IKEA Franchising Strategy

IKEA Franchising StrategyIKEA is an outside(a) home piece of furniture order that selling the wide ranges of well- somaed and working(a) harvest-feasts which packed in form of ready-to-assemble. According to IKEA (2012), its employment is founded in 1943 by 17 old age former(a) Ingvar Kamprad in Sweden. The headquarter beau monde of IKEA is placed in Delft, Netherlands. With the time turned, furniture seller IKEA becomes hotshot of prospering companies or so the world and has ability to take payoff of planetaryization. on that pointfore, now IKEA has 325 stores in 38 countries in which 287 stores in 26 countries is altogether own INGKA Holding (non-for-profit corporation) and the remaining 38 stores argon run by dealershipes which under Dutch company (for-profit corporation) (n.a, 2012). INGKA Holding is pargonnt company of Dutch company. The large-mouthedst stores around the world be placed in mainland China, German and Sweden (IKEA, 2012).The IKEA strain is developed starting with home selling and then turn to become international nowadays. Origin every(prenominal)y, IKEA only sold small home accessories and trinkets products in its home, Sweden. Until 1948, IKEA began to design its own furniture products and sold in minuscule price with high quality (Ellis, 2010). The process of business development is from home selling the products, sur fountain a retail store in Almhult town, Sweden (1958), then develop a larger retail number in Norway (1963). In 2012, IKEA committees plan to develop a altogether-own footslogger corporate in India countries after did the foodstuff investigation.Currently, majority of IKEA stores be wholly own and managed by INGKA Holding ( in addition known as Stichting INGKA Foundation). The wholly owned subsidiary schema explain that majority of stores achievements, management, its furniture design and manufacture are overseen by INGKA Holding. For the case, IKEA has broad eyed the retail commercialize in India, now plan to invest900 million to micturate a wholly own subsidiary in India (Kinetz, 2012).On the some other(a) hand, IKEA in addition implements the franchising strategy in rough countries to manage minority stores. The franchisees who allowed using IKEAs apprehension and trademark to run business occupy to pay 3% of revenue back. Since the socialisation and value is different in e truly unpolished, IKEA committees evaluate the countrifieds topical anesthetic commercialise and its rising expansion opportunities earlier go in.For the future expansion, we suggest that IKEA should take joint profess strategy as business expansion strategy in India country. Joint venture is a good strategy to tending a company inserts into a different cultural mart. As an example, Wal-Mart k sassy nonhing or so Asian retail market, they choose make ited into Hong Kong via joint venture with Thai conglomerate (Neelima Mahajan-Bansal, 2012). Second recommendation we sug gest to IKEA is using wholly owned subsidiary to enter Brazil. The reason we choose Brazil as another target market beca expenditure it has stability of policy-making economy environment which bath rationalize various risk of business (n.a., 2011). IKEA also can take the advantage of Brazil since there has teeming(a) of high quality woods as the re witnesser for business (n.a., 2011).2.0 Current Expansion StrategyWholly owned SubsidiariesIKEA use wholly owned subsidiary as their main expansion. The IKEA corporate structure is divided in to two parts which are operating and franchising. Most of the IKEAs operations practices are overseen and managed by INGKA Holding B.V. INGKA Holding B.V is wholly owned by Stichting INGKA Foundation, a non-profit registered in Leiden in the Netherlands which is construeled by the Kamprad family (IKEAFANS, 2009). In stratum 2011, there are IKEA stores in 38 countries operating around the world such(prenominal) as United States, Canada, United Kingdom, Switzerland, Netherland, France, Russia, Saudi Arabia, China, Malaysia, Australia, and etc. There are 287 stores run by the INGKA Holding B.V and the remaining 38 stores are run by franchisees (Inter IKEA Group, n.d.).IKEA can either set up new operation in the country or can undertake an established firm in the host nation and use that firm to promote its promote its product as long as IKEA own 100 percent self- willing of the stock. Habitat Retail Ltd. is a household furnishings retailer in the United Kingdom, Germany, France and Spain and in the year of 1992, IKEA acquired Habitats UK and French chain with about outwit 55m to round their business (Moore. J, 1992). IKEA own all of their launchings and land, and stores are custom built and designed for efficiency and sales potential. In order to do that, IKEA do not cut back investment in retail stores. (Deniz, Marco Art, 2012)The main purpose of the IKEA use this expansion strategies is to ensure operational contro l, standardization, and provide