Case Study IKEA: Expanding through franchising to the South American market? Introduction This report is made by four, fourth year IBMS students for a marketing course.
This report is based on a case from the book Global Marketing, by Svend Hollensen. The basis of this report is the international operating company IKEA. The main question that will be answered in this report is: Should IKEA expand further through franchising to the South American market? To answer this question the current situation of IKEA will be taken into account in this report.Next to this also other aspects like a SWOT analysis and other theoretical information will be used to come to conclusion, recommendation and possible implementation. Table of content Current Situation5 IKEA basic information5 The IKEA concept7 IKEA’s vision7 SWOT8 IKEA’s Strengths8 IKEA`s Weaknesses8 IKEA’s Opportunities8 IKEA’s Threats9 Conclusion SWOT analysis9 Marketing Strategy11 Transnational Organization11 Region Centre (Regional headquarters)12 Conclusion Market Strategy13 Entry Mode14 Franchising14 Pros franchising14 Cons franchising14 Strategic Alliances15 Non-equity15Pros non-equity15 Cons non-equity15 Joint venture16 Pros16 Cons16 Conclusion entry mode16 Entering the South American Market17 Brazil17 Brazilian furniture market17 IKEA and Brazil18 Short term recommendations19 Long term recommendations21 Sourcing concept IKEA23 Economical and Political Situation Brazil23 Conclusion Sourcing Concept South America24 Overall Recommendations25 Current Situation IKEA basic information IKEA is founded in 1943 a small village called Agunnaryd in Sweden. IKEA is a Acronym, composed from the following components: * I (Ingvar) – Founder’s first name K (Kamprad) – Founder’s last name * E (Elmtaryd) – Farm where Ingvar Kamprad grew up * A (Agunnaryd) – Home village Today IKEA is present in almost 40 countries worldwide. Within these countries IKEA currently has 301 IKEA stores, the IKEA Group owns 267 of the in total 301 stores.
These 267 stores are divided over 25 countries. Next to this IKEA employs over 120,000 employees worldwide. IKEA has over 600 million visitors annually, worldwide. The following map shows the coverage of IKEA store worldwide. Legenda: Light orange: IKEA is not present in these countriesDark orange: IKEA is present with one or more store in this country The following table shows how the amount of stores has developed over the last years; Annually IKEA generates around 21,5 Billion Euros. The following graph shows the turnover development of the last years; Currently five countries are responsible for a large amount of IKEA’s turnover worldwide. These countries are: * Germany (16% of total revenues) * USA (11% of total revenues) * France (10% of total revenues) * Great Britain (7% of total revenues) * Italy (7% of total revenues) The IKEA conceptThe IKEA Concept is a concept based on offering not only a wide range of well designed, functional home furnishing products.
The concept is also based on offering the products at low prices, this so that as many people as possible will be able to afford them. IKEA wants to reach as many people as possible, by offering their home furnishing products at a low price and hereby help people to live a better life in their own home. Next to this the IKEA Concept also sets guidelines for the product design, the manufacturing, transporting and selling process as well as for the assembly of the products by the customers at home.Together these guidelines contribute to putting the IKEA concept into practice. IKEA’s vision IKEA’s vision is to create a better everyday life for as many people as possible around the world. Our business idea supports this vision by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them. To summarize, IKEA’s mission statement is; “to create a better everyday life for the many”.
SWOT As describe in the current situation IKEA is doing well, and their concept is working worldwide.But as every company, IKEA also has weaknesses and threats also come along IKEA’s path. A good way of making an overview of not only the internal, but also external situation of IKEA, is by a SWOT analysis. In this chapter IKEA’s strengths and weaknesses, as well as the companies opportunities and threats will be shown in a SWOT analysis. IKEA’s Strengths Strengths are company resources that represent competitive assets. Next to this strengths are very important for a company’s competitiveness and ability to succeed within a market.IKEA’s strengths can be defined as following; * IKEA’s strong, and worldwide known brand * IKEA’s strong concept and vision * IKEA`s partnerships with suppliers (long-term and high quality) * Economies of scale IKEA`s Weaknesses Weaknesses are the opposites of strengths, and therefore a company’s competitive liabilities.
