I S S N( pr i nt ) :2 3 3 2 3 4 0 X I S S N( onl i ne) : 23323418 I nt e r na t i ona l J our na l of Bus i ne s sknowl e dgea nd I nnov a t i on i npr a c t i c e( I J BKI P)
I nt e r na t i ona l J our na l of Bus i ne s sknowl e dge a ndi nnov a t i on i np r a c t i c e( I J BKI P) Vol. 0 1/I s s ue. 0 1 I S S N: 2332340X( Pr i nt ) /I S S N: 23323418( Onl i ne) Dec ember, 2013 Li ght hous e sst r at e gi cdi l e mmas De bor ahcampbe l l Ki m 1 Re gul at i ngphar mac e ut i c alpr i c e si nt heeur ope anuni on Rol andat t i l acs i z maz i a 10 I KEA si nt e r nat i onalexpans i on Cl ay t onhar api ak 25
International Journal of Business Knowledge and Innovation in Practice December 2013, Vol. 1, No. 1, pp. 1-9 ISSN: 2332-340X (print) 2332-3396 (online) Lighthouse s Strategic Dilemmas Deborah Campbell-Kim * Case Overview This case concerns a small business at a tipping point in the owner s life cycle immediately before the global financial crisis hit. Students should be able to identify a number of areas where the company can improve its strategy in a highly competitive industry. The case is geared towards college juniors or seniors and can be taught in a one to two hour class. Although the case takes place in the U.S., the basic concepts and problems presented in the case are applicable to many areas of business and many countries. Keywords Product life cycle, entrepreneur, small business, medical real estate Acknowledgements: This work was supported by the Hankuk University of Foreign Studies Research Fund. * Assistant Professor, Business Administration, Hankuk University of Foreign Studies (HUFS), Seoul, South Korea Email: debkim@hufs.ac.kr
2 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp. 1-9 Case Synopsis: Susan Christiansen, a real estate broker in Ohio, had big plans. It was early 2008, and her small real estate brokerage had recently reached a significant milestone: its 25th commercial real estate transaction and 66th residential transaction, healthy achievements for a relatively new regional broker. Her achievements were all the more impressive because all of her agents were women, and the commercial real estate market was truly an old boy s network where more work was conducted on the male-dominated golf course than in offices. Susan had started her business, Lighthouse, in 2004 with $200,000 in borrowed money from her second husband, a physician at a local hospital. Despite having a background in pharmaceutical sales and no experience in real estate, Susan grew her business from nothing to a small regional player with a staff of three residential real estate agents and three commercial real estate agents. Susan did so by recruiting experienced agents from big-name brokerage firms, wooing them with larger-than-average commissions. This recruiting practice kick-started Lighthouse s business, especially its commercial real estate sales. It also eliminated the need for specialized training in an area that Susan did not have much experience in. Lighthouse had also grown by using a combination of traditional and on-line residential real estate services. Traditionally, homebuyers and homeowners would be shown a few houses or sign a contract to have their home sold by the broker, then, once a deal was made, come into the office again to sign the closing agreement. Brokers for both the seller and buyer would each take 3% of the sales price to split 50/50 with the real estate agent. Susan, however, recognized that more and more residential real estate was being offered online for sale by owner for a very low flat fee online, completely eliminating the need for traditional brokerages like Lighthouse. She recognized this as a growing trend so partnered with an existing online
D. Campbell-Kim Lighthouse s Strategic Dilemmas 3 broker to capitalize on flat-fee real estate sales. For 20% of the $500 fee that home sellers paid the online broker, Lighthouse provided extra home selling services such as preparing the home for staging and providing for sale signs to home sellers. In addition, Lighthouse was given leads for home sellers who were frustrated when their online efforts failed and wanted a traditional broker. Susan was able to hire her third residential real estate agent in 2007 as a result of these online sales leads. Since the number of Lighthouse s residential sales - from both traditional and online leads - grew 20%, Susan felt that partnering with an online real estate brokerage was a wise business decision. Lighthouse s commercial real estate business grew more slowly. Her team of three women went after sales of indoor shopping malls and stand-alone restaurant buildings as well as other types of commercial real estate that they d heard was going to be put on sale. Susan felt that, as a newcomer to the market, she needed to cover all areas of the business to make her name well-known. Susan felt very pleased that her strategy led to so many sales. Although Lighthouse had experienced strong growth, the company had also experienced numerous difficulties. Net income was 33% lower than Susan had originally expected due to her decision to give significantly higher commissions to her agents. She also was experiencing high turnover of residential real estate agents who, upon quitting, told her that they had better offers elsewhere. The lack of training for agents also was viewed a negative by potential real estate agents who could get free training at other brokerages. Susan was able to make a living and make regular payments on the principle on her debt to her husband but was not able to pay it down as much as she had initially promised him. He was quite understanding but his patience was growing a bit thin.
4 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp. 1-9 Susan was happy with her recent successes but was intent on growing her business at an even greater pace. She felt that she was at a tipping point in her company s life cycle. Since commercial real estate transactions were so much more profitable than residential transactions, Susan started investigating ways to grow that area of her business. One area that she hit upon was the idea of working in medical office building sales. If Obama became president, it was possible that he would try to reform the country s health care system. Regardless, the country was aging considerably. With age comes more medical problems which means more doctors and health services would be needed. As Susan began to explore this idea, she became more and more confident that medical office building sales were the way to go. She d have to decide quickly, though, since commercial real estate sales took many, many more months to fully conclude than residential real estate sales. She d have to get started now. Discussion Questions: 1. What mistakes, if any, had Susan made before early 2008? 2. Do you believe Susan is making a good decision in deciding to take on the medical facilities sales? What factors could help or hinder her efforts? 3. What are some marketing strategies Susan could use to enhance her commercial real estate sales? What strategies could she use to improve her residential real estate sales? 4. Conduct a SWOT analysis of Susan s business. What are some of her most serious issues?
D. Campbell-Kim Lighthouse s Strategic Dilemmas 5 Instructor Notes: 1. What mistakes, if any, had Susan made before early 2008? Lighthouse s decision to enter the low flat fee residential sales market was most likely a loss-making decision. Lighthouse only received $100 for preparing a home for making signage and preparing a home for staging. (Staging a home takes hours to do.) The labor costs alone would have cost more than $100. Although the residential real estate agents who quit Lighthouse told Susan that it was because they had better opportunities elsewhere, it was highly likely that they felt their services were being made more of a commodity and that they felt they were being replaced with an online service. Susan made a bad hiring decision with the third residential real estate agent. Although the number of total real estate sales grew 20% when Susan added a third real estate agent, they really should have increased by up to 50% if the real estate agent had been as good as her other two agents and the marketplace had remain unchanged. (In 2007, the real estate market was still very hot.) In other words, her real estate agent was underperforming and Susan should take measures to replace her. Lighthouse s growth had been hampered by her decision to hire only female agents for the commercial side of the business. Commercial real estate transactions were often initiated and discussed among men on the golf course, out of reach of most women. (Only exceptional female golfers were permitted on many country clubs courses during normal playing times. Average female golfers were strongly discouraged from playing at those times.) This meant
6 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp. 1-9 that Lighthouse s growth was not as strong as it could have been if it had hired men as well. However, Susan felt that hiring only women was both a good marketing tool and a good way to empower women. For her, therefore, this was not a mistake. Some students may also see it that way. Susan took a haphazard approach to the commercial real estate market by trying to cover everything at once. Commercial real estate sales also have long lead times so growing them properly took focus and patience. As the case states, it also takes the strong relationships which, given Lighthouse s all-female staff, would be harder to develop. The fact that Lighthouse had 25 commercial transactions under its belt was likely a result of existing relationships that her agents had rather than new relationships developed under the Lighthouse name. 2. Do you believe Susan is making a good decision in deciding to take on the medical facilities sales? What factors could help or hinder her efforts? Students may argue for or against her decision. What should be pointed out, though, is that Susan currently lacks focus and clear direction. Help: her background in pharmaceutical sales and her husband s knowledge of what was required in office buildings could help her understand what type of buildings may be needed. This knowledge, though, could result in Susan being overly confident in herself and lead her to make mistakes.
