ikeas standardized way to china

7/27/2019 IKEAs Standardized Way to China

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Aarhus School of Business

Department of Business Administration

IKEAsStandardized way to China

Seminar Supervisor: Liliya Nureeva

Student: Paul Adrian BalascanBusiness Administration

6th semester

Number of Charachters without blanks: 27,500

10/2013


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Table of contents

1. Introduction.12. About Ikea...1

2.1History....12.2Ikea in the new millennium....22.3SWOT....32.4Ikea vision..6

3. Theoretical Background...63.1Positive Aspects 73.2Negative Aspects...7

4. IKEA Sweden..74.1Place...84.2Product...84.3Price...84.4Promotion...94.5Shopping Environment and DIY concept.9

5. IKEA in China...105.1Placement.105.2Product.....105.3Price.115.4Promotion.125.5Shopping Environment and DIY concept12

6. Conclusion.147. Reference list.15


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1. Introduction

The aim of this seminar paper is to describe and explain the challenges faced and the

strategies used by Ikea, one of the most profitable companies in the furniture industry, in

order to enter the biggest market worldwide: China.

This paper should serve as a tool to understand how IKEA is able to maintain itself so well in

a very old market. In order to do this, we will first make a short report about the history of the

company; secondly, we will describe the main marketing strategy and the means to

implement it by and finally, we will talk about the challenges of implementation encountered

by IKEA when it first opened a store in China.

2. About Ikea

2.1History

In 1943, Ingvar Kamprad - at the age of seventeen - decided to establish a local catalogue

company that sold basic households goods at very accessible prices. After four years

Kampard started selling home furnishings. Six years after that, in 1953, the young

entrepreneur opened his first furniture showroom.1

In 1958, the first Ikea store is opened in Almhult, Sweden. The store had 6700 square meters

and it was the biggest furniture exposition at that time in the Scandinavian region.

In 1965, Ikea Stockholm opened the gates for thousands of Swedish customers. This was

considered a huge success, but it also generated one of the first problems. Ikea was not able

to serve all the customers, thus for the first time the company opened the warehouse and let

people serve themselves. Hence one of the most important Ikea Concept was born, a concept

that will be applied in all the future stores of Ikea.

1Youngme Moon, (2004). IKEA invades America


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aStores/countries being opened by 2002.

bEstimate.

cCorresponding to net sales of the IKEA group of companies.

(Source:Michael R. Czinkota, Ilkka A. Ronkainen, International Marketing, 7th Edition, 2004, p. 174-178, ISBN: 0-324-28289-3)

Aswe can observe in Table 1, until 2002 Ikea managed to expand in over 32 countries with

over 175 stores.

2.2Ikea in the new millennium

In 2001, Ikea had the revenue of 10.4 bil EUR, and from 2001 their revenue continued to

grow steady, therefore in the Fiscal Year 2012 Ikea reported the following:

As of August 31, 2012 Ikea Group had a total of 298 stores in 26 countries.

Total sales amounted to 27 Bill EUR

690 Million store visits

Ikea food had 1.3 Bill turnover

Ikea.com had more than 1 billion visits

Ikea Catalogue was printed in 212 million copies in 29 languages and 62 editions

A product range of approx. 9500 products

(Yearly summary; ikea.com)2

2Welcome Inside IKEA Group Yearly Summary FY12


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2.3SWOT

In order to better understand Ikeas strategy planning we need first to get familiar with the

internal and external key factors. The internal aspects of a company are strengths and

weaknesses, the external aspects are opportunities and threats. The analysis of all there four

factors provide a powerful strategy planning called SWOT analysis.

a) Strengths

Strengths are all the features of a business that add value to certain products or services.

One of the biggest strengths of IKEA is the brand itself. And old and powerful brand that

promises quality and variety worldwide. Another strength is the production style. Ikea

designs very functional products. They create their products in such a way that when the

product is packed for shipping, all of its elements are packed very compactly, thus not

containing too much unoccupied space and therefore saving transport costs.

