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Assessment
2 Case Study

Assignment Specifics:

• Read the case study and answer all
four questions
• This is an individual piece of work
• Weighting: 40% towards final grade
• Please use the Harvard Referencing
System for referencing requirements
• Total wordage: 4000 words

IKEA: A Long March
to the Far East

From its humble beginning as a small general retail store in
a village situated in the south of Sweden, IKEA has grown into the world’s
largest furniture retailer with 279 stores in 36 countries today. The name IKEA
is formed from the founder’s initials I. K. (Ingvar Kamprad) plus the first
letters of Elmtaryd (E) and Agunnaryd (A), the farm and village where he grew
up. Specializing in furniture and home decoration, IKEA has an annual turnover
of 19.8 billion euros (source: IKEA, www.ikea.com,accessed25/03/2012).TheIKEAcatalogue
is printed in 52 editions with 25 languages, with a global distribution in
excess of 160 million copies.

IKEA’s success has been nothing short of a global phenomenon.
Edvardsson and Edquist (2002) have accounted for the company’s rise to global
success following the timeline of three development phases. In phase one, IKEA’s core concepts were
formed as a result of adapting to the market circumstances. The important
moments during this period were publishing the first IKEA catalogue in 1951,
opening the first furniture showroom in Älmhult in 1953, introducing flat
packages in 1956 and finding the key to low cost production in Poland in the
early 1960s. Phase two is characterized by the company’s initial
internationalization expansion when
it reached out to its
Scandinavian neighbours in the 1960s. Since the 1970s, the company began to
expand farther into other European countries, Australia and Canada. In 1985,
IKEA arrived at the world’s largest consumer market—the United States where
first experienced North America as a market very different from those in
Europe. Armed with its international experience in Europe and North America,
IKEA took the company into the third phase of its development by embarking on a
major expansion into the Far East, in particular Japan and China.

IKEA sees the Far Asia as an emerging market still in its
infant stage. Its number of retail outlets in Malaysia, Singapore, Taiwan,
Beijing, Shanghai and Hong Kong are very small and comprises a mere 3% of the
company’s total sales. These stores were expected to be more successful in the
near future. IKEA’s imminent strategic expansion into this region exemplified
its ambitions to dominate this emerging market.

IKEA’s entry into Mainland China started in 1998 when it
opened its first store in Shanghai, followed by Beijing in 1999. IKEA took its
time to get to know the Chinese customers. This prudent approach to market
entry took IKEA the following 5 years before it opened its first full-scale
standard IKEA store in Shanghai in 2003. The store occupies 33,000 square
meters and retails more than 7,000 products.
Its signature Småland
children’s playground is 170
square meters and the free parking area holds 800 cars. A record of 80,000
visitors flocked to the store on the opening day. This new Shanghai store
represents an important landmark for IKEA’s business development in China.

It is the largest of its stores not only in China, but also
in Asia. In the same year, the president of IKEA China, Ian Duffy, unveiled a
long-term plan to open ten more stores in mid-sized cities, such as Dalian and
Qingdao, by the end of 2010. This plan would require a US$600 million investment.
The expansion plans underscored IKEA’s confidence in China considering none of
IKEA’s retail stores in China have yet turned a profit, making them the only
loss-making stores in the entire IKEA group (Wei, 2007). Its expansion in China
nonetheless saw its sales revenue increased by 500% from 2000 to 2005.

IKEA brought its distinct organizational culture and retail
strategies to China. Its Chinese stores look very similar to its store in
Europe with its blue and yellow
painted logo hung
up high outside
the building. Customers
walk through the showrooms where
they can see and try the products before making a decision on
which ones to take home. After making up their minds, customers make notes of
the details for collecting the products. They then find the products in
flat-pack in the warehouse on the ground floor according to the correspondent
aisle and shelf numbers. Once it is paid for, customers can choose to transport
the shopping themselves or have it delivered by IKEA with a surcharge. The
so-called IKEA retail experience is no different after being
‘transplanted’ into another
country. The core
concept of showrooms, flat-
packed products and do-it-yourself remain intact.

In China, IKEA successfully differentiates itself as an international
brand that provided modern furniture with elegant, western design. Unlike the
local furniture brands, IKEA promotes a ‘complete solution’ to decorating the
home. Apart from selling well-designed furniture, it also sells various
necessities for the home including cooking appliances, lighting, and bedding.
IKEA was probably the only store in China that offers such a wide range of
products for home decoration and a ‘do it yourself’ furnishing concept. It
promotes its philosophy of ‘how it is not wrong to be different’ by offering
its customers a range of options to suit the customer’s preferences and living
requirements. Although this ‘individualistic’ value is in contrast to the local
tradition, Chinese customers seem to gradually appreciate this difference.
They start to appreciate the simplicity of light-coloured,
Scandinavian style and even consider going to IKEA as experiencing another
culture.

Despite the phenomenal growth in the number of visitors and
sales volume in recent years, IKEA struggles to break even from its sales
revenue. There is a large gap between customers who visit the stores and those
who make a purchase. Those who make purchases tend to be small decoration
products with low profit margins (which make up 45% of total sales). Continuous
losses suggested that the challenges for IKEA in China were complicated and
demanding.

To appeal to its Chinese customers, IKEA has made a lot of
efforts to adapt its products to the
local tastes and
demands. For instance,
IKEA would release a series of
products to celebrate the Chinese New Year, which is the most important
festival for the Chinese people.

In 2006, a red rooster appeared on many IKEA products,
greeting the year of the Rooster. This move had won IKEA many customers. It
introduced a series of products under the FANBY range that feature red pigs to
welcome the coming year of the Pig. The colour red suggests good fortune in
Chinese culture and is commonly used in decorations to bring good luck. Apart
from that, the Swedish
kitchen section provides
IKEA with an
important store differentiation
from its competitors in the Chinese market. While emphasizing its Swedish
origin, IKEA also takes into consideration the Chinese style of cooking and
eating. For instance, IKEA Shanghai provides 3 kinds of meat cleavers and 3
kinds of chopsticks together with Western style of knives and forks.
Approximately 5% of the products IKEA sells in China are for China only, in
contrast to 1% in IKEA’s European markets.

While brand new designs for a single market may be very
effective in terms of delivering customer value for a specific market, it is an
expensive strategy that does not chime well with the IKEA way of being cost
conscientious at every step. It is more cost effective to produce small
adaptations to the features of existing products. For example, the SULTAN HÖGBO
series of sprung mattresses are sold in Malmö in the categories of 80 × 200 cm,
90 × 200 cm, 140 × 200 cm, 160 × 200 cm and 180 × 200 cm. In China, different
kinds of the SULTAN HÖGBO series are marked as single, double, standard double
and big double. The difference is due to the fact that in Sweden, people are
used to putting two single-sized beds together to form a double-sized bed to
ensure a good night sleep free from the disturbance by the person sharing the
bed. This idea does not fit well with the Feng Shui of Chinese culture as
couples who sleep in two separate beds symbolizes a bad relationship between
the couple and is believed to bring bad luck.

Product pricing in the Far East, in particular in China,
presents a unique challenge for IKEA. IKEA derives its competitive advantage
in developed countries from the low cost production in developing
countries supported by aggressive control over the supply chain. Large amounts
of raw materials are sourced in the developing countries and production
outsourced to factories in countries with low cost labour such as Malaysia,
India and China.
The gap in the raw material and the production costs between
developing countries and western
countries is the
main source of
IKEA’s low prices.
This cost advantage however
cannot be maintained in the Chinese market. As a developing country, China’s
GDP per capita of around US$1,000 is still low even compared with other
developing countries in Asia. Prices of furniture provided by local stores are
much lower because they often do not invest on original product
designs. Most local
firms imitate the
designs of famous brands (including those of Ikea) and
produced furniture at a much lower cost since they are able to access cheap
materials and labour locally, as well as use less expensive transportation
methods. For example, a sofa sold at RMB3000 in IKEA would be priced at around
RMB2000 at a regular local store such as the OrientHome (www.orienthome.com.cn).

In addition, many Chinese consumers do not like IKEA’s DIY
concept to home furnishing especially in the light of having to accept the
highly priced products without the accompanying personal services, assembly and
home delivery. Although it is making in routes into the pro-western 28-35
consumer groups, it is failing to turn the majority of people in more common
households into actual buyers. Many young customers, who like the design of
IKEA’s furniture and decorations, turn to other local stores to buy after
wandering around the IKEA store due to the high prices of IKEA’s products.
There is a perceived incoherence between the consumer groups who understand the
IKEA concept and the groups who can afford the product. Chinese consumers with
high incomes normally opt for expensive foreign brands, whereas those with a
medium or low income tend to shop at local stores. In this regard, IKEA’s low
price strategy seems to create confusion among Chinese consumers. Foreign goods
are perceived to be more expensive than local brand products. For consumers who
are able and willing to pay a high premium for foreign produces, foreign brands
like IKEA which prides itself as a low price retailer make little sense. For
those seeking low prices, they find IKEA products more expensive in comparison
to the local brands. Therefore, given the ‘low price’ image that IKEA
associated itself with and the relatively high actual prices, it is difficult
for the Chinese consumers to recognize IKEA’s value and accept its prices at
the same time.