D. Campbell-Kim Lighthouse s Strategic Dilemmas 7 Hindrances: Most commercial real estate brokerages were also likely thinking that the aging population would drive the medical office building market upwards. In addition, the real estate market was beginning to see some cracks in early 2008. Recruiting agents away from big name firms may be harder than normal since big name firms are perceived as being safer than smaller firms. 3. What are some marketing strategies Susan could use to enhance her commercial real estate sales? What strategies could she use to improve her residential real estate sales? Commercial: Susan had never done a STP analysis; doing this would be a good first step. She could then focus on a few markets only, learn the customers needs more in-depth and make those markets the focal points of her company. Residential: Because residential real estate agents are very independent and hypercompetitive, trying to get them all to focus in one direction may prove futile. Instead, Susan could focus on helping her agents develop more leads. One way Susan could attempt to gain more sales is by branching out and offering home stagings and other home-selling related services as side income. Although she might break even on those services, the real benefit would come from leads generated by doing a good job. 4. Conduct a SWOT analysis of Susan s business. What are some of her most serious issues?
8 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp. 1-9 Strengths: willingness to take risks, no bank loans and one very forgiving husband, experienced agents, no extras offered to agents that would take her away from generating leads, like training Weaknesses: lack of focus, lack of brand name (even after 4 years), high turnover, female agents only (some may argue that this is not a weakness), no free training to agents Opportunities: medical office buildings, online business, additional realtor services Threats: many very large commercial brokerages, threatening economic slowdown that began in 2007, lack of loyalty of agents, marital problems could lead to financing troubles Note 1: A real estate transaction could either be a sale or a purchase. Note 2: This case is entirely fictional and bears no relationship to any existing persons or organizations.
D. Campbell-Kim Lighthouse s Strategic Dilemmas 9 References Arrowsmith, J. and Parker, J. (2013) The meaning of employee engagement for the values and roles of the HRM function. The International Journal of Human Resource Management Vol. 24 No. 14, pp. 2692-2712. Doha, A., Das, A. and Pagell, M. (2013) The influence of product life cycle on the efficacy of purchasing practices, International Journal of Operations & Production Management, Vol. 33 No. 4, pp.470 498. Golder, P. N., and Tellis, G. J. (2010). Product Life Cycle. Wiley International Encyclopedia of Marketing. Hartley, J. (1994) Case studies in organizational research, in Qualitative Methods in Organizational Research: A Practical Guide, eds. C. Cassell and G. Symon, London: Sage, pp. 208-229. Wilhelm, W. B. (2013). Incorporating Product Life Cycle Impact Assessment Into Business Coursework. Business Education Innovation Journal, Volume 5, No.1, pp. 45-52.
International Journal of Business Knowledge and Innovation in Practice December 2013, Vol. 1, No. 1, pp. 10-24 ISSN: 2332-340X (print) 2332-3396 (online) Regulating Pharmaceutical Prices in the European Union Roland Attila Csizmazia * Abstract This case study aims to provide a better understanding of the necessity for regulation in the market for pharmaceuticals and to reveal the impacts of parallel trades in the European Union and how they may affect markets in the future. The pharmaceutical industry up to now has largely been regulated. Although the EU is a single market, it still has variable prices for pharmaceuticals. Consequently, the price gap and other EU-specific factors have created a great environment for parallel trades. The author has confined this study to the price regulations inside the EU before the enlargement in 2004. Keywords: regulation, pharmaceutical market, European Union, parallel trade Acknowledgment: The present research has been extended and revised at Kwangwoon University. The author would like to gratefully acknowledge the financial support granted by Kwangwoon University. * Assistant Professor, Business Administration, Kwangwoon University, Seoul, South Korea, E-mail: csix@gmx.at
R.A. Csizmazia Regulating Pharmaceutical Prices in the European Union 11 Introduction There are a multitude of reasons for regulation as participating stakeholders pursue different goals. From the perspective of government the most important objectives of regulations are expenditure control, quality and access (Maynard and Bloor, 2003). Governments in the EU frequently offer a list of reimbursable drugs and provides access to them for anybody who might not be able to pay the full price. Thus, it is obvious that people s price sensibility plays an important role when governments attempt to regulate the market. Additionally, stringent development testing must be conducted to comply with high quality standards before a potential drug would reach the market in order to identify both potential positive and negative effects as well as side effects. The versatility of regulations is reduced to the scope of regulations dealing with pricing within the European Union. Drug companies want to present themselves as entities which contribute to the improvement of the quality of life worldwide. They created various corporate slogans to persuade people of the necessity of their drugs, e.g., Life is our life s work, and We re part of the cure. The reality however suggests that these slogans are commercialized and introduced to obtain larger market shares in the market for pharmaceuticals rather than caring about the patients health. Even though it is obvious that drug companies spend billions of dollars on research, it should not necessarily lead to predatory marketing. They undoubtedly could use and largely use legally allowed methods to influence governments that their products were the best alternative to be subsidized.
12 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp. 10-24 The companies in this sector will continue to fight for and to protect their market shares, even if they may endanger the patients lives. Numerous cases were brought to court, where the patients won the lawsuit sadly usually after huge negative impacts on human lives. Still they would rather follow aggressive tactics trying to lower the initial cost of developing new drugs. (Un)surprisingly innovative drugs may have no other effect than the ones developed earlier, but companies replace them in order to generate higher profits through price skimming strategies. The replacement happens as long as the older products continuously reach a price as prices fall gradually that is near to their marginal costs (Reekie, 1997). When a new drug appears in the market after obtaining approval, the drug manufacturer may not care about the proper dosage, but wants to boost the profit and the impact of the newly introduced drug on their balance sheets. They rarely care about the so important and many times emphasized balance of the human body (Olivieri, 2003). Only recently has more attention been devoted to traditional (also herbal) drugs which as a result face a huge growth in demand. Unlike profit oriented companies, producers of such pharmaceuticals have a solid base of production with thousands of years old approved herb and of natural techniques (Jia and Zhang, 2005). Regulation in markets have been established for a long time. While Smith described in his theory a self-regulating mechanism as an invisible hand. In addition, neoclassical economists already had insisted that the existence of invisible hand was vital. Maynard Keynes stated in his book The General Theory of Employment, Interest and Money, that the uncontrolled price mechanism would not work, so it was normally in disequilibrium and that should be corrected by the government.
R.A. Csizmazia Regulating Pharmaceutical Prices in the European Union 13 On the contrary, the monetarists argue that there is no need for intervention since they only have short-term effects and in the long-run may even lead to a potential negative effect on the price level and on the GDP of the specified country or group of countries. These arguments blur in the case of public interest, such as health (Palley, 2005). In this case actually the public goods are meant to be available for everybody at an affordable price. For that reason governments attempt to negotiate with suppliers of pharmaceuticals in order to reach a consensus related to the state-subsidized pharmaceuticals (e.g., reimbursement schemes). Parallel trade in the European Union This kind of legalized business is possible within the boundaries of the European Union as one of the major pillars, namely the free movement of goods and exhaustion of related rights, and is provided by the Treaty of Rome to the parallel exporters. Exporters buy the authorized pharmaceutical products in countries, where the price is significantly lower than in the target country; then they repack the products if necessary, and supply to the countries with higher prices. They simply undercut the prices of the target countries. This activity is not new in the EU. Exporters have certain advantages besides simply the cost advantages. They usually do not need to go through a second marketing authorization procedure. But, of course, the precondition is that the product is identical or almost identical with the local product in the target member state, where this product has a same standard as the imported one. Before a medicinal product is placed on the market of any country in the EU, it must obtain marketing authorization. This requires the detailed information of the safety, quality and efficacy of the given product. In the EU the authorization can be issued either by one of the national regulatory authorities in accordance with Directive 2001/83/EC or by a centralized
14 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp. 10-24 authority in accordance with the Regulation 2309/93/EC (EU 2001). The latter one allows the exporters directly to purchase the product and sell it, since it refers to the entire EU market. The states reimbursement system that will be exploited gives only the allowance to specified packages of the certain drug and, therefore, the package has to be modified with the official language for the product information. Occasionally even the package size has to be changed. Parallel traders are often faster than manufacturers in launching their products in a particular European market. Initially the manufacturers did not count on such a rapid reimportation of their products since they believed that the traders also need significant time to evaluate the market, and determine the profit potential. However, this happened in the early phase of the parallel exportation, and since then parallel traders have become more and more sophisticated and quick. They even may be able to identify the future blockbusters before the manufacturer or the wholesaler launches them and they obtain licences rapidly. Since they sell directly to wholesalers, they can process the deals fast and load up stocks often before the manufacturer can step into the national market with the new product (Haigh, 2002). Several years ago, the threshold was supposed to be at 20% price difference, but the IMS Health (Haigh, 2002) has discovered remarkable cases as well, e.g., importation of pharmaceuticals having higher prices on paper in the source country than in the country of importation. This certainly was not understandable at first glance, but investigations discovered that the primary purchaser in the source country was a hospital and these particular medicinal products were discounted at these institutions. It was the hospital stock which was sold at a higher price in the other country (Haigh, 2002).
