Strategies for Market Entry and Expansion

Strategies for Market Entry & Expansion

Abstract

In the following paper, the strategies of the Swedish company IKEA for market entry to Japan are discussed. Based on reliable sources regarding the globalization of IKEA the reader can follow the key issues and problems the company had to face when entering the Asian market. The report starts off with an introduction of IKEA entering Japan case so the reader can have a broader understanding of the why the case is considered to be interesting and educational regarding the project topic Strategies of Market Entry and Expansion. Short but informative background of IKEA’s history, type of products offered on the market, and its culture are presented as well. IKEA’s strengths and weaknesses are also discussed for better understanding the company’s profile and therefore the abilities it has for entering foreign markets. After giving a full picture of the company’s profile IKEA’s market entry is discussed based on the Japanese market environment. It is followed by the most important part of the paper which presents and analyzes the problems which IKEA has faced, as well as the operations and strategies it has implemented in Japan. Since the report aims to give learning outcomes, several factors of success and failures are presented which provide a more comprehensive idea of IKEA’s expansion to Japan. Lastly, the conclusion gives a summary of the main points of the paper together with some useful learning outcomes. The analysis of the case IKEA entering Japan lead to an important message regarding the expansion of companies – no matter how big and recognized a company is and has international experience, it must think globally but in the same time act locally. IKEA’s experience in Japan sheds light on the importance of conducting research, knowing customers’ preferences, and understanding cultures as main success factors in planning strategies for entering foreign countries.

1. Case Background

IKEA is one of the biggest international retail companies worldwide; and expansion is a strategy which has helped the company to accomplish its well known brand image and strong position among its competitors. The Swedish company has started its expansion by entering its nearest countries such as Norway and Denmark in its early years of operation. (IKEA Group Corporate site) Later on IKEA considered expansion to Asia by starting with Japan referred to as “the second-biggest economy and retail market in the world” by Tommy Kullberg, the president and CEO of IKEA Japan from 2002 until 2006. (Wijers-Hasegawa, 2006) Detailed factors and market environment conditions which have contributed to the company’s decision to enter Japan are discussed later on in the paper. Although, IKEA was successful in Europe and North America, the company had serious obstacles and difficulties expanding into the Asian market. Since, in the early 80’s most of the Asian countries were closed to the outside world, Japan was considered by IKEA as an attractive market to start its performance on the Asian continent. (Encyclopedia of the Nations) IKEA’s attempt to successfully enter the Japanese market is an interesting and educational case due to the fact that the company has entered Japan twice. In 1974 IKEA came into Japan by franchising with a Japanese company in order to avoid possible financial risks in the new market. (Wijers-Hasegawa, 2006) Due to differences in culture, consumer behavior, and lifestyle IKEA has experienced a failure and has withdrawn in 1986. (Lane, 2007)  President and CEO, IKEA Japan K.K., Tommy Kullberg, has stated that the company’s failure happened as a result of lack of international experience and knowledge of the Japanese consumers. The poor cooperation with the Japanese company IKEA had franchised with also has contributed to the IKEA’s failure of expansion to Japan. (Japan External Trade Organization)

Based on the unsuccessful first try of market entry but carefully considered marketing and consumer factors, IKEA prepared itself and expanded a second time to Japan twenty years later – in 2006. In the second try the chosen market entry is a self-owned store established by the group’s own direct investments. (Japan External Trade Organization) Nowadays, IKEA is successfully operating five stores in Japan – Tokyo, Kokoku, Port Island, Osaka, and Saitama. (IKEA Group Corporate site) The market entry and operations of IKEA’s first try to expand in Japan are scarcely discussed since the aim of the paper is to analyze updated facts and figures. The report concentrates on the second try which is most recent, thus attractive for the learning outcomes of the project. Nonetheless, some essential factors which contributed to the company’s failure in the first try will be taken into consideration when analyzing the key issues of IKEA’s entry to the Japanese market in general.

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2. IKEA Company Overview

2.1 History

IKEA is a Swedish furniture company established by Ingvar Kamprad in 1943. It first store was opened in Almhut, Sweden offering completely different products than nowadays such as pens, wallets, greeting cards. However, today IKEA offer its customers price affordable and well-designed furniture which are self-assembled in order to reduce storage space which is the well-known style of the company.  The IKEA’s founder, Ingvar Kaprad, decided to create an ownership structure which is independent, therefore The IKEA Group was formed with a foundation based in the Netherlands. IKEA is a major retail company which operates in 36 countries with 296 stores which are either franchisees or self-owned ones. Based on the IKEA financial facts of 2008 the IKEA Group total sales result in 21.2 billion euro with top sales in Germany, USA, and France. (IKEA Group Corporate site) 