A highly efficient distribution and logistics system plays a
fundamental role in enabling IKEA to keep its prices competitive and
contributes to every percentage of its profit margins. Under pressure to cut
costs and deliver lower prices, IKEA needs to increase sourcing its products
locally by collaborating with local manufacturers. Its efforts of improving its
distribution system are shown in building 2 logistics centres in Shanghai. After finishing the first logistics
centre in Song Jiang District in December 2005, IKEA is building the second one
in another district, Feng Xian. The latter is IKEA’s first logistics centre
with a quality control centre attached to it. Once it is finished in 2010, both
logistics centres can hold 300,000 cubic metres of products. Before these
products are distributed to the IKEA shops in the Asia-Pacific region, they
will undergo a series of quality control tests (Chen, 2006).

IKEA’s efforts to establish an efficient and economic
network of logistics and distribution have been met with significant
challenges. Distribution systems in China are still relatively underdeveloped.
With a large population of 1.3 billion and an inadequate basic road
infrastructure, most companies can only access a small part of the population
in the most affluent cities. Due to relatively low private car ownership, the
locations of most IKEA store in China have to be situated in the city, which is
traditionally considered ‘non-IKEA’ when IKEA’s retail strategy is concerned.
For instance, IKEA Shanghai is built in one of the most expensive districts
downtown Shanghai, Xu Jia Hui District, where there is convenient public
transportation and opens from 10am to 10pm daily. Apart from the high retail
property costs, transporting thousands of products to city stores inevitably
increase distribution costs due to road congestion and logistical
complications.

Further expansion into the Chinese market cannot be
materialized without significant investment in developing its supply chain in
China.

Japan has one of the most established consumer markets in
the world. Many international companies have tried to establish themselves in
Japan without succeeding. Although Japan has started to open up its market to
foreign competition since the
recession in the
1990s, it remains
a culturally challenging market
to succeed for foreign organizations.

IKEA first entered into the Japanese home furnishing market
in 1974 through a franchise arrangement with a Japanese trading company. It had
to withdraw from the Japanese
market in 1986
after 12 years
of mediocre financial returns. It
took IKEA another
5 years to
establish a much
deeper understanding of the Japanese consumers before deciding to
re-enter the country. During this
period, IKEA conducted
research on more
than 100 Japanese homes in order
to understand their way of living and their needs in everyday life, and develop
products which would fit well with the Japanese consumer perception.

In 2006, IKEA went into the Japanese market for the second
time. Instead of using a franchised arrangement, it opened two IKEA-owned
retail outlets: one in Funabashi (Tokyo) and one in Kohoku. It has opened two
more stores in 2008: one in Kobe and one in Osaka. All the stores have IKEA’s
largest store design in the world occupying 40,000 squared meters with an
in-store restaurant of over 700 seats. This series of substantial investment
signifies IKEA’s ambition to dominate the market with one of the world’s
wealthiest consumers.

On the opening day of IKEA Funabashi, the store attracted
35,000 visitors. Since then, the store generally maintains 30,000 to 40,000
visitors at every weekend. Not unlike other markets, the most important target
group for IKEA in Japan is families with children. Their customers tend to be
relatively young with those in their 30s being the largest age segment. The
average household size among this group of customers is three people per
household and the annual household income is 40,000 to 45,000 Euros per year.

For a nation which values simplicity in many aspects of
living, the Japanese consumers were expected to appreciate IKEA’s
well-designed, light-coloured Scandinavian
furniture. Compared to
other European or
Scandinavian furniture manufacturers, IKEA products are priced very
competitively making them very accessible for most Japanese consumers.

IKEA’s biggest challenge in Japan is to make the home a more
important aspect in the Japanese lifestyle. By any measure, Japanese homes are
tiny with approximately only 50 to 60 squared meters making it very hard for
household owners to make their homes beautiful while having to considered
storage space for all of the family’s belongings. Most Japanese consumers see
their home as a place to sleep and store their personal belongings.

Culturally, home furnishing is therefore not regarded as
important hence little time is spent on decorating the home. It is not in their
nature to invite guests over to their homes. As Japanese people have a tendency
to socialize outside their homes, they spend more time and money on products
and accessories such as Prada or Louis Vuitton handbags, mobile phones and cars
that they can show off in society.

To overcome this cultural apathy towards home furnishing,
IKEA needs to find ways to enthuse Japanese consumers to develop the idea of
making a home more than just a place
to sleep, and make them
realize that with home furnishing they can make even small
spaces more enjoyable. For instance, IKEA
demonstrates this by displaying
Japanese-sized apartments in
their stores that incorporate a kitchen, a bathroom, a sofa that turns
into a bed, and several storage areas. To make it more realistic in relation to
Japanese style homes, IKEA uses the Japanese traditional ‘tatami’ measures for
their display rooms – the only IKEA store in the world where this is practiced.
Tatami mats are a traditional type of Japanese flooring. They are made of rice
straw in individual mats of uniform size and shape bordered by brocade or plain
green cloth. All kitchen appliances such as sinks, taps, dishwashers, fridges
etc. must fulfil Japanese
law requirements, and
all cabinets have
to be earthquake-safe. While this
is a great opportunity for IKEA to be a catalyst of cultural change, this
changing process is taking some time as the Japanese view of their homes is
deeply rooted in their cutural values.

As in China, the Japanese consumers do not appreciate the
DIY concept of self-service, self-delivery and self-assembly. This aspect has
generated some confusion and discussion since a high level of customer service
is something that Japanese consumers are culturally accustomed to from every
retailer in the country. Although
more staff members
are now employed
in their Japanese stores to adapt
to this culture, IKEA limits itself to the amount of service that customers
receive. Despite this extra investment, the Japanese customers are still not
happy. Customer surveys show that ‘staff attitude’ to customer service tends to
score very low in the results.

In conclusion, IKEA’s ventures into China and Japan are
laden with unique marketing
challenges which it
had not encountered
before in other international markets. Its ambition to
conquer the vast Asian markets is reflected in its substantial financial
investment and long-term management commitment. Although IKEA strives to
implement its own brand of retail strategies that has brought tremendous
success in the European markets, it has
yet produced comparable
success in Japan
and China. Are
IKEA’s current strategies in these markets going in the right direction?
Is the company’s retail concept appropriate for the Chinese and Japanese
consumers and eventually be widely accepted? Is it impossible for IKEA to
largely ignore the needs of the local consumers as well as it is perhaps very
difficult for the company to adapt itself fully to the local culture?

Questions

1. Based
on your analysis, what are the opportunities and challenges for IKEA in their
market operations in (a) China; and (b) Japan?

(Wordage: 1000. Weight: 25%)

2. In
reference to Topic 6, discuss the market entry strategies that IKEA adopt in
China and Japan respectively.
(Wordage: 1000. Weight: 25%)

3. In
reference to Topic 4 & 5, what are IKEA product, pricing, marketing
communication and distribution decisions in the two Asian markets? To what
extent these marketing mixes have been adapted to the preferences and needs of
these markets?

(Wordage: 1000. Weight: 25%)

4. For
each of these markets, plan, discuss and justify what, in your opinion, IKEA’s
marketing strategy should be in the near future to gain market shares and
achieve higher profitability.

(Wordage: 1000. Weight: 25%)

This case is based on:

Chen, H. (2006), IKEA’s investing 1.2 billion RMB on another
logistics hub of the Asia-Pacific region in Feng Xian District, Shanghai, National Business Daily.

Edvardsson, B. and
Edquist, B. (2002),
“The IKEA Saga”:
How Service Culture Derives Service
Strategy, The Service Industries Journal,
22(4), 153- 86.

Leroux, J., Thamhaksa, D., Yokoi, H. (2007), “Home Sweet Home” – A
Controversial Thought? A Case Study of IKEA in Japan, Bachelor Thesis,
Sweden: Lund University, Unpublished.

Pan, Y (2005), Marketing
Across Cultures: A case study of IKEA Shanghai, Masters Dissertation,
Sweden: Lund University, Unpublished.

Wei, L-Q. (2007), IKEA in China: Facing Dilemma in an
Emerging Economy, Asian Case Research
Journal, 11(1), 1-21.

