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+ Fit to width IN Page view IKEA: Entering Russia When Swedish furniture retailer IKEA's country manager arrived in Russia to set up the first store, the country was in a state of deep shock. It was 17 August 1998, the day the Russian monetary policy finally collapsed. Almost all foreign companies were leaving the country, but IKEA stayed and this may turn out as a very favorable strategic move from a long-term perspective. The decision to stay in Russia in 1998 was, however, taken almost entirely by one man, IKEA's founder Ingvar Kamprad. During one of his visits to Russia, he shared his vision of how IKEA Russia would develop in the coming years: "IKEA becomes the main supplier of home furniture to the normal Russian families and our sales in Russia will exceed those in our old home country Sweden. To make this vision come true, he stood in opposition to the whole management group when the decision to enter the country was taken The fact that IKEA's owner saw Russia as a long-term investment also enabled the management to apply a long-term view that may become a competitive advantage in the years to come. As a Russian manager commented: "We have been on the market here for three and a half years now, and we can note the tendency, and if the tendency grows as quickly as it has done during this time, the market will be unlimited for a company like IKEA, and for most Western companies who are now interested to come here." Transferring the IKEA Culture and Values to Russia IKEA is a leading home furnishing company with more than 200 stores in 32 countries, selling a range of some 10 000 articles and having more than 84000 employees within the IKEA group. The company was founded by Ingvar Kamprad in Smland, a province in southern Sweden where people are renowned for working hard, being thrifty and innovative, and achieving big results with small means. Today, the IKEA group is controlled by a private foundation and the company is thus not on the stock market. Ingvar Kamprad's innovative idea was to offer home furnishing products of good function and design at prices much lower than competitors by using simple cost-cutting solutions that did not affect the quality of products. This is a prominent philosophy at IKEA, which is now realizing its ambitious plans in Russia. IKEA has been operating in Russia since 1991 but opened its first store in Khimki, Moscow, only in March 2000 Since that time, three new stores have been opened - one more in Moscow (in December 2001, one in St Petersburg in December 2003, and one in Kazan in March 2004). All Russian operations are controlled as fully owned ventures by the IKEA group IKEA is characterized by a strong brand based upon its vision to create a better everyday life for many people. A set of explicit values is linked to the vision and plays a guiding role in the strategy development. The values are the foundation of a culture called internally the 'IKEA Way.' which is an expression of IKEA's history, the product range, the distribution system, the management style, the human resource ideas, etc. Brand and cultural values coincide and affect the strategy, organizational processes, product development and customer relationships. Thus, the key value of cost-consciousness that lies in the heart of IKEA's flat-package concept dictates the necessity of global sourcing defines the customer relationship where 'IKEA does a half and customers do a half and guides the product design, choice of materials and logistics. The value of simplicity is reflected in the fast planning process, behaviors and routines governed by common sense. and straight-forward relationships with suppliers and customers as well as in the product development process. By linking vision and values, IKEA creates a firm platform for entering a new market. It was the overall company vision that guided the desire to establish business in Russia, and especially the impression that few companies in Russia focused on solving the needs of the many people by offering attractive products at reasonable prices. However, the initial knowledge about the Russian market as IKEA decided to open its first store in Moscow was very scarce. No special marketing research was carried out before setting up the store. A company representative commented: 'If we had done such a research, it should have shown that the consumption level is too low, the individual income level is too low, there are no traditions of retailing, which result in the fact that consumers generally don't go to the chains to shop In each market IKEA enters it must recreate its company culture from scratch. In Moscow that included the replication of the store design and layout in accordance with the latest version of the existing store and an extensive cultural education that was carried out by the team of experienced IKEA people. It involved introducing the newly employed co-workers to IKEA routines and cultural traditions as well as helping them to develop the necessary competences (e.8. teamwork, leadership skill diversity, etc.) and the IKEA management style. It has its roots in Swedish leadership style and gives responsibility to each co-worker and emphasizes "learning by doing. In the Russian case, the store played an additional role by becoming the training site for new