It is known that Ikea emphasizes over long term partnership. By pledging to acquire larger

volumes over a number of years Ikea is able to negotiate for lower prices. Thus they

empower their ability to produce more products at a lower cost and with this they create an

impeccable economy of scale.

Another strength is the sustainable image of themselves, that they created over the years.

They are considered a sustainable and environmental friendly company. In the Fiscal Year of

2012 they developed a sustainability strategy called People & Planet Positive; this strategy

focuses on three important areas: 1. Inspire and enable millions of customers to live more

sustainable life at home; 2. Strive for resource and energy independence; 3. Take a lead in

creating a better life for people and communities(See image 1)


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(Source: Yearly summary; ikea.com)

b) WeaknessesFirst of all, the size and the scale of the business must be mentioned; being present in 26

countries can be troublesome because there are some countries - where IKEA goods are made

where the legislation to control working conditions is not implemented. This aspect can

hurt IKEAs image. In order to cancel this weakness IKEA invented IWAY. On

www.IKEAFANS.com we find that IWAY means IKEA Way of Purchasing Home

Furniture Products. These are IKEA's internal policies governing everything from

environmental issues, worker safety, compliance with local laws and regulations to social

welfare and manufacturers who contract to do business with IKEA must abide by these

policies.

The second major weakness could be their constant need of balance between quality and

price. Even though so far IKEA has managed this issue well, developing high quality

products with a low amount of money remains a challenge, and failure in this can again hurt

IKEAs image in the perception of their customers.

Last but not least, selling products with a very simple but functional design may be attractive

to the customers, but having such a policy makes IKEA vulnerable to counterfeiting, which

can reduce the companys sales in certain places. Take for instance the shop presented in

Image 2, no it is not IKEA, it is a 10000m2

furniture shop called 11 Furniture a copycat of

IKEA.

IMAGE 1


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(First there were the fake Chinese Apple stores, now there's a counterfeit IKEA... in the same city Published by Daily Mail Reporter on 2nd

of August 2011)3

c) OpportunitiesThe fact that IKEA focuses more and more on environmental aspects is a positive approach

in meeting future opportunities.

One of the biggest opportunities is increasing customer demand for sustainable products.

Even though IKEA has used 13.56 million cubic meters of wood in 2012 (not including paper

and packaging), the company has in plan to become forest positive by 2020; this means that

even though IKEA uses a lot of wood, they want to plant more forests that they destroy.

(guardian.uk)

Another opportunity consists in the growing demand for cheaper products. Due to all the

financial downturns in the past, it is fair to assume that most people will switch to lower price

alternatives for the most products. One other opportunity is the current customer attitude and

increased attention in lowering the carbon footprint and water usage. These are facts that go

hand in hand with IKEAs People and Planet Positive strategy.

d) ThreatsWhen a specific market segment is targeted the competition should be taken into account.Usually when low budget families are aimed a huge competition will be encountered,

regardless of the product sold. One of the biggest problems here may be the so called disloyal

competition; for instance we can consider certain Asian companies that may counterfeit

31. http://www.dailymail.co.uk/news/article-2021607/First-fake-Apple-stores-China-fake-Ikea-shop-Kunming.html

IMAGE 2


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and/or copy designs. Thus Ikea has to strengthen its unique features and quality in order to be

able to compete on this market.

2.4Ikea vision

The companys vision is available on www.ikea.com in the company information section:

To create a better everyday life for the many people. At the same time there business idea

is: To offer a wide range of well designed, functional home furnishing products, at prices so

low that as many people as possible will be able to afford them.

Taking this vision into consideration we can understand that IKEA wants to maintain a wide

range of affordable products. Based on Porter generic strategies we can thus conclude that

they pursue overall cost leadership a term that will be discussed in the following chapter.

3. Theoretical Background

Before we discuss about IKEAs marketing strategy it is very relevant to define and discuss

certain concepts as: cost leadership and standardization.