Assessment
2 Case Study

Assignment Specifics:

• Read the case study and answer all
four questions
• This is an individual piece of work
• Weighting: 40% towards final grade
• Please use the Harvard Referencing
System for referencing requirements
• Total wordage: 4000 words

IKEA: A Long March
to the Far East

From its humble beginning as a small general retail store in
a village situated in the south of Sweden, IKEA has grown into the world’s
largest furniture retailer with 279 stores in 36 countries today. The name IKEA
is formed from the founder’s initials I. K. (Ingvar Kamprad) plus the first
letters of Elmtaryd (E) and Agunnaryd (A), the farm and village where he grew
up. Specializing in furniture and home decoration, IKEA has an annual turnover
of 19.8 billion euros (source: IKEA, www.ikea.com,accessed25/03/2012).TheIKEAcatalogue
is printed in 52 editions with 25 languages, with a global distribution in
excess of 160 million copies.

IKEA’s success has been nothing short of a global phenomenon.
Edvardsson and Edquist (2002) have accounted for the company’s rise to global
success following the timeline of three development phases. In phase one, IKEA’s core concepts were
formed as a result of adapting to the market circumstances. The important
moments during this period were publishing the first IKEA catalogue in 1951,
opening the first furniture showroom in Älmhult in 1953, introducing flat
packages in 1956 and finding the key to low cost production in Poland in the
early 1960s. Phase two is characterized by the company’s initial
internationalization expansion when
it reached out to its
Scandinavian neighbours in the 1960s. Since the 1970s, the company began to
expand farther into other European countries, Australia and Canada. In 1985,
IKEA arrived at the world’s largest consumer market—the United States where
first experienced North America as a market very different from those in
Europe. Armed with its international experience in Europe and North America,
IKEA took the company into the third phase of its development by embarking on a
major expansion into the Far East, in particular Japan and China.

IKEA sees the Far Asia as an emerging market still in its
infant stage. Its number of retail outlets in Malaysia, Singapore, Taiwan,
Beijing, Shanghai and Hong Kong are very small and comprises a mere 3% of the
company’s total sales. These stores were expected to be more successful in the
near future. IKEA’s imminent strategic expansion into this region exemplified
its ambitions to dominate this emerging market.

IKEA’s entry into Mainland China started in 1998 when it
opened its first store in Shanghai, followed by Beijing in 1999. IKEA took its
time to get to know the Chinese customers. This prudent approach to market
entry took IKEA the following 5 years before it opened its first full-scale
standard IKEA store in Shanghai in 2003. The store occupies 33,000 square
meters and retails more than 7,000 products.
Its signature Småland
children’s playground is 170
square meters and the free parking area holds 800 cars. A record of 80,000
visitors flocked to the store on the opening day. This new Shanghai store
represents an important landmark for IKEA’s business development in China.

It is the largest of its stores not only in China, but also
in Asia. In the same year, the president of IKEA China, Ian Duffy, unveiled a
long-term plan to open ten more stores in mid-sized cities, such as Dalian and
Qingdao, by the end of 2010. This plan would require a US$600 million investment.
The expansion plans underscored IKEA’s confidence in China considering none of
IKEA’s retail stores in China have yet turned a profit, making them the only
loss-making stores in the entire IKEA group (Wei, 2007). Its expansion in China
nonetheless saw its sales revenue increased by 500% from 2000 to 2005.

IKEA brought its distinct organizational culture and retail
strategies to China. Its Chinese stores look very similar to its store in
Europe with its blue and yellow
painted logo hung
up high outside
the building. Customers
walk through the showrooms where
they can see and try the products before making a decision on
which ones to take home. After making up their minds, customers make notes of
the details for collecting the products. They then find the products in
flat-pack in the warehouse on the ground floor according to the correspondent
aisle and shelf numbers. Once it is paid for, customers can choose to transport
the shopping themselves or have it delivered by IKEA with a surcharge. The
so-called IKEA retail experience is no different after being
‘transplanted’ into another
country. The core
concept of showrooms, flat-
packed products and do-it-yourself remain intact.

In China, IKEA successfully differentiates itself as an international
brand that provided modern furniture with elegant, western design. Unlike the
local furniture brands, IKEA promotes a ‘complete solution’ to decorating the
home. Apart from selling well-designed furniture, it also sells various
necessities for the home including cooking appliances, lighting, and bedding.
IKEA was probably the only store in China that offers such a wide range of
products for home decoration and a ‘do it yourself’ furnishing concept. It
promotes its philosophy of ‘how it is not wrong to be different’ by offering
its customers a range of options to suit the customer’s preferences and living
requirements. Although this ‘individualistic’ value is in contrast to the local
tradition, Chinese customers seem to gradually appreciate this difference.
They start to appreciate the simplicity of light-coloured,
Scandinavian style and even consider going to IKEA as experiencing another
culture.

Despite the phenomenal growth in the number of visitors and
sales volume in recent years, IKEA struggles to break even from its sales
revenue. There is a large gap between customers who visit the stores and those
who make a purchase. Those who make purchases tend to be small decoration
products with low profit margins (which make up 45% of total sales). Continuous
losses suggested that the challenges for IKEA in China were complicated and
demanding.

To appeal to its Chinese customers, IKEA has made a lot of
efforts to adapt its products to the
local tastes and
demands. For instance,
IKEA would release a series of
products to celebrate the Chinese New Year, which is the most important
festival for the Chinese people.

In 2006, a red rooster appeared on many IKEA products,
greeting the year of the Rooster. This move had won IKEA many customers. It
introduced a series of products under the FANBY range that feature red pigs to
welcome the coming year of the Pig. The colour red suggests good fortune in
Chinese culture and is commonly used in decorations to bring good luck. Apart
from that, the Swedish
kitchen section provides
IKEA with an
important store differentiation
from its competitors in the Chinese market. While emphasizing its Swedish
origin, IKEA also takes into consideration the Chinese style of cooking and
eating. For instance, IKEA Shanghai provides 3 kinds of meat cleavers and 3
kinds of chopsticks together with Western style of knives and forks.
Approximately 5% of the products IKEA sells in China are for China only, in
contrast to 1% in IKEA’s European markets.

While brand new designs for a single market may be very
effective in terms of delivering customer value for a specific market, it is an
expensive strategy that does not chime well with the IKEA way of being cost
conscientious at every step. It is more cost effective to produce small
adaptations to the features of existing products. For example, the SULTAN HÖGBO
series of sprung mattresses are sold in Malmö in the categories of 80 × 200 cm,
90 × 200 cm, 140 × 200 cm, 160 × 200 cm and 180 × 200 cm. In China, different
kinds of the SULTAN HÖGBO series are marked as single, double, standard double
and big double. The difference is due to the fact that in Sweden, people are
used to putting two single-sized beds together to form a double-sized bed to
ensure a good night sleep free from the disturbance by the person sharing the
bed. This idea does not fit well with the Feng Shui of Chinese culture as
couples who sleep in two separate beds symbolizes a bad relationship between
the couple and is believed to bring bad luck.

Product pricing in the Far East, in particular in China,
presents a unique challenge for IKEA. IKEA derives its competitive advantage
in developed countries from the low cost production in developing
countries supported by aggressive control over the supply chain. Large amounts
of raw materials are sourced in the developing countries and production
outsourced to factories in countries with low cost labour such as Malaysia,
India and China.
The gap in the raw material and the production costs between
developing countries and western
countries is the
main source of
IKEA’s low prices.
This cost advantage however
cannot be maintained in the Chinese market. As a developing country, China’s
GDP per capita of around US$1,000 is still low even compared with other
developing countries in Asia. Prices of furniture provided by local stores are
much lower because they often do not invest on original product
designs. Most local
firms imitate the
designs of famous brands (including those of Ikea) and
produced furniture at a much lower cost since they are able to access cheap
materials and labour locally, as well as use less expensive transportation
methods. For example, a sofa sold at RMB3000 in IKEA would be priced at around
RMB2000 at a regular local store such as the OrientHome (www.orienthome.com.cn).

In addition, many Chinese consumers do not like IKEA’s DIY
concept to home furnishing especially in the light of having to accept the
highly priced products without the accompanying personal services, assembly and
home delivery. Although it is making in routes into the pro-western 28-35
consumer groups, it is failing to turn the majority of people in more common
households into actual buyers. Many young customers, who like the design of
IKEA’s furniture and decorations, turn to other local stores to buy after
wandering around the IKEA store due to the high prices of IKEA’s products.
There is a perceived incoherence between the consumer groups who understand the
IKEA concept and the groups who can afford the product. Chinese consumers with
high incomes normally opt for expensive foreign brands, whereas those with a
medium or low income tend to shop at local stores. In this regard, IKEA’s low
price strategy seems to create confusion among Chinese consumers. Foreign goods
are perceived to be more expensive than local brand products. For consumers who
are able and willing to pay a high premium for foreign produces, foreign brands
like IKEA which prides itself as a low price retailer make little sense. For
those seeking low prices, they find IKEA products more expensive in comparison
to the local brands. Therefore, given the ‘low price’ image that IKEA
associated itself with and the relatively high actual prices, it is difficult
for the Chinese consumers to recognize IKEA’s value and accept its prices at
the same time.

