IKEA Franchising Strategy

IKEA is an international home furniture company that selling the wide ranges of well-designed and functional products which packed in form of ready-to-assemble. According to IKEA (2012), its business is founded in 1943 by 17 years old Ingvar Kamprad in Sweden. The headquarter company of IKEA is placed in Delft, Netherlands. With the time turned, furniture retailer IKEA becomes one of successful companies around the world and has ability to take advantage of globalization. Therefore, now IKEA has 325 stores in 38 countries in which 287 stores in 26 countries is wholly owned INGKA Holding (non-for-profit corporation) and the remaining 38 stores are run by franchisees which under Dutch company (for-profit corporation) (n.a, 2012). INGKA Holding is parent company of Dutch company. The largest stores around the world are placed in China, German and Sweden (IKEA, 2012).

The IKEA business is developed starting with home selling and then turn to become international nowadays. Originally, IKEA only sold small home accessories and trinkets products in its home, Sweden. Until 1948, IKEA began to design its own furniture products and sold in low price with high quality (Ellis, 2010). The process of business development is from home selling the products, open a retail store in Almhult town, Sweden (1958), then develop a larger retail outlet in Norway (1963). In 2012, IKEA committees plan to develop a wholly-own subsidiary corporate in India countries after did the market investigation.

Currently, majority of IKEA stores are wholly owned and managed by INGKA Holding (also known as Stichting INGKA Foundation). The wholly owned subsidiary strategy explain that majority of stores’ operations, management, its furniture design and manufacture are overseen by INGKA Holding. For the case, IKEA has long eyed the retail market in India, now plan to invest €900 million to create a wholly own subsidiary in India (Kinetz, 2012).

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On the other hand, IKEA also implements the franchising strategy in some countries to manage minority stores. The franchisees who allowed using IKEA’s concept and trademark to run business have to pay 3% of revenue back. Since the culture and value is different in every country, IKEA committees evaluate the country’s local market and its future expansion opportunities before go in.

For the future expansion, we suggest that IKEA should take joint venture strategy as business expansion strategy in India country. Joint venture is a good strategy to assist a company enters into a different cultural market. As an example, Wal-Mart knew nothing about Asian retail market, they choose entered into Hong Kong via joint venture with Thai conglomerate (Neelima Mahajan-Bansal, 2012). Second recommendation we suggest to IKEA is using wholly owned subsidiary to enter Brazil. The reason we choose Brazil as another target market because it has stability of political economy environment which can reduce various risk of business (n.a., 2011). IKEA also can take the advantage of Brazil since there has full of high quality woods as the resource for business (n.a., 2011).

2.0 Current Expansion Strategy

Wholly owned Subsidiaries

IKEA use wholly owned subsidiary as their main expansion. The IKEA corporate structure is divided in to two parts which are operating and franchising. Most of the IKEA’s operations practices are overseen and managed by INGKA Holding B.V. INGKA Holding B.V is wholly owned by Stichting INGKA Foundation, a non-profit registered in Leiden in the Netherlands which is controlled by the Kamprad family (IKEAFANS, 2009). In year 2011, there are IKEA stores in 38 countries operating around the world such as United States, Canada, United Kingdom, Switzerland, Netherland, France, Russia, Saudi Arabia, China, Malaysia, Australia, and etc. There are 287 stores run by the INGKA Holding B.V and the remaining 38 stores are run by franchisees (Inter IKEA Group, n.d.).

