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IKEA company overview:

Background:

IKEA was founded in 1943 by Swedish native Ingvar Kamprad (Freden, 2020). Initially Ingvar’s business consisted of him riding his bike around his home town selling miscellaneous items, such as lighters and pens (Lewis, 2016) . It wasn’t until 1947 that Ingvar first began selling furniture made by local manufacturers (Lewis, 2016). Business was good and IKEA was beginning to generate a profit until 1955 when the manufacturers that supplied IKEA boycotted the business due to pressure from competitors having to compete with IKEA’s lower prices (Lewis, 2016). Determined, Ingvar began designing his own furniture and outsourcing manufacturing to neighboring countries, such as Denmark and Poland (IKEA website, 2020). This led to the development of the revolutionary and cost efficient process of “flat packing furniture”, which will later revolutionize the company (Freden, 2020). Over the following years, IKEA saw a large amount of international expansion throughout Europe during the 1970’s and overseases to the United States and Asia in the 1980’s (Freden, 2020). Today IKEA has exploded as a titan of industry with over 400 stores worldwide, 211,000 employees, and $44 billion dollars in sales (O’Connell, 2019; Magnusson).

Vision:

“To create a better everyday life for the many people” (IKEA Website, 2020).

By optimizing their value chain and establishing solid supplier relationships, IKEA strives 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” (IKEA website, 2020).

Global Strategy:

Globalization:

With each passing day, the world is continuously getting smaller and smaller. Globalization has given companies the opportunity to expand beyond its home country’s borders and has facilitated the movement of people, products, information, and money across the globe.

Following the end of WWII, in 1957 the European Committee was formed by the Treaty of Rome as a way of unifying European nations and establishing a common market (Lasserre, 2018). Europe saw an explosion of business as more and more countries joined together in more political and economical integration, thus leading to the creation of the european union in 1993 (Lasserre, 2018).

During this time period was when IKEA had an explosion of international expansion (Lewis, 2016). While there were many speed bumps along the way, IKEA was still able to attract shoppers that were looking for modern furniture at cheaper prices (Freden, 2020).

European expansion

After much pressure from competitors, local Swedish manufacturers boycotted IKEA and forced the company to outsource product manufacturing and adopt a global sourcer stance (IKEA Website, 2020). The boycott later proved to be very beneficial as this was when IKEA was able to benefit from even cheaper production costs and could adopt an even stronger low-cost strategy. After much success in the Swedish market, IKEA began to realize their potential in becoming a global player and began developing global ambitions fueled by market seeking objectives (IKEA Website, 2020).

IKEA’s first, and most logical, step in international expansion was into the neighboring scandanavian countries, such as Norway and Denmark (Lewis, 2016). This was a very wise decision as it eliminated many of the barriers normally encountered with international expansion. While Scandavian countries may have some differences in language and culture, many Scandinavians are still able to communicate and relate closely to one another. Not only this but the close proximity did not put too heavy of a strain on IKEA’s supply chain, which drastically contributed to IKEA’s success.

Following an overwhelming amount of success in Scandinavia, in the 1970’s IKEA set its eyes on expanding into mainland Europe (IKEA Website, 2020). Using the business model and products developed in Sweden, IKEA was able to utilize their unique operational techniques to establish themselves as a first mover in new markets (Shoulberg, 2018). Switzerland was chosen as the first non-country as it shares many customs and traditions (Lewis, 2016). At that time there was an untapped niche of those who were not typically able to afford new expensive furniture and did not have any cheaper alternatives (Freden, 2020). IKEA’s low-cost strategy was accomplished through a well organized supply chain that utilized the localization of Swiss suppliers and materials (Shoulberg, 2018). By catering to less affluent individuals, IKEA essentially created their own market poised on providing modern and minimalistic furniture for affordable prices that allowed the company to spread all over Europe .

North American expansion

After an overwhelming success in the European Market, IKEA had decided to take its business across the pond and tackle the North American Market IKEA (Website, 2020). Before jumping into the United States Market, in 1976 IKEA set up shop in the Canadian market due to the many similarities shared between the two countries (Lewis, 2016). Carrying over the same successful advertising campaign used in Europe, IKEA was able to gain a firm foothold in the Canadian Market (Lewis, 2016). Much like IKEA’s European business model, by localizing the manufacturing of products, coupled with European imports, IKEA was able to maintain its Swedish identity while consistently maintaining their lower than average price points (Shoulberg, 2018). However, there were some growing pains in the Canadian market as much of the managerial style used in Europe was too ambiguous and less structured than managerial styles typically used in Canada (Shoulberg, 2018). Nonetheless, IKEA has continued to perform well in the Canadian market and has since opened 14 stores and generated over $2.5 billion dollars in sales during 2019 (IKEA Canada, 2019).