A highly efficient distribution and logistics system plays a
fundamental role in enabling IKEA to keep its prices competitive and
contributes to every percentage of its profit margins. Under pressure to cut
costs and deliver lower prices, IKEA needs to increase sourcing its products
locally by collaborating with local manufacturers. Its efforts of improving its
distribution system are shown in building 2 logistics centres in Shanghai. After finishing the first logistics
centre in Song Jiang District in December 2005, IKEA is building the second one
in another district, Feng Xian. The latter is IKEA’s first logistics centre
with a quality control centre attached to it. Once it is finished in 2010, both
logistics centres can hold 300,000 cubic metres of products. Before these
products are distributed to the IKEA shops in the Asia-Pacific region, they
will undergo a series of quality control tests (Chen, 2006).

IKEA’s efforts to establish an efficient and economic
network of logistics and distribution have been met with significant
challenges. Distribution systems in China are still relatively underdeveloped.
With a large population of 1.3 billion and an inadequate basic road
infrastructure, most companies can only access a small part of the population
in the most affluent cities. Due to relatively low private car ownership, the
locations of most IKEA store in China have to be situated in the city, which is
traditionally considered ‘non-IKEA’ when IKEA’s retail strategy is concerned.
For instance, IKEA Shanghai is built in one of the most expensive districts
downtown Shanghai, Xu Jia Hui District, where there is convenient public
transportation and opens from 10am to 10pm daily. Apart from the high retail
property costs, transporting thousands of products to city stores inevitably
increase distribution costs due to road congestion and logistical
complications.

Further expansion into the Chinese market cannot be
materialized without significant investment in developing its supply chain in
China.

Japan has one of the most established consumer markets in
the world. Many international companies have tried to establish themselves in
Japan without succeeding. Although Japan has started to open up its market to
foreign competition since the
recession in the
1990s, it remains
a culturally challenging market
to succeed for foreign organizations.

IKEA first entered into the Japanese home furnishing market
in 1974 through a franchise arrangement with a Japanese trading company. It had
to withdraw from the Japanese
market in 1986
after 12 years
of mediocre financial returns. It
took IKEA another
5 years to
establish a much
deeper understanding of the Japanese consumers before deciding to
re-enter the country. During this
period, IKEA conducted
research on more
than 100 Japanese homes in order
to understand their way of living and their needs in everyday life, and develop
products which would fit well with the Japanese consumer perception.

In 2006, IKEA went into the Japanese market for the second
time. Instead of using a franchised arrangement, it opened two IKEA-owned
retail outlets: one in Funabashi (Tokyo) and one in Kohoku. It has opened two
more stores in 2008: one in Kobe and one in Osaka. All the stores have IKEA’s
largest store design in the world occupying 40,000 squared meters with an
in-store restaurant of over 700 seats. This series of substantial investment
signifies IKEA’s ambition to dominate the market with one of the world’s
wealthiest consumers.

On the opening day of IKEA Funabashi, the store attracted
35,000 visitors. Since then, the store generally maintains 30,000 to 40,000
visitors at every weekend. Not unlike other markets, the most important target
group for IKEA in Japan is families with children. Their customers tend to be
relatively young with those in their 30s being the largest age segment. The
average household size among this group of customers is three people per
household and the annual household income is 40,000 to 45,000 Euros per year.

For a nation which values simplicity in many aspects of
living, the Japanese consumers were expected to appreciate IKEA’s
well-designed, light-coloured Scandinavian
furniture. Compared to
other European or
Scandinavian furniture manufacturers, IKEA products are priced very
competitively making them very accessible for most Japanese consumers.

IKEA’s biggest challenge in Japan is to make the home a more
important aspect in the Japanese lifestyle. By any measure, Japanese homes are
tiny with approximately only 50 to 60 squared meters making it very hard for
household owners to make their homes beautiful while having to considered
storage space for all of the family’s belongings. Most Japanese consumers see
their home as a place to sleep and store their personal belongings.

Culturally, home furnishing is therefore not regarded as
important hence little time is spent on decorating the home. It is not in their
nature to invite guests over to their homes. As Japanese people have a tendency
to socialize outside their homes, they spend more time and money on products
and accessories such as Prada or Louis Vuitton handbags, mobile phones and cars
that they can show off in society.

To overcome this cultural apathy towards home furnishing,
IKEA needs to find ways to enthuse Japanese consumers to develop the idea of
making a home more than just a place
to sleep, and make them
realize that with home furnishing they can make even small
spaces more enjoyable. For instance, IKEA
demonstrates this by displaying
Japanese-sized apartments in
their stores that incorporate a kitchen, a bathroom, a sofa that turns
into a bed, and several storage areas. To make it more realistic in relation to
Japanese style homes, IKEA uses the Japanese traditional ‘tatami’ measures for
their display rooms – the only IKEA store in the world where this is practiced.
Tatami mats are a traditional type of Japanese flooring. They are made of rice
straw in individual mats of uniform size and shape bordered by brocade or plain
green cloth. All kitchen appliances such as sinks, taps, dishwashers, fridges
etc. must fulfil Japanese
law requirements, and
all cabinets have
to be earthquake-safe. While this
is a great opportunity for IKEA to be a catalyst of cultural change, this
changing process is taking some time as the Japanese view of their homes is
deeply rooted in their cutural values.

As in China, the Japanese consumers do not appreciate the
DIY concept of self-service, self-delivery and self-assembly. This aspect has
generated some confusion and discussion since a high level of customer service
is something that Japanese consumers are culturally accustomed to from every
retailer in the country. Although
more staff members
are now employed
in their Japanese stores to adapt
to this culture, IKEA limits itself to the amount of service that customers
receive. Despite this extra investment, the Japanese customers are still not
happy. Customer surveys show that ‘staff attitude’ to customer service tends to
score very low in the results.

In conclusion, IKEA’s ventures into China and Japan are
laden with unique marketing
challenges which it
had not encountered
before in other international markets. Its ambition to
conquer the vast Asian markets is reflected in its substantial financial
investment and long-term management commitment. Although IKEA strives to
implement its own brand of retail strategies that has brought tremendous
success in the European markets, it has
yet produced comparable
success in Japan
and China. Are
IKEA’s current strategies in these markets going in the right direction?
Is the company’s retail concept appropriate for the Chinese and Japanese
consumers and eventually be widely accepted? Is it impossible for IKEA to
largely ignore the needs of the local consumers as well as it is perhaps very
difficult for the company to adapt itself fully to the local culture?

Questions

1. Based
on your analysis, what are the opportunities and challenges for IKEA in their
market operations in (a) China; and (b) Japan?

(Wordage: 1000. Weight: 25%)

2. In
reference to Topic 6, discuss the market entry strategies that IKEA adopt in
China and Japan respectively.
(Wordage: 1000. Weight: 25%)

3. In
reference to Topic 4 & 5, what are IKEA product, pricing, marketing
communication and distribution decisions in the two Asian markets? To what
extent these marketing mixes have been adapted to the preferences and needs of
these markets?

(Wordage: 1000. Weight: 25%)

4. For
each of these markets, plan, discuss and justify what, in your opinion, IKEA’s
marketing strategy should be in the near future to gain market shares and
achieve higher profitability.

(Wordage: 1000. Weight: 25%)

This case is based on:

Chen, H. (2006), IKEA’s investing 1.2 billion RMB on another
logistics hub of the Asia-Pacific region in Feng Xian District, Shanghai, National Business Daily.

Edvardsson, B. and
Edquist, B. (2002),
“The IKEA Saga”:
How Service Culture Derives Service
Strategy, The Service Industries Journal,
22(4), 153- 86.

Leroux, J., Thamhaksa, D., Yokoi, H. (2007), “Home Sweet Home” – A
Controversial Thought? A Case Study of IKEA in Japan, Bachelor Thesis,
Sweden: Lund University, Unpublished.

Pan, Y (2005), Marketing
Across Cultures: A case study of IKEA Shanghai, Masters Dissertation,
Sweden: Lund University, Unpublished.

Wei, L-Q. (2007), IKEA in China: Facing Dilemma in an
Emerging Economy, Asian Case Research
Journal, 11(1), 1-21.