IKEA can either set up new operation in the country or can acquire an established firm in the host nation and use that firm to promote its promote its product as long as IKEA own 100 percent ownership of the stock. Habitat Retail Ltd. is a household furnishings retailer in the United Kingdom, Germany, France and Spain and in the year of 1992, IKEA acquired Habitat’s UK and French chain with about pound 55m to expand their business (Moore. J, 1992). IKEA own all of their buildings and land, and stores are custom built and designed for efficiency and sales potential. In order to do that, IKEA do not cut back investment in retail stores. (Deniz, Marco & Art, 2012)

The main purpose of the IKEA use this expansion strategies is to ensure operational control, standardization, and provide a smooth entry into to a new market. The attractive way to use wholly owned subsidiaries is where IKEA can reduces the risk of losing control over their core competence and its concept. This expansion strategies give IKEA have the full control over operation practices such as marketing, logistics and decision in different countries to meet their standard. In addition, all the profits will go to IKEA due to having full control on every operation. It is necessary for them engaging in global strategic coordination. Wholly owned subsidiaries also required IKEA to realize location and experience curve economies (Hill et. al., 2011). This which means, IKEA able to achieve economic of scale by manufacture more products and reduce the average cost of products (Hill et. al., 2011). Indirectly, this also fulfill the IKEA porter generic strategies which is cost leadership.

However, wholly owned subsidiary strategy is highly expensive choice for company that would lead to severe financial risk if not successful. IKEA have to bear the full costs and high risk by themselves of setting up the factories, stores and retail shops operations in other nations (Hill, et. al., 2011). Japan was the first country in Asia that IKEA considered to enter in 1970’s during their expansion to the international market. Their first entry to Japan market was in 1974 (n.a, 2008). Due to the differences between culture, lifestyle and behavior lead to IKEA face the failure and they had to withdraw their store out of Japan. However, IKEA decided to re-enter the market in 2002. This time IKEA conducted a thorough study of the markets and understand their requirement (Alexandra, 2009). At present, there are five IKEA stores in Japan, last of which was opened in year 2011(Inter IKEA Group, n.d.). Besides that, there are political risks of entering in to the market wholly in the form of nationalisation threats or corruption and bribery (Back et. al., 2010).  Recently in year 2009, there have been issues about corruption in the opening of retail store in Russia (n.a., 2011). It has been held by safely officials’ requests for payments and IKEA is refusing to so. Thus, IKEA has ended up by would not build more stores outside the Moscow region until Russian officials stop withholding permission and freeze expansions on Russia (n.a., 2011).

Franchising Strategy

The IKEA concept which bring IKEA franchise worldwide is belong to the Inter IKEA System B.V in Netherlands. Inter IKEA Systems B.V is the franchisor and it is the owner of the IKEA concept and trademark (IKEAFANS, 2009). The franchisees have the right to operate IKEA store under the franchise agreements in accordance with franchisor’s systems and methods to use IKEA trademarks establish by Inter IKEA Systems B.V(Inter IKEA Group, n.d.). Besides, IKEA franchisees able to access to the product range of IKEA and opportunity to continuously take part in IKEA concept development in their own stores. (Inter IKEA Group, n.d.). Then, IKEA franchisee has its own responsibilities to manage, develop and run their local market business with efforts after granting the rights of IKEA concept.

The main concept of IKEA want to expand its market by implement franchising is due to the objective of Inter IKEA Systems B.V.. According to the objective of Inter IKEA Systems B.V., its objective is to increase the availability of IKEA products through world-wide franchising the IEKA concept (IKEAFANS, 2009). So, this encourages the IKEA wanted to create infinity for IKEA through franchising.

Besides, the decisive factors for IKEA to franchise for long-term approach are due to its ownership structure and total independence in furniture market (Inter IKEA Group, n.d.). Thus, IKEA bring out the franchising method so that it can secure an infinite life for the IKEA concept when the different companies in different countries able to build the resources needed to expand global under IKEA concept (Inter IKEA Group, n.d.). Moreover, the franchisor, Inter IKEA Systems B.V. acts role to perform some important tasks such as expand IKEA business, improve and develop IKEA concepts, transfer know-how of IKEA to its retailers, monitor IKEA concept’ implementation and protect IKEA concept (Inter IKEA Group, n.d.).

Currently, total of 38 IKEA franchisees are located over 11 countries. The countries with IKEA franchisee included 2 stores in United Arab Emirates, one stores in Kuwait, 3 stores in Saudi Arabia, 2 stores in Australia, 7 stores in China Taiwan, one stores in Cyprus, 5 stores in Greece, 3 stores in Malaysia and Singapore, 5 stores in Turkey, one stores in Iceland, 2 stores in Israel, 1 stores in Dominican Republic and 4 stores in Spain (Inter IKEA Group, n.d.).