R.A. Csizmazia Regulating Pharmaceutical Prices in the European Union 15 In 2004 there were 25 countries between which these products can be dealt in parallel. Manufacturers simply tried to spread the belief that their items have different quality according to the pricing. Accordingly, they attempted to make people believe that the products having lower prices in other states also have inferior quality compared to the products which they put into the market by themselves. But the products were and are most of the times identical and the only difference might have been that the package and/or package size was/were designed in a different way. The European market has the same high quality requirements everywhere, which must be fulfilled by the manufacturers. Currently not just the sales of branded products suffer from the lower profits, but the traders also found the way of making more money by non-branded, generic, drugs. On parallel trades the off-patent products mean a certain threat as traders cannot sell their products so easily due to the high competition among generic products. Still when the parallel trader found a way of supply from a source country, where the price is a little lower, the product found its market in the still high-priced market. Through their re-importation activities the price gaps among countries have been narrowing and probably but not necessarily will lead to a single common market price in the future. Parallel traded pharmaceutical products are of quality and well-packaged. They cannot be distinguished from the branded products coming from the manufacturers through their actual distribution network. The market has been growing and reached about 5% of the total European market in 2002 as Figure 1 reveals.
16 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp. 10-24 Figure 1: Parallel Import penetration (EAASM, 2007) This European phenomenon is growing and will probably become a global one in the future. After parallel trades reach a significant level governments have tended to introduce different regulations to tighten parallel trades or to reduce price differences between paralleltraded pharmaceuticals and products that came through the traditional distribution channels. Accordingly, parallel traders pulled out slowly from one market and attempted to tap into other markets. The high growth represented by Figure 2 for Greece accounted for its parallel export share in its market for pharmaceuticals. The growth in Sweden slowed down while the UK and Germany reported the highest growth between 1998 and 2002 (Kanavos et al, 2004).
R.A. Csizmazia Regulating Pharmaceutical Prices in the European Union 17 Figure 2: Development of market share in parallel-trades in a few EU countries (Kanavos et al, 2004) Not only price matters Most of the regulation schemes of pharmaceutical markets introduced by governments are so complex, that even experts have problems in using them properly. Any intervention in the price setting mechanism driven by the invisible hand may only have short term effects and might not lead to the expected low prices at the highest general welfare. Nevertheless, governments in welfare states have to contribute to the satisfaction of demand in a socially sensible industry such as the pharmaceutical one significantly. From this point of view a combination of price reference schemes and profit control systems like PPRS seems to
18 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp. 10-24 be the most effective and consumer-friendly, even if they may not be transparent enough (Ess et al, 2003). Parallel trades became the consequence of complex and diverse price regulations within the European Union. The parallel trades exploit the loopholes in the law of the EU and if one market shows unfavourable tendencies traders seek for other opportunities, i.e., a solution of the problem concerning parallel trade is rather impossible during the following years. Besides, parallel trades can contribute largely to a single price or at least to less difference in prices. Danzon and Towse (2003) argue that confidential contract between the demand and the source side could wipe out parallel trades in order to maintain profit and to be able to develop new pharmaceuticals. Whereas both sides may be correct, the author considers parallel trades as not the real source of danger while fake pharmaceuticals are and the trades just started through the globalization process. This is likely to affect the major markets of the pharmaceutical manufacturers in the future largely (Balfour et al, 2005). Although price is a major factor, it is not the only factor for the parallel trading activities. Spain is considered as one of the cheapest states for medicinal goods and UK is as one of the most expensive states. But many times, where there is just a bit price difference, the items still can bring profit for the trader companies. The factors, which a parallel trade can depend on: Product price The sales volume in the source country The sales volume in the destination country
R.A. Csizmazia Regulating Pharmaceutical Prices in the European Union 19 Price differences between the two countries The way to acquire the product whether it is easy (Haigh, 2002). Since not just the price difference is a necessary pre-condition, other pre-conditions also must be considered: It is important to determine the volume of supply for the particular product in the market of the destination country. Whether regulatory conditions allow to make an adequate profit in both, the exporting and the importing, countries. The transportation costs between the two markets. Legal and regulatory conditions to allow the importer to place the product on the host market. As last but not least the importance of the acceptance of the product on the market by the patients, pharmacists and wholesalers After the parallel traders could make so much profit, the manufacturers looked for possibilities to fight back and took legal actions. According to the judgement in UK there is an important distinction between the application of trademark law and relabelled pharmaceutical products and the repacking of those. With that background, the judge held that all repackaging was to be treated as harmful and would only be permitted where it could be shown to inflict the minimum collateral damage on the [trademark and] should be as unobtrusive from a trademark point of view as possible. The judge considered that at least two forms of packaging satisfied this requirement :
20 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp. 10-24 Imitation Packaging: Packaging whose design imitates the design of the original packaging in all ways, but for the features have no trademark significance e.g., translation of the words from German to English. Blank Packaging: Completely plain boxes telling nothing except the proprietor s trademark. (Wearing et al, 2004) When can a manufacturer oppose repacking? As mentioned above, the court also investigated different cases and made a way of repacking still available. Whether the pharmaceutical producers can oppose the activities of traders successfully or not depends on the following factors: Whether the parallel trader considers itself as the proprietor of the trademark and whether it gave a prior notice that the repacked pharmaceutical product will be put on sale, is a sample supplied? -> If not, the manufacturer is entitled to oppose the marketing of the repackaged pharmaceutical product. Is the package design so that it protects the legitimate interest of the owner of the trademark? - Does the repacked product have any effect on the original condition by advertising it?
R.A. Csizmazia Regulating Pharmaceutical Prices in the European Union 21 - Is the repackaging adequate so that it does not cause any harm for the trademark (e.g., the packaging must not be defective, of poor quality or untidy; de-branding and co-branding must be avoided)? -> If not, the manufacturer is entitled to oppose the marketing of the repackaged pharmaceutical product. Does the package show clearly, who repacked the product itself and who is the manufacturer? -> If not, the manufacturer is entitled to oppose the marketing of the repackaged pharmaceutical product. Would the trademark proprietor s exercise of his rights amount to a disguised restriction on trade (i.e., would it contribute to the artificial partitioning of the markets between Member States)? Is a repackaging objectively necessary for the parallel importer to obtain an effective access to the market of the importing state? -> If not, the manufacturer is entitled to oppose the marketing of the repackaged pharmaceutical product (Wearing et al, 2004). But if the above written criteria are met the manufacturer is not entitled to oppose the marketing of the repacked product.