Assessment
2 Case Study

Assignment Specifics:

• Read the case study and answer all
four questions
• This is an individual piece of work
• Weighting: 40% towards final grade
• Please use the Harvard Referencing
System for referencing requirements
• Total wordage: 4000 words

IKEA: A Long March
to the Far East

From its humble beginning as a small general retail store in
a village situated in the south of Sweden, IKEA has grown into the world’s
largest furniture retailer with 279 stores in 36 countries today. The name IKEA
is formed from the founder’s initials I. K. (Ingvar Kamprad) plus the first
letters of Elmtaryd (E) and Agunnaryd (A), the farm and village where he grew
up. Specializing in furniture and home decoration, IKEA has an annual turnover
of 19.8 billion euros (source: IKEA, www.ikea.com,accessed25/03/2012).TheIKEAcatalogue
is printed in 52 editions with 25 languages, with a global distribution in
excess of 160 million copies.

IKEA’s success has been nothing short of a global phenomenon.
Edvardsson and Edquist (2002) have accounted for the company’s rise to global
success following the timeline of three development phases. In phase one, IKEA’s core concepts were
formed as a result of adapting to the market circumstances. The important
moments during this period were publishing the first IKEA catalogue in 1951,
opening the first furniture showroom in Älmhult in 1953, introducing flat
packages in 1956 and finding the key to low cost production in Poland in the
early 1960s. Phase two is characterized by the company’s initial
internationalization expansion when
it reached out to its
Scandinavian neighbours in the 1960s. Since the 1970s, the company began to
expand farther into other European countries, Australia and Canada. In 1985,
IKEA arrived at the world’s largest consumer market—the United States where
first experienced North America as a market very different from those in
Europe. Armed with its international experience in Europe and North America,
IKEA took the company into the third phase of its development by embarking on a
major expansion into the Far East, in particular Japan and China.

IKEA sees the Far Asia as an emerging market still in its
infant stage. Its number of retail outlets in Malaysia, Singapore, Taiwan,
Beijing, Shanghai and Hong Kong are very small and comprises a mere 3% of the
company’s total sales. These stores were expected to be more successful in the
near future. IKEA’s imminent strategic expansion into this region exemplified
its ambitions to dominate this emerging market.

IKEA’s entry into Mainland China started in 1998 when it
opened its first store in Shanghai, followed by Beijing in 1999. IKEA took its
time to get to know the Chinese customers. This prudent approach to market
entry took IKEA the following 5 years before it opened its first full-scale
standard IKEA store in Shanghai in 2003. The store occupies 33,000 square
meters and retails more than 7,000 products.
Its signature Småland
children’s playground is 170
square meters and the free parking area holds 800 cars. A record of 80,000
visitors flocked to the store on the opening day. This new Shanghai store
represents an important landmark for IKEA’s business development in China.

It is the largest of its stores not only in China, but also
in Asia. In the same year, the president of IKEA China, Ian Duffy, unveiled a
long-term plan to open ten more stores in mid-sized cities, such as Dalian and
Qingdao, by the end of 2010. This plan would require a US$600 million investment.
The expansion plans underscored IKEA’s confidence in China considering none of
IKEA’s retail stores in China have yet turned a profit, making them the only
loss-making stores in the entire IKEA group (Wei, 2007). Its expansion in China
nonetheless saw its sales revenue increased by 500% from 2000 to 2005.

IKEA brought its distinct organizational culture and retail
strategies to China. Its Chinese stores look very similar to its store in
Europe with its blue and yellow
painted logo hung
up high outside
the building. Customers
walk through the showrooms where
they can see and try the products before making a decision on
which ones to take home. After making up their minds, customers make notes of
the details for collecting the products. They then find the products in
flat-pack in the warehouse on the ground floor according to the correspondent
aisle and shelf numbers. Once it is paid for, customers can choose to transport
the shopping themselves or have it delivered by IKEA with a surcharge. The
so-called IKEA retail experience is no different after being
‘transplanted’ into another
country. The core
concept of showrooms, flat-
packed products and do-it-yourself remain intact.

In China, IKEA successfully differentiates itself as an international
brand that provided modern furniture with elegant, western design. Unlike the
local furniture brands, IKEA promotes a ‘complete solution’ to decorating the
home. Apart from selling well-designed furniture, it also sells various
necessities for the home including cooking appliances, lighting, and bedding.
IKEA was probably the only store in China that offers such a wide range of
products for home decoration and a ‘do it yourself’ furnishing concept. It
promotes its philosophy of ‘how it is not wrong to be different’ by offering
its customers a range of options to suit the customer’s preferences and living
requirements. Although this ‘individualistic’ value is in contrast to the local
tradition, Chinese customers seem to gradually appreciate this difference.
They start to appreciate the simplicity of light-coloured,
Scandinavian style and even consider going to IKEA as experiencing another
culture.

Despite the phenomenal growth in the number of visitors and
sales volume in recent years, IKEA struggles to break even from its sales
revenue. There is a large gap between customers who visit the stores and those
who make a purchase. Those who make purchases tend to be small decoration
products with low profit margins (which make up 45% of total sales). Continuous
losses suggested that the challenges for IKEA in China were complicated and
demanding.

To appeal to its Chinese customers, IKEA has made a lot of
efforts to adapt its products to the
local tastes and
demands. For instance,
IKEA would release a series of
products to celebrate the Chinese New Year, which is the most important
festival for the Chinese people.

In 2006, a red rooster appeared on many IKEA products,
greeting the year of the Rooster. This move had won IKEA many customers. It
introduced a series of products under the FANBY range that feature red pigs to
welcome the coming year of the Pig. The colour red suggests good fortune in
Chinese culture and is commonly used in decorations to bring good luck. Apart
from that, the Swedish
kitchen section provides
IKEA with an
important store differentiation
from its competitors in the Chinese market. While emphasizing its Swedish
origin, IKEA also takes into consideration the Chinese style of cooking and
eating. For instance, IKEA Shanghai provides 3 kinds of meat cleavers and 3
kinds of chopsticks together with Western style of knives and forks.
Approximately 5% of the products IKEA sells in China are for China only, in
contrast to 1% in IKEA’s European markets.

While brand new designs for a single market may be very
effective in terms of delivering customer value for a specific market, it is an
expensive strategy that does not chime well with the IKEA way of being cost
conscientious at every step. It is more cost effective to produce small
adaptations to the features of existing products. For example, the SULTAN HÖGBO
series of sprung mattresses are sold in Malmö in the categories of 80 × 200 cm,
90 × 200 cm, 140 × 200 cm, 160 × 200 cm and 180 × 200 cm. In China, different
kinds of the SULTAN HÖGBO series are marked as single, double, standard double
and big double. The difference is due to the fact that in Sweden, people are
used to putting two single-sized beds together to form a double-sized bed to
ensure a good night sleep free from the disturbance by the person sharing the
bed. This idea does not fit well with the Feng Shui of Chinese culture as
couples who sleep in two separate beds symbolizes a bad relationship between
the couple and is believed to bring bad luck.

Product pricing in the Far East, in particular in China,
presents a unique challenge for IKEA. IKEA derives its competitive advantage
in developed countries from the low cost production in developing
countries supported by aggressive control over the supply chain. Large amounts
of raw materials are sourced in the developing countries and production
outsourced to factories in countries with low cost labour such as Malaysia,
India and China.
The gap in the raw material and the production costs between
developing countries and western
countries is the
main source of
IKEA’s low prices.
This cost advantage however
cannot be maintained in the Chinese market. As a developing country, China’s
GDP per capita of around US$1,000 is still low even compared with other
developing countries in Asia. Prices of furniture provided by local stores are
much lower because they often do not invest on original product
designs. Most local
firms imitate the
designs of famous brands (including those of Ikea) and
produced furniture at a much lower cost since they are able to access cheap
materials and labour locally, as well as use less expensive transportation
methods. For example, a sofa sold at RMB3000 in IKEA would be priced at around
RMB2000 at a regular local store such as the OrientHome (www.orienthome.com.cn).

In addition, many Chinese consumers do not like IKEA’s DIY
concept to home furnishing especially in the light of having to accept the
highly priced products without the accompanying personal services, assembly and
home delivery. Although it is making in routes into the pro-western 28-35
consumer groups, it is failing to turn the majority of people in more common
households into actual buyers. Many young customers, who like the design of
IKEA’s furniture and decorations, turn to other local stores to buy after
wandering around the IKEA store due to the high prices of IKEA’s products.
There is a perceived incoherence between the consumer groups who understand the
IKEA concept and the groups who can afford the product. Chinese consumers with
high incomes normally opt for expensive foreign brands, whereas those with a
medium or low income tend to shop at local stores. In this regard, IKEA’s low
price strategy seems to create confusion among Chinese consumers. Foreign goods
are perceived to be more expensive than local brand products. For consumers who
are able and willing to pay a high premium for foreign produces, foreign brands
like IKEA which prides itself as a low price retailer make little sense. For
those seeking low prices, they find IKEA products more expensive in comparison
to the local brands. Therefore, given the ‘low price’ image that IKEA
associated itself with and the relatively high actual prices, it is difficult
for the Chinese consumers to recognize IKEA’s value and accept its prices at
the same time.