Franchises strategy not only provide the firm with high control of brand and strategy, but it is also a low financial investment risk and enabling the company to benefit from local knowledge (Back, Andrew & Sparapani, 2010). Furthermore, some benefits can be able to gain through franchising by IKEA. For instance, it can earn extra source of income in term of loyalty and franchise fees since it franchises its retail stores located over 38 countries. The franchisees who allowed to use the concept and trademarks of IKEA is necessary to pay 3% of revenue earn to Inter IKEA Systems B.V annually (IKEAFANS, 2009). So, this intentionally provides other cash inflow for the IKEA.

Although by using franchising strategy, IKEA can relief of many of the cost and risk of opening a foreign market (Hill & Hernández-Requejo, 2011). However, this could make IKEA difficult to control the standards and quality where some franchisees may not concerned about these issues. This could be happened and hard to detect due to the geographic distance between franchisees and main franchisor. This might lead to affect consumer views of IKEA’s product if the standards of products are not standardize in its own country compare with the IKEA main stores.

3.0 Future Expansion Strategy

Joint Venture to Enter into India Market

Joint venture is suitable for IKEA to enter into India Market. It refers to the set up of a new company that is jointly owned by two or more participants (Hill & Hernández-Requejo 2011). Each partner must have something special and important such as knowledge, skill, and capital to offer the venture and simultaneously provide a source of gain to the other participants. The reason for enter into India market is India furniture retail market has been classified by CSIL Milano as one of the 14 largest furniture markets in the world with the worth of US$8 billion and is growing at 30% annually (n.a., 2012). The second reason is that the furniture industry in India is highly unorganized. Nearly 85% of the home furnishing industry is in the unorganized sector and remaining 15% is in the organized sector which included domestic players and also imports (n.a., 2009).

The reason to use joint venture is due to the government policy in inviting foreign company to invest in India. According to past policy in India, foreign firms can only own up to 51 percent of joint venture (Sharma & Hansegard, 2012). The policy has changed last year by allows some retailers to own 100% of their Indian units. After the change of policy, IKEA have applied for permission to invest into India. However, the result of permission still has not come out. IKEA should not realize on the permission of the wholly own subsidiary given by the local government. If government reject its application, is it IKEA will not enter into the one of the 14 largest furniture markets in the world? There are many successful example of joint venture or cooperative between foreign furniture companies with local company in India today. Arrital Cucine, an Italian furniture company sells its products in India through its Indian partner, Overseas Connexions while the Germany company, Wilhelm Bolt & Co. has a technical agreement with Arvind furniture to produce furniture at India (Mukherjee & Patel, 2005). There is no time for IKEA to waste as they should quickly enter into India market through joint venture with local company to set up its manufacturing plants and also sell its product around the India.

Culture is an important aspect that multinational company should consider before take an action to enter into a specific country (Hill & et. al, 2011). Indian culture and their home decoration style are different from western country. Consumers may not accept the western design furniture as they are used to purchase traditional design of furniture which suit to their culture. Thus, set up a joint venture with local firm is a better way to doing business in India and hence can reduce the risk of failure. The difference of culture can directly affect the way how a business operates in that country. The experience of IKEA in China should be take note. Although there is a rapid increase in the number of visitors and sales volume in China, IKEA had yet to make a profit in China. IKEA showed local consumers new home decoration concepts using its various products but Chinese consumers do not accept it (Li & Xu, 2007). IKEA have 25 years of procurement experience in China but yet still cannot understand deeply about the Chinese culture and consumers’ living style, preferences and taste. Thus, before set up its own retail store in India, they should make a deeply study on the local market. Joint venture with local company can bring more valuable information and knowledge for IKEA. IKEA can build relationship with local suppliers, distributors, and media. They can get the data and information form the joint venture firm. Besides that, cooperation with local branded company can quickly promote its brand name into consumers’ mind.

