming more concerned
with the design and more open to the idea of disposable furniture; whereas the younger generation
was more open to risks and willing to experiment. In response to this issue, IKEA needs to redesign
its products to fit American needs by applying a multinational strategy, whereby it needs to source
locally to lower costs and reconstruct its design concepts that meet local market needs.

First Internal Situation

1. There is a strength of IKEA which they are not adjusting to business tactics that go against its core
principles. From the case study, it provides that, IKEA’s business takes pride in its "clean" reputation
and is prepared to stop investing to safeguard it. It suspended investment in Russia in the middle of
the 2000s in opposition to widespread corruption. As a result of allegations that they gave a
subcontractor a bribe for a power supply, they sacked two top executives in the nation. Another
strength of IKEA is the dedication to make every attempt to expand their business in the
marketplace despite the fact that the countries have different cultures which varies from IKEA’s
American style of products and operations. For instance, IKEA put a lot of effort into positioning itself
in China as a Western brand that young middle-class Chinese might aspire to. This demographic,
which gains from China's quick economic growth, has comparatively high salaries, more education,
and a greater awareness of Western fashions. They are also more receptive to IKEA's products.

2. One of the internal situations that affects IKEA during international expansion is its ability to
redesign its products to fit the local consumers’ needs when it expands to foreign countries. For
example, when IKEA enters the US market, it has redesign many of its products to cater the
American needs because it found that its European-style offerings did not resonate with American
consumers, such as the beds were measured in cm, not king, queen, and twin sizes; the American
sheets did not fit IKEA beds; sofas are not big enough; glasses too small; kitchen did not fit US size
appliances and so on. Hence, IKEA fulfil its capability to implement transnational strategy to study
the local demands and change its products offering to meet the US consumers’ expectations.
According to VRIN test analysis, IKEA’s capability of redesign its products offerings is valuable as it is
able to fulfil consumers needs and create value to them; it is rare that this capability is not easily
found from other rivals since it requires strong company financial performance to support the
innovation and product development process; it is imitable due to the high investment cost needed;
and it is non-substitutable. As a result, this capability of IKEA becomes the company’s sustainable
competitive advantage, which encourages and makes it easier to expand its business internationally.

3. There is a weakness of IKEA, that its European-style products did not favorable by the American
consumer. For example, the size is measured in centimeters instead of the king, queen, and twin
sizes, the sheets did not fit on IKEA beds, small size of sofas to consumers in US, and so on. The next
weakness is less competitive compared with local competitors in terms of the design cost, labor cost,
raw material costs, and traffic imposed by the local government. Besides, IKEA was rigid or persistent
with its motto. in the mid-2000s, it decided to halt investment in Russia with the reasons of
protesting endemic corruption and protecting its 'clean' image.

4. The internal situation could be the clash in value with the targeted country. Due to the endemic
corruption in Russia, IKEA halted its investment in the country to protect its brand image as a “clean”
company. This brings pros and cons to IKEA being an international enterprise, it may affect customer
perception of IKEA as a company conducting business with integrity and increase customer loyalty.
On the other hand, IKEA will lose its market share in Russia, and in worse cases, IKEA will face
difficulties in entering or capturing other potential markets where the countries have high corruption
rates such as Denmark and Finland.

Second Internal Situation

1. IKEA had a weakness by the beginning of the 1990s. As provided in the case study, the business
discovered that American customers weren't always interested in its European-style offers. Instead
of the king, queen, and twin sizes that are familiar to Americans, beds were measured in
centimetres. IKEA beds did not accommodate American sheets. The kitchen did not accommodate
U.S. size appliances, the sofas were too small, the closet drawers were too shallow, the glasses were
too little, the curtains were too short, and so on. It took years for IKEA to adapt the demands of India
in order to open its first Indian store due to the country forbade IKEA from selling its items in zones
considered politically sensitive in order to safeguard local businesses. For example, 18 of the 30
product categories it had originally applied for include gift items, fabrics, books, toys, and consumer
electronics. These also contain food and beverage outlets, a common element of its stores globally.
Additionally, the government mandated a sizeable percentage of local sourcing.
2. Another internal situation is that referring to SWOT analysis, IKEA has the strength of offering
affordable, well-designed, and functional furniture to its targeted consumers. This can be seen as for
instance, in the US market, there are several general discount retailers such as Wal-Mart and Costco
that offer limited product line of basic furniture in low cost, but are lack of the design elegance
compared to IKEA and the product quality are often low. Besides, although other higher-end
retailers like Ethan Allen are offering high quality and well-designed furniture, their prices are also
relatively high. Therefore, IKEA who is able to produce high quality, well-designed furniture in low
cost is able to compete with its rivals by attracting more customer base. Hence, this strength has
affected IKEA during its international expansion in a way that allowing it to be more able to enter the
market faster and gain market share.

3. The strength that composes was the ability to observe the trends, and consumer needs,
redesigned its product, way to increase its profitability by choosing the low costs of goods and
location to capture that opportunity. For example, in the US to meet the needs of American
consumers, it choose to open its store at a newer but larger store location, IKEA sourced the goods
from a lower-cost location and dependency on the dollar's calue to align with its low-cost strategy.
Besides, it also observed that there is a change in American culture as Americans more emphasis on
design with elegance, and quality and have a preference for disposable furniture. Moreover, the
ability to make adjustments to deal with the problems arising in different countries and always
aligned with their low-cost strategy. In China, to compete with the local competitors, its built
factories in china, and increase local sourcing to deal with the problem of higher costs compared to
local competitors and the high traffic imported into china. As a result, the cuts its prices on many
items by up to 60%. Besides, it shifts from its typical mass-market approach to an aspirational one to
deal with the problem of copying from other competitors.