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Homework answers / question archive / Question 1 As a 25 mark question you need to have at least seven to eight ways of how IKEA managed to reconcile its low price strategy with the perception of IKEA in China as a high-end brand

Question 1 As a 25 mark question you need to have at least seven to eight ways of how IKEA managed to reconcile its low price strategy with the perception of IKEA in China as a high-end brand

Business

Question 1

As a 25 mark question you need to have at least seven to eight ways of how IKEA managed to reconcile its low price strategy with the perception of IKEA in China as a high-end brand.

 

Question 2

IKEA’s concept is for standardization of its products which also leads to lower costs but in China it had to customize/localize its product offering which can lead to higher costs. How did IKEA reconcile between standardization and customization?

 

1

 

Question 3

Culturally China and Sweden are very different and IKEA had to make adjustments in terms of product and service offerings in China. What were the adjustments that IKEA had to make?

 

Question 4

This is an open ended question and you are free to discuss if IKEA, a Swedish company will lose its original identity as it enters into culturally different emerging countries.

Read the case study and answer all the questions that follow.

 

IKEA in China

 

Swedish furniture giant IKEA was founded by entrepreneur Ingvar Kamprad in 1943.

He began by selling pens, wallets and watches by going door to door to his customers. When he started selling his low-priced furniture, his rivals did everything to stop him. Local suppliers were banned from providing raw material and furniture to IKEA, and the company was not allowed to showcase its furniture in industry exhibitions. What did IKEA do? It innovated to stay in business. It learnt how to design its own furniture, bought raw material from suppliers in Poland, and created its own exhibitions. Today, IKEA is the world's largest furniture retail chain and has more than 300 stores globally.

 

 

When IKEA entered a new country they did things their way. The idea was to be IKEA everywhere, as they believed that their furniture is a cultural statement. But as the years went by they learnt to be more flexible, particularly when demand in Sweden declined and they became more dependent on the non-Scandinavian markets. Though IKEA has been extremely successful in implementing the standardised concept with a low national responsiveness in the product offerings, they recognised that the organisational culture needed to be more adaptive. Perhaps, because IKEA had experienced major market entry failures in Japan in the 1980s and how they have solved the big problems in the United States. 

 

In 1998, IKEA started its retail operations in China. To meet local laws, it formed a joint venture. The venture served as a good platform to test the market, understand local needs, and adapt its strategies accordingly. It understood early on that Chinese apartments were small and customers required functional, modular solutions. The company made slight modifications to its furniture to meet local needs. The store layouts reflected the typical sizes of apartments and also included a balcony.

 

 

IKEA had faced similar problems previously when it entered the United States. The company initially tried to replicate its existing business model and products in the US. But it had to customise its products based on local needs. American customers, for instance, demanded bigger beds and bigger closets. IKEA had to make a number of changes to its marketing strategy in the US and faced even bigger challenges in China.

 

 

 

 

 

As the company opened more stores from Beijing to Shanghai, the company's revenue grew rapidly. In 2004, for instance, its China revenue jumped 40 per cent from the year before. But there was a problem - its local stores were not profitable.

 

IKEA identified the strategic challenges and made attempts to overcome them. One of the main problems for IKEA was that its prices, considered low in Europe and North America, were higher than the average in China. Prices of furniture made by local stores were lower as they had access to cheaper labour and raw materials and no design costs.

 

IKEA built a number of factories in China and increased local sourcing of materials. While globally 30 per cent of IKEA's range comes from China, about 65 per cent of the volume sales in the country come from local sourcing. These local factories resolved the problem of high import taxes in China. The company also started performing local quality inspections closer to manufacturing to save on repair costs. The company plans to reduce prices further, helped by mass production and trimming supply chain costs.

 

High prices were one of the biggest barriers in China for people to purchase IKEA products. IKEA's global branding that promises low prices did not work in China because western products are seen as aspirational in Asian markets. In this regard, IKEA's low-price strategy seemed to create confusion among Chinese consumers.