IKEA’s weaknesses can be defined as following; * IKEA’s rapid growth and worldwide of activities (centralized startegy) * Keep the information flow to customers and stakeholders up-to date IKEA’s OpportunitiesA market opportunity is an opportunity for the company is the company’s strengths can be used to gain from the situation. Opportunities for IKEA can be defined as following; * Continue developing (even) green(er) products to fulfill the future demand for environmental friendly products * Increase presence in North American and Asian markets, by making use of economies of scale * Explore possibility of expanding in new markets IKEA’s Threats Threats are opposed by a company’s external environment, and should be recognized by the company so that the company can take measures.Threats for IKEA can be defined as following; * Growing number of retailers are offering low cost furniture * The global economical crisis makes that the consuming behavior worldwide has dropped, because of a increase in unemployment rates and a decrease in disposable income of consumers Conclusion SWOT analysis To being able to make a good conclusion of IKEA’s SWOT analysis, the following figure will give a simple but clear overview of the above described parts of the SWOT analysis. Internal Environment Weaknesses IKEA’s rapid growth and worldwide of activities (centralized strategy) – Keep the information flow to customers and stakeholders up-to date Strengths + IKEA’s strong, and worldwide known brand + IKEA’s strong concept and vision + IKEA`s partnerships with suppliers (long- term and high quality) + Economies of scale External Environment Threats – Growing number of retailers are offering low cost furniture – The global economical crisis, drop in consuming by consumers Opportunities + Continue developing (even) greener roducts + Increase presence in North American and Asian markets + Explore possibility of expanding in new markets From the SWOT analysis there can be concluded that IKEA is currently very successful. The main reason for this are IKEA’s strong strengths, the combination of these strengths is what makes IKEA so successful. IKEA can use their strengths to become even more successful on the market worldwide. But they have to work on their weaknesses to stay keep the position on the global market that they currently have.
Therefore IKEA should especially pay attention to the speed with which they are still growing, this could become a more serious weakness in the future and managerial measures should be taken to oversee this. A way of managing this could be to thoroughly analyze future expansion opportunities, so that IKEA will stay successful in the future. The threat of the global economical crisis is not only affecting IKEA, but still IKEA should focus even more of communication with their customers. By staying true to their concept and vision, and by keep communicating this to consumers IKEA will be able to manage this threat.The treat of competition will become more severe when the current global economical crisis is over. IKEA should pay close attention to the competition, not only on a global level but also on a local level. This will need to be analyzed on a regular basis, so that IKEA will be able to come with new products and or marketing tools to keep customers satisfied and informed.
Marketing Strategy Currently IKEA centrally controls their marketing strategy from the corporate headquarter. But because of the speed of expansion, IKEA is facing local pressure.The local pressure comes from demographic and cultural differences that IKEA is now facing, due to their centrally controlled marketing strategy. Managerial measures need to be taken to deal with the local pressure, this can be done by choosing another hierarchical entry mode. Therefore the suitability of a transnational organization or a region centre as hierarchical entry mode will be discussed as alternatives for IKEA’s current centralized strategy. Transnational Organization A transnational organization as hierarchical entry mode is based on the “lead country” concept.This concept states that the “lead” country takes the role of coordinator and stimulator on themselves, in combination with a reference to a homogeneous and single product group.
In IKEA’s case this would mean that the headquarter still plays a major role in managing IKEA’s strategy, but IKEA will be able to also act upon local differences within demographic and cultural differences. When a transnational organization will be use by IKEA as hierarchical entry mode, the value chain would look as shown the following figure. Lead” country Border Foreign (target) market C Region Centre (Regional headquarters) A region centre, also called regional headquarters, as hierarchical entry mode has two variants. In both variants the headquarter stimulates and coordinates the sales in the whole region. But some within the region parts of the value chain activities will take place, and will be coordinated from here, which differs from the transnational organization as hierarchical entry mode. Under region centre, as hierarchical entry mode, there are four types of internal new venture.These four types are shown in the figure below.