In his Generic strategies Michael porter argues that are three main strategies that provide a

starting point for marketing strategic thinking. The first and the most important for this

seminar paper is cost leadership. In order to adopt this strategy a firm must strive to achieve

the lowest cost in production as well as in distribution, thus generating a competitive

advantage when it comes to price. The other main strategies proposed by Porter are

differentiation and focus or niche.

The second most important concept is standardization.

This subject is very sensitive because researchers have not reached a common consensus

towards this matter. In Buzzell, (1968) we find that standardization represents the offering

of identical product lines at identical prices through identical distribution systems, supported

by identical promotional programs in several different countries. Most of the literature

ground this definition into the borders of the Marketing Mix. In order to better understand the

complexity behind the standardization strategy we need to further analyse the positive and

negative aspects.


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3.1Positive Aspects

Buzzell argues for the fact that standardization provides important cost savings and enhances

the control across national borders. One other important aspect in favour of standardization is

the overall progress of technology in communication and transport that has made it easier to

trade around the world, thus creating a more homogenous market. (Levitt, 1983)

This context has intensified the competition on the entire market; new and old companies are

able to provide high quality products at lower price.

3.2Negative Aspects

Firstly, one of the main negative aspects of standardization is the orientation and focus of the

company adopting such a strategy. In order to implement the strategy, a company needs to be

product, not customer or competition oriented (Douglas and Wind, 1987). Most of the

literature (Narver and Slater, 1990), (Jaworski and Kohli; 1993) argues that customer and

competition focus provides outstanding performance in terms of business development.

Secondly, in order to be able to use standardization certain conditions need to be fulfilled:

Availability of communication, the presence of a global market segment and the

infrastructure for distribution (in order to enhance the products shipment).

Thirdly, in certain countries one company can be subjugated to different policies, regulations

and marketing infrastructure. Policies and regulations refer to safety standards, local content

requirements and environmental conventions. Marketing infrastructure refers to certain habits

and views of the target population and because these views usually differ from country to

country, the same marketing campaign might fail into one country and be a total success in

others.

Last but not least a drawback is the fact that standardization alone does not work when there

are huge cultural differences between the targeted segment and the home country of the

company that tries to implement this strategy.

4. IKEA Sweden

As we found out in IKEAs history, the first store of IKEA was opened in 1958 in Almhult.

In Sweden, the company has 17 stores and an overall good customer awareness: most of the

Sweeds have already at least one IKEA branded product in their homes. Most of them have


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grown with IKEA products in their home: one can actually argue that at the moment there is a

third generation of IKEA users since their opening in Almhult, thus we can say that they

obtained a high market penetration and they can be considered an important player on the

furniture and home decoration market.

Due to the fact that the definition of standardization from chapter 3 is in the boundaries of the

4Ps, we will continue to describe IKEAs strategy respecting these limits and I will create an

additional subchapter called Shopping environment and DIY mentality in order to explain

additional challenges generated by cultural differences with regards to the Do It Yourself

concept and Environment and Atmosphere inside the shop.

4.1Place

The place of IKEA stores in Sweden is standard, the stores are placed in the nearby of big

cities, at a reasonable distance to the city centre. The placement is designed in such a way

that customers will use their cars to go to and from Ikea. All IKEAs stores share the same

design; they have two storey buildings, surrounded by a big parking lot. The only exception

of this rule is Stockholm Kungens Kurva, which is the biggest IKEA store worldwide

(55200m2)

4.2Product

Even though IKEA has a range of approx. 10000 products, the Swedish stores only sell six to

seven thousand products. Some adjustments are made at the local level by the managers that

possesses the power to do so, in order to fulfil certain demands or as a response to local

competition.

4.3Price

With respect to their strategy, IKEA Sweden aims to deliver affordable prices. The Swedish

people recognize IKEA as a dealer of quality products offered at low prices, thus we can

observe that their position on the Swedish market was a success. They enforce this positionby reducing their prices even more in contrast to their competition. Over the past 8 years

IKEA lowered their prices by 20% and yet their revenue kept growing, therefore we can

conclude that their sales grew constantly.


