Deck 6: Strategy in the Global Environment

Question 1

IKEA may be the world's most successful global retailer. Established by Ingvar Kamprad in Sweden in 1943 when he was just 17 years old, the home furnishing superstore has grown into a global cult brand with 230 stores in 33 countries that host 410 million shoppers a year and generates sales of €15 billion ($18 billion). Kamprad himself, who still owns the private company, is rumored to be the world's richest man.
IKEA's target market is the global middle class who are looking for low priced but attractively designed furniture and household items. The company applies the same basic formula worldwide- open large warehouse stores festooned in the blue and yellow colors of the Swedish flag that offer 8,000 to 10,000 items from kitchen cabinets to candlesticks. Use wacky promotions to drive traffic into the stores. Configure the interior of the stores so that customers have to pass through each department to get to the checkout. Add restaurants and child care facilities so that shoppers stay as long as possible. Price the items as low as possible. Make sure that product design reflects the simple clean Swedish lines that have become IKEA's trademark. And then watch the results- customers who enter the store planning to buy a $40 coffee table and end up spending $500 on everything from storage units to kitchen ware.
IKEA aims to reduce the price of its offerings by 2%-3% per year, which requires relentless attention to cost cutting. With a network of 1,300 suppliers in 53 countries, IKEA devotes considerable attention to finding the right manufacturer for each item. Consider the company's best selling Klippan love seat. Designed in 1980, the Klippan with its clean lines, bright colors, simple legs and compact size has sold some 1.5 million units since its introduction. Originally manufactured in Sweden, IKEA soon transferred production to lower cost suppliers in Poland. As demand for the Klippan grew, IKEA then decided that it made more sense to work with suppliers in each of the company's big markets to avoid the costs associated with shipping the product all over the world. Today there are five suppliers of the frames in Europe, plus three in the United States and two in China. To reduce the cost of the cotton slipcovers, production has been concentrated in four core suppliers in China and Europe. The resulting efficiencies from these global sourcing decisions enabled IKEA to reduce the price of the Klippan by some 40% between 1999 and 2006.
Despite its standard formula, however, IKEA has found that global success requires that it adapt its offerings to the tastes and preferences of consumers in different nations. IKEA first discovered this in the early 1990s when it entered the United States. The company soon found that its European style offerings didn't always resonate with American consumers. Beds were measured in centimeters, not the king, queen and twin sizes that Americans are familiar with. Sofas weren't big enough, wardrobe draws were not deep enough, glasses were too small, curtains too short, and kitchens didn't fi t U.S. size appliances. Since then IKEA has redesigned its offerings in the U.S. to appeal to American consumers, and has been rewarded with stronger stores sales. The same process is now unfolding in China where the company plans to have 10 stores by 2010. The store layout in China reflects the layout of many Chinese apartments, and since many Chinese apartments have balconies, IKEA's Chinese stores include a balcony section. IKEA has had to adapt its locations to China, where car ownership is still not widespread. In the West, IKEA stores are generally located in suburban areas and have lots of parking space, but in China they are located near public transportation, and IKEA offers delivery services so that Chinese customers can get their purchases home.
How is IKEA profiting from global expansion? What is the essence of its strategy for creating value by expanding internationally?

Answer 1

IKEA is successfully exploiting the global market. The company originally started with applying its retailing concepts and retailing value systems of Sweden worldwide. The main philosophy was:
- The customers should enjoy shopping.
- Prices of the products should be as low as possible.
Above philosophy was quite successful in Sweden. But it could not gain momentum in other countries initially. Later on the company realized that to be successful it needs to consider taste and preferences of customers of that country.
In developed countries, positioning of IKEA as a low priced mass market brand was quite acceptable in the market. But in developing countries, low price business model was a running trend. So, IKEA targeted growing middle class who aspired to products of international lifestyles.
So, price has now been a less important part of marketing mix for the company as an overall strategy. Now IKEA believes in doing things in a right way. The company focuses now on culture, suppliers, staff, locations, economies of scale, etc. This has become essence of its international business strategy.