Number of countries involved Few Many Multinational trader Export/Import start-up Few activities coordinated across countries Coordination of value chain activities 2 1 4 Global start-up Geographically focussed start-up Many activities coordinated across countries 3 When a region centre, or regional headquarters, will be use by IKEA as hierarchical entry mode, the two variants of the value chain would look as shown the following figure. “Lead” country Border Foreign (target) market C C Conclusion Market StrategySince IKEA is current facing local pressure from demographic and cultural differences in new regions, it would be better for IKEA to switch from a centrally controlled marketing strategy to a hierarchical entry mode. After taking the above hierarchical entry modes into account, and how the value chain for both entry modes functions, the transnational organization hierarchical entry mode would be a perfect. By using this hierarchical entry mode, IKEA would be able to go in on local demographic and cultural differences, but it will still control, oversee and stimulate from the headquarter.By using transnational organization as an hierarchical entry mode IKEA will still be partially centralized in their marketing strategy, but they will be able to “think global, and act local”. This change will make IKEA stronger and it will eliminate one of their weaknesses, when it comes to further expanding into new markets in the international market. Entry Mode IKEA is currently using franchising as their traditional entry mode, when entering new markets.
The question now arises whether or not IKEA should keep using this mode of entry or if IKEA should look into alternatives, such as setting up a joint venture and strategic alliances.To see which entry mode would be the best fit for IKEA’s future expanding, all three entry modes’ pros and cons will be evaluated will then decide which mode of entry is most suitable for IKEA. Franchising This entry mode which is based on a form of licensing; the franchisee operates in a local market and pays royalty fees on revenues to the franchisor who owns the brand. The local operator has to invest in the company and has certain rights to operate the business. A guideline laid out by the franchisor has to be followed to a certain extend.In IKEA’s case there is a selection process in which potential franchisees are evaluated on retail experience and sufficient financial backing. The franchisee has to carry a certain number of standardized items, from the product-line of over 12,000 products, but he also has some room to adapt to local market needs.
All products have to be purchased from IKEA’s product lines. All franchisees are periodically audited and compared to overall corporate performance. IKEA also offers training and operational support to its franchisees.Franchisees operate on their own, but all promotional activities and catalogues are taken care of by the headquarters. Pros franchising The current system of franchising offers certain advantages for IKEA. One of the advantages is that this entry mode is safer to use with high risk countries. Since the risk the company takes is limited; the franchisee takes on most of the financial risk.
Another advantage is that the company can make use of the local experience of the franchisee; since he already has experience with the local market needs.Next to this is franchising would be in line with the change in using transnational organization as an hierarchical entry mode, this combination would increase the control of IKEA over its franchisees as well. Cons franchising If we look at the cons of franchising we can see that one of the problems is that IKEA has limited control over the single franchisees. The company needs to audit individual franchisees to maintain a certainty quality standard. Strategic Alliances When looking for alternative modes of entry for IKEA to use, the first group that comes to mind are strategic alliances.Since the main con from using the franchising method is the lack of control. Therefore it is reasonable to look into an entry mode that offers more control to IKEA.
Strategic alliances involve a number of cooperative arrangements between different firms. These arrangements are more extensive than those of a regular supplier and customer, but are not as extensive as in an acquisition. The partners both make investments in long term relationships and next to this have a common orientation towards individual and mutual goals.When looking at strategic alliances we can see that there are different modes of entry within this category. The first thing that needs to be looked at is whether or not equity in each firm is shared between the partners. A joint venture is an option where there is an equity share between the partners. Non-equity In a non-equity strategic alliance the two firms work out a contractual relationship to share some of their unique resources and capabilities.
In IKEA’s case this could be done with a retail agent that owns several stores in the new market that IKEA wants to enter.The thing that IKEA would add to this relationship is the brand name and product range of IKEA. The other company would bring in the existing distribution network and experience in the local market and capital. Pros non-equity The main advantage of using this mode of entry is that IKEA can make use of the existing distribution network and cultural experience of the partner. Another advantage is that this option is not as expensive as a going into a joint venture. Cons non-equity It will be hard to find a suitable partner, because IKEA only wants to have its own products sold in an IKEA store.So the partner needs to be willing to set up a store dedicated to IKEA.