22 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp. 10-24 Questions 1) What are the current developments of parallel-trades in the EU? 2) Consider if there is any imitation of parallel trades of pharmaceuticals on other continents. If there is, what are the similarities to the European case? 3) Are price regulations necessary in a market like the markets for pharmaceuticals? 4) Are governments able to lower or stem the increase of their pharmaceutical expenditures by regulating their pharmaceutical industries? 5) Do parallel trades reduce price differences between countries? Do the prices lead to a better price control? 6) Does parallel trade contribute to welfare at the end? References Balfour F., Matlack C., Barrett A., Capell K., Roberts, D., Wheatley, J., Symonds, C. W., Magnusson P., Brady D., (2005) Fakes!, Businessweek, 6 February, http://www.businessweek.com/stories/2005-02-06/fakes, accessed 22 October 2013 Danzon, M. P. and Towse, A. (2003) Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents. International Journal of Health Care Finance and Economics 3 (3): 183-205. EAASM (2007) European Patient Safety and Parallel Pharmaceutical Trade a potential public health disaster? European Alliance for Access to Safe Medicines and Dr Jonathan Harper, 13 November, http://www.europeanbraincouncil.org/pdfs/publications_/harper%20report%20summary.pdf, accessed 22 October 2013.
R.A. Csizmazia Regulating Pharmaceutical Prices in the European Union 23 Ess, M. S., Schneeweiss, S. and Szucs, T. D. (2003) European Healthcare Policies for Controlling Drug Expenditure. PharmacoEconomics 21 (2): 89-103. EU (2001) Directive 2001/83/EC of The European Parliament and of The Council. Official Journal of the European Communities 44/L311: 67-119. Haigh, J. (2002) Parallel trade the number one concern in Europe. IM Health Report, 30 October, http://lists.essential.org/pipermail/ip-health/2004-february/005992.html, accessed 22 October 2013. Jia, W. and Zhang, L. (2005) Challenges and Opportunities in the Chinese Herbal Drug Industry. In: Zhang, L., Demain, A. L. (eds.) Natural Products: Drug Discovery and Therapeutic Medicine. Totowa and New Jersey: Humana Press, pp. 229-250. Kanavos, P., Costa-i-Font, J., Merkur, S., Gemmill, M. (2004) The economic impact of pharmaceutical parallel trade in European union member states: a stakeholder analysis. LSE Special Research Paper: p. 147 Maynard A. and Bloor K. (2003) Dilemmas In Regulation Of The Market For Pharmaceuticals. Health Affairs 22 (3): 31-41, doi: 10.1377/hlthaff.22.3.31 Mossialos, E., Mrazek, M.,Walley, T. (2004) Regulating pharmaceuticals in Europe: striving for efficiency, equity and quality. Berkshire: Open University Press Olivieri, N. F. (2003) Patients health or company profits? The commercialisation of academic research. Science and Engineering Ethics 9 (1): 29-41. Palley, T. (2005) From Keynesianism to Neoliberalism: Shifting Paradigms in Economics. In: Saad-Filho, A. and Johnson, D. (eds.) Neoliberalism a Critical Reader. London: Pluto Press, pp. 20-29. Reekie D. (1997) Regulations Without a Cause. In: Green D., Brown P., Burstall M., Mossialos E., Redwood H., Reekie W. D. (eds.) Should Phatmaceutical Ptices be Regulated? The Strengths and
24 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp. 10-24 Weaknesses of the Pharmaceutical Price Regulation Scheme, London: Institute of Economic Affairs. Wearing, A., Kirby, I., Van Kerckhove, M., and Vodra, W. Arnold & Porter LLP (2004) Parallel Trade in the EU and US pharmaceutical markets. In: Life Sciences 2004/05. London: Practical Law Company Limited, pp. 117-124.
International Journal of Business Knowledge and Innovation in Practice December 2013, Vol. 1, No. 1, pp.25-51 ISSN: 2332-340X (print) 2332-3396 (online) IKEA s International Expansion Clayton Harapiak * Abstract This case concerns a global retailing firm that is dealing with strategic management and marketing issues. Applying a scenario of international expansion, this case provides a thorough analysis of the current business environment for IKEA. Utilizing a variety of methods (e.g. SWOT, PESTLE, McKinsey Matrix) the overall objective is to provide students with the opportunity to apply their research skills and knowledge regarding a highly competitive industry to develop strategic marketing strategies. The case is oriented towards upper-level undergraduate or MBA marketing students and can be taught within a one to two-hour class with several hours of outside student preparation. Keywords IKEA, Home Furnishings Industry, International Expansion, Expansion Strategy * Assistant Professor
26 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 Introduction Traditionally in Europe, children inherited their furniture from their forefathers. However, modernization and globalization in both developed and developing countries have changed consumer buying patterns. Recently, younger generations are more prone to purchase low costing, portable contemporary furniture and home furnishing products (Jonsson, 2008). As a result, global retailer IKEA has intentionally designed their products to cater to this target market, further reducing costs by streamlining operations with local suppliers. In fact, IKEA is a model example of a company that has redesigned an industry in relation to how its supply chain operates (Antidote Issue, 1997). IKEA has successfully implemented it s strategic business models in numerous countries in Europe, North America, Asia Pacific and Russia/Ukraine (Jonsson, 2008). Furthermore, IKEA intends to extend their corporate strategic models when entering Serbia, Croatia, South Korea, Russia, China and India (Bloomberg, 2011). IKEA is world renowned for combining competitive low pricing with high quality products, within an appealing store setting (Reynolds, 1988). In fact, IKEA s corporate slogan is Low price with meaning, and Vision Statement is To create a better everyday life for the many people (IKEA Group, 2011; Moon, 2004). In other words, IKEA s main driving force is to provide customers with trendy functional products with minimalist lines, that are manufactured cost-efficiently with suppliers, and priced low enough so that most people can afford them (Hill & Jones, 2005). Moreover, IKEA measures strengths by utilizing Key Performance Indicators (KPI) which help assess the progress of its vision and long-term goals by setting targets and monitoring progress (Times, 2009, p. 3).