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4.4Promotion

The IKEA Catalogue is the main tool for promotion in Sweden; it provides new ideas and

insights for the Swedish customers. In their home country IKEA focused on different target

groups:

Old Customers that already have IKEA products in their homes; for example in 2008

they had a campaign which aimed to lead the public opinion into thinking that IKEA

is new and thrilling, the main lines of the campaign were Decorate the home as you

want to live and Long live diversity4

Recently divorced parents; their main slogan was Better divorce for everybody5

Ethnic diversity; their main slogan was Not for the rich but for the wise5

Another important tool for promotion is the IKEA Family programme. This is a way for

IKEA to gain customer loyalty. This was first implemented in Sweden and because of the

great success it encountered; it has been used in other places around the world.

4.5Shopping Environment and DIY concept

One of the most important concepts for IKEA is DIY (Do It Yourself), a concept that is

embraced by the Swedish people, thus the customers are happy to look for the product they

are going to buy in the warehouse, transport the product to their home and assemble it, as

long as the price of the product reflects the absence of these services.

Because they apply standardization, most of their shops use the same layout. The standard

design is to place the furniture on the first or second floor and to arrange it in different

settings to prove the adaptability and compatibility of IKEA products.

The walking path for customers in IKEA stores is very specifically thought out, so that the

visitors are somehow drawn to go only forward, thus exploring all what the store has to offer

whilst walking through a sort of maze5. This seems to be very successful as James Tozer said

in a Dailymail2

article: Alongside its reputation for good, cheap design, Ikea's distinctive

labyrinth has been phenomenally successful.

4S. Burt et al. (2011) Journal of retailing and Customer Services 18 page 187

5Why shoppers find it so hard to escape from Ikea: Flatpack furniture stores are 'designed just like a maze by James Tozer 24

thof January

2011

www.dailymail.co.uk/femail/article-1349831/Ikea-design-stores-mazes-stop-shoppers-leaving-end-buying-more.html


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Even though the layout is standard, the Swedish people have certain habits, thus in the stores

we will often see kitchens in form of islands and large dressing rooms connected to the

bedroom.

5. IKEA in China

One of the most important moves for IKEA was the debut on the Asian market. In 1998 they

opened the first store in Shanghai6

- the biggest city in China, with a population of 13.46

million7. Because of the fact that this city had a population higher than the entire Sweden

8,

the first challenge was to establish a customer group. Ikea decided that the main target will be

customers between 25 and 30 years old, most of them born into the One Child Policy - a

segment branded as being socially adapted, big fans of foreign brands and very

impulsive.(Gunnarsson, 1997)

5.1Placement

The whole concept of the huge supermarket format where one can find more types of

products in the same place, does not apply so often in Chinese culture; usually, the general

population uses specialized shops to buy household goods. In China, IKEA placed its shops

closer to the public transport lines in order to obtain a higher volume of customer traffic. This

was a total success because in Shanghai for instance, the core customers visit IKEA more

often than anywhere else in the world: 33% come to the store every month9. The main

reason for adopting this placement is the fact that in China, access to cars is limited compared

to other European countries, thus the standard approach of placing the shop out of the town

was unviable.

5.2 Product

The range of products is the standard one, approx. 10000 products are available. Over the

years new products have been introduced firstly in IKEA China: a wok with a lid, a cleaver

and chopsticks. Because of the success these products had now we can see them on the

shelves of all the IKEA shops in the world.

6www.ikea.com/ms/en_US/about_ikea/the_ikea_way/history/1990.html

7 What are Chinas largest and richest cities? by Clayton Dube; www.China.usc.edu; University of Southern California, 2007)8 www.Scb.se

9 S. Burt et al. (2011) Journal of retailing and Customer Services 18 page 188


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Most of the Chinese reside in flats with balconies, thus IKEA has updated their product line

in order to provide decoration for that area as well. They have created settings in their stores

to exemplify how one can furnish this space. (Lewis; 2005)

One anomaly with regards to the products in IKEA China is the beds they are selling which

are shorter by ten centimetres in comparison with standard sized beds (200cm).