IKEA’s success in the Canadian market encouraged their drive to enter the United States market and did exactly that in 1985 (Bhasin, 2012). However, IKEA’s entrance into the U.S. market did not go as smoothly as the Canadian market. American consumers called for more customization and adaptation of products to American households (Hirst, 2014). Many of the displays used in stores did not accurately depict the typical American household and became less attractive to customers (Hirst, 2014). After revising store layouts and studying exactly what the American market demanded, IKEA was able to find a happy medium of modern sweidsh styles that could be functional in American households (Bhasin, 2012). Additionally, by improving the check out process and implementing less strict return policies, American consumers were no longer deterred by long lines and felt more confident in their purchases (Hirst, 2014). The whole concept of supply chain optimization through localization of manufacturing coupled with customization and tailoring products, marketing and managerial styles came to be an extremely effective formula for any market IKEA entered.

Assessing the Brazilian Market:

BRICS Countries

In 2001, Goldman Sachs identified Brazil, Russia, India, China, and (in 2010) South Africa (BRICS) as countries whose economies were projected to be some of the fastest growing economies in the world (Majaski, 2020). Currently the BRICS countries are growing at a faster rate than the G-7 nations and are on track to be wealthier than today’s current economic powers by 2050 (Majaski, 2020). While these countries are not in any formal political alliances nor entered into any official trade agreements with each other, the five heads of state issued a declaration of intent to “ Coordinate actions at a global level to reach maximum economic growth” (Devonshire-Ellis, 2019). It is very possible that if harmoniously executed, by 2030 BRICS could account for over 50% of the global GDP and could tie together expansive Free Trade or Preferential Trade areas (Devonshire-Ellis, 2019). Brazil is currently a part of a free trade area, named Mercsosur, that includes: Argentina, Brazil, Paraguay, and Uruguay. The Mercsosur nations are also currently in a preferential trade agreement with India and could potentially see more unification of BRICS nations and could further link the Brazilian market to far reaches of the world (Devonshire-Ellis, 2019).

Brazil’s Middle Class

Since the beginning of this century, Brazil has experienced a fluctuating degree of economic progress that has led to over 106 million Brazilians rising up from poverty and joining the middle class (Woinarski, 2019). Prior to the economic setback in 2015, Brazilian middle class consumers lead more of a materialistic lifestyle and would spend and flaunt their new found wealth (Woinarski, 2019). However after the 2015 recession, there was a sharp increase in the demand for more cost-effective shopping experiences causing the middle class to become more conscientious consumers (Woinarski, 2019). Despite a fluctuating market, multinational corporations are still interested in establishing a foothold in Brazil, with companies such as Ford, General Electric, and Apple investing in Brazilian expansion (Choenni, 2018). The ability for Brazil’s middle class to consume beyond subsistence level is a prime example of how the middle-class effect drives the demand in consumer goods and services (Lasserre, 2018)

Brazil’s Furniture Market

As previously mentioned, Brazil’s economy has been gradually improving and has led to the growth of a sizable middle class over the last 20 years. As such, the furniture industry in Brazil has had a significant amount of growth since the country first saw foreign investors enter the market during the 1990’s (Eucatex, 2020). Brazil is a country that has an abundance of natural resources and cheap labor (Singh, 2019). The cheap resources and labor has led to a boom in furniture manufacturing that is projected to produce over 1.1 billion dollars in revenue in 2020 (Statista, 2020). Many local furniture manufacturers are heavily investing in their supply chain and upgrading production equipment as a means of competing with imports from abroad (Redaccion, 2019). As such, there is an abundance of local suppliers that are actively competing to have the most attractive prices for buyers both local and foreign (Redaccion, 2019).

Brazil’s Infrastructure

While Brazil has experienced economic improvement over the years, its infrastructure has been neglected and led to a serious issue with intermodal transportation of goods (Michelon, 2019). The road systems in Brazil have not kept up with the economic demand and are not poised to sustain the volume of traffic that the country is expected to have in the upcoming years (Michelon, 2019). This would make any initial investment in Brazil from a multinational corporation more difficult and costly as a comprehensive and complicated supply chain would need to be developed to circumnavigate this complication. However, with the expectation of considerable foreign investment, Brazil has set goals to significantly improve its infrastructure through the use of partnerships and privatization (Endo, 2019). Brazil has announced its intent to double the country’s yearly infrastructure budget to $65 billion dollars by 2022 (Endo, 2019). In addition to a sharp increase in infrastructure improvement, Brazil is working on reorganizing and improving the bureaucratic infrastructure acquisition process (Endo, 2019). This means that any proposed infrastructure improvements would not get caught up in red tape and can be streamlined and function more efficiently. While these are very promising goals, the wheels of government do not move quickly and will take some time before significant improvements are made.

Marketing in Brazil

The primary goal of our marketing managers operating in Brazil is to understand the needs of Brazil’s consumers. Some important factors to take into account would be income, social habits, and convenience. IKEA’s brand identity is focused on low prices with high style. By giving Brazilian consumers access to low-priced furniture options that are sleek and desirable, we become a successful competitor to current industry leader, Tok & Stok. We have taken into consideration Tok & Stok’s strategy of home delivery, and developed our own delivery operations using consumer proximity from stores.