Next to this, this option requires IKEA to invest more than when it does by using a franchising entry mode. Another con of this option is that IKEA will have a limited financial benefit from using this option, for this entry mode to be profitable enough IKEA should have a well defined and set up contract. Control for IKEA will still be very limited, since the other company only agrees on terms in the contract. If IKEA would like to influence the partner during the period of the contract its options are very limited.Joint venture Another option for IKEA to consider is a joint venture alliance. In this mode of entry two or more companies start a joint operation together, which in many cases involves transfer of personnel and resources to operate a joint facility in a certain area. There is a certain form of equity in each company, as resources are shared and brought in by both companies.
Pros The big advantage for IKEA would be the fact that the company will have more control over the joint venture compared to franchising. Since IKEA owns part of the operations it can influence the structure more.This way the company will have an easier task evaluating and maintaining the quality that the IKEA brand stands for. All in all control will be a lot easier. Cons The big disadvantage for IKEA would be the fact that it requires more financial resources to be invested in the joint venture and a higher risk in general. In the case that the joint venture becomes too risky or is not profitable enough the two parties may decide to close down the operation, taking the losses into account. Opposed to a franchising structure where the franchisee bares almost all of the risk, with joint venture the risk is shared.
Conclusion entry mode After evaluating all alternative entry modes and IKEA’s current mode of entry being franchising, there can be concluded from the pros and cons described above that the current method suits IKEA best. Especially when looking at the change to transnational organization as hierarchical entry mode, control over the franchisees will be increased. This change in hierarchical entry mode, in combination with the other pros that franchising has to IKEA, like a low risk and no large capital investments, franchising would stay the best fit for IKEA.The past has also proven that IKEA’s strategy, of using franchising as entry mode for new markets, is working very well and that there is no need for change. Especially not when IKEA changes their centralized strategy making to transnational organization as hierarchical entry mode. Entering the South American Market Over the last 30 years IKEA has grown continuously becoming a global retailer. Over the last 10 years the company has more than doubled its turnover and the number of stores they operate worldwide.
The company is nowadays present in 37 countries and runs stores in 25 of those countries.In the remaining countries 34 stores are run by franchise holders. IKEA is present in Europe, North-America, Asia and Australia but has not yet established itself in South-America. Brazil as the largest country of the continent could offer IKEA good opportunities for IKEA to expand and set foot in the region. It is therefore interesting to see if IKEA should enter that market. Brazil The Federal Republic of Brazil has an estimated population 199 million people and is the 5th largest country in the world. From 2003 to 2006 the country had a real GDP growth of 3,4% and it is predicted to rise at a similar pace in the coming years.
As a result of that growth the income of households has risen and a middle class has emerged. From 2002 to 2006 the percentage of households with a disposable income of over 5ooo$ a year has risen from 29 to 33. 5% and should keep on increasing. This income level is similar then the one of the target group of IKEA in other developing countries like China. This would mean that IKEA has a potential target market of 64 million people in Brazil. Brazilian furniture market In 2007 the Brazilian furniture market was worth 10. 01 billion $, an increase of 44% since 2004.
During the same time period, imports increased by 300% from 92 million $ to 284 million $ but still represent only a marginal share of the total Brazilian furniture market (less than 2%). The market is split in 3 main segments: residential, office and institutional with respectively 60%, 20%, 20% of the total market share. For imports the main sectors are office and institutional furniture, the high end high quality residential furniture being the only furniture of that sector which is imported for the wealthier members of the country’s society.The main import countries for Brazil are Germany and the USA with each a 20% share of total imports. As an example of the type of imports, over two thirds of imports from the USA in 2005 were institutional and office furniture. As for retail and distribution there are no large local furniture chains, most imports are done by direct importers, the end user or in small quantities by local manufacturers as a complement to their existing product lines. As IKEA is a fairly unique concept and has no global rivals, they would be the first stores of that kind in Brazil.