2.2 Products

IKEA offers a wide variety of products starting with furniture as well as accessories for every room of a house and ending with children toys. The company tries to offer its customers everything they might need to feel comfortable and happy in their household. IKEA presents innovative and well-designed products at a good quality and but at prices which customers can afford. The company focuses on efficiency and low cost, and at the same time preserves good quality and friendly service. In order to be unique, efficient, and let the customer be involved in the IKEA’s spirit the company has made the whole purchasing process individually involving – from choosing the product, picking it up at the self-service area of the store, transporting it, to self-assembling it. (IKEA Group Corporate site) 

2.3 Philosophy

The firm’s philosophy is believed to be the strongest competitive advantage which is the continuous strives of improvements. Willingness of support to each other, simplicity, responsibility and enthusiasm makes the IKEA’s style unique by trying to keep the Swedish tradition in every aspect of the company’s production. IKEA’s vision is “…to offer a wide range of well-designed, functional, home furnishing products at prices so low that as many people as possible can afford them. (IKEA Group Corporate site) 

2.4 Strengths and Weaknesses

In order to better analyze IKEA strategies of operation and business management, its strengths and weaknesses should be emphasized so that the reader receives a better understanding of the company’s advantages and disadvantages. IKEA is one of the major retailers in home furnisher and other home wares, therefore is a company whit a very-well known international brand image. The company is on the 35th position in the rank list of the best global brands around the world. Due to the strong brand equity, most of the IKEA customers are brand loyal which ensures repetitive purchases as well as easiness when expanding into markets abroad and introducing new products. (Ranking the Brands)

The second important strength which makes IKEA a successful company not only regionally but internationally as well is the company vertical integration. All of the production process of furniture is carefully controlled by IKEA’s operation. Since the efficient manufacturing and distribution of the products are significant to the maintaining of low cost on the market, the company has introduced a retail network of 262 IKEA stores with 31 distribution centers and 1,350 suppliers. (IKEA Group Corporate site) 

Regarding the company’s weaknesses in general, the only one which could be considered of an importance is the product recalls which often happen within the company. These defects in the products result in decreasing the brand equity and negativism in the brand image. (IKEA Group Corporate site) 

3. IKEA in Japan

3.1 Market Environment

In the beginning of the 21st century, Japan has started to become more and more attractive emerging market for foreign investments. The Japanese government has succeeded to keep the inflation rate low, the economy was recovered and there was a high increase in plant and equipment investments. The service sector of Japan was growing as well and all of these factors have led Japan to become the world’s second largest economic and technologically advanced power after U.S.A. (Encyclopedia of the Nations)  Due to the growing economy the Japanese furnishing sector has expanded and became a focus of many local and foreign companies. One of the reasons why IKEA decided to enter in 2006 is the deregulation of Japanese Large Scale Retail Store Law which affected the ability of foreign companies to invest in Japan.  (Japan External Trade Organization) Another positive change which occurred concerning the furniture sector is the consumers’ encouragement and interest of seeking household products for self-designing their homes. (The Local Sweden’s News in English) All of the above mentioned factors are important for the IKEA consideration to choose the Japanese market to enter. Since Japan is economically, politically and technologically stable the cost and risk related to operating a business there are relatively low. (Hill, 2007)

3.2 Market Entry

IKEA chose Japan because of its stable economy and consumer’s interest in Western furniture. In 2006, the Swedish furniture retailer entered Japan with a directly owned mega store located in Tokyo. (Japan External Trade Organization) Owning their subsidiary, IKEA has a tight control over the store’s operation and receives the full profit of its sales in Japan. The scale of entry the second time in Japan was a large one which resulted in a big advantage of the company over its competitors. Not all firms have the resources to manage a production of a large scale since it is riskier and the company needs to be familiar with the market. Therefore, by entering on a large scale and make such a commitment on their strategy gives customers and distributors the impression that IKEA is a famous and strong company which has a long run operations and ideas. This makes IKEA an attractive and stable company which influences the competition on the market. (Hill, 2007)

4. IKEA Operations in Japan

IKEA has successfully settled in Japan in its second try although the problems it needed to face and deal with. One of the main difficulties the company had to cope with is the cultural distance which has a major influence on the Japanese customers – their lifestyles, type of household products, and their behavior in general. Although IKEA is a big furniture retailer with a serious experience of going internationally, the company had to manage a problem related to the significant cost reducing advantage in its operation; the self-assemble kit or “flat packs” was a downfall for IKEA since Japanese people were not familiar with assembling furniture by themselves. (Wijers-Hasegawa, 2006) This problem has emerged from the cultural distance between the IKEA in the Japanese market which leads the company to a failure. The company had to consider significant factors regarding adaptation of the products they offer in Japan such as advertising, promoting, and packaging. In order to deal with the mentioned challenges in the Japanese market IKEA considered to make a market research in order to gather the required knowledge of understanding what Japanese customers want and need. Based on undertaken surveys and the acquired marketing information, IKEA realized that Japan will not get familiar with the self-assembly issue therefore the company started providing deliveries to its customers including furniture assembly with extra charge This tactic was perceived positively by Japanese since they do not mind to pay higher prices for better convenience and safety. (Wijers-Hasegawa, 2006)

