PART B: CASE STUDY. ANSWER BOTH QUESTIONS [20 MARKS] Case study: IKEAs foreign entry strategy

IKEA is an active player in the international market. The decision to enter a new market is based on very detailed market research and IKEA operates a franchise system with each of 445 IKEA stores in 52 countries. The franchise model allows IKEA to raise capital, benefit from royalties and tap into local knowledge. The IKEA group carefully monitors the performance of each of its stores because poor performance in one retail outlet could have a damaging effect on the IKEA brand as a whole. IKEAs founder, Ingvar Kampard, recognised the benefit of an internationally distributed supply chain very early on when he changed from Swedish to Polish sources of supply in order to cut costs. As the company grew and entered new markets, its value chain became more distributed. Whilst product design remained in Sweden, the company moved its headquarters to the Netherlands in 2001 and located its European logistics center in Germany. IKEA has its own manufacturing subsidiary, Swedwood, which manufactures and distributes wooden furniture and controls the entire value chain by managing an operating long-term forest contracts, saw mills, board factories as well as producing and distributing self-assembly furniture. Swedwood itself has internationalised and now owns and operates facilities in number of countries including the US and Russia. In addition IKEA has a network of about 2000 other suppliers distributed around the globe. Suppliers are chosen primarily for their ability to provide specific products at low cost and IKEA closely monitors their adherence to its product and process specifications. IKEA has sought to introduce its Swedish-style home decor to the world by standardising not only its stores and product range, but also its management practices in all countries in which it operates. On the outside IKEA stores look the same regardless of where they are located. They are all painted blue and yellow reflecting the colors of the Swedish flag and all offer much the same retail experience. Nonetheless, IKEA has had to adapt to some local conditions. In Japan, for example, space is at a premium. IKEA has had to reduce the size of many of its furniture items so that they fit Japanese rooms which are typically smaller than those in other countries. Similarly, they have had to ensure that their kitchen cabinets comply with Japanese earthquake standards by fitting them with automatic locking systems. In contrast, IKEA has had to increase the size of its furniture in the US. European beds are narrower than Americans are used to and cabinet drawers too shallow to take bulky sweaters. IKEA has also faced pressures to make adjustments to its management practices which have met with different responses in different countries. Whilst many European employees may be comfortable with the companys somewhat paternalistic style, flat structure and informality, employees in some parts of the world have been less happy with these arrangements and see the flat structure as limiting opportunities for progression.

Case questions (Each answer should not go beyond 300 words)

1. Given IKEAs resources and competences, do you think a franchise model best suits IKEAs internationalisation strategy? Discuss and explain. [10 marks]

2. IKEA faces significant rivalry from other Scandinavian producers and competition from low-cost manufacturers in China and other parts of Asia. Identify and analyse IKEAs strategic capabilities and competitive advantages in its competition in the international market. [10 marks]