Further on, IKEA has set a level of product standardization that can address similar consumer needs in different areas of the world. This was made possible since IKEA is considered a global brand that is marketed across the world under our business name. According to Professor John Quelon (1999), there are common features among global brands that IKEA also possesses. These include: consistent product positioning, addressing similar consumer needs worldwide, a name that is easy to pronounce, and being associated with the product category, furniture. Which then leads into the use and importance of global pricing, or in other words, keeping prices consistent across our global markets.

To conclude, our marketing strategy is going to include the delivery at home feature and furniture that gives you the ability to have a beautifully furnished home without spending a fortune. With Brazil being a country that has a “driving-obsessed” population, similar to the US, we must have stores that are accessible for purchases and repairs if needed.

Operations and Networking

The location decision for the integrated network of procurement, production, distribution and servicing centers are crucial for our success in Brazil. When deciding where we will build our centers of operation, we considered the placement of regional resources, such as the ports and similar areas being used for industrial factors, risk characteristics, and customer proximity. All these factors led us to develop most of our production and service facilities in Sao Paulo, Brazil. Continuing, the prime strategic reasons for setting up operations in Sao Paulo include: the access to lower cost production, the skills and knowledge available, and the relatable markets.

When deciding to have production facilities in Brazil, rather than importing the goods, we will avoid the high costs of importing in this country. In 2018, IKEA partnered with the Chilean retailer, Falabella, to open stores in South America, such as Colombia, Peru, and Chile under a franchise agreement. This was a strategy used to accomplish the goal of increasing IKEA’s customer base to 3.2 billion by 2025. Another approach that has been useful is the investment in online services, these aids in adapting to the rise in e-commerce and home delivery.

In summary, to penetrate the furniture market in Brazil, we must have a very strategic plan. By changing some details to operations, we can market our low prices, stylish products available for delivery to consumers and manage to keep production costs low by setting up our network domestically to save on any importing costs.

https://www.reuters.com/article/us-ikea-falabella/inter-ikea-grants-franchise-rights-to-saci-falabela-for-peru-chile-and-colombia-idUSKCN1II2W4

Financial Management

Brazil is the last of the BRIC countries without an IKEA store operating within it. There has been much success with the stores in Russia, which has 14 stores, and China, which has 29. IKEA just entered into India with its first location. We think Brazil is the perfect landing spot for the next IKEA store. The type of currency used in Brazil is the Brazilian Real, which is worth about half that of the Swedish Krona, and about twenty percent of the Euro. This can enhance the impact of the change in these currency values and becomes a great advantage. This strategic exposure translates into a change in future cash flow potential which takes us into market perception and translation exposure. The reported valuation of assets and liabilities of global firms is affected by currency variations; this in turn may affect market perception and ultimately the market value of IKEA.

Brazil is a very attractive market for IKEA, especially since its furniture imports have experienced a growth of over 16% since 2006 and a more industrial emerging economy since then. In the year 2018, IKEA’s revenue was reportedly 37.1 billion Euros. The net profit for the year FY18 was 1.5 billion Euros. In total, IKEA invested 2.8 billion Euros in stores, distribution and customer fulfilment networks, shopping centers, renewable energy and forestry. IKEA is huge with sustainability and will treat the forests of Brazil with great care.

IKEA looks to take financial responsibility on its growth and transformation. It’s liquidity is in excess of 21 billion Euros which gives us a solid foundation to invest in our future with expansion projects such as Brazil. Customer visits to the stores have increased by 3%, and visits to IKEA.com have increased by 12%. IKEA has five investment portfolios: Renewable Energy, Resource Independence, Venture & Growth Capital, Business Development and Treasury Assets.

With all of the above in mind we come to the conclusion that IKEA is always looking to expand and innovate, and sets apart a good size of its resources to do this. There will be a big chunk of change needed, in order to make this project a possibility, approximately 70 to 90 million Euros. This includes land purchases, store construction, commercial build-up and stocking, staff costs, and marketing.

Human Resource Management

One of the toughest parts of expanding into a new market is staffing and the company makeup. There is a need to adopt a worldwide policy of international movement of personnel. HR will need to differentiate within the pool of managers of which will follow a “global” career from those who will follow a “local” career. Expatriate managers who are seeking a global career will be needed to make sure the company's goals transcend across this new market in Brazil. Local managers will be needed to run the day to day operations in the store. Both the finance and business navigation functions span the whole company, and the work is performed in a similar way regardless of location. This must continue in Brazil.

Human resources teams lead the work of attracting and inspiring co-workers and creating a stimulating and enjoyable work environment. Acculturation is the process by which group members from one culture adapt to the culture of a different group. Expatriate managers must be ready to learn the Brazilian culture in order to thrive.

There is a lack of brand strength in the Latin American furnishing market. This in turn makes it somewhat easy for new businesses to enter the market. Examples of such businesses, however, are those well-established diversified retailers, such as IKEA. We are keenly aware that the continued success of IKEA businesses depends on the continual development of IKEA co-workers, especially in this new market of Brazil.