One of the main problems which IKEA needed to take into consideration is related to Japanese people lifestyle. Since Japan is a very small country in area but with a lot of population, people live in significantly small space which results in the need of smaller in size furniture for their household compared to most of the other countries in which IKEA operates. The cultural difference also has an influence on the Japanese customers’ preferences since Japanese value the quality of products the most. IKEA offers furniture at a very low price therefore Japanese accept the products as ones with a low quality, thus decreases their interest in purchasing. (Wijers-Hasegawa, 2006) Since sales are the most important factor regarding profit and successful performance for a company, IKEA had to refer to a solution which can attract Japanese customers to buy IKEA’s furniture but at the same time not to result in high cost and time consuming. Hence, IKEA chose a winning strategy by selecting/identifying appropriate size of around 8000 items out of 10,000 products to offer on the Japanese market. (Wijers-Hasegawa, 2006) In this case the company does not spend money on new designs and manufacturing techniques but deals with the issue in a very efficient and effective way. Regarding the high quality preferences of the Japanese, their behavior towards affordable price products of IKEA starts to change towards acceptance increasingly by the time they get more familiar with the company and its products. (Capell, 2006)

Another factor which is of an importance regarding IKEA successful operations is the  size of the company and therefore the size of the store has a strong influence on the Japanese customers. The more famous the company and the bigger its store is the more attractive it is to Japanese. As mentioned in the first part of the report, the scale of entry is of a great importance when expanding abroad. (Hill, 2007) Therefore, in its second try to enter Japan IKEA opened a mega store to which customers were invited to experience the IKEA style through 40, 000 square meter showroom together with 10,000 items on sale (Wijers-Hasegawa, 2006). These were specially designed to appeal Japanese taste – small furniture in size, simple design, and products for every room in a household.  Opening a mega store gave the IKEA the opportunity to attract and amuse customers by offering a restaurant with Swedish food and playground for children. (The Local Sweden’s News in English, 2006)

The last but not the least important obstacle IKEA had encountered entering Japan is insufficiency in their supplying chain. Since Japan is the first country to be entered in whole Asia, IKEA had to transport products from Europe which made difficult for the company to keep low prices. In order to cope with the problem, IKEA decided to provide supply centers and warehouse in Asia which simplified the shipping of products to Japan and resulted in low costs as well as in non-delayed stock. (Capell, 2006)

5. Key Factors

5.1 Failure Factors

As mentioned in the introduction part, IKEA’s first try to enter Japan in 1974 was not successful and the company had to withdraw. (Wijers-Hasegawa, 2006) However, the failure did help the company to realize the problems and improve its performance in the second time of expansion to Japan so the two cases are inevitably connected. Therefore, after discussing the key issues and problems which IKEA had to deal with in its second try, the paper now focuses on the key success and failure factors combined from both IKEA’s attempts to enter Japan.

One of the main factors which lead IKEA to a failure in the first try of its entry to Japan is the wrong mode of entry the company had chosen – franchising with large Japanese Company. Due to the Japanese Large Scale Retail Store Law IKEA had to enter Japan with the help of a domestic company. However, IKEA did not experience the right collaboration with the foreign company in order to have a positive progress on the Japanese market. (Japan External Trade Organization) Another failure factor is the rush jumping of IKEA into Japan with small size store without any knowledge of the Japanese customers’ behavior or lifestyle. The Asian customers were not familiar with the self-assembly of furniture which resulted in low sales. (Wijers-Hasegawa, 2006) Therefore, IKEA failed in adapting its products, services, and operations to the Japanese market and customers. This low degree flexibility and lack of marketing knowledge lead the company to its downfall. The last failure factor which had a strong influence on IKEA’s withdraw is the bad strategic decision making process which the company had implemented – no adequate planning of its operations as well as lack of understanding of the market they had entered. (Capell, 2006)

All of the above mentioned failure factors are regarding the first try of IKEA entering Japan in 1974. The second try of the company in 2006 has been accepted as a completely successful one since the company has already five highly profitable stores around Japan nowadays and continue to expand and improve. (IKEA Group Corporate site) Therefore, there are no major failure factors which threat IKEA’s operations in Japan nowadays.

