Ikeas Internalization Strategy free essay sample

During Ikea’s expansion on the international market Japan was the first country in Asia that Ikea considered to enter in 1970’s. The differences between culture, lifestyle and behavior made Ikea face the failure. Japan is different from other European countries that Ikea was already present in, so it was difficult to pursue success in the same way. In 1986 Ikea had to withdraw their store out of Japan because of difficulties and then, twenty years later, they decided to reenter the Japanese market for one more time. At present, there are six Ikea stores in Japan, last of which was opened in 2009. Having entered only five European countries by the time Ikea decided to internationalize in Japan, Ikea’s international experience was rather poor. In this thesis, it will be studied why Ikea chose to internationalize in a culturally distant country as Japan at the given time as well as analyzed which cultural and strategic factors were behind Ikea’s failure and success on the Japanese market. 1. 2 Thesis statement The objective of the thesis is to understand factors in Ikea’s internationalization strategy in Japan that influenced the failure on the Japanese market in the first round but success in the second round. 1. 3 Delimitations The thesis makes use only of secondary data, whereas primary data is not present, due to the difficulty in accessing the data since Ikea has expanded to Japan for the first time for a long time ago. Moreover, executives continually changed, which made it very difficult to find a way of contacting them. Customer interviews, which could have been a useful tool for analyzing effectiveness of Ikea’s new strategy in Japan, are not used in this thesis for the reason of great distance between Japan and Denmark and language barriers, which made it almost impossible for me, as a student, to accomplish. In depth economical analysis of the Japanese market is left out of discussion being considered irrelevant, since the thesis focuses on external communication. For the same reason analysis of Ikea company structure and internal communication is not included. 1. 4 Method In the thesis secondary data is used for analysis. Even though secondary data does not possess the same advantages as primary data, which is collected for a particular research purpose, it is less time and money consuming, proving a suitable method to solve a specific research problem. [1] The information retrieved by and large form various articles was carefully collated and subjected to critical scrutiny in order to increase its consistence and reliability. Yet, since Ikea’s first expansion on the Japanese market took place more then thirty years ago, no articles which would treat the whole set of strategies employed at that time were available. The information derives mainly from articles which describe Ikea’s new entry on the market and only refer to the past events. It is fully acknowledged that this fact can result in a somewhat deficient picture of Ikea’s strategy in the 1970’s, yet the key data relevant for our analysis could still be retrieved from the secondary sources to form a reliable basis for our research. 1. 4. 1 Choice of theory As this thesis is about internationalization process, literature relevant for the topic had been reviewed. In order to find out why Ikea internationalized on the Japanese market, what factors influenced the choice of marketing strategy in the fist round and lead to failure, and what factors made Ikea to review the strategy and succeed in the second round, the choice had been placed on the following theories: 1. The Uppsala internationalization process model explains the impact of knowledge and learning to the firm’s approach to foreign markets. It has been used to understand why Ikea decided to internationalize on the Japanese market in the first place and how the knowledge affected the entry mode and strategy choice. Moreover, it is used to analyze why and how Ikea has changed the strategy when expanding on the Japanese market for the second time and the consequences of that. Criticism of the theory is taken into consideration when conducting the analysis. 2. The concept of psychic distance is implemented to gain understanding of factors that hampered the successful internalization and explain how the perception of the cultural differences influenced choice of a marketing strategy. 3. Geert Hofstede’s cultural dimensions have been used to define cultural differences between countries of interest. 4. Standardization and adaptation pproaches are used to elaborate on the strategies used on the Japanese market, and explain how the degree of adaptation contributed to failure in the first round and success in the second. Furthermore, advantages and disadvantages of both strategies are discussed. 2. Discussion of theory In this section theories that are considered relevant for the study are presented and discussed. 2. 1 Reasons for internationalization The retailer’s decision to internationalise is in most cases driven by the sales growth. Sales growth is a measure of success and if the desired growth could be achieved on the domestic market, according to Kotler, most companies would prefer to remain domestic. However, it is much easier to grow sales by increasing the store network than by getting more sales out of existing stores, and if the domestic market is not large enough any more, foreign markets give the retailer an opportunity to grow. The international arena gets attractive when the company discovers higher profit opportunities than on the domestic market, when it needs a larger customer base to achieve economies of scale, when the company wants to reduce its dependence on a particular market or gives an opportunity to counterattack the competitors that attack the company on its domestic market on their home markets. [2] In general, a company prefers to enter countries that rank high on market attractiveness, that are low in market risk, and in which it possesses competitive advantage. [3] 2. 