IKEA Takes on China
The current globalization trend has affected all the spheres of human life, including the business one. As a result, many Western companies have started their expansion to the foreign markets, among them those that were previously ignored. IKEA is one of them; the Swedish furniture manufacturer and retailer has recently entered the Chinese market. However, this process is accompanied by a wide array of issues and challenges that may hinder the company's growth and lower its profitability and competitiveness. The following work focuses on the analysis of the expansion strategy of IKEA and the process of its adjustment to the new business environment.
In China, IKEA primarily targets consumers that belong to the middle class of the society, namely the double-income families either with children or without them, with their members being about 20 to 45 years old and having a sufficient education. Additionally, the majority of target consumers (about 70%) are women. The choice of such target clientele can be justified in the following ways. First of all, such people have relatively high income (about 400 dollars per month against the average level of 121 dollars per month) (Miller). As a result, they are more likely to be willing to spend it on smart solutions for their homes during each visit to the store. IKEA’s prices are mid-range, meaning its goods may be too expensive for people receiving a lower salary. At the same time, consumers of this age group usually seek convenience, preferring the stores that offer a wide range of products under a single roof, which is a distinctive feature of IKEA (Ringstrom). Finally, the female auditory tends to pay more attention to the design of the offered goods, which is one of the three primary criteria of IKEA’s mission in China.
In order to adjust the company’s strategies to the realities of the Chinese market, IKEA’s specialists have utilized several research methods. They included surveys (obtaining required information from the responses to the questions prepared in advance), focus groups (in-depth interviews of the target audience), and home visits (Miller). Their adequacy can be assessed by the degree, to which they have allowed defining the peculiarities of the Chinese customers. First of all, it became clear that the price of a product is not the primary selling issue in China, meaning that IKEA had to concentrate on other features of its goods, such as design and convenience. As a result, the company has introduced the practice of getting products off the shelves for the buyers, as well as expanding the delivery and installation services. At the same time, certain research methods were additionally used in order to increase the consumers’ knowledge and awareness of IKEA and its products. Considering the fact that the target customers were attracted to the Western lifestyle but had little knowledge about it (Ringstrom), such measure had a positive effect on the sales. As a result, it is possible to say that the adequacy of the conducted research was quite high.
The prices of IKEA’s products have proven to be too high for the Chinese market. In order to attract the representatives of the Chinese middle class, the company had to reposition itself and occupy the mid-range pricing segment. In particular, the prices were lowered by almost 50% (Ringstrom). In turn, such move has resulted in the changes of the company’s pricing strategy with the aim to maintain its sustainability. For example, IKEA had to lower manufacturing costs of its products, including those of the raw materials. As a result, the majority of the production that covered the needs of the Chinese branch of the firm is to be relocated to China. Moreover, most of the required resources (glass, plastic, and timber) are supplied by the local manufacturers (Miller). As a result, the logistic chain of IKEA will become significantly shorter, meaning that the manufacturing costs will also decrease. In turn, the price cut will be less painful for the firm, not to mention it is already compensated by the increased sales. At the same time, the high standards of IKEA must be maintained, especially in terms of food. Thus, the company has turned to the food-import agent instead of relying on the local suppliers in order to avoid the supply of low-quality products to its stores (Miller).
IKEA had to develop new promotion tactics for the Chinese market. In particular, its promotional campaign primarily relies on the catalogues that are sent via mail and distributed in the stores rather than advertising in the media. The print ads also contain a wide array of ideas regarding the interior design. Additionally, IKEA utilizes TV ads that compare the living areas before and after restyling with the emphasis on the simplicity of this process, in other words, the magic touch (Miller). The necessity of such modification was justified by several factors. First of all, the target auditory of the company was attracted by the Western lifestyle, as well as corresponding products. However, its knowledge of it was limited, meaning that IKEA was going to become not only a store but also an information bank, which distinguished it from other similar enterprises (Ringstrom). Additionally, the focus on simplicity was required due to the fact that the Chinese consumers usually follow all-or-nothing principle in terms of the interior design; in other words, its change must be ultimate or do not take place at all). Thus, the company had to show that restyling the room with IKEA products would not be a difficult task and could be easily performed in a step-by-step manner (Miller).