C. Harapiak IKEA s International Expansion 27 The purpose of this report is to ascertain how IKEA should determine its strategic position in continued international expansion. First of all, an extensive literature review on IKEA s company background and worldwide expansion will be provided. Secondly, an in-depth analysis of IKEA s life cycle, product range, target market segmentation, corporate and business strategies, and financial performance results will be critiqued. Thirdly, SWOT, PESTLE, market competitor analysis, McKinsey Matrix, and organizational gap analyses will be utilized to determine IKEA s trends and growth. Fourthly, IKEA s challenges in penetrating US, Japan, and China home furnishing markets will be fully addressed. Finally, recommendations for innovative strategies in contributing to IKEA s future growth and revenue stream will be evaluated. Company Background Industry and company background The name IKEA comes from the initials of the founder, Ingvar Kamprad, his farm Elmtaryd, and his county, Agunnaryd, in Småland, South Sweden (Moon, 2004). Since IKEA s humble beginnings in 1943 on Kampradʼs small farm, to opening it s first furniture showroom in Almhult, and later large scale Scandinavian and international expansion in Europe, North America, Asia Pacific and Russia/Ukraine, IKEA has become one the world s most successful global retailers (Hill & Jones, 2005; Jonsson, 2008; Moon, 2004). By 2008, IKEA had 253 home furnishing superstores in 36 countries and territories and was visited by 583 million shoppers generating 21.2 billion in sales (Times, 2009; Hill & Jones, 2005). Company product and services Product Strategy Council
28 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 IKEA sells from 8,000 to 10,000 home furnishing products from kitchen cabinets to candlesticks (Hill & Jones, 2005). Products have a "democratic design", which according to Kamprad, was not just good, but also from the start adapted to machine production and thus cheap to assemble. (Hill & Jones, p. 16). IKEA manager Gillis Lundgren adds that IKEA finds ways to alter the design of furniture to save on manufacturing costs (Hill & Jones, 2005, p. 16). Product development undergoes a rigorous process, overseen by a product strategy council, which consists of select senior managers who establish priorities for IKEA s product line-up (Moon, 2004). Once prioritized product line-ups are determined, product developers analyze prices, thereby reducing the price point by 30% to 50% (Hill & Jones, 2005). When the target retail price for the proposed product is set, the company selects a manufacturer to produce it, and distributes a description of the product s specifications and target cost to its suppliers, encouraging them to compete for the production package (Moon, 2004). This process may take as long as 3 years, even though IKEA replaces a third of its product line every year (Bloomberg, 2005; Hill & Jones, 2005). According to Hill & Jones (2005) about 90% of all products were sourced from independent suppliers, with 10% being produced internally (p. 21). Before shipping, all products are placed in flat-packaged boxes, to reduce transportation costs for both IKEA and the consumer (i.e. more items can fit into a crate, which means fewer delivery journeys, and reduces warehouse costs and damages) (Moon, 2004; Times, 2009). Retail Outlets IKEA trademark blue and yellow retail outlets average 300,000 square feet, and have meticulously designed store layouts. (Bloomberg, 2005; Moon, 2004). Store interiors are deliberately designed to require customers to pass through each department before arriving at
C. Harapiak IKEA s International Expansion 29 the checkout (akin to a maze), thereby enticing customers to make more impulse purchases during shopping (Hill & Jones, 2005). Shoppers are encouraged to try out and test products in the furniture showroom. Consumer concerns about quality control and longevity are also addressed (e.g. seat testing machines work demonstration products to destruction) (Reynolds, 1988). For easier purchase decision making, each display has pricing information, materials used, colors available, instructions for care of the product, product dimensions and characteristics itemized on a standard ticket, and where to order and collect the product within the store (Antidote Issue, 1997; Reynolds, 1988). IKEA provides extra-wide checkouts, with roof-racks available for purchase (to ease transportation of products), or home delivery options for an additional extra charge (Reynolds, 1988). There is also a fourteen day "No-Nonsense Return Policy" (Reynolds, 1988). In addition, IKEA further entices customers to stay longer by having restaurants (usually in the middle of the store) and child-care facilities (located at the entrance) (Hill & Jones, 2005). This form of "gentle coercion" is to keep customers in the store as long as possible (Bloomberg, 2005). Target Market Segmentation IKEA's main consumers are classified as young, middle class, and upwardly mobile, who prefer low-priced but trendy furniture and household products (Hill & Jones, 2005). Moon (2004:8) describes IKEA s target market in the US as someone who traveled abroad, liked taking risks, liked fine food and wine, had a frequent-flier plan, and was an early adopter of consumer technologies. Recently, IKEA has developed its product plans to increase its use of waste or recycled materials due to their customers increased demand for eco-friendly products (Time, 2009). It is however important to note that the average age and income level in most
30 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 developed countries is expected to rise, while IKEA's target segmentation of young, low- to middle-income families is expected to shrink (Harvard Business School, 1996). Therefore, IKEA may need to adjust their STP strategies accordingly. Corporate and business strategies IKEA s main corporate strategy focuses on offering customers low priced contemporary designed, functional products (Bloomberg, 2005; Time, 2009). Through its steely competitiveness, and relentless cost-cutting, IKEA strives at lowering prices on all products by an average of 2% to 3% each year (Bloomberg, 2005:54). Mark McCaslin, manager of IKEA Long Island, in Hicksville, N.Y. corroborates this: "We look at the competition, take their price, and then slash it in half" (Bloomberg, 2005: 54). To achieve this, IKEA spends considerable time on product development (constantly finding new ways to manufacture products cheaper), and strengthens long-term relationships with their suppliers (Harvard Business School, 1996). Strategic global outsourcing of product manufacturing has enabled IKEA to effectively reduce prices on their product, leading to international expansion (Hill & Jones, 2005). Moreover, productive internal competitiveness developed among the retail outlets and supply chain distributors (Harvard Business School, 1996). However, during expansion IKEA has encountered various pitfalls in building supply networks (Hill & Jones, 2005). For example, in Eastern Europe, after the fall of communism, new managers of manufacturing companies did not have loyalty to IKEA, and often tore up contracts, tried to raise prices, and underinvested in new technology (Hill & Jones, 2005:21). As a result, IKEA adapted quickly by purchasing a Swedish manufacturer, Swedwood, thereby giving IKEA a low-cost supply source, inside knowledge about the manufacturing process in
C. Harapiak IKEA s International Expansion 31 Eastern Europe, and the ability to help suppliers adopt new technology and drive down their costs (Hill & Jones, 2005). Another example of IKEA s corporate strategy in building relationships with suppliers is in Vietnam, where IKEA has expanded its supply base. Vietnam suppliers offers low-cost labor and inexpensive raw materials, while IKEA provides the prospect of forging a long-term, high-volume business relationship, and advice on locating the best and cheapest raw materials, setting up and expanding factories, choosing what equipment to purchase, and strategies to boost productivity through technology investments and management process (Baraldi, 2008; Hill & Jones, 2005). It appears evident that IKEA has adapted to international markets, while remaining true to its business concept (Johannson & Thelander, 2009). In other words, IKEA is a concept driven company, where it is essential to manage operations, and share knowledge the IKEA way, regardless of the location of the retail outlet (Jonsson, 2008). Open communication is vital to IKEA s operational systems. For example, whenever a problem occurred, both external and internal networks are utilized to find speedy resolutions. This corresponds with research arguing that it is important to build good relationships in order to enable the sharing of knowledge (Ghoshal, Viorine & Szulanski, 1994, as cited in Jonsson, 2008). Other competencies such as purchasing raw materials in bulk at cheaper costs (e.g. wood), streamlining decision making, maintaining delivery schedules and filling available manufacturing capacity with suppliers, mastering new technology in furniture production, and effective advertising methods (e.g. product catalogues and wacky promotions) have all contributed to IKEA s distinct competitive advantage in the furniture industry (Bloomberg, 2009; Bloomberg, 2005; Hill & Jones, 2005 ; Harvard Business School, 1996:6).