5.3PriceAs discussed in earlier chapters of this paper, IKEAs main goal is to deliver good quality

products at low prices, but due to the fact that minimum wage in Shanghai is 1620

RMB/Month10

- that is the equivalent of 196 Euro11

, customers can find even the most basic

Billy Book case (171 Euro12

) an expensive, even luxurious piece of furniture. In order to cut

the prices even further IKEA has decided to rethink the sourcing guidelines, thus IKEA

China has an open hand towards expanding the proportion of products sourced locally. By

doing this, they succeed in cutting the price not only by reducing the production cost, but by

avoiding high import taxes and huge lead times (almost 3 months).

A huge challenge in achieving the lowest price on the market is the vulnerability to

counterfeiting. The fact that many Chinese companies can copy the designs of IKEA

products so well and then replicate it with lower grade material it will always be a problem.

An example of this problem is found in IMAGE 2. On one of the biggest platforms for

trading a wide range of products is www.alibaba.com, by searching IKEA on their product

list one can find over 27387 products from 1341 suppliers.

(Source: www.alibaba.com)

10www.WageIndicator.org

11www.TheMoneyConverter.com

12www.ikea.com/de/de/catalog/products/S69895186/

IMAGE 3


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5.4Promotion

The biggest challenge of IKEA in China when it comes to advertisement is the fact that they

are not able to efficiently use the IKEA Catalogue, their main promotion tool in the rest of the

world. The cost of using this instrument would have been too expensive, thus smaller

brochures are used instead. The company sends these several times per year. In order to

maintain the same quality of advertisement the brochures are made in Almhult by the same

people that do the catalogue.

All the advertisement campaigns are done through the usual channels: television, newspapers

and internet, using the same theme like in the rest of the world. In addition to that some other

messages are sent: Ikea inspires the target group (aged between 25-30 years old) to be

different, to change, to stray from their tradition: Do not be like your parents (Lewis, 2005)

5.5Shopping Environment and DIY concept

Firstly, Chinese people do not get along with DIY concept, because China is a labour

intensive country, the hand of work is cheap, thus when a Chinese customer buys a product

that needs shipment and assembly he expects to pay for these as well. Therefore he gets

confused by the fact that he has to Do It Himself. Another aspect that confuses the Chinese

customer is the aspect of getting your own products from the warehouse. Yet another

problem is the absence of tools to assemble the IKEA furniture; even though IKEA products

are designed in such a way that only minimal tools are required at the assembly point, most of

the Chinese do not have any kind of tools in their homes - when they need tools that means

they need a type of repair, thus they will hire someone for that matter. IKEA has a home

delivery system and on top of that they offer assembly service for low fees. This whole

problem was generated by the perception of Chinese customers. A European considers that

this is the cheapest possibility, to buy cheap but high quality furniture and bring it together

himself. But for a Chinese, IKEA furniture is considered expensive thus he expects that the

money he paid to have included the shipment and assembly.

One important aspect of selling environment is the interior design of the store. Here, IKEA

had to adapt to the average Chinese apartment which is lower than a European one, thus all

the settings reproduce the available space an average Chinese has in his flat.

Secondly, Chinese customers have transformed IKEA shops into social areas. At the

beginning, they were coming in to meet and share quality time with friends in a friendly


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atmosphere, which in comparison with other Chinese shops was more relaxed. To take this

even a step further, customers started to rest or read as we can see in IMAGE 4. Ikea realized

that by tolerating this kind of behaviour which would not exist in Europe or USA the Chinese

that act like this will most probably return as clients.