A highly efficient distribution and logistics system plays a
fundamental role in enabling IKEA to keep its prices competitive and
contributes to every percentage of its profit margins. Under pressure to cut
costs and deliver lower prices, IKEA needs to increase sourcing its products
locally by collaborating with local manufacturers. Its efforts of improving its
distribution system are shown in building 2 logistics centres in Shanghai. After finishing the first logistics
centre in Song Jiang District in December 2005, IKEA is building the second one
in another district, Feng Xian. The latter is IKEA’s first logistics centre
with a quality control centre attached to it. Once it is finished in 2010, both
logistics centres can hold 300,000 cubic metres of products. Before these
products are distributed to the IKEA shops in the Asia-Pacific region, they
will undergo a series of quality control tests (Chen, 2006).

IKEA’s efforts to establish an efficient and economic
network of logistics and distribution have been met with significant
challenges. Distribution systems in China are still relatively underdeveloped.
With a large population of 1.3 billion and an inadequate basic road
infrastructure, most companies can only access a small part of the population
in the most affluent cities. Due to relatively low private car ownership, the
locations of most IKEA store in China have to be situated in the city, which is
traditionally considered ‘non-IKEA’ when IKEA’s retail strategy is concerned.
For instance, IKEA Shanghai is built in one of the most expensive districts
downtown Shanghai, Xu Jia Hui District, where there is convenient public
transportation and opens from 10am to 10pm daily. Apart from the high retail
property costs, transporting thousands of products to city stores inevitably
increase distribution costs due to road congestion and logistical
complications.

Further expansion into the Chinese market cannot be
materialized without significant investment in developing its supply chain in
China.

Japan has one of the most established consumer markets in
the world. Many international companies have tried to establish themselves in
Japan without succeeding. Although Japan has started to open up its market to
foreign competition since the
recession in the
1990s, it remains
a culturally challenging market
to succeed for foreign organizations.

IKEA first entered into the Japanese home furnishing market
in 1974 through a franchise arrangement with a Japanese trading company. It had
to withdraw from the Japanese
market in 1986
after 12 years
of mediocre financial returns. It
took IKEA another
5 years to
establish a much
deeper understanding of the Japanese consumers before deciding to
re-enter the country. During this
period, IKEA conducted
research on more
than 100 Japanese homes in order
to understand their way of living and their needs in everyday life, and develop
products which would fit well with the Japanese consumer perception.

In 2006, IKEA went into the Japanese market for the second
time. Instead of using a franchised arrangement, it opened two IKEA-owned
retail outlets: one in Funabashi (Tokyo) and one in Kohoku. It has opened two
more stores in 2008: one in Kobe and one in Osaka. All the stores have IKEA’s
largest store design in the world occupying 40,000 squared meters with an
in-store restaurant of over 700 seats. This series of substantial investment
signifies IKEA’s ambition to dominate the market with one of the world’s
wealthiest consumers.

On the opening day of IKEA Funabashi, the store attracted
35,000 visitors. Since then, the store generally maintains 30,000 to 40,000
visitors at every weekend. Not unlike other markets, the most important target
group for IKEA in Japan is families with children. Their customers tend to be
relatively young with those in their 30s being the largest age segment. The
average household size among this group of customers is three people per
household and the annual household income is 40,000 to 45,000 Euros per year.

For a nation which values simplicity in many aspects of
living, the Japanese consumers were expected to appreciate IKEA’s
well-designed, light-coloured Scandinavian
furniture. Compared to
other European or
Scandinavian furniture manufacturers, IKEA products are priced very
competitively making them very accessible for most Japanese consumers.

IKEA’s biggest challenge in Japan is to make the home a more
important aspect in the Japanese lifestyle. By any measure, Japanese homes are
tiny with approximately only 50 to 60 squared meters making it very hard for
household owners to make their homes beautiful while having to considered
storage space for all of the family’s belongings. Most Japanese consumers see
their home as a place to sleep and store their personal belongings.

Culturally, home furnishing is therefore not regarded as
important hence little time is spent on decorating the home. It is not in their
nature to invite guests over to their homes. As Japanese people have a tendency
to socialize outside their homes, they spend more time and money on products
and accessories such as Prada or Louis Vuitton handbags, mobile phones and cars
that they can show off in society.

To overcome this cultural apathy towards home furnishing,
IKEA needs to find ways to enthuse Japanese consumers to develop the idea of
making a home more than just a place
to sleep, and make them
realize that with home furnishing they can make even small
spaces more enjoyable. For instance, IKEA
demonstrates this by displaying
Japanese-sized apartments in
their stores that incorporate a kitchen, a bathroom, a sofa that turns
into a bed, and several storage areas. To make it more realistic in relation to
Japanese style homes, IKEA uses the Japanese traditional ‘tatami’ measures for
their display rooms – the only IKEA store in the world where this is practiced.
Tatami mats are a traditional type of Japanese flooring. They are made of rice
straw in individual mats of uniform size and shape bordered by brocade or plain
green cloth. All kitchen appliances such as sinks, taps, dishwashers, fridges
etc. must fulfil Japanese
law requirements, and
all cabinets have
to be earthquake-safe. While this
is a great opportunity for IKEA to be a catalyst of cultural change, this
changing process is taking some time as the Japanese view of their homes is
deeply rooted in their cutural values.

As in China, the Japanese consumers do not appreciate the
DIY concept of self-service, self-delivery and self-assembly. This aspect has
generated some confusion and discussion since a high level of customer service
is something that Japanese consumers are culturally accustomed to from every
retailer in the country. Although
more staff members
are now employed
in their Japanese stores to adapt
to this culture, IKEA limits itself to the amount of service that customers
receive. Despite this extra investment, the Japanese customers are still not
happy. Customer surveys show that ‘staff attitude’ to customer service tends to
score very low in the results.

In conclusion, IKEA’s ventures into China and Japan are
laden with unique marketing
challenges which it
had not encountered
before in other international markets. Its ambition to
conquer the vast Asian markets is reflected in its substantial financial
investment and long-term management commitment. Although IKEA strives to
implement its own brand of retail strategies that has brought tremendous
success in the European markets, it has
yet produced comparable
success in Japan
and China. Are
IKEA’s current strategies in these markets going in the right direction?
Is the company’s retail concept appropriate for the Chinese and Japanese
consumers and eventually be widely accepted? Is it impossible for IKEA to
largely ignore the needs of the local consumers as well as it is perhaps very
difficult for the company to adapt itself fully to the local culture?

Questions

1. Based
on your analysis, what are the opportunities and challenges for IKEA in their
market operations in (a) China; and (b) Japan?

(Wordage: 1000. Weight: 25%)

2. In
reference to Topic 6, discuss the market entry strategies that IKEA adopt in
China and Japan respectively.
(Wordage: 1000. Weight: 25%)

3. In
reference to Topic 4 & 5, what are IKEA product, pricing, marketing
communication and distribution decisions in the two Asian markets? To what
extent these marketing mixes have been adapted to the preferences and needs of
these markets?

(Wordage: 1000. Weight: 25%)

4. For
each of these markets, plan, discuss and justify what, in your opinion, IKEA’s
marketing strategy should be in the near future to gain market shares and
achieve higher profitability.

(Wordage: 1000. Weight: 25%)

This case is based on:

Chen, H. (2006), IKEA’s investing 1.2 billion RMB on another
logistics hub of the Asia-Pacific region in Feng Xian District, Shanghai, National Business Daily.

Edvardsson, B. and
Edquist, B. (2002),
“The IKEA Saga”:
How Service Culture Derives Service
Strategy, The Service Industries Journal,
22(4), 153- 86.

Leroux, J., Thamhaksa, D., Yokoi, H. (2007), “Home Sweet Home” – A
Controversial Thought? A Case Study of IKEA in Japan, Bachelor Thesis,
Sweden: Lund University, Unpublished.

Pan, Y (2005), Marketing
Across Cultures: A case study of IKEA Shanghai, Masters Dissertation,
Sweden: Lund University, Unpublished.

Wei, L-Q. (2007), IKEA in China: Facing Dilemma in an
Emerging Economy, Asian Case Research
Journal, 11(1), 1-21.