employees who later got involved in new projects or formed teams for the newly opened stores - a sort of cultural incubator. The extensive in-store training gave some very positive results. According to a store manager, the second store in Moscow could operate well from the first minute it opened because the whole staff was trained in the first store working with corresponding jobs: 'Here they just started and then they went on like this! No downturn, no nothing, no reaction, they just knew what to do!' The role of IKEA's experienced management staff has also been indispensable in Russia. A main task is to train and prepare the local people who will be ready to lead further the expansion process. As a manager has commented about his management group: 'My main task is really to make this group more Russian and to export people for the upcoming expansion. The demand for knowledgeable Russian staff is indeed very big with two stores just opened in St Petersburg (12 December 2003) and Kazan (22 March 2004). Development of experienced staff is impossible without extensive training. As a whole, there is thus a strong emphasis on the vital role of training at IKEA Russia, at an overall management level as well as the store level. The local staff on the store level with a primarily academic education and a prioritization of abstract knowledge is faced with the necessity to translate it into concrete sales figures. This includes both cultural training and education in IKEA values and different levels of professional on-the-job training Developing and Positioning the Retail Proposition in Russia Market information was thus not regarded as necessary for selecting the Russian market. According to a manager, IKEA knew that a lot of people live in Moscow so that at least one store should succeed. A survey giving that information was considered as unnecessary. Furthermore it was considered less important to develop specific strategies for the market in advance. Instead, entry was based on the view that there is a need to live and learn about the new market before setting the strategies. Within IKEA, setting up a new business was described as very little theory and very much practice. However, once the decision was made to enter the Russian market IKEA specialists were sent to Russia to make investigations, but data about the Russian market was often uncertain and difficult to assess. For example, one initial conclusion was that the IKEA store should be situated near a Metro station since there were hardly any cars in Moscow. Five years later, however, traffic jams were among Moscow's biggest problems. The country manager argued that instead of information about the market it is better to acquire market knowledge and the best way to get that knowledge is to live and learn in the market. IKEA introduces more or less the same product range in all new countries - irrespective of what is considered popular by local customers. In Russia IKEA's Scandinavian furniture design is in some contrast to the historically preferred dark wood, massive, lacquered, expensive furniture. In order to support this strategy. IKEA most often identifies the potential needs that are similar across markets: 'We have the IKEA range and we have the market knowledge and the people needs, which are pretty much the same needs in Moscow and in Malm.' Another IKEA approach was to create needs that could be satisfied within the range, and to inspire customers with numerous new solutions based on the existing range. The theme 'Living with small spaces' was one such solution used in Russia. The storage solutions are among those most popular in Russia since the average apartments are small and often house several families. Cheap and nice looking accessories for the home also became very popular with Russian customers and accounted for a big part of the stores' turnover. IKEA's basic strategy - neither to adjust the style of the products to the local needs nor follow the competitors' product development - was central to preserving the IKEA concept and image: 'The range is supposed to be IKEA unique and typical IKEA' All range products are divided into four major categories or styles: Scandinavian, Country. Modern and Young Swede, which are clearly distinguished in all business areas across the store. One of the reasons why IKEA was successful with its standard product ranges in Russia was the fact that several of these IKEA ranges emphasize the modern style, which is very different from the traditional Russian style but is attractive and new for the Russian customers since it symbolizes change. An important part of the market approach was to identify the needs that are not fully recognized and to teach customers what IKEA is about. IKEA's retail proposition is based to a large extent on its Swedish roots and history, which is, in turn, very different from Russian traditions. Therefore, learning as much as possible about the local culture and customer needs was considered essential. For example, IKEA practiced home visits to customers in order to talk to people, see how they lived and used their homes and to identify potential needs and wants not fully realized by customers themselves. Understanding the local family conditions and furnishing traditions then provided a basis for an effective introduction and marketing of the IKEA concept. As