32 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 Financial Performance For the first time in IKEA s history, financials were revealed in 2010. Total revenues reached a record high of $31 billion, representing an 8 percent increase from the previous year (Bloomberg, 2011). In 2010, retail operations saw growth in most markets (2.4%), especially China, Russia and Portugal, with increased sales to 23.1 billion (7.7% from 2009) and profitability of 2.7 billion (IKEA Group, 2011). In addition, higher sales and reduced costs in supply chains, led to gross margin improvement from 44.6% to 46.1% since 2009 (IKEA Group, 2011). However, operating costs increased from 7.2 billion to 7.9 billion, mainly due to legal issues in Russia (over diesel generators), and the impairment of assets in industrial groups (IKEA Group, 2011). IKEA adjusted accordingly by reducing expenses by 2.3% (from 2009), with higher currency results also compensating for decreased financial net interest income (IKEA Group, 2011). The tax rate increased from 13.2% to 17.6% mainly due to higher taxable profits (especially in countries with higher nominal tax rates), with corporate income taxes totaling 577 million, and 150 million in property taxes (IKEA Group, 2011). Investments in property (12 new stores and eco-friendly wind farms) and increase in cash and securities led to an increase from 3.7 billion to 41.3 billion in total assets, with securities rising from 2.5 billion to 15.2 billion (no credit losses), and total equity amounting to 22.8 billion (IKEA Group, 2011). (For full Financial Data, see Appendix B) Strengths/Advantages See Appendix C (SWOT analysis)
C. Harapiak IKEA s International Expansion 33 Current Analysis Competitor Analysis Although IKEA s smaller competitors have less buying power with suppliers (due to less volume orders), they may be able to respond quicker to emerging trends in the market (less inventory or product orders) (WEC, 2011). However, IKEA maintains long term mutually beneficial relationships with suppliers to ensure direct communication to meet the needs of the customer (Jonnson, 2008). In fact, IKEA s networks extend all the way to the raw material suppliers of its products (unlike Wal-Mart) (Baraldi, 2008). With larger competitors, IKEA s main focus is minimizing costs to maintain competitive advantage. Another competitive advantage is IKEA s absence of production facilities, factories, and warehouses, since all manufacturing is outsourced to local suppliers (WEC, 2011). Moreover, IKEA s brand name value renowned for high quality, low priced, modern contemporary products, poses challenges for new competitors to enter the home furnishing market (i.e. brand loyalty) (WEC, 2011). IKEA also differentiates strategically from competitors by placing outlets in geographic locations best suited for their customers (e.g. near suburbs in Europe and North America and metropolitan areas in China) (Johannson, & Thelander, 2009; WEC, 2011). Organizational Structure IKEA is a model global corporation, often described as "the prototypical Teflon multinational" because "no charge ever sticks for long." (Newsweek, 2009 as cited in Bloomberg, 2009:26). Some view IKEA as the quintessential global cult brand, with an egalitarian culture. (Bloomberg, 2005:26; Hill & Jones, 2005). For example, at company dinners
34 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 employees eat first, followed by managers, then directors and Ingvar Kamprad often last (Harvard Business School, 1996). Kamprad himself is an informal and frugal man, whose values are legendary and permeates IKEA s organization (Hill & Jones, 2005). All employees are discouraged from wearing business attire (jeans and sweaters preferred), and encouraged to find innovative ways to reduce costs within all levels of the organization (Harvard Business School, 1996). Even the founder models this by flying economy class, eating at inexpensive restaurants, and furnishing his home only with IKEA s furniture (often for prolonged periods of time) (Bloomberg, 2011). In other words, cost consciousness, especially travel and entertainment expenses are particularly sensitive areas. For example, while on a business trip, Kampar found his hotel too expensive (by 5Kr) so he drove around town late at night checking hotel prices, till he found one economical enough (Harvard Business School, 1996). Kamprad stressed an informal (no titles, privileges, or perks), team-based, nonhierarchical organization (i.e. matrix organization), clearly emphasizing the need for an open flow of knowledge and information within management (Jonsson, 2008). He prefers speaking directly to front-line operation managers (especially the designers and the purchasing group), rather than delegating to upper management (Harvard Business School, 1996). The IKEA management process is face paced, emphasizing simplicity and attention to detail (Harvard Business School, 1996). Moreover, since it is expected that people enjoy their work at IKEA, salaries are not particularly high (Hill & Jones, 2005). Kamprad also views his organization as a family, with its core value being love (Hill & Jones, 2005, p. 23). Therefore, he employs likeminded individuals, where the most important value is ödmjukhet a Swedish word that implies humility, modesty and respect for one s fellow man (Harvard Business School, 1996).
C. Harapiak IKEA s International Expansion 35 Creativity is also highly valued (especially within the design team) (Hill & Jones, 2005). IKEA will not become publicly listed in the near future, since Kamprad believes the stock market would impose short-term pressures on IKEA, thereby affecting the long-term goals of the company (Hill & Jones, 2005). Stichtung INGKA Foundation (the world s biggest non-profit legal entity) controls INGKA Holding (a Dutch corporation) which in turn controls IKEA. This entitles IKEA to tax exemptions for substantial donations to charities (Bloomberg, 2011). Current IKEA Strategic Performance US market When IKEA entered the US market in 1985, low end general discount retailers such as Wal-Mart, K-mart, Target, and Sam s Club, and office supply stores such as Office Depot, and discount warehouses such as Costco (who sold a limited product line of basic furniture) were the main competitors (Bloomberg, 2005; Harvard Business School, 1996; Moon, 2004; Hill & Jones, 2005). However, their furniture was generally lower quality, primarily functional, and lacking contemporary innovative designs. The high-end retailers, such as Ethan Allen, Thomasville, and Jordan s furniture offered high-quality, well-designed, high-priced furniture, and home delivery services including set up in customers homes (either for free or a small additional charge) (Harvard Business School, 1996; Hill & Jones, 2005; Moon, 2004). In addition, due to the expensive costs in warehousing high-end furniture, much of what was on display in stores was not readily available, and the client would often have to wait a few weeks before it was delivered (Harvard Business School, 1996).
36 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 Initially, IKEA had challenges meeting American customers needs. For example, stores weren't large enough (thereby offering the full IKEA experience), and many were in poor locations, beds were not long enough and did not fit American sheet sizes, bedroom wardrobes not deep enough, kitchen cabinets did not fit US size appliances, sofas were too hard and not big enough for American comfort, curtains were too short, product dimensions were in centimeters rather than inches, and kitchenware was too small for American serving-size preferences (e.g. glasses) (Bloomberg, 2005; Hill & Jones, 2005; Moon, 2004). In addition, prices were too high since IKEA was sourcing many of the goods from overseas, priced in the Swedish kronor, which was strengthening against the American dollar (Bloomberg, Nov 14, 2005; Hill & Jones, 2005). Therefore, IKEA had to localize products, find modern, larger store locations, and outsource goods from local lower-cost suppliers (lowering transport costs and currency devaluation) (Hill & Jones, 2005). Fortunately, American consumption patterns also changed towards an interest in contemporary design, and the idea of disposable furniture (IKEA s main product line) (Hill & Jones, 2005). As a result, IKEA started promoting with a series of quirky hip advertisements aimed at their American target market (i.e. young, married couples, college students) (Hill & Jones, 2005:19). However, copycat competitors such as California-based retailer Stör, followed IKEA's concepts in detail (from product design to in-store restaurants to ball-filled play areas for children) leading IKEA to file numerous litigations against them (Harvard Business School, 1996). Regardless, from 1997-2001, IKEA was able to double revenue (from $600 million to $1.27 billion) (Hill & Jones, 2005; Moon, 2004). The United States had 35 stores (10% of total revenue-$2.4 billion) being the second-largest market after Germany (Hill & Jones, 2005).
C. Harapiak IKEA s International Expansion 37 Various sources indicate that IKEA plans to have 50 US retail outlets by 2013 (Bloomberg, Nov 14, 2005; Moon, 2004; Hill & Jones, 2005). China market Currently, Asia generates only 6% of IKEA s total revenue; however, IKEA sees major growth potential, especially in China (Bloomberg, January 16, 2011). China is the 2nd largest economy in the world, with GDP increasing over 10% yearly (Bloomberg, 2011). The Chinese government stimulus spending and favorable policies toward retailing and consumer lending have encouraged overall retail growth in China (Bloomberg, 2010). Although this may benefit IKEA s Chinese competitors, combined with increasing labor unrest among Chinese migrant workers (especially in International corporations), high import duties, and copycat imitations of IKEA s product line, IKEA projects success in the furniture and home furnishing market in China (Bloomberg, 2011; Jonsson, 2008). For example, IKEA has been allowed to exceed and expand its source of products in China, thereby ignoring the usual sourcing guidelines (same products from outside China) (Johannson, & Thelander, 2009). Producing goods locally to substantially lower prices is key to IKEA s success in China (as much as 70% lower than IKEA stores outside China) (Hill & Jones, 2005; Jonsson, 2008). Nearly 20% of all purchase volumes are made in China (Baraldi, 2008). In fact, previous IKEA executive, Stenebo, submits that raw materials (e.g. wood) purchased in China are purchased at lower than the average price (suggesting illegal purchasing) (Bloomberg, 2009). Baraldi (2009) adds that the technological advancements by Chinese suppliers also contributes to low cost but equivalent quality to traditional European suppliers. However, Jonsson (2008) argues that what is even more important is to strengthen further IKEA s home interior competence, which is a key competitive advantage in China (p.