2 The Uppsala internationalization process model Once a firm has reached a decision to internationalize, the next step would be to choose a strategy. The internationalization strategy is a first step to success or failure. The choice of the country and the way to approach it require knowledge of foreign markets. The Uppsala internationalization model reflects on how the knowledge development influences the market choice and international marketing activities, and is employed in this thesis while analyzing Ikea’s expansion on the Japanese market. The Uppsala internationalization model was developed by Johanson and Vahlne in 1977 and is based on Johanson and Wiedersheim-Paul study of internationalization of four Swedish firms. There are two assumptions that the model is based on: first, firms want to increase their long term profit at one site, but at the other site want to keep risk-taking at a low level; second, the lack of knowledge about foreign markets is a major obstacle to the development of international organizations, and that the necessary knowledge can be acquired mainly through operations abroad. [4] It focuses on four aspects that firms should face while going abroad: market knowledge and commitment, and commitment decisions and current activities which are divided into stage and change aspects that interact with each other in a cycle. [pic] The two state aspects market knowledge and commitment decisions are resources committed to foreign markets. Market commitment is measured as the amount of resources committed to foreign markets on the one hand, and the degree of commitment on the other hand. The amount of resources committed is easy to grasp. â€Å"It is close to the size of the investment in the market, using this concept in a broad sense, including investment in marketing, organization, personnel, and other areas. †[5] The degree of commitment is related to the difficulty of finding an alternative use for the resources and transferring them to it. â€Å"The more specialized the resources are to the specific market the greater is the degree of commitment. †[6] Market knowledge is classified into two types. Objective knowledge can be taught and on its basis it is only possible to formulate theoretical opportunities. Experiential knowledge can only be learned by personal experience and provides the framework for perceiving and formulating opportunities. Johanson and Vahlne view the experiential knowledge as critical, for it cannot be so easily acquired as objective knowledge. It must be gained successively during the operations in the country. Another way to classify knowledge is to make a distinction between general knowledge and market-specific knowledge. General knowledge concerns, in the present context, marketing methods and common characteristics of certain types of customers, irrespective of their geographical location, depending, for example, in the case of industrial customers, on similarities in the production process. It has been argued that the market-specific knowledge relates to characteristics of the specific national markets such as its business climate, cultural patterns, structure of the market system, and, first and foremost, characteristics of the individual customer firms and their personnel. While general knowledge can be transferred from one country to another, market-specific knowledge can be achieved mainly through experience in the market. [7] The two change aspects are current business activities and commitment decisions. They are of more variable nature then the state aspects. Current business activities are all of the activities undertaken by a firm at a certain moment. There is a lag between current activities and the consequences of these activities. The longer the lag, the higher is the commitment of the firm. Marketing activities are a good illustration of this. Current activities are also the prime source of experience. Market experience can be also obtained by hiring people with this experience or to make an appeal to external advisors. To clarify the roles of these alternative ways of integrating experience into the firm in the internationalization process, the authors of the model make a distinction between firm experience and market experience, both of which are essential. Persons working on the boundary between the firm and its market must be able to interpret information from inside the firm and from the market. â€Å"The interpretation of one kind of information is possible only for one who has experience in the other part. [8] The authors conclude that, for the performance of marketing activities, both kinds of experience are required; and in this area it is difficult to substitute personnel or advice from outside for current activities. The more the activities are production-oriented, or the less interaction is required between fi rm and its market environment, the easier it will be to substitute hired personnel or advice for current activities. On the other hand, the more market-oriented, the more difficult it is to rely on hired personnel or external advice because they lack the necessary firm experience. The second change aspect is the decision to commit resources to foreign operations. According to Johanson and Vahlne, these decisions are made because there are problems or opportunities in the market. Problems and opportunities are mostly discovered by parts of the organization working in the market (marketing personnel, salesmen). But opportunities can also be seen by individuals in organizations with which the firm is interacting; these individuals may propose alternative solutions to the firm in the form of offers and demand. The probability that the firm will be offered opportunities from outside is dependent on the scale and type of operations it is performing; that is, on its commitment to the market. [9] There are two kinds of commitment decisions: scale-increasing commitment decisions and uncertainty reducing decisions. Scale-increasing commitments are influenced by factors such as competitive or political stabilization of the market, which means that the firm can function peacefully and obtain market knowledge through experience, that way increasing market commitment by declining uncertainty about the market, and increase of total returns of the firm or more aggressive approach towards risk, which leads to increasing market commitment by raising the maximum tolerable risk level. Uncertainty-reducing commitment can be occasioned by decrease of maximum tolerable risk level or increase of existing risk in the market. [10] Another aspect of the model, the stage model, is that firms develop their activities abroad over time in an incremental fashion, based on their knowledge development, in two dimensions. One dimension is mode of operation which illustrates the market commitment, and the other is market dimension which illustrates the geographic diversification. There are 4 stages of entering an international market in the mode of operation. First stage is no regular exports activities, stage two is export via independent representatives, third stage is establishment of a foreign sales subsidiary, and fourth stage is foreign production and sales subsidiary. The successive stages represent higher degrees of market commitment. [11] International activities require knowledge when entering new markets, which is emphasised in the market knowledge aspect of the model. The better the knowledge about the market the more valuable are the resources and the stronger is the commitment to the market. Even though the empirical research confirms that commitment and experience are important factors explaining international