exemplified by a store manager, the main priority in Russia is the normal living costs; then comesthe car and TV and afterwards maybe a trip abroad. The idea of changing people's priorities by explaining to them that a beautiful home does not have to cost a for- tune, and they can afford both the wardrobe and a trip abroad, is an essential leitmotiv of the marketing campaigns in Russia. Since IKEA was totally new to many Russian customers, to bring people as much as possible in the store in order to learn about IKEA and get a positive attitude was a main goal from the very beginning. IKEA put a strong emphasis on making the Russian customers feel welcome and important in the store, which was very unusual for Russian stores at the time. The way the range was presented and the opportunity to touch and test everything in the store also made the products much more desirable to the Moscow customers. This was a new and unusual retail approach. However, a great deal of IKEA's success with the product range can be attributed to their work to influence the customer's decision making. One example of how IKEA has considered the local preferences is in developing the room settings to reflect local conditions in terms of apartment sizes and the local traditions of furnishing. As discussed earlier, it is vital to understand the local customer needs and transfer IKEA's range into relevant solutions for the families where three generations often live together in small apartments of 5060 square metres. It should also be possible to 'mix and match the range with the Russian home. The importance of positioning the IKEA concept in accordance with the desired image from the very beginning was critical. This meant building an image of a low price brand that also guaranteed attractive and modern products of good quality. To achieve this, IKEA has faced many challenges such as high customs fees, necessity to purchase more from the local producers; difficulties in finding and developing suppliers in Russia; still low buying power of Russian customers, etc. For IKEA, it was critical to associate the low price with meaning. For Russian customers low price was very strongly related to unattractive products of poor quality, and one challenge has been to overcome this and explain how it is possible to offer good products at low prices. Therefore, it has also been an ambition to provide the Russian market with the best and most attractive IKEA products. Marketing communications became an important means to create the right image of IKEA in Russia. The ways to communicate the image were many: the outdoor product ads (prices). image ads in the glossy magazines, TV (though IKEA has used this very restrictively due to high costs), articles in the newspapers (press coverage has become very broad and quite positive towards the IKEA culture and philosophy). Another very important communication means in Russia is the buzz network or word-of-mouth communication that works very effectively. In addition, IKEA had an open and friendly approach towards Russian journalists. This was in sharp contrast to most other large organizations. IKEA was completely open to the journalists and introduced them to the IKEA way and values by organizing press trips to Almhult in Sweden to learn how the range is created. The result was that the press coverage of IKEA in Russia became much more positive Government authorities and officials of different ranks were also critical stakeholder groups. Their goodwill and support was crucial for IKEA's expansion in Russia. What played a pivotal role in the present success of IKEA's operations in Russia was the fact that IKEA was the only company that stayed in Russia after the currency devaluation and subsequent economic collapse in August 1998, when almost all foreign companies left the country. That created an immediate effect of trust and willingness to cooperate with IKEA on the part of the major Russian politicians. IKEA's positive image in Russia plays an increasingly important role in further expansion, since it is crucial for creating new contacts with the local government and finding sites for the new stores in the distant regions. Internal organizational processes also supported the positioning strategy. Common activities carried out on a regular basis were informal and formal discussions at the store level, where co-workers from one or several store departments take part. The discussions covered different customer issues and the best ways to present the range to the customers. Market data and experience were also transferred and shared within and between different departments and units at the company. The store managers and department heads meet regularly to share the sales information and the latest decisions regarding the room settings, etc. Data about local customer perceptions and opinions about IKEA's different products and service parameters, collected by the store departments' heads, were also quickly reported to the marketing and sales department at the service office in Moscow. This information in most cases is about product pricing with the goal to lower the price for a specific product. These issues were discussed at the weekly and even daily store meetings since the speed of reaction might be very crucial for the store sales statistics. The topics included outgoing