38 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 29). Of course, extensive market and corporate knowledge is essential to fulfill this competency (Jonsson, 2008). IKEA opened first in Beijing in 1998, followed by Shanghai and Guangzhou (by 2006), and 3 outlets in Hong Kong, with plans for investment of $1.2 billion in 10 outlets by 2012 (Bloomberg, 2010; Bloomberg, 2010; Johannson, & Thelander, 2009; Jonsson, 2008). These stores are close to the city (compared to IKEA outlets in other parts of the world), because the majority of Chinese consumers use public transportation (Johannson, & Thelander, 2009). Nevertheless, IKEA still built 700 parking places under the Shanghai store, with expectations that shopping patterns will change in the future (Johannson, & Thelander, 2009). Interestingly, IKEA s main target segmentation are Chinese females around 30 years old (since they often make decisions around home furnishings). Some research has indicated that this generation was born during China s One Child Policy and are believed to be impulsive, easy to influence, very social, and committed to leading foreign consumer brands (Johannson, & Thelander, 2009:57). In fact, Chinese consumers often use IKEA stores as a social venue or weekend family outing (often browsing or taking naps on some of IKEA s products) (Bloomberg, 2010). However, IKEA s GM in China indicated that, Over the last 10 years, we ve seen a very big change in the number of visitors that become customers, he said. Most people buy something today. (Bloomberg, 2010). Moreover, IKEA customizes showrooms according to Chinese living patterns and standards. For example, many Chinese people live in small apartments with balconies, therefore, IKEA has added model sets and special balcony sections in the stores to show how to furnish your balcony (Johannson, & Thelander, 2009). Local entrepreneurs have capitalized on
C. Harapiak IKEA s International Expansion 39 home transport services for IKEA customers along with home assistance in assembling the furniture (especially since China does not have a Do-It-Yourself culture (Johannson, & Thelander, 2009). In addition, promotions and marketing are often internal, due to the costs and distances involved in distributing catalogues (Johannson, & Thelander, 2009). Organizational Structure in China IKEA has realized the need to adapt its organizational structure and competencies to fit with strategic partners within their networks (Baraldi, 2008). For example, the organizational structure in China was developed differently than the standard IKEA organizational set-up, mainly due to Chinese cultural tenets (e.g. Confucianist hierarchical values) (Jonsson, 2008). According to research on IKEA franchising in China, a certain amount of discontent was reported that HQ was not always very interested in knowledge coming from IKEA in China because of a lack of interest in the Chinese market (Jonsson, 2008). However, HQ had announced that China, Russia and Japan would probably be among the most important markets for IKEA in the future (Jonsson, 2008). Japanese market Even though IKEA had entered Japan and failed 30 years earlier, in 2002, the IKEA Group established IKEA Japan KK (Hill & Jones, 2005; Jonsson, 2008). Immediately, IKEA faced challenges in differentiating against local competitors Mujirushi Ryohin (Muji) and Nitori who were well-entrenched (numerous national stores), inexpensive (due to low-cost imports from developing Asian countries) and popular local brands (especially among IKEA s younger generation target market) (Bloomberg, 2006). This mature and saturated market created
40 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 difficulties in attracting IKEA s target customers (Jonsson, 2008). Japanese consumers were very quality oriented and traditionally viewed high priced products as being of high quality (Bloomberg, 2006; Jonsson, 2008). However, many Japanese customers are in the process of embracing the concept of value" (Bloomberg, 2006). In addition, IKEA has localized its modern designs to include richer and darker wood products packaged in aesthetically pleasing boxes, which are preferred by their Japanese clients, and customized showrooms (small scale apartments) display fitted IKEA furnishings (thereby changing consumer buying patterns) (Bloomberg, 2006; Jonsson, 2008). Large retail outlets offer home delivery and assembly services, since the Do-It-Yourself culture has not yet been widely accepted in Japan (Bloomberg, 2006). In fact, IKEA is developing a service where old furniture is transported away, to make way for new IKEA furniture (Jonsson, 2008). Marketing Various marketing challenges exist in emerging markets like China and Russia and even developed markets like Japan. Therefore, IKEA needs to cooperate and share knowledge between the marketing departments within those countries (Jonsson, 2008). However, Jonsson (2008) argues that, it may also be devastating to simply acquire a solution from, for example IKEA China to apply to IKEA Japan (p. 33). For example, although IKEA experienced difficulties with copycat competitors in China, applying similar strategic marketing solutions in Japan may not be successful since copying in Japanese refers to copy something and to make it even better (Jonsson, 2008).
C. Harapiak IKEA s International Expansion 41 Anders Dahlvig, IKEA s group president, suggests that many competitors could try to copy one or two of these things. The difficulty is when you try to create the totality of what we have. You might be able to copy our low prices, but you need our volumes and global sourcing presence. You have to be able to copy our Scandinavian design, which is not easy without a Scandinavian heritage. You have to be able to copy our distribution concept with the flat-pack. And you have to be able to copy our interior competence the way we set out our stores and catalogues (Moon, 2004:32). Regardless, these strategic challenges must be rectified to meet IKEA s targeted potential sales volume, in order to fulfill its goal in opening 8 12 outlets (first stores in Tokyo) with 46 stores in the next 33 years (Jonsson, 2008). Conclusion In conclusion, IKEA has strategically designed their products to cater to their target market (i.e. younger generational families), while further reducing costs by streamlining operations with local suppliers. In addition, they have pursued a global expansion strategy of primarily entering countries going through periods of high GDP growth (i.e. China, Eastern Europe) or those developed countries with niches within the home furnishing industry (i.e. US, Japan). This research will further benefit analysts, academics or students seeking to better understand IKEA s primary points of success and weakness. Future research should be investigated into IKEA s strategic goals in entering emerging markets. Questions
42 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 In considering an international market for IKEA and using the information available, the following questions may be pertinent to perform a thorough analysis: 1. In a feasibility study, what competitive advantages do the existing competitive entities have and which can be challenged by IKEA? 2. What specific difficulties will IKEA face in the PESTLE analysis? Is there an existing acceptance of foreign competition in the local market or do negative sentiments exist? 3. Does IKEA s current STP match the potential target of the country? Are there any variations to consider? 4. What is the potential for strategic alliances/partnerships or joint ventures? Is this an advisable course of action? 5. How will IKEA source its raw materials? 6. Will localization of products be an important factor for IKEA and if so, in what way can IKEA pursue a localization effect? 7. Are there primary locations for IKEA to base its operations and will there be any challenges in this regard? 8. What other local concerns (values, norms, expected behaviors) should IKEA consider in the development of new markets? References Bloomberg Businessweek. (2005, November 14). IKEA: How the Swedish retailer became a global cult brand, pp.32-36. Bloomberg Businessweek. (2006, April 26). IKEA's new plan for Japan, pp.48-51.
C. Harapiak IKEA s International Expansion 43 Bloomberg Businessweek. (2009, November 12). Shocking tell-all book takes aim at IKEA, pp.72-73. Bloomberg Businessweek. (2010, October 19). IKEA to add $300 million to mall developerʼs China spending, p.67. Bloomberg Businessweek. (2010, October 21). Dozing Chinese shoppers filling IKEA beds spur expansion plans, p.22. Bloomberg Businessweek. (2011, January 16). IKEA reveals the extent of its success, 39-40. Baraldi, E. (2008). Strategy in industrial networks: Experiences from IKEA. California Review Management, 50, 4, p. 99-136. Harvard Business School. (1996). Ingvar Kamprad and IKEA. Harvard Business Review: Boston. Hill C. W. H. & Jones, G. R. (2005). Strategic Management Cases. University of Washington Press: Washington, D.C. IKEA Group. (2011). Welcome inside: Yearly FY10. Inter IKEA Systems Publishing. Sweden. Johannson, U. & Thelander, A. (2009). A standardised approach to the world? IKEA in China. International Journal of Quality and Service Sciences, 1, 5, pp. 199-219. Jonsson, A. (2008). A transnational perspective on knowledge sharing: Lessons learned from IKEA s entry into Russia, China, and Japan. The International Review of Retail, Distribution and Consumer Research, 18, 1, p. 17-44. Moon, Y. (2004). IKEA invades America. Harvard Business School. Harvard Business School Press. Boston. Reynolds, J. (1988). IKEA: A competitive company with style. Retail and Distribution Management, 5, p. 6-7. The Antidote. (1997). The story of IKEA. In the Antidote newspaper.