Question 2

IKEA may be the world's most successful global retailer. Established by Ingvar Kamprad in Sweden in 1943 when he was just 17 years old, the home furnishing superstore has grown into a global cult brand with 230 stores in 33 countries that host 410 million shoppers a year and generates sales of €15 billion ($18 billion). Kamprad himself, who still owns the private company, is rumored to be the world's richest man.
IKEA's target market is the global middle class who are looking for low priced but attractively designed furniture and household items. The company applies the same basic formula worldwide- open large warehouse stores festooned in the blue and yellow colors of the Swedish flag that offer 8,000 to 10,000 items from kitchen cabinets to candlesticks. Use wacky promotions to drive traffic into the stores. Configure the interior of the stores so that customers have to pass through each department to get to the checkout. Add restaurants and child care facilities so that shoppers stay as long as possible. Price the items as low as possible. Make sure that product design reflects the simple clean Swedish lines that have become IKEA's trademark. And then watch the results- customers who enter the store planning to buy a $40 coffee table and end up spending $500 on everything from storage units to kitchen ware.
IKEA aims to reduce the price of its offerings by 2%-3% per year, which requires relentless attention to cost cutting. With a network of 1,300 suppliers in 53 countries, IKEA devotes considerable attention to finding the right manufacturer for each item. Consider the company's best selling Klippan love seat. Designed in 1980, the Klippan with its clean lines, bright colors, simple legs and compact size has sold some 1.5 million units since its introduction. Originally manufactured in Sweden, IKEA soon transferred production to lower cost suppliers in Poland. As demand for the Klippan grew, IKEA then decided that it made more sense to work with suppliers in each of the company's big markets to avoid the costs associated with shipping the product all over the world. Today there are five suppliers of the frames in Europe, plus three in the United States and two in China. To reduce the cost of the cotton slipcovers, production has been concentrated in four core suppliers in China and Europe. The resulting efficiencies from these global sourcing decisions enabled IKEA to reduce the price of the Klippan by some 40% between 1999 and 2006.
Despite its standard formula, however, IKEA has found that global success requires that it adapt its offerings to the tastes and preferences of consumers in different nations. IKEA first discovered this in the early 1990s when it entered the United States. The company soon found that its European style offerings didn't always resonate with American consumers. Beds were measured in centimeters, not the king, queen and twin sizes that Americans are familiar with. Sofas weren't big enough, wardrobe draws were not deep enough, glasses were too small, curtains too short, and kitchens didn't fi t U.S. size appliances. Since then IKEA has redesigned its offerings in the U.S. to appeal to American consumers, and has been rewarded with stronger stores sales. The same process is now unfolding in China where the company plans to have 10 stores by 2010. The store layout in China reflects the layout of many Chinese apartments, and since many Chinese apartments have balconies, IKEA's Chinese stores include a balcony section. IKEA has had to adapt its locations to China, where car ownership is still not widespread. In the West, IKEA stores are generally located in suburban areas and have lots of parking space, but in China they are located near public transportation, and IKEA offers delivery services so that Chinese customers can get their purchases home.
How would you characterize IKEA's original strategic posture in foreign markets? What were the strengths of this posture? What were its weaknesses?

Answer 2

IKEA's original posture in foreign markets has been low prices. In fact low prices of the products have been the central part of business strategy of IKEA. The company has always been striving to drive down the costs as much as possible. Company finds new ways to reduce prices. After that these ways are incorporated in its business model. The main aim behind this strategy is to target middle class of each country the company is operating in.
Strengths of the strategy of IKEA are as below:
- Company need not pay much attention on different kind of marketing strategies. Since the core concept behind business model is same worldwide, the company saves its precious time and resources on developing new strategies of marketing in different regions it enters.
- Brand image of the company remains same and supportive in all parts of the world.
Weaknesses of the strategy of IKEA are as below:
- In markets where consumer's tastes and preferences are quite different, exactly same strategy may not work. So, company needs to customize its plans to some extent without affecting its core business model.
- Government policies are not same worldwide. IKEA may face difficulties in implementing its policies uniformly in all countries.
- IKEA may also face resource constraints. While its strategy may be cost effective in one country, it may not be in another.