Who should IKEA select to cooperative is crucial. Durian, Furniturewala, Zuari, Renaissance, Furniture Concepts, Millenium Lifestyles, are some of the key players in Indian furniture industry. Local company who can provide marketing expertise, local knowledge, have strong relationship with government, suppliers and distributors should be consider as they can provide many benefit to IKEA for their future operating its own subsidiary in India (Hill & et. al, 2011). Besides that, good reputation and image of the local company also is one of the aspects to be considered for cooperative. Company with good reputation can bring IKEA into local market and also consumer’s mind easily. In contrast, cooperative with company possess bad reputation will straightly harm IKEA brand name and thus being bookmark as poor image company in consumer’s mind. Thus, companies mentioned above are the best local company for cooperation.

According to IKEA Company, the requirement of purchase at least 30% of goods from local small and medium size enterprise under the new policy will remain a challenge for the company (Sharma & etc. 2012). Thus, direct investment may not be a best strategy as they are not familiar with local business and industry. Until now, they still cannot truly build the supply chain network in India, so how are they going to set up its own retail store and run the business by themselves. Thus, when should they enter into India? If they do seriously consider the joint venture strategy, they should enter into India 1 or 2 year ago. With joint venture with local firm, IKEA can quickly access to local suppliers through the network of the local company and operate its business smoothly. The growing of furniture industry in India is due to two reasons, India’s large size and Indian tastes have started changed and Indian people are looking for more western furniture style (n.a., 2010). The market attractiveness is not a problem and it is a chance to take the advantage for establishes its own retail store in coming year.

As conclusion, due to local government policy, cultural difference, and also local business network, IKEA should use joint venture as entry mode to enter into India. This action enables them to build up a strong base for future expansion.

Wholly Owned Subsidiary to Enter into Brazil

IKEA needs to expand the business by entering into new foreign markets in order to ensure the company’s future growth. We recommend IKEA can enter into Brazil in South America by considering the wholly owned subsidiary strategy. IKEA have entered into Europe, Asia, North America, Middle East and Caribbean but have yet entered into South America (IKEA, 2012). Two of the mandatory requirements for IKEA to move into Brazil are that the host country must be a member of the World Trade Organisation and a signatory to the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Back et.al., 2011).

The reason we choose to enter into Brazilian market because of the stable political economy factors. Political factors, economic factors, demand factors are factors that will influenced the potential attractiveness of a foreign markets (Hill et al., 2011). The Brazilian economy’s entered into a stable growth stage after the recovery form financial crisis in 2008. Besides that, Brazil estimated to grow 4.0% in 2012 and the economy is expected will rises from the seventh world’s largest to the fifth within next few years (n.a., 2011). Comparing with other countries in South America, Brazil has the highest Market Potential Index (MPI) (n.a., 2011). As a result, Brazil’s economy is the best that all of other countries in South America (CIA, 2012). Since domestic savings are not sufficient to sustain long-term growth rates, Brazil is currently encourages foreign direct investment (FDI) and it is the largest recipient of foreign direct investment in South America (n.a., 2011). The entry of IKEA can increase the employment rate of Brazil and increase the revenue of government. Furthermore, IKEA may exploit the market of South America by grabbing this opportunity. Furthermore, the furniture and furnishings sales in Brazil has grown by 5% in 2009 to reach over R$18 billion (U$ 555,435,224.08) and expected continue to grow in the next few years (Ong, Ng and Wu, 2010). This indicated that the demands of consumers are increasing and providing the opportunity for business to grow.

IKEA expand into the Brazil market would form early market entry because it enters first into South America markets before other foreign firms. According to Lieberman and Montgomery (1988), the advantages of first mover are the ability to pre-empt rivals, capture demand by building s strong brand name, rides the learning curve ahead of rivals and the ability to create switching costs that tied customers into their products and services. For example, Walmart entered into the China market as early mover, which gained the ability to pre-empt rivals and capture early demand and still dominating the market over the late over Tesco (Waldmeir, 2010).