44 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 The Times 100. (2009). Swot analysis and sustainable business planning. In Times Newspaper Limited. World Education Council (2011). Strategic Planning. WEC Publishing: Malaysia.
C. Harapiak IKEA s International Expansion 45 Appendix A 1943: After receiving money for his success in academic studies from his father, Kamprad began his business by selling fish, Christmas magazines, and seeds at the age of 17. He soon expanded his product range including ballpoint pens and furniture, delivering via mail-order and utilizing existing delivery routes (Harvard Business School, 1996; Hill & Jones, 2005; Moon, 2004). 1947: Kamprad expands furniture production via local manufacturers in the forests close to Kamprad s home (Moon, 2004). 1951: IKEA is prohibited direct sales to customers at fairs, thereby changing the customer order process through requests from IKEA furniture catalogs. Kamprad decides to discontinue all other products and focus directly on low-priced furniture (Moon, 2004). 1953: In Almhult, the first furniture showroom is opened (a converted disused factory), allowing customers to sample furnishings before purchasing. Kamprad converted a Company sales grow from SKr 3 million to SKr 6 million in less than 2 years (Harvard Business School, 1996; Moon, 2004). 1955-1956: Due to competitors pressuring IKEA suppliers, IKEA started to design its own innovative and low-cost furniture. IKEA manager Gillis Lundgren also invented the flatpacking concept (by removing a table s legs to fit into a customer s car), thereby reducing transportation, storage, and labor costs. 1957: IKEA displayed and sold furniture at home furnishing fairs in Sweden. By streamlining operations and using the self-assembly concept, Kamprad lowered costs of IKEA products
46 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 compared to competitors (Moon, 2004). Moreover, he found that furniture manufactured in Poland was up to 50% cheaper than furniture made in Sweden (Hill & Jones, 2005). 1958: The first IKEA store is inaugurated in Almhult. 6,700 square meters of home furnishings. It was the largest furniture display in Scandinavia (Moon, 2004). The original idea behind the store was to have a location where customers could come and see IKEA furniture set up. It was a supplement to IKEA's main mail-order business. The store adapted to customer needs and soon started to sell car roof racks so customers could leave with flat-packed furniture loaded on top (Hill & Jones, 2005). 1961: IKEA's annual turnover was over SKr 40 million (80 times more than average competitor) (Moon, 2004). 1964: Over 800,000 IKEA catalogues had been mailed to Swedish homes. Swedish magazine Allt i Hemmet (Everything for the Home) published results that not only was IKEA's quality as good if not better than that from other Swedish furniture manufacturers, the prices were much lower (Hill & Jones, 2005, p. 16). As a result, IKEA sales skyrocketed. 1965: During IKEA s grand opening in Stockholm (45,800 square meter store), thousands of customers waited to purchase products (Moon, 2004). Therefore, IKEA opened the warehouse and encouraged self-service (i.e. customers load flat-packed furniture onto trolleys, and proceed to checkout). This pivotal moment became an important concept for all subsequent IKEA stores (Hill & Jones, 2005). The second outlet was constructed larger, located just outside the city, had ample parking space, and implemented wide distribution of informative catalog,
C. Harapiak IKEA s International Expansion 47 the use of explanatory tickets on display merchandise, stock of products in flat pack boxes, and the cash-and-carry concept (Harvard Business School, 1996). 1973: IKEA had 9 stores with a market share of 15%, becoming the largest furniture retailer in Scandinavia (Hill & Jones, 2005). 1974: IKEA opened near Munich, promising low-cost furniture, quick delivery, and the quality image of the Swedish Furniture Institute's Möbelfakta seal (Moon, 2004). However, the German retailers filed legal proceedings against IKEA with the support of the German courts, and curbed IKEA's activities. Regardless, by the late 1980 s IKEA s business was successful with 15 stores, and had built a 50% share in the cash and-carry segment of the West German market (Moon, 2004). 1976-1982: IKEA successfully opened 7 stores in Canada (Hill & Jones, 2005). 1985: IKEA entered the US market in Philadelphia and the coastal regions (Hill & Jones, 2005). 1986: IKEA entered into a joint venture with a Hungarian retail chain, opening outlets in Budapest and later Leningrad (Harvard Business School, 1996). 1987: IKEA was slow to expand into the UK. Nevertheless, it had 17 stores by 2008 (successful entry in Warrington and largest home furnishing store in London) mainly due to acquisition of competitor Habitat in the early 1990ʼs (Harvard Business School, 1996; Hill & Jones, 2005; Moon, 2004).
48 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 1988: IKEA Poland built a $25 million warehouse and retail center near Warsaw, purchased furniture and established a joint-venture woodworking factory in Poland, planned outlets in Yugoslavia, and administration offices in Vienna (Harvard Business School, 1996). 1989: In Italy, during the first three days of operation, customers waited for 1 hour outside the store (Harvard Business School, 1996). 1998: IKEA entered China and had 4 stores by 2008 (Hill & Jones, 2005). 2000: IKEA expanded in Russia with 11 stores by 2008 (Hill & Jones, 2005). 2006: IKEA re-entered the Japanese market after failing 30 years previously (Hill & Jones, 2005). 2007: IKEA had home furnishing superstores in 35 countries and was visited by 583 million shoppers. IKEA generated sales of 21.2 billion in 2008, up from 4.4 billion in 1994 (Hill & Jones, 2005). 2008: The IKEA group had 253 stores in 36 countries and territories, with a further 32 stores owned and run by franchisees (Time, 2009; Hill & Jones, 2005). IKEA also had 1,380 suppliers in 54 countries such as China (21 % of supplies), Poland (17%), Italy (8%), Sweden (6%), and Germany (6%) (Hill & Jones, 2005). 2011: IKEA employs 127,000 people (Bloomberg, 2011).
C. Harapiak IKEA s International Expansion 49 Appendix B Financial Reports
50 International Journal of Business Knowledge and Innovation in Practice (IJBKIP) December 2013, Vol.1, No.1, pp.25-51 Appendix C: SWOT Analysis for IKEA Strengths Weaknesses Strengths Weaknesses -Strong international brand attracting key consumer groups, and ensures universal low prices, exceptional quality, well designed, functional, and wide range of products (Times, 2009) -Promotes social and environmental responsibility with all suppliers (e.g. production process increases use of renewable raw materials and transport) (Times, 2009) -IKEA has strong purchasing power (i.e. buys large volumes of bulk goods thereby providing barriers for competitors), and partnerships with suppliers (e.g. sourcing materials close to supply chain) to reduce costs (Times, 2009) -Utilizes new technologies to modify -Increasing international expansion and obsessive need for low cost products creates challenges in maintaining universal standards and quality of products, with differentiation from competitors (Times, 2009) -Needs more transparency with consumers and stakeholders on profitability and environmental activities (e.g. Kamprad needs to hold more public interviews) (Bloomberg, 2009) -Recent negative publicity from former executive has damaged public image (e.g. lack of foreign management, alleged informer network, and cult ideologies) (Bloomberg, 2009; Harvard Business School, 1996)
C. Harapiak IKEA s International Expansion 51 products, thereby reducing raw materials needed (Times, 2009) -Solid revenue growth (IKEA Group, 2011) -Concerns around losing patriarch Kamprad leading to demise of companies thrust and drive (Harvard Business School, 1996) Opportunities Threats -Eco-friendly business conduct (i.e. green products, wastewater treatment, energy use reduction, lowering carbon footprint) and information (on website) may result in good returns even in price sensitive markets (e.g. during economic recession) (Times, 2009) -Social (e.g. less new home owners entering market), market (e.g. increase in low price household and furnishings competitors), and economic (e.g. recession causes less consumer spending) trends pose substantial threats to IKEA (Times, 2009) -Social responsibility by donating to charities via IKEA non-profit organization (e.g. UNICEF, Save the Children (Times, 2009) -Increased opportunities for expansion and growth in Serbia, Croatia, South Korea, Russia, China and India (Bloomberg,, 2011)