Assessment
2 Case Study


Assignment Specifics:

• Read the case study and answer all
four questions
• This is an individual piece of work
• Weighting: 40% towards final grade
• Please use the Harvard Referencing
System for referencing requirements
• Total wordage: 4000 words







IKEA: A Long March
to the Far East


From its humble beginning as a small general retail store in
a village situated in the south of Sweden, IKEA has grown into the world’s
largest furniture retailer with 279 stores in 36 countries today. The name IKEA
is formed from the founder’s initials I. K. (Ingvar Kamprad) plus the first
letters of Elmtaryd (E) and Agunnaryd (A), the farm and village where he grew
up. Specializing in furniture and home decoration, IKEA has an annual turnover
of 19.8 billion euros (source: IKEA, www.ikea.com,accessed25/03/2012).TheIKEAcatalogue
is printed in 52 editions with 25 languages, with a global distribution in
excess of 160 million copies.









IKEA’s success has been nothing short of a global phenomenon.
Edvardsson and Edquist (2002) have accounted for the company’s rise to global
success following the timeline of three development phases. In phase one, IKEA’s core concepts were
formed as a result of adapting to the market circumstances. The important
moments during this period were publishing the first IKEA catalogue in 1951,
opening the first furniture showroom in Älmhult in 1953, introducing flat
packages in 1956 and finding the key to low cost production in Poland in the
early 1960s. Phase two is characterized by the company’s initial
internationalization expansion when
it reached out to its
Scandinavian neighbours in the 1960s. Since the 1970s, the company began to
expand farther into other European countries, Australia and Canada. In 1985,
IKEA arrived at the world’s largest consumer market—the United States where
first experienced North America as a market very different from those in
Europe. Armed with its international experience in Europe and North America,
IKEA took the company into the third phase of its development by embarking on a
major expansion into the Far East, in particular Japan and China.

















IKEA sees the Far Asia as an emerging market still in its
infant stage. Its number of retail outlets in Malaysia, Singapore, Taiwan,
Beijing, Shanghai and Hong Kong are very small and comprises a mere 3% of the
company’s total sales. These stores were expected to be more successful in the
near future. IKEA’s imminent strategic expansion into this region exemplified
its ambitions to dominate this emerging market.






IKEA’s entry into Mainland China started in 1998 when it
opened its first store in Shanghai, followed by Beijing in 1999. IKEA took its
time to get to know the Chinese customers. This prudent approach to market
entry took IKEA the following 5 years before it opened its first full-scale
standard IKEA store in Shanghai in 2003. The store occupies 33,000 square
meters and retails more than 7,000 products.
Its signature Småland
children’s playground is 170
square meters and the free parking area holds 800 cars. A record of 80,000
visitors flocked to the store on the opening day. This new Shanghai store
represents an important landmark for IKEA’s business development in China.











It is the largest of its stores not only in China, but also
in Asia. In the same year, the president of IKEA China, Ian Duffy, unveiled a
long-term plan to open ten more stores in mid-sized cities, such as Dalian and
Qingdao, by the end of 2010. This plan would require a US$600 million investment.
The expansion plans underscored IKEA’s confidence in China considering none of
IKEA’s retail stores in China have yet turned a profit, making them the only
loss-making stores in the entire IKEA group (Wei, 2007). Its expansion in China
nonetheless saw its sales revenue increased by 500% from 2000 to 2005.








IKEA brought its distinct organizational culture and retail
strategies to China. Its Chinese stores look very similar to its store in
Europe with its blue and yellow
painted logo hung
up high outside
the building. Customers
walk through the showrooms where
they can see and try the products before making a decision on
which ones to take home. After making up their minds, customers make notes of
the details for collecting the products. They then find the products in
flat-pack in the warehouse on the ground floor according to the correspondent
aisle and shelf numbers. Once it is paid for, customers can choose to transport
the shopping themselves or have it delivered by IKEA with a surcharge. The
so-called IKEA retail experience is no different after being
‘transplanted’ into another
country. The core
concept of showrooms, flat-
packed products and do-it-yourself remain intact.


















In China, IKEA successfully differentiates itself as an international
brand that provided modern furniture with elegant, western design. Unlike the
local furniture brands, IKEA promotes a ‘complete solution’ to decorating the
home. Apart from selling well-designed furniture, it also sells various
necessities for the home including cooking appliances, lighting, and bedding.
IKEA was probably the only store in China that offers such a wide range of
products for home decoration and a ‘do it yourself’ furnishing concept. It
promotes its philosophy of ‘how it is not wrong to be different’ by offering
its customers a range of options to suit the customer’s preferences and living
requirements. Although this ‘individualistic’ value is in contrast to the local
tradition, Chinese customers seem to gradually appreciate this difference.
They start to appreciate the simplicity of light-coloured,
Scandinavian style and even consider going to IKEA as experiencing another
culture.














Despite the phenomenal growth in the number of visitors and
sales volume in recent years, IKEA struggles to break even from its sales
revenue. There is a large gap between customers who visit the stores and those
who make a purchase. Those who make purchases tend to be small decoration
products with low profit margins (which make up 45% of total sales). Continuous
losses suggested that the challenges for IKEA in China were complicated and
demanding.







To appeal to its Chinese customers, IKEA has made a lot of
efforts to adapt its products to the
local tastes and
demands. For instance,
IKEA would release a series of
products to celebrate the Chinese New Year, which is the most important
festival for the Chinese people.







In 2006, a red rooster appeared on many IKEA products,
greeting the year of the Rooster. This move had won IKEA many customers. It
introduced a series of products under the FANBY range that feature red pigs to
welcome the coming year of the Pig. The colour red suggests good fortune in
Chinese culture and is commonly used in decorations to bring good luck. Apart
from that, the Swedish
kitchen section provides
IKEA with an
important store differentiation
from its competitors in the Chinese market. While emphasizing its Swedish
origin, IKEA also takes into consideration the Chinese style of cooking and
eating. For instance, IKEA Shanghai provides 3 kinds of meat cleavers and 3
kinds of chopsticks together with Western style of knives and forks.
Approximately 5% of the products IKEA sells in China are for China only, in
contrast to 1% in IKEA’s European markets.















While brand new designs for a single market may be very
effective in terms of delivering customer value for a specific market, it is an
expensive strategy that does not chime well with the IKEA way of being cost
conscientious at every step. It is more cost effective to produce small
adaptations to the features of existing products. For example, the SULTAN HÖGBO
series of sprung mattresses are sold in Malmö in the categories of 80 × 200 cm,
90 × 200 cm, 140 × 200 cm, 160 × 200 cm and 180 × 200 cm. In China, different
kinds of the SULTAN HÖGBO series are marked as single, double, standard double
and big double. The difference is due to the fact that in Sweden, people are
used to putting two single-sized beds together to form a double-sized bed to
ensure a good night sleep free from the disturbance by the person sharing the
bed. This idea does not fit well with the Feng Shui of Chinese culture as
couples who sleep in two separate beds symbolizes a bad relationship between
the couple and is believed to bring bad luck.














Product pricing in the Far East, in particular in China,
presents a unique challenge for IKEA. IKEA derives its competitive advantage
in developed countries from the low cost production in developing
countries supported by aggressive control over the supply chain. Large amounts
of raw materials are sourced in the developing countries and production
outsourced to factories in countries with low cost labour such as Malaysia,
India and China.
The gap in the raw material and the production costs between
developing countries and western
countries is the
main source of
IKEA’s low prices.
This cost advantage however
cannot be maintained in the Chinese market. As a developing country, China’s
GDP per capita of around US$1,000 is still low even compared with other
developing countries in Asia. Prices of furniture provided by local stores are
much lower because they often do not invest on original product
designs. Most local
firms imitate the
designs of famous brands (including those of Ikea) and
produced furniture at a much lower cost since they are able to access cheap
materials and labour locally, as well as use less expensive transportation
methods. For example, a sofa sold at RMB3000 in IKEA would be priced at around
RMB2000 at a regular local store such as the OrientHome (www.orienthome.com.cn).
























In addition, many Chinese consumers do not like IKEA’s DIY
concept to home furnishing especially in the light of having to accept the
highly priced products without the accompanying personal services, assembly and
home delivery. Although it is making in routes into the pro-western 28-35
consumer groups, it is failing to turn the majority of people in more common
households into actual buyers. Many young customers, who like the design of
IKEA’s furniture and decorations, turn to other local stores to buy after
wandering around the IKEA store due to the high prices of IKEA’s products.
There is a perceived incoherence between the consumer groups who understand the
IKEA concept and the groups who can afford the product. Chinese consumers with
high incomes normally opt for expensive foreign brands, whereas those with a
medium or low income tend to shop at local stores. In this regard, IKEA’s low
price strategy seems to create confusion among Chinese consumers. Foreign goods
are perceived to be more expensive than local brand products. For consumers who
are able and willing to pay a high premium for foreign produces, foreign brands
like IKEA which prides itself as a low price retailer make little sense. For
those seeking low prices, they find IKEA products more expensive in comparison
to the local brands. Therefore, given the ‘low price’ image that IKEA
associated itself with and the relatively high actual prices, it is difficult
for the Chinese consumers to recognize IKEA’s value and accept its prices at
the same time.





