One main obstacle for mporting furniture into Brazil is high tariffs and taxes which can go so far as to double the price of a product for the end consumers. The Brazilian furniture manufacturing sector is made up of a large number of small to medium sized companies, which produce thanks to the large wood reserves of the country. They are mainly situated in the south of the country where most wood plantations are situated. This sector is in the process of modernising, investing in new machinery so to be able to compete on an international market and fulfil the requirements of western industrialised markets.IKEA and Brazil Just by looking at the size of the Brazilian or South-American market one can easily come to the conclusion that those are markets with potential for IKEA. Following the international growth of IKEA it seems unlikely that they will not enter South-America at some point. The question remains if this is the right time for it and how they should enter the market.
Due to the complexity of the question the recommendations will be in two parts, one being short term the other one being long term.Short term recommendations On the short term, next 5 years, we advise against IKEA opening a store in Brazil. The current situation of IKEA combined with the specifics of the Brazilian market does not seem to offer immediate opportunities which could be taken advantage of. Regarding the specific situation of IKEA the following aspects have to be taken into account: Disregarding their entry mode, self owned stores as well as Franchisees are obliged to carry a large part of IKEA’s international catalogue.Those products are standardises for the whole world and are currently produced in countries outside of Brazil which makes them vulnerable to Brazils import tariffs, therefore IKEA would have difficulties selling the products at a price which would make them competitive on the Brazilian market.. Furthermore considering that the average IKEA store has an annual turnover of more than 80€ million and the demand for imported furniture of the type that IKEA sells in Brazil; it seems unlikely that there is currently enough potential for a store to be profitable.
The geographic location of Brazil also poses a problem if IKEA ants to continue using some of its strategies and it might be one of the reasons they are not in South-America yet. The strategies we are referring to are both for environmental protection and cost saving, meaning that by applying some principles to protect the environment IKEA has been able to reduce its costs. Two of those principles are: * Using railroads for long-distance transportation. * Maximizing the efficiency of shipments: reduce the number of transports and the number of empty transports, make maximum use of cargo vehicle space, utilize return transportation, and avoid rush-hour traffic.When looking at Brazil in the light of this, it shows that IKEA’s logistics network is not adapted to that country. When looking at IKEA store locations and sourcing countries at the same time, it is easy to see how IKEA uses its logistics to improve efficiency. Currently IKEA is sourcing 67% of its products from Europe, 30% from Asia and 3% from North-America and those are also the places they have stores in.
When we look at a world map we can see how goods flow both ways, making it possible for IKEA to use transportation efficiently (for example by using transport units both ways).By generalising we can say that IKEA stores are located in producing countries, close to producing countries or on major world trade routes. When looking at IKEA’s efficiency, it also is important to mention that they are faced with some sourcing problems, or more precisely a sourcing bottleneck and are only able to open and supply 20 new stores a year. Considering that IKEA only has 36 stores in the USA and 10 in China compared to 44 in Germany, it would be logical for them to first concentrate on expanding withing countries or regions they are already present in until those markets are fully serviced or the bottleneck issue is solved.The last issue with IKEA entering the Brazilian market in the near future are cultural differences. Those have an impact on two main points: * The first point is the bad experiences that IKEA has made in the past in other developing countries, regarding corruption which have made them loose millions of euros. In world rankings Brazil is in the middle field but that still puts it far behind IKEA’s traditional markets in western Europe.
IKEA has in the past tried to avoid risks and this could be a factor slowing down their possible ambitions in South-America. * The second point is the need to addapt IKEA to local markets.Like their experienced showed in the USA and other countries IKEA has to addapt its concept to local culture to be able to be successful. This applies to products offered as well as the way of managing the company in that country. Since Brazil is a country IKEA has no experience with, does not know the culture or preferences of, it would take major efforts on IKEA’s part to start operations there. All these factors combined lead to the conclusion that Brazil is not yet a good country for IKEA to open a store in, so our recommendation for the near future is not to open a store there.Long term recommendations On the longer term, the recommendations are different because we belive that it is in the interest of IKEA to get involved in the South-American market and specialy Brazil for their future.