In China, the way of life and housing situation are quite different from those in the Western countries. This fact forces IKEA to adapt its product strategy, namely in terms of the assortment, to suit the needs of the local consumers. In particular, for the Chinese, the living room is a face of the house, meaning that it is usually furnished in the best way possible and often serves as an eating place (Miller). As a result, the company had to increase the share of products for dining and living rooms at the expense of those for kitchens and bedrooms. Moreover, the recent increase in the number of square meters of living space per person has stimulated the demand for the furniture of all sorts. At the same time, the products themselves are being altered to better fit the needs of the Chinese consumers. For example, the beds are being resized to be smaller due to the lower average height of the Asian people in comparison to the Westerners. Additionally, the cheap labor in the country, with the services such as delivery and assembly being affordable for the majority of consumers, has resulted in the low popularity of do-it-yourself (DIY) concept introduced by IKEA (Miller). As a result, the assembly services offered by the company are in higher demand than usual, resulting in the need to increase the number of personnel responsible for their provision.
The cities of China are often overpopulated, laying at the intersections of the major transportation lines. At the same time, city residents do not favor personal vehicles; for example, only the fifth part of the company’s target consumers residing in Shanghai has a personal car (Miller). One may assume that the high density of the population is the primary reason for such a situation. All these peculiarities have forced IKEA to adapt its location/place strategy, as well as introduce several corresponding services. In particular, the company had to relocate its stores by moving them away from the suburbs and making them closer to the transportation lines and cities. In turn, such a strategy creates more favorable conditions for the provision of the delivery services both within a particular city (taxi lanes and home delivery) and outside its borders (Miller). Considering the fact that about 80% of IKEA's visitors have to rely on such services to deliver the purchased products to home, it is possible to say that the new location strategy implemented by the company is quite feasible.
In China, the competitive environment of IKEA is presented by both legal and illegal spheres. In the first case, there are companies that offer similar products and services and occupy the same pricing segment. The most significant of legal competitors is B&Q - a British retailer that also utilizes a do-it-yourself model (Miller). IKEA may compete with it by adding value to its products (offering additional services, and providing bonuses and discounts). On the other hand, the illegal competition involves the manufacturing and realization of the counterfeit IKEA products by the third-party companies (Miller). Considering the fact that these goods are likely to be cheaper than those offered by IKEA, there is a possibility that they may rob the company of a significant share of its revenues. At the same time, one may assume that their quality will be significantly lower to match their price. Nevertheless, they will be associated with IKEA, meaning that the reputation of the company may be damaged resulting in a decrease of sales in the long-term perspective.
In order to address the problem of counterfeit products that may undermine the company’s financial well-being and reputation, it is required to implement the following countermeasures. First of all, it is possible to recommend the use of an original package manufactured from special materials and having individual shape and design that are difficult to copy. The application of a holographic image or watermark to the packaging is also desirable. The feasibility of this measure lies in the fact that the introduction of a special package requires additional costs that are bearable for large companies but are too high for the smaller ones, including those involved in the illegal competition. Considering the fact that each counterfeit product must be packaged and marked in the same way as the original one, it is clear that the manufacturing costs of the illegal competitors will increase significantly, making it unfeasible for them to remain in the market.
Another measure involves the introduction of the electronic protection system (brand-control). It is based on the principle of comparison of the code on the packaging or label of a product with a single database of unique product numbers. Before making a purchase, the buyer can check the authenticity of the product by making an on-line request. The feasibility of this measure lies in the fact that the mentioned database is unlikely to be faked by the offenders. Moreover, the involvement of the consumers in such a process of quality control creates a positive image of a company that cares for its customers, thus raising its credibility.
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The expansion of a company to the foreign market, especially the one that operates on the basis of different principles and rules is always a challenging task. As was demonstrated by the example of IKEA, the companies often have to adjust their promotional, pricing, product, and place strategies in order to attract new customers and maintain a sustainable level of profitability. There are many specific features that must be taken into account when developing an expansion strategy, meaning that a comprehensive analysis of the new business environment (culture, consumer preferences, and legal base, for example) is a necessity.
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