a smooth creation into to a new market. The attractive way to use wholly owned subsidiaries is where IKEA can reduces the risk of losing control over their core competence and its concept. This expansion strategies give IKEA nurture the full control over operation practices such as marketing, logistics and decision in different countries to meet their standard. In addition, all the profits get out go to IKEA due to having full control on every operation. It is necessary for them engaging in global strategic coordination. Wholly owned subsidiaries also required IKEA to realize location and engender curve economies (Hill et. al., 2011). This which means, IKEA up to(p) to achieve economic of scale by manufacture more products and reduce the average cost of products (Hill et. al., 2011). Indirectly, this also fulfill the IKEA porter generic strategies which is cost leadership.However, wholly owned subsidiary strategy is highly high-ticket(prenomina l) choice for company that would lead to severe financial risk if not successful. IKEA fool to bear the full costs and high risk by themselves of setting up the factories, stores and retail shops operations in other nations (Hill, et. al., 2011). Japan was the set-back country in Asia that IKEA considered to enter in 1970s during their expansion to the international market. Their first opening to Japan market was in 1974 (n.a, 2008). Due to the differences between culture, lifestyle and behavior lead to IKEA face the failure and they had to withdraw their store out of Japan. However, IKEA decided to re-enter the market in 2002. This time IKEA conducted a thorough study of the markets and understand their requirement (Alexandra, 2009). At present, there are five IKEA stores in Japan, put up of which was opened in year 2011(Inter IKEA Group, n.d.). Besides that, there are political risks of submission in to the market wholly in the form of nationalisation threats or corruption a nd bribery (Back et. al., 2010). Recently in year 2009, there submit been issues about corruption in the opening of retail store in Russia (n.a., 2011). It has been held by safely officials requests for payments and IKEA is refusing to so. Thus, IKEA has ended up by would not build more stores outside the Moscow arena until Russian officials stop withholding permission and freeze expansions on Russia (n.a., 2011).Franchising StrategyThe IKEA concept which mother IKEA franchise worldwide is belong to the Inter IKEA System B.V in Netherlands. Inter IKEA Systems B.V is the franchisor and it is the owner of the IKEA concept and trademark (IKEAFANS, 2009). The franchisees have the right to operate IKEA store under the franchise sympathys in accordance with franchisors systems and methods to use IKEA trademarks establish by Inter IKEA Systems B.V(Inter IKEA Group, n.d.). Besides, IKEA franchisees able to access to the product range of IKEA and opportunity to continuously take part in IKEA concept development in their own stores. (Inter IKEA Group, n.d.). Then, IKEA franchisee has its own responsibilities to manage, develop and run their topical anesthetic market business with efforts after granting the rights of IKEA concept.The main concept of IKEA want to expand its market by implement franchising is due to the accusatory of Inter IKEA Systems B.V.. According to the objective of Inter IKEA Systems B.V., its objective is to increase the availability of IKEA products through world-wide franchising the IEKA concept (IKEAFANS, 2009). So, this encourages the IKEA treasured to create infinity for IKEA through franchising.Besides, the decisive factors for IKEA to franchise for long-term approach are due to its ownership structure and total independence in furniture market (Inter IKEA Group, n.d.). Thus, IKEA bring out the franchising method so that it can secure an infinite life for the IKEA concept when the different companies in different countries able to build the resources needed to expand global under IKEA concept (Inter IKEA Group, n.d.). Moreover, the franchisor, Inter IKEA Systems B.V. acts role to perform some primal tasks such as expand IKEA business, improve and develop IKEA concepts, transfer know-how of IKEA to its retailers, monitor IKEA concept implementation and hold dear IKEA concept (Inter IKEA Group, n.d.).Currently, total of 38 IKEA franchisees are located over 11 countries. The countries with IKEA franchisee included 2 stores in United Arab Emirates, ace stores in Kuwait, 3 stores in Saudi Arabia, 2 stores in Australia, 7 stores in China Taiwan, one stores in Cyprus, 5 stores in Greece, 3 stores in Malaysia and Singapore, 5 stores in Turkey, one stores in Iceland, 2 stores in Israel, 1 stores in Dominican Republic and 4 stores in Spain (Inter IKEA Group, n.d.).Franchises strategy not only provide the firm with high control of brand and strategy, but it is also a low financial investment risk and enabling the company to benefit from topical anesthetic