A highly efficient distribution and logistics system plays a
fundamental role in enabling IKEA to keep its prices competitive and
contributes to every percentage of its profit margins. Under pressure to cut
costs and deliver lower prices, IKEA needs to increase sourcing its products
locally by collaborating with local manufacturers. Its efforts of improving its
distribution system are shown in building 2 logistics centres in Shanghai. After finishing the first logistics
centre in Song Jiang District in December 2005, IKEA is building the second one
in another district, Feng Xian. The latter is IKEA’s first logistics centre
with a quality control centre attached to it. Once it is finished in 2010, both
logistics centres can hold 300,000 cubic metres of products. Before these
products are distributed to the IKEA shops in the Asia-Pacific region, they
will undergo a series of quality control tests (Chen, 2006).












IKEA’s efforts to establish an efficient and economic
network of logistics and distribution have been met with significant
challenges. Distribution systems in China are still relatively underdeveloped.
With a large population of 1.3 billion and an inadequate basic road
infrastructure, most companies can only access a small part of the population
in the most affluent cities. Due to relatively low private car ownership, the
locations of most IKEA store in China have to be situated in the city, which is
traditionally considered ‘non-IKEA’ when IKEA’s retail strategy is concerned.
For instance, IKEA Shanghai is built in one of the most expensive districts
downtown Shanghai, Xu Jia Hui District, where there is convenient public
transportation and opens from 10am to 10pm daily. Apart from the high retail
property costs, transporting thousands of products to city stores inevitably
increase distribution costs due to road congestion and logistical
complications.














Further expansion into the Chinese market cannot be
materialized without significant investment in developing its supply chain in
China.



Japan has one of the most established consumer markets in
the world. Many international companies have tried to establish themselves in
Japan without succeeding. Although Japan has started to open up its market to
foreign competition since the
recession in the
1990s, it remains
a culturally challenging market
to succeed for foreign organizations.








IKEA first entered into the Japanese home furnishing market
in 1974 through a franchise arrangement with a Japanese trading company. It had
to withdraw from the Japanese
market in 1986
after 12 years
of mediocre financial returns. It
took IKEA another
5 years to
establish a much
deeper understanding of the Japanese consumers before deciding to
re-enter the country. During this
period, IKEA conducted
research on more
than 100 Japanese homes in order
to understand their way of living and their needs in everyday life, and develop
products which would fit well with the Japanese consumer perception.
















In 2006, IKEA went into the Japanese market for the second
time. Instead of using a franchised arrangement, it opened two IKEA-owned
retail outlets: one in Funabashi (Tokyo) and one in Kohoku. It has opened two
more stores in 2008: one in Kobe and one in Osaka. All the stores have IKEA’s
largest store design in the world occupying 40,000 squared meters with an
in-store restaurant of over 700 seats. This series of substantial investment
signifies IKEA’s ambition to dominate the market with one of the world’s
wealthiest consumers.








On the opening day of IKEA Funabashi, the store attracted
35,000 visitors. Since then, the store generally maintains 30,000 to 40,000
visitors at every weekend. Not unlike other markets, the most important target
group for IKEA in Japan is families with children. Their customers tend to be
relatively young with those in their 30s being the largest age segment. The
average household size among this group of customers is three people per
household and the annual household income is 40,000 to 45,000 Euros per year.







For a nation which values simplicity in many aspects of
living, the Japanese consumers were expected to appreciate IKEA’s
well-designed, light-coloured Scandinavian
furniture. Compared to
other European or
Scandinavian furniture manufacturers, IKEA products are priced very
competitively making them very accessible for most Japanese consumers.







IKEA’s biggest challenge in Japan is to make the home a more
important aspect in the Japanese lifestyle. By any measure, Japanese homes are
tiny with approximately only 50 to 60 squared meters making it very hard for
household owners to make their homes beautiful while having to considered
storage space for all of the family’s belongings. Most Japanese consumers see
their home as a place to sleep and store their personal belongings.






Culturally, home furnishing is therefore not regarded as
important hence little time is spent on decorating the home. It is not in their
nature to invite guests over to their homes. As Japanese people have a tendency
to socialize outside their homes, they spend more time and money on products
and accessories such as Prada or Louis Vuitton handbags, mobile phones and cars
that they can show off in society.






To overcome this cultural apathy towards home furnishing,
IKEA needs to find ways to enthuse Japanese consumers to develop the idea of
making a home more than just a place
to sleep, and make them
realize that with home furnishing they can make even small
spaces more enjoyable. For instance, IKEA
demonstrates this by displaying
Japanese-sized apartments in
their stores that incorporate a kitchen, a bathroom, a sofa that turns
into a bed, and several storage areas. To make it more realistic in relation to
Japanese style homes, IKEA uses the Japanese traditional ‘tatami’ measures for
their display rooms – the only IKEA store in the world where this is practiced.
Tatami mats are a traditional type of Japanese flooring. They are made of rice
straw in individual mats of uniform size and shape bordered by brocade or plain
green cloth. All kitchen appliances such as sinks, taps, dishwashers, fridges
etc. must fulfil Japanese
law requirements, and
all cabinets have
to be earthquake-safe. While this
is a great opportunity for IKEA to be a catalyst of cultural change, this
changing process is taking some time as the Japanese view of their homes is
deeply rooted in their cutural values.






















As in China, the Japanese consumers do not appreciate the
DIY concept of self-service, self-delivery and self-assembly. This aspect has
generated some confusion and discussion since a high level of customer service
is something that Japanese consumers are culturally accustomed to from every
retailer in the country. Although
more staff members
are now employed
in their Japanese stores to adapt
to this culture, IKEA limits itself to the amount of service that customers
receive. Despite this extra investment, the Japanese customers are still not
happy. Customer surveys show that ‘staff attitude’ to customer service tends to
score very low in the results.












In conclusion, IKEA’s ventures into China and Japan are
laden with unique marketing
challenges which it
had not encountered
before in other international markets. Its ambition to
conquer the vast Asian markets is reflected in its substantial financial
investment and long-term management commitment. Although IKEA strives to
implement its own brand of retail strategies that has brought tremendous
success in the European markets, it has
yet produced comparable
success in Japan
and China. Are
IKEA’s current strategies in these markets going in the right direction?
Is the company’s retail concept appropriate for the Chinese and Japanese
consumers and eventually be widely accepted? Is it impossible for IKEA to
largely ignore the needs of the local consumers as well as it is perhaps very
difficult for the company to adapt itself fully to the local culture?

















Questions

1. Based
on your analysis, what are the opportunities and challenges for IKEA in their
market operations in (a) China; and (b) Japan?



(Wordage: 1000. Weight: 25%)

2. In
reference to Topic 6, discuss the market entry strategies that IKEA adopt in
China and Japan respectively.
(Wordage: 1000. Weight: 25%)




3. In
reference to Topic 4 & 5, what are IKEA product, pricing, marketing
communication and distribution decisions in the two Asian markets? To what
extent these marketing mixes have been adapted to the preferences and needs of
these markets?





(Wordage: 1000. Weight: 25%)

4. For
each of these markets, plan, discuss and justify what, in your opinion, IKEA’s
marketing strategy should be in the near future to gain market shares and
achieve higher profitability.




(Wordage: 1000. Weight: 25%)

This case is based on:

Chen, H. (2006), IKEA’s investing 1.2 billion RMB on another
logistics hub of the Asia-Pacific region in Feng Xian District, Shanghai, National Business Daily.


Edvardsson, B. and
Edquist, B. (2002),
“The IKEA Saga”:
How Service Culture Derives Service
Strategy, The Service Industries Journal,
22(4), 153- 86.






Leroux, J., Thamhaksa, D., Yokoi, H. (2007), “Home Sweet Home” – A
Controversial Thought? A Case Study of IKEA in Japan, Bachelor Thesis,
Sweden: Lund University, Unpublished.



Pan, Y (2005), Marketing
Across Cultures: A case study of IKEA Shanghai, Masters Dissertation,
Sweden: Lund University, Unpublished.



Wei, L-Q. (2007), IKEA in China: Facing Dilemma in an
Emerging Economy, Asian Case Research
Journal, 11(1), 1-21.



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