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STRATEGIC FOCUS

IKEA expands all over the world


The Swedish home products company IKEA is one of the largest in their industry with revenues in 2009 of 22.7bn and 301 stores worldwide. IKEA was one of the first in their industry who moved to globalization. The furniture industry is an example of a business that did not lend itself to globalization before the 1960s. The fact that the furniture industry was not internationalized can be explained by several reasons. Furniture relatively takes up a lot of space compared to its value and can be damaged easily. Those two factors led to high transportation costs. Furthermore, government trade barriers were also unfavourable. IKEAs furniture was not assembled and therefore could be shipped more economically. IKEA also lowered costs by involving the customer in the value chain; the customer carried the furniture home and assembled it himself. IKEA successfully expanded in Europe by moving to Norway in 1963 and to Switzerland in 1973. Since customers in different countries were willing to purchase similar designs, IKEA expanded to other European countries, and Australia and Canada followed. IKEA applied the same formula

to its international expansion, but after successfully expanding to several countries, ran into difficulties in the US market because of differences in taste and culture. IKEA moved to the US in 1985 and over the following six years, six more stores were opened. Many of the products sold in these stores were manufactured in Sweden and shipped to the US. Some of these products did not match the local preferences in the US. IKEA had learned from the move to the US that consumption patterns and the way of life regarding household equipment, furniture and related items remain significantly different, according to the consumers cultural backgrounds. Routines were adapted as IKEA started to make use of local suppliers. The aforementioned can be witnessed by comparing IKEA customers in Germany with their counterparts in Singapore and Malaysia, where customers perceive IKEA as a prestigious European brand and prefer not to assemble the furniture themselves as wished for by IKEA. On the contrary, IKEA acknowledges its perception as a European status brand, and offers all electric goods with European sockets in order to enhance its up-market image by appearing distinctly European (although these electric goods are manufactured outside Europe). In the 1990s IKEA expanded into economies that were now open due to the fall of the Berlin Wall (e.g. Hungary and Poland). These markets were rapidly growing as well as customer spending.111 This expansion created another big challenge for IKEA. Difficulties in the US were mainly due to product characteristics that did not fit local preferences, However, these new markets required more adaptation. In 2009, IKEA faced problems with extending globally. IKEA already sources textiles from India for its global stores. However, for almost two years they failed to persuade the Indian government to raise its foreign ownership limit on single-brand retail businesses to 100 per cent, up from the current 51 per cent. In June 2009 IKEA abandoned their plans to enter the Indian retail market because of those stringent foreign direct investment norms. However, the company said it would continue sourcing supplies from the country for its international operations. We would have liked the government to allow 100 per cent FDI in retail. As it is not forthcoming, we have stopped all plans for our retail business in India, an IKEA official said. Our sourcing business has no links with our retail plans in India. The sourcing of goods and raw materials will continue from India, the official added. The company has been active in India for two years and is

sourcing business that is worth around Rs 1800 core ( 295 billion). He said the company has a policy of not operating retail chains through joint ventures or other routes. Under the existing rules, foreign investment of up to 51 per cent is allowed in single-brand retail, while for wholesale cash-and-carry business, 100 per cent FDI is allowed. No FDI is currently allowed in multibrand retail business. This illustrates the problems a globalization strategy brings, based on the rather different customer needs and local governments. In conclusion, IKEA succeeds globally by relying on the match between their strategy and structure as the key driver of profitable growth.
Sources: Flynn, J. and Bongiornom, L. (1997) IKEAs new game plan, BusinessWeek. http://www.businessweek.com. October 6; Inter IKEA Systems B.V. (2006) Grundsteinlegung fr neues IKEA Einrichtungshaus in Spreite, Inter IKEA

Systems B.V. http://www.ikea.com. March 10; 1994 Management brief: Furnishing the world, The Economist, 333 (7890): 7980; Lloyd, M. E. (2009) IKEA sees opportunity in slump, Wall Street Journal Online, http://online.wsj.com, February 17; Baraldi, E. (2008) Strategy in industrial networks: Experiences from IKEA, California Management Review, 50(4): 99126; Kazmin, A. (2009) Ikea abandons efforts to invest in India Financial Times http://www.ft.com. June 11; Inter IKEA Systems B.V. (2010) Facts & Figures. Inter IKEA Systems B.V. http://www.franchisor.ikea.com. July 13.

Questions
1 How did IKEA evolve in its international expansion? 2 Identify the main problems IKEA faced in its international strategy and describe how these problems relate to IKEAs organizational structure. 3 Can you provide an update on IKEAs international organizational structure?