anaesthetic anaesthetic knowledge (Back, Andrew Sparapani, 2010). Furthermore, some benefits can be able to gain through franchising by IKEA. For instance, it can earn extra source of income in term of loyalty and franchise fees since it franchises its retail stores located over 38 countries. The franchisees who allowed to use the concept and trademarks of IKEA is necessary to pay 3% of revenue earn to Inter IKEA Systems B.V annually (IKEAFANS, 2009). So, this intentionally provides other funds inflow for the IKEA.Although by using franchising strategy, IKEA can relief of many of the cost and risk of opening a im temporal market (Hill Hernndez-Requejo, 2011). However, this could make IKEA difficult to control the standards and quality where some franchisees may not concerned about these issues. This could be happened and hard to detect due to the geographic distance between franchisees and main franchisor. This qualification lead to actu ate consumer views of IKEAs product if the standards of products are not standardize in its own country discriminate with the IKEA main stores.3.0 Future Expansion StrategyJoint Venture to Enter into India MarketJoint venture is suitable for IKEA to enter into India Market. It refers to the set up of a new company that is jointly owned by two or more participants (Hill Hernndez-Requejo 2011). Each partner must have something special and important such as knowledge, skill, and capital to offer the venture and simultaneously provide a source of gain to the other participants.The reason for enter into India market is India furniture retail market has been classified by CSIL Milano as one of the 14 largest furniture markets in the world with the worth of US$8 billion and is induceing at 30% annually (n.a., 2012). The second reason is that the furniture industry in India is highly unorganized. N advance(prenominal) on 85% of the home furnishing industry is in the unorganized celesti al sphere and remaining 15% is in the organized sector which included domestic players and also imports (n.a., 2009).The reason to use joint venture is due to the government insurance in inviting irrelevant company to invest in India. According to past policy in India, foreign firms can only own up to 51 percent of joint venture (Sharma Hansegard, 2012). The policy has changed utmost(a) year by allows some retailers to own 100% of their Indian units. After the change of policy, IKEA have employ for permission to invest into India. However, the result of permission still has not come out. IKEA should not realize on the permission of the wholly own subsidiary given by the local government. If government reject its application, is it IKEA will not enter into the one of the 14 largest furniture markets in the world? There are many successful example of joint venture or co-op between foreign furniture companies with local company in India today. Arrital Cucine, an Italian furniture company sells its products in India through its Indian partner, Overseas Connexions firearm the Germany company, Wilhelm Bolt Co. has a technical agreement with Arvind furniture to produce furniture at India (Mukherjee Patel, 2005). There is no time for IKEA to waste as they should quickly enter into India market through joint venture with local company to set up its manufacturing plants and also sell its product around the India.Culture is an important reflexion that multinational company should consider forward take an action to enter into a detail country (Hill et. al, 2011). Indian culture and their home ribbon style are different from western country. Consumers may not accept the western design furniture as they are used to barter for traditional design of furniture which suit to their culture. Thus, set up a joint venture with local firm is a better way to doing business in India and hence can reduce the risk of failure. The difference of culture can directly affect the way how a business operates in that country. The experience of IKEA in China should be take note. Although there is a rapid increase in the number of visitors and sales meretriciousness in China, IKEA had yet to make a profit in China. IKEA showed local consumers new home decoration concepts using its various products but Chinese consumers do not accept it (Li Xu, 2007). IKEA have 25 years of procurement experience in China but yet still cannot understand deeply about the Chinese culture and consumers living style, preferences and taste. Thus, before set up its own retail store in India, they should make a deeply study on the local market. Joint venture with local company can bring more valuable information and knowledge for IKEA. IKEA can build relationship with local suppliers, distributors, and media. They can get the data and information form the joint venture firm. Besides that, cooperation with local brand company can quickly promote its brand name into consumers mind.Wh o should IKEA select to cooperative is