business behaviour, some criticism concerning the model has been expressed. [12] Studies have shown that the model is not valid for service industries, because the growing reinforcement of foreign commitments implied by the process model is absent. Given that Ikea is not a service but a retailer only including subordinate services, this criticism will be seen at as not relevant in this particular case. Another criticism of the model is based on studies claiming that firms seem lately to skip the early stages of the establishment chain entering psychically distant markets at an early stage and to â€Å"leap-frog some intermediate entry modes in order to move away from the sequentialist pattern and more directly to some kind of foreign investment†. [13] As Hollensen explains, this is possible, because the level of uncertainty is reduced by the fact that markets are becoming more homogenous, psychic distance has decreased, and services and information offered by international consulting firms reduce the level of uncertainty by providing knowledge about foreign markets. This does not exclude, however, that the firm’s international activities develop in the incremental fashion based on their knowledge development, but means that the process of knowledge development is going faster. 2. 3 The concept of psychic distance The internationalization process is also explained by the concept of psychic distance, with firms expanding first into markets which are psychically close and most easy to understand and into more distant markets as their knowledge develop. Psychic distance is defined in terms of factors such as differences in language, culture, and political systems, which disturb the flow of information between the firm and the market. [14] The higher is the level of psychic distance, the more knowledge is required in order to reduce the uncertainty level. However, there has been some criticism concerning among other things the measurement of the psychic distance. According to the model, psychic distance is caused by individual decision-makers perceived uncertainty, which means that the distance exists in the minds of individuals. As a result, â€Å"the concept does not refer to an objective concept or measurement of a cultural distance which may influence corporate behavior. Hence, the psychic distance may not capture the influence of cultural differences on firm’s internationalization process. †[15] Seen from another perspective, however, cultural distances among countries have an influence on the individual’s perception. The greater the cultural distance of the foreign country to the home country, the less knowledge about the new environment is likely to be available and the more difficult it is to understand and learn about the foreign country on the individual level as well. Thus, according to Sousa and Bradley analysis, there is a positive relationship between cultural and psychic distance: the greater the cultural distance between the home and the foreign market, the greater is the psychic distance. [16] According to Sousa and Bradley, cultural distance, and thus psychic distance, can be measured using Hofstede’s study on cultural differences. Bjorkman and Forsgren argue, however, that Hofstede’s results concern cross-cultural differences in people’s relationship with one another when they act as employees, i. e. ntra-organizational relationships across nations. They do not explain cultural differences in general, for instance, cross-cultural differences in consumer behavior. [17] Still, cross-cultural differences in intra-organizational relationships and consumer behavior have the same root, which is the difference between cultures in general and lack of its understanding. Hofstede’s cultural dimensions, which are power distance, individualism, masculinity, uncertainty avoidance and long-term orientation, describe the cultural differences on the intra-organizational level because they explain the cultural differences in these areas in general, thus giving an insight in the culture. So, even though they cannot explain psychic distance and consumer behavior completely, they still do highlight some preferences and can be useful in an analysis of cultural differences. This conclusion will be used when dealing with the psychic distance concept in this thesis. The concept has also been criticized in other aspects. First of all, for that it assumes that all firms at a given stage of internationalization are influenced by cultural differences in the same direction and by the same intensity. This does not justify that multinational companies are not influenced by cultural differences in all aspects of their international behavior as small companies. Secondly, it may be problematic to use the country as a unit of analysis when dealing with psychic distance. What really matters is the gap between actual and expected behavior. [18] This critic is considered when conducting an analysis. 2. 4 Srandardization vs. adaptation Once a company has decided which markets to enter, it needs to deal with the cultural differences identified on the foreign market and choose a marketing program accordingly. The following theory reflects on the strategy choice and will be used to analyse it in case of Ikea on the Japanese market. International companies must decide how much to adapt their marketing strategy to local conditions. At the one extreme are companies that use a globally standardized marketing mix worldwide, whereas at the other extreme is an adapted marketing mix, where the producer adjusts the marketing program to each target country. Standardizing the marketing program has advantages such as economies of scale in production and distribution, lower marketing costs, consistency in brand image, ability to leverage good ideas quickly and efficiently. [19] It is said to offer the possibility of building a uniform worldwide corporate image, a world brand or global brand with a global image. However, only few products and brands allow for a fully standardized approach. Differences in consumer needs, wants, and usage patterns for products, consumer response to marketing-mix elements, differences in brand and product development, competitive environment, legal environment, marketing institutions and administrative procedures all make it necessary for the company to place the choice between standardized and differentiated marketing strategy. Some changes in product features, packaging, channels, pricing or communication are needed in different global markets in order to make sure that the company’s marketing is relevant to consumers in every market. The degree of adaptation can be influenced by product category, the company’s organization and management, homogenization of consumer needs and tastes, product life cycle and brand positioning or, for instance, by psychic and cultural differences.