IKEA has experienced as an early mover into the markets in the past. The company has entry into Canada markets in 1976, USA in 1985 and China in 1998 (IKEA, 2012). Thus, IKEA have the advantages of pre-empt rivals and riding the learning curve ahead of its rivals. However, IKEA also suffered from the pioneering costs when they realised of the need for localisation of its American product range (Back et al., 2011). The reasons IKEA failed in the Japanese markets was because IKEA lack of readiness for the Japanese market and lack of readiness of Japanese consumers for IKEA’s do-it-yourself concept (Wijers-Hasegawa 2006). Consequently, IKEA need to beware that riding the learning curve can be a long ride if the market is not ready to adapt the products.

We suggest IKEA use wholly owned subsidiary because there are around 16,000 furniture companies in Brazil and most are family owned companies. There are few key domestic players included Florense, Brazil Furniture Group, and others. The furniture market is keep growing and there is yet well known and large furniture company emerge in the market. (Evans, 2012). Thus, the furniture market in Brazil is still unexplored by multinational furniture company. Thus, a well known brand name is easily discover by the market and the consumer when large company entering into that industry. IKEA, a world famous furniture company, have the competency to entering into furniture industry in Brazil and create strong brand image to the entire furniture market easily. As there are many small furniture companies, it is easily for IKEA to enter and dominate the Brazil’s market.

The world’s largest rainforest, The Amazon, is located in Brazil. Thus, Brazil has abundance of high quality woods as the raw material for IKEA produce high quality furniture to consumers. This is the main reason for IKEA to use the wholly owned subsidiary to entry into Brazil. Besides that, the labour cost in Brazil is cheap compared to Europe and America (n.a., 2011). In other words, Brazil has significant comparative advantages compared to others exporting countries because it has excellent quality of raw materials at low costs and flexible labor (n.a., 2004).

Wholly owned subsidiary can enable IKEA gain full control over the business’s operations which will also lower the brand risk in the same time (Back et.al., 2011). By wholly owned subsidiary, IKEA can get 100 percent profits that generated in Brazil. Besides that, by adapting wholly owned subsidiary, IKEA can gain the ability to realize location and experience economics as the company is adopting transnational strategy (Hill et. at., 2011). Thus, IKEA can make full decisions to produce products that are customized to the local customer wants and needs.

In the South America Context, Brazil is the most preferred country for investment. Entering into South America market is an imported step of the IKEA’s globalization strategy.

4.0 Conclusion

In conclusion, we knew that IKEA is a very successful worldwide home furniture company. But, they are also facing franchising control management problem due to geographic distance. If franchises do not operate well in the current market, this will affect IKEA’s reputation. They tend to reduce this problem by using wholly owned subsidiaries for expansion. This strategy also not very well for IKEA because full control over their competence and its concepts but instead increasing the risks for entry the market due to cultural conflict. We can see that IKEA was failure to entry in Japan before due to diff culture, lifestyle and purchasing behavior.

So, we recommended that joint venture is suitable for IKEA to further expand. This strategy can reduce risk for entry and for better handle the market culture and policy. The joint venture that enable IKEA cooperative with those company that fulfill marketing expertise, local knowledge and skill and the most important factor is have strong relationship with government. These benefits encourage IKEA enable to operating well in the specific country. A successful company should analyze all the variables that will lead to failure before enter into a specific market. Although this strategy has occurs some problem and risk but compare to previous strategies, this strategy is better for IKEA sustainable development. Furthermore, cooperative with well known company will also increase IKEA reputation and influence local consumer purchasing behavior.

Finally, a very successful company will not stop growing their business and finding the ways that lead to further expansion. They must know well their limit and beat all the deadlines. IKEA has put a lot of efforts on developing their business that strengthen capacity for further expansion. Consequently, they should use joint venture strategy to expand in other countries. The more understanding other countries culture, lifestyle and behavior, the closer the gaps for success.