crucial. Durian, Furniturewala, Zuari, Renaissance, Furniture Concepts, Millenium Lifestyles, are some of the key players in Indian furniture industry. Local company who can provide marketing expertise, local knowledge, have strong relationship with government, suppliers and distributors should be consider as they can provide many benefit to IKEA for their future operating its own subsidiary in India (Hill et. al, 2011). Besides that, good nature and characterisation of the local company also is one of the aspects to be considered for cooperative. Company with good reputation can bring IKEA into local market and also consumers mind easily. In contrast, cooperative with company possess bad reputation will straightly harm IKEA brand name and thus being bookmark as poor depiction company in consumers mind. Thus, companies mentioned above are the best local company for cooperation.According to IKEA Company, the requirement of purchase at least 30% of goods from local small and medium size enterprise under the new policy will remain a challenge for the company (Sharma etc. 2012). Thus, direct investment may not be a best strategy as they are not familiar with local business and industry. Until now, they still cannot truly build the supply chain network in India, so how are they going to set up its own retail store and run the business by themselves. Thus, when should they enter into India? If they do seriously consider the joint venture strategy, they should enter into India 1 or 2 year ago. With joint venture with local firm, IKEA can quickly access to local suppliers through the network of the local company and operate its business smoothly. The growing of furniture industry in India is due to two reasons, Indias large size and Indian tastes have started changed and Indian people are looking for more western furniture style (n.a., 2010). The market attractiveness is not a fuss and it is a chance to take the advantage f or establishes its own retail store in coming year.As conclusion, due to local government policy, cultural difference, and also local business network, IKEA should use joint venture as entry mode to enter into India. This action enables them to build up a strong base for future expansion.Wholly Owned appurtenant to Enter into BrazilIKEA needs to expand the business by entering into new foreign markets in order to ensure the companys future growth. We recommend IKEA can enter into Brazil in South the States by considering the wholly owned subsidiary strategy. IKEA have entered into Europe, Asia, North the States, Middle East and Caribbean but have yet entered into South the States (IKEA, 2012). Two of the mandatory requirements for IKEA to move into Brazil are that the host country must be a member of the World Trade Organisation and a signatory to the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Back et.al., 2011).The reason we choose to enter into Br azilian market because of the stable political economy factors. Political factors, economic factors, necessity factors are factors that will influenced the potential attractiveness of a foreign markets (Hill et al., 2011). The Brazilian economys entered into a stable growth stage after the recovery form financial crisis in 2008. Besides that, Brazil estimated to grow 4.0% in 2012 and the economy is expected will rises from the seventh worlds largest to the fifth within next few years (n.a., 2011). Comparing with other countries in South America, Brazil has the highest Market authorization Index (MPI) (n.a., 2011). As a result, Brazils economy is the best that all of other countries in South America (CIA, 2012). Since domestic savings are not sufficient to sustain long-term growth rates, Brazil is shortly encourages foreign direct investment (FDI) and it is the largest recipient of foreign direct investment in South America (n.a., 2011). The entry of IKEA can increase the employme nt rate of Brazil and increase the revenue of government. Furthermore, IKEA may utilise the market of South America by grabbing this opportunity. Furthermore, the furniture and furnishings sales in Brazil has grown by 5% in 2009 to reach over R$18 billion (U$ 555,435,224.08) and expected continue to grow in the next few years (Ong, Ng and Wu, 2010). This indicated that the demands of consumers are increasing and providing the opportunity for business to grow.IKEA expand into the Brazil market would form early market entry because it enters first into South America markets before other foreign firms. According to Lieberman and Montgomery (1988), the advantages of first mover are the ability to pre-empt rivals, capture demand by building s strong brand name, rides the learning curve ahead of rivals and the ability to create switching costs that tied customers into their products and services. For example, Walmart entered into the China market as early mover, which gained the ability to pre-empt rivals and capture early demand and still dominating the market