5.2 Success Factors

The success of IKEA in the second try results mainly from doing research and surveys in order to understand the Japanese customers and their culture. IKEA attempted a strategy of getting to know the Japanese even better by visiting customers’ homes and gathering knowledge about their lifestyle. (Wijers-Hasegawa, 2006) Another success factor is the solution IKEA found regarding the need of small size furniture on the Japanese market. The selection of appropriate products for Japanese from the already existing designs of furniture IKEA produces is a smart and effective strategy since it does not bare additional costs but at the same time satisfies the Japanese taste. (Capell, 2007) The mode and way of entry to Japan gave IKEA a fresh and stable start to its successful performance. IKEA’s decision to expand to Japan by wholly owned subsidiary and to open a mega store as the first one in Japan resulted in full control over their operations and profits as well as maximum attraction of customers in the very beginning. (The Local Sweden’s News in English) Finally, instead of shipping products from Europe, IKEA saved money on transport and stock delays by setting up a supply chain in Asia. Nowadays, more than half of the selected items for the Japanese customers are made in Asia. (Wijers-Hasegawa, 2006)

6. Conclusion

6.1 Summary

IKEA is accepted as a successful international company which has a firm understanding in the nature of markets as well as what household products do customers desire all over the world. Besides, IKEA is famous with its production strategy to maintain very low costs and its aim of settling strong relationships with its suppliers. These main characteristics of IKEA give the company all the advantages a firm needs to possess in order to internationalize and succeed in doing so. Entering the Asian continent does not end only with expanding to Japan but IKEA considered entering China which is an enormous market as well. Therefore, the company considers Japan as a solid start to Asian expansion since coping with the Japanese customers and furniture market gives IKEA the advantage of getting familiar with the Asian preferences and therefore making the entering of China smoother and promising.

There are various drivers for IKEA’s expansion to the Japanese market. Japan was chosen due to its economic and political stable position, its asset-based advantages, and continuous improvements and innovations in every aspect of the country. In general the most influential drivers of the key success and failure factors are basically the cultural differences between the countries IKEA is used to operate and Japan. The strategic decision making referring to what scale of entry to choose when expanding to Japan, the entry strategy and some organizational characteristics of the company all create barriers for successful entry of IKEA to Japan.

6.2 Learning Outcomes

IKEA entering Japan is an appealing and instructive case since it presents the failure and at the same time the strategy of improvement which results in valuable success. There are several most significant learning outcomes which the reader should keep in mind after observing the paper. Firstly, the strong and well known brand image of a company does not assure its success in new markets. Controversially, when entering an unfamiliar country a company has to support and give evidence of its fame, efficient products, flawless service and successful company operations. Secondly, doing a preliminary research is the key winning strategy no matter what the company attempts to undertake – retention, introduction of a new product, expansion, advertising, etc.  Another important learning outcome to be emphasized on is the importance of knowing and understanding the market environment including country’s economic and political situation, influence of competitors, types of consumers and their lifestyle and culture, and supplier options. After presenting the case, discussing the main problems and strategies, underlying the learning outcomes it could be concluded that IKEA has successfully entered and maintained its strong performance in the second try in 2006. The only recommendation which would apply to the company’s further progression is continuous improvements in every organizational aspect and doing researches despite the success IKEA already has achieved.

References

Capell, K 2006, Ikea’s New Plan for Japan.  Retrieved November 21, 2009,  from

http://www.businessweek.com/globalbiz/content/apr2006/gb20060426_821825.htm

Encyclopedia of the Nations, Japan – Overview of Economy. Retrieved November 19, 2009, from http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Japan-OVERVIEW-OF-ECONOMY.html

Hill, C 2007, Entry Strategy and Strategic Alliances, International Business: Competing in the Global Marketplace, ch.14, pp.480-495. New York: McGraw-Hill/Irwin

IKEA Group Corporate site, About IKEA. Retrieved November 19, 2009, from http://www.ikea-group.ikea.com/index.php?ID=2

Japan External Trade Organization, 2003, Invest Japan. Retrieved November 20, 2009, from http://www.jetro.go.jp/en/invest/reports/newsletter/pdf/ij_03.pdf

Lane, G 2007, Failed Businesses in Japan. Retrieved November 21, 2009, from http://www.japaninc.com/mgz_sep-oct_2007_issue_failed-businesses

Ranking the Brands, 2009, Rankings per Brand. Retrieved November 19, 2009, from http://www.rankingthebrands.com/Brand-detail.aspx?brandID=27

The Local Sweden’s News in English, 2006, Size matters as Ikea returns to Japan. Retrieved November 21, 2009, from http://www.thelocal.se/3566/20060416/

Wijers-Hasegawa, Y 2006, Sweden’s IKEA Back in Japan after 20-year Hiatus. Retrieved November 21, 2009, from http://search.japantimes.co.jp/cgi-bin/nb20060425a1.html