articles, a new range, and different solutions to present it, and discussion took the form of an informal exchange of opinions. The inter- departmental and local corporate flows of information were prerequisites of the fast decision making at IKEA. For example, the new product development supported the trading organization and the retailing organization in Russia with ideas about new products and supplier capabilities. In early 2004 IKEA thus had four stores operating in Russia, two of them occupying plots on the outskirts of Moscow, one in Khimki to the north of the city, and the other in Tyoplyi Stan to the south one store in St Petersburg and one in Kazan. The company also opened its Mega Mall shop- ping complex at the Tyoplyi Stan site. The mall accommodates around 210000 square metres of retail space and 240 retail outlets. Construction of another Mega Mall is now under way at the Khimki site, which is going to be 10 per cent larger than the Tyoplyi Stan Mall, and will house more than 250 retailers. The Mega Malls were treated as a separate business, which was an addition to IKEA's core concept. Normally. IKEA does not manage or develop shopping centres, but this was considered necessary in Russia due to its lack of an existing structure of large branded stores and external as well as central shopping centres of a Western kind. Previously, many Russians shopped for furniture and other products in outdoor markets or at smaller, local stores. From IKEA's perspective, developing a whole mega mall was part of attracting Russian customers to the stores. The Future As a whole, IKEA has made substantial investments in Russia, and the turnover is increasing rapidly. IKEA was also hoping to see profit in Russia in the near future. It would, however, still be needed to back up further expansion: 'As soon as we make a profit, I can see at least ten years ahead when we will need all the money that is generated in Russia in Russia. So, the day when we will start to take out profit from Russia and use it in other countries is perhaps 15 years away In the near future IKEA plans to open 13 new stores in Russia, with at least two openings a year. A project team has been made responsible for the expansion - to look for new cities, get permissions, build a store and recruit and educate IKEA co-workers. As a whole, experiences and knowledge in general about the process of opening a new store, as well as specific market knowledge, is important in this expansion phase. One example is the knowledge about potential sites - where to build new stores. The choice of cities is to a large extent based on the local attitude and IKEA's intention is to establish new stores only in cities where the authorities welcome the company. However, as a manager argued, the fact that authorities are hesitant towards the establishment of a new large store in the area can be seen as an opportunity. If it is difficult to enter a new city or region, other retailers will also face difficulties and may give up the attempt. IKEA can, on the other hand, take advantage of its previous experiences regarding this type of challenge and may eventually open a new store in an area with little competition. The realization of these vast plans will be to a large extent dependent on the progress in IKEA's local buying and production in Russia. An increased capacity and bigger volumes by the Russian suppliers will allow the company to cut costs and lower prices in Russia as well as to export the Russian-made furniture to its other markets. As a matter of fact, IKEA prices are still very high for many ordinary Russians. For example, even in St Petersburg, the second largest city, the shopping power is 30 to 50 per cent lower than in Moscow, where an average purchase value equals that in Stockholm As a whole, almost all IKEA managers have perceived the cultural differences between Sweden and Russia as very substantial. It is clear that the cultural aspect will continue to play a major role when considering that many of the regions and cities that IKEA plans to enter in the future are likely to be even more different from the West when compared to the major cities of Moscow and St Petersburg. As one manager commented, 'Everything we believed would have been a problem when we came to Russia has turned out to be no problem at all. Everything we believed would work nicely was and still is a problem." QUESTIONS 1. Can you see any alternative entry strategy that IKEA could have applied when entering the Russian market? What would have been the advantages and disadvantages of these alternative strategies? 2. To what extent do you think that IKEA's entry strategy for Russia is based on adaptation and on standardization? How are those approaches balanced? 3. In what respects do you think that IKEA's market behavior in Russia has been different due to the fact that Russia is an emerging market? 4. IKEA has a vision of building up a global brand. Can IKEA be regarded as a global brand? How does IKEA's marketing strategy in Russia influence/contribute to the company's brand vision? 5. What do you think the ownership form means for IKEA's entry strategy and its long-term activities in the Russian market? 6. Discuss IKEA's opportunities to achieve long-term success in the Russian market. What are the main challenges that IKEA faces? How can they be managed