over the late over Tesco (Waldmeir, 2010).IKEA has experienced as an early mover into the markets in the past. The company has entry into Canada markets in 1976, USA in 1985 and China in 1998 (IKEA, 2012). Thus, IKEA have the advantages of pre-empt rivals and riding the learning curve ahead of its rivals. However, IKEA also suffered from the pioneering costs when they realised of the need for localisation of its American product range (Back et al., 2011). The reasons IKEA failed in the Japanese markets was because IKEA lack of installation for the Japanese market and lack of readiness of Japanese consumers for IKEAs do-it-yourself concept(Wijers-Hasegawa 2006). Consequently, IKEA need to beware that riding the learning curve can be a long ride if the market is not ready to adapt the products.We suggest IKEA use wholly owned subsidiary because there are around 16,000 furniture companies in Brazil and most ar e family owned companies. There are few key domestic players included Florense, Brazil Furniture Group, and others. The furniture market is keep growing and there is yet well known and large furniture company emerge in the market. (Evans, 2012). Thus, the furniture market in Brazil is still unexplored by multinational furniture company. Thus, a well known brand name is easily discover by the market and the consumer when large company entering into that industry. IKEA, a world famous furniture company, have the competency to entering into furniture industry in Brazil and create strong brand image to the entire furniture market easily. As there are many small furniture companies, it is easily for IKEA to enter and harness the Brazils market.The worlds largest rainforest, The Amazon, is located in Brazil. Thus, Brazil has abundance of high quality woods as the raw material for IKEA produce high quality furniture to consumers. This is the main reason for IKEA to use the wholly owned su bsidiary to entry into Brazil. Besides that, the labour cost in Brazil is cheap compared to Europe and America (n.a., 2011). In other words, Brazil has significant comparative advantages compared to others exporting countries because it has excellent quality of raw materials at low costs and flexible labor (n.a., 2004).Wholly owned subsidiary can enable IKEA gain full control over the businesss operations which will also lower the brand risk in the same time (Back et.al., 2011). By wholly owned subsidiary, IKEA can get 100 percent profits that generated in Brazil. Besides that, by adapting wholly owned subsidiary, IKEA can gain the ability to realize location and experience economics as the company is adopting transnational strategy (Hill et. at., 2011). Thus, IKEA can make full decisions to produce products that are customized to the local customer wants and needs.In the South America Context, Brazil is the most preferred country for investment. unveiling into South America marke t is an imported step of the IKEAs globalization strategy.4.0 ConclusionIn conclusion, we knew that IKEA is a very successful worldwide home furniture company. But, they are also facing franchising control management problem due to geographic distance. If franchises do not operate well in the current market, this will affect IKEAs reputation. They tend to reduce this problem by using wholly owned subsidiaries for expansion. This strategy also not very well for IKEA because full control over their competence and its concepts but instead increasing the risks for entry the market due to cultural conflict. We can see that IKEA was failure to entry in Japan before due to diff culture, lifestyle and purchasing behavior.So, we recommended that joint venture is suitable for IKEA to further expand. This strategy can reduce risk for entry and for better handle the market culture and policy. The joint venture that enable IKEA cooperative with those company that fulfill marketing expertise, loc al knowledge and skill and the most important factor is have strong relationship with government. These benefits encourage IKEA enable to operating well in the specific country. A successful company should analyze all the variables that will lead to failure before enter into a specific market. Although this strategy has occurs some problem and risk but compare to previous strategies, this strategy is better for IKEA sustainable development. Furthermore, cooperative with well known company will also increase IKEA reputation and influence local consumer purchasing behavior.Finally, a very successful company will not stop growing their business and finding the ways that lead to further expansion. They must know well their limit and beat all the deadlines. IKEA has put a lot of efforts on developing their business that strengthen capacity for further expansion. Consequently, they should use joint venture strategy to expand in other countries. The more understanding other countries cultu re, lifestyle and behavior, the closer the gaps for success.