(Source: http://www.dailymail.co.uk)13

13www.dailymail.co.uk/news/article-2404811/We-love-cool-furniture-People-beat-heat-Beijing-going-sleep-air-conditioned-IKEA--store-

says-welcome.html

IMAGE 4


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6. Conclusion

In this paper I have described the strategy of IKEA on their home land and in China; from all

above we can conclude that IKEA managed to apply their strategy by using standardization

approach. IKEA was able to do that because of their values and great management. Even

though IKEA had to adjust some of their work in China, they still try to teach the Chinese

people by the western way of doing things; they introduce concepts like DIY and Huge Box

Supermarket which they hope that in time will be accepted by the Chinese. IKEA had to learn

that in order to succeed in this market, they have to drop some of their basic principles, to

allow regional sourcing and to limit using their Catalogue. Another thing IKEA learned is

that a business cannot achieve the same results using only the same tools in all markets

around the globe.

In conclusion IKEA successfully applied standardization with the purpose of obtaining cost

leadership, even though they adapted some aspects of their supply chain and retail

management; they managed to keep their values and style intact.


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7. Reference list

Buzzell, R., 1968. Can you standardize multinational marketing? Harvard Business

Review NovemberDecember, 102113.

Gunnarsson, N., 1997. China- perfect child. The one child policy and its

implications. The Political Science Department. Lund University.

Levitt, T., 1983. The globalization of markets. Harvard Business Review, MayJune,

92102.

S. Burt et al. (2011) Journal of retailing and Customer Services 18 183-193

Douglas, S.P. and Wind, Y. (1987), The myth of globalization, Columbia Journal of

World Business, Winter, pp. 19-29

Jaworski, B.J. and Kohli, A.K.(1993), Market orientations: antecedents and

consequences, Journal of Marketing, Vol. 57 No.3, pp. 53-70

Narver, J.C. and Slater, S.F. (1990), The Effect of market orientation on business

profitability Journal of Marketing, Vol 54., October, 20-35

Moon, Y. (2004). IKEA invades America September 2004 Harvard Business

School

1990s IKEA history viewed on 15.10.2013

http://www.ikea.com/ms/en_US/about_ikea/the_ikea_way/history/1990.html

Welcome Inside IKEA Group Yearly Summary FY12 viewed on 15.10.2013

http://www.ikea.com/ms/en_GB/pdf/yearly_summary/ys_welcome_inside_2012.pdf

Michael R. Czinkota, Ilkka A. Ronkainen, International Marketing, 7th Edition, 2004,

p. 174-178, ISBN: 0-324-28289-3

First there were the fake Chinese Apple stores, now there's a counterfeit IKEA... in

the same city BY DAILY MAIL REPORTER, MEDIA RELEASE 2 AUGUST

2011, VIEWED ON 15.10.2013

http://www.dailymail.co.uk/news/article-2021607/First-fake-Apple-stores-China-

fake-Ikea-shop-Kunming.html

Why shoppers find it so hard to escape from Ikea: Flatpack furniture stores are

'designed just like a maze by James Tozer 24th of January 2011, viewed on

15.10.2013

http://www.dailymail.co.uk/femail/article-1349831/Ikea-design-stores-mazes-stop-

shoppers-leaving-end-buying-more.html


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What are Chinas largest and richest cities? by Clayton Dube; University of

Southern California, 2007) viewed on 15.10.2013

http://china.usc.edu/(S(swqn0p55xbqmsu45cwso5lzy)A(IEcheuFczAEkAAAAODRl

NTk2OTMtMDViMC00Yjk5LWFmZTgtODc1OTA1YWYxMDM4e9e8O7-

g5_HYhuft0Huy7h2GlGg1))/ShowAverageDay.aspx?articleID=910

SWOT analysis and sustainable business planning An IKEA case study, viewed on

15.10.2013 http://businesscasestudies.co.uk/ikea/swot-analysis-and-sustainable-

business-planning/introduction.html#axzz2ho5q0HN9

ikeas standardized way to china

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