Question 3

Are the following global industries or are they characterized by local responsiveness: bulk chemicals, pharmaceuticals, branded food products, moviemaking, television manufacture, personal computers, airline travel, and cell phones?

Answer 3

Bulk chemicals : Global Industry
Pharmaceuticals : Global Industry
Branded food products : Followed by local responsiveness
Movie making : Followed by local responsiveness
Television manufacture : Global Industry
Personal computers : Global Industry
Airline travels : Followed by local responsiveness
Cell phones : Followed by local responsiveness

Question 4

IKEA may be the world's most successful global retailer. Established by Ingvar Kamprad in Sweden in 1943 when he was just 17 years old, the home furnishing superstore has grown into a global cult brand with 230 stores in 33 countries that host 410 million shoppers a year and generates sales of €15 billion ($18 billion). Kamprad himself, who still owns the private company, is rumored to be the world's richest man.
IKEA's target market is the global middle class who are looking for low priced but attractively designed furniture and household items. The company applies the same basic formula worldwide- open large warehouse stores festooned in the blue and yellow colors of the Swedish flag that offer 8,000 to 10,000 items from kitchen cabinets to candlesticks. Use wacky promotions to drive traffic into the stores. Configure the interior of the stores so that customers have to pass through each department to get to the checkout. Add restaurants and child care facilities so that shoppers stay as long as possible. Price the items as low as possible. Make sure that product design reflects the simple clean Swedish lines that have become IKEA's trademark. And then watch the results- customers who enter the store planning to buy a $40 coffee table and end up spending $500 on everything from storage units to kitchen ware.
IKEA aims to reduce the price of its offerings by 2%-3% per year, which requires relentless attention to cost cutting. With a network of 1,300 suppliers in 53 countries, IKEA devotes considerable attention to finding the right manufacturer for each item. Consider the company's best selling Klippan love seat. Designed in 1980, the Klippan with its clean lines, bright colors, simple legs and compact size has sold some 1.5 million units since its introduction. Originally manufactured in Sweden, IKEA soon transferred production to lower cost suppliers in Poland. As demand for the Klippan grew, IKEA then decided that it made more sense to work with suppliers in each of the company's big markets to avoid the costs associated with shipping the product all over the world. Today there are five suppliers of the frames in Europe, plus three in the United States and two in China. To reduce the cost of the cotton slipcovers, production has been concentrated in four core suppliers in China and Europe. The resulting efficiencies from these global sourcing decisions enabled IKEA to reduce the price of the Klippan by some 40% between 1999 and 2006.
Despite its standard formula, however, IKEA has found that global success requires that it adapt its offerings to the tastes and preferences of consumers in different nations. IKEA first discovered this in the early 1990s when it entered the United States. The company soon found that its European style offerings didn't always resonate with American consumers. Beds were measured in centimeters, not the king, queen and twin sizes that Americans are familiar with. Sofas weren't big enough, wardrobe draws were not deep enough, glasses were too small, curtains too short, and kitchens didn't fi t U.S. size appliances. Since then IKEA has redesigned its offerings in the U.S. to appeal to American consumers, and has been rewarded with stronger stores sales. The same process is now unfolding in China where the company plans to have 10 stores by 2010. The store layout in China reflects the layout of many Chinese apartments, and since many Chinese apartments have balconies, IKEA's Chinese stores include a balcony section. IKEA has had to adapt its locations to China, where car ownership is still not widespread. In the West, IKEA stores are generally located in suburban areas and have lots of parking space, but in China they are located near public transportation, and IKEA offers delivery services so that Chinese customers can get their purchases home.
How has the strategic posture of IKEA changed as a result of its experiences in the United States? Why did it change its strategy? How would you characterize the strategy of IKEA today?

Question 5

Discuss how the need for control over foreign operations varies with the strategy and distinctive competencies of a company. What are the implications of this relationship for the choice of entry mode?

Question 6

Licensing proprietary technology to foreign competitors is the best way to give up a company's competitive advantage. Discuss.