 

The company realised this and started targeting the young middle-class population. This category of customers has relatively higher incomes, is better educated and is more aware of western styles. The middle class in China has grown modern in taste and therefore Western styled furniture is in demand there. However, the life style and housing styles are different from western nations and cultures. IKEA adapted to these things and brought suitable styles that could fit well in the Chinese lifestyle. It also used local social media sites and micro blogging website Weibo for advertising and expanding its reach. Targeting this segment helped IKEA project itself as an aspirational western brand. This was a massive change in strategy, as IKEA was targeting the mass market in other parts of the world.

  

 

 

 

IKEA also had to tweak its marketing strategy. In most markets, the company uses its product catalogue as a major marketing tool. In China, however, the catalogue provided opportunities for competitors to imitate the company's products. Indeed, local competitors copied IKEA's designs and then offered similar products at lower prices. IKEA decided not to react, as it realised Chinese laws were not strong enough to deter such activities. Instead, the company is using Chinese social media and microblogging website Weibo to target the urban youth.

 

IKEA also adjusted its store location strategy. In Europe and the US, where most customers use personal vehicles, IKEA stores are usually located in the suburbs. In China, however, most customers use public transportation. So the company set up its outlets on the outskirts of cities which are connected by rail and metro networks. IKEA, famous for its flat-pack furniture which consumers have to assemble themselves, realised that understanding the local culture is important - Chinese people hate the do-it-yourself concept. 

 

In China, the concept DIY (do it yourself) is not a common thing.  Customers do not feel comfortable when they have to visit warehouse to pick their purchases and then assemble them at home. IKEA found that “to try to explain and justify the DIY concept – which is at the heart of the IKEA concept – is thus hard work in China”. All these challenges resulted in adjustments at IKEA stores in China. IKEA provides home delivery – long and short distances – as well as an assembly service, for a small fee. IKEA has also unintentionally created an industry around itself – of delivery drivers that help assemble the IKEA furniture. These pick-up trucks with drivers are lined up outside the stores. IKEA tries to acknowledge these issues and provides information in the stores, on the web site and in the catalogue, to prepare the Chinese consumer for the IKEA experience. They even have shopping hostesses walking around the store explaining to customers how the concept works. 

 

The China expansion came at a cost. Since 1999, IKEA has been working on becoming more eco-friendly. It has been charging for plastic bags, asking suppliers for green products, and increasing the use of renewable energy in its stores. All this proved difficult to implement in China. Price-sensitive Chinese consumers seem to be annoyed when asked to pay extra for plastic bags and they did not want to bring their own shopping bags. Also, a majority of suppliers in China did not have the necessary technologies to provide green products that met IKEA's standards. Helping them adopt new technologies meant higher cost, which would hurt business. IKEA decided to stick with low prices to remain in business.

 

 

 

As IKEA prepares to enter other emerging markets, its China experiences will come in handy. It understood that in emerging markets, global brands may not replicate their success using a low-price strategy. There always will be local manufacturers who will have a lower cost structure. The company also learnt that emerging economies are not ready for environment-friendly practices, especially if they result in higher prices.

  

IKEA did well to adapt in China, although it took numerous changes to its strategies and more than 12 years for the company to become profitable in the Asian nation. Instead of stubborn sticking to the IKEA Swedish way everywhere, IKEA let the IKEA core values, IKEA concept embrace the local culture in order to find the “balance” for the development.

 

(Source : adapted from https://www.businesstoday.in/magazine/lbs-case-study/how-ikea-adaptedits-strategies-to-expand-in-china/story/196322.html, accessed 1 Oct 2020)

 

Question 1

IKEA wanted to be known as a low-price provider of durable furniture, while the Chinese consumers looked at IKEA as an aspirational brand. Explain how IKEA resolved this issue.

                                                                                                                      (25 marks)

Question 2

Evaluate how IKEA has managed to balance its fundamental low cost, standardisation practice with localisation/customisation in China.

                                                                                                                      (25 marks)

Question 3

Describe the cultural adjustments that IKEA had to make in China.

                                                                                                                      (25 marks)

Question 4

As IKEA continues to enter into more culturally different emerging markets, discuss if it will lose its original ‘Swedishness’.

                                                                                                                      (25 marks)

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