The two mains reason for that are the growing wealth of the large local population and the potential of Brazil as a sourcing country for IKEA. Regarding the local population and the wealth it would not be logical for IKEA not to enter South-America if the markets there keep on developping in the current direction.So on the long term IKEA will be present on that continent when conditions make it more interesting for them, then it currently is. As for Brazil presenting opportunities for sourcing this should be seen as something worth looking into for IKEA. Currently IKEA is looking into turning Russia in one of their main supplying countries, because of the amount of timber availableinthat country. The same would apply to Brazil, which has large reserves of wood and a developed furniture manufacturing base. As IKEA develops in North-America, Brazil becomes more interesting as a supplier country.
Currently China produces a lot of products for IKEA but it does not have enough raw materials available and must import some of those. It would therefore be smart for IKEA to develop it’s relations with Brazilian producers as an alternative manufacturing base to Asia. This would probably be a relatively slow process considering that illegal logging is still a common problem in Brazil and IKEA must make sure it can trust it’s suppliers. Once that relations are established with suppliers, IKEA sould then consider opening a store in Brazil, preferably under franchise to avoid some of the risks associated with the Brazilian market.This would also give access to knowledge about the local preferences. In the mean time IKEA should collect knowledge about Latin-American consumers, in their North-American markets and in the future with their first store in the Dominican Republic..
This last store opening also shows the posibility of progressive expansion by going south of the USA. By starting in the Dominican Republic (close to Florida) and maybe following with Mexico, IKEA could expand it’s geagraphical coverage without over extanding their logistical network. Sourcing concept IKEAIKEA is making use of use of their self-owned Swedwood Group, which produces wood based furniture and also all wooden components. Swedwood Group is present in 11 countries, which are in majority European countries. Together with IKEA they strive to produce all products as cost efficient as possible, by at the same time taking social responsibility and environmental responsibility. Swedwood’s production concept is to set up and/or further develop existing production units, this in order to maximize capacity utilization and the production plants.The production is concept ‘s goal is to optimize efficiency and volumes.
Next to the fact that this concept ensures short lead times, it also makes an efficient distribution channel possible. When looking at the current situation the current situation of IKEA it becomes obvious that they are makes use of effective sourcing strategies to make their production as cost efficient as possible. IKEA outsources their raw materials to other companies and uses Shedwood Group for, for example, the production of wooden furniture. Economical and Political Situation BrazilAs previously stated the Brazilian furniture market has grown with 44% since 2004, to a market size of $ 10. 01 billion. Although imports of furniture have only increased with 2 %, the market is growing in Brazil. As shown in the table below, the economy of Brazil is growing and the position of the consumers is becoming better.
Demographic and economic indicators| | 2005| 2006| 2007| 2008| 2009| Population aged 65+: January 1st (‘000)| 11,403. 24| 11,778. 91| 12,150. 42| 12,526. 21| 12,918. 18| Population density (people per sq km)| 22. 00| 22.
24| 22. 47| 22. 9| 22. 90| GDP measured at purchasing power parity (million international $)| 1,584,678. 23| 1,696,680. 73| 1,836,914. 57| 1,958,293.
49| 2,028,681. 20| Real GDP growth (% growth)| 3. 16| 3. 97| 5. 67| 5. 08| -0. 66| Inflation (% growth)| 6.
87| 4. 18| 3. 64| 5. 66| 4. 85| Consumer expenditure (US$ million)| 531,822. 46| 656,971. 56| 813,584.
75| 958,968. 26| 973,270. 17| Annual gross income (US$ million)| 694,076. 13| 834,724. 42| 1,032,305. 74| 1,220,762. 89| 1,237,535.
93| Annual disposable income (US$ million)| 543,442. 51| 672,063. 55| 830,185. 96| 980,754. 8| 994,446. 03| From the table above, there can be concluded that the GDP ,at purchasing power parity, is steadily growing since 2005. Also the real GDP growth, in percentage, is growing.
In 2009 there was no growth in the real GDP, but a drop of -0,6, this decrease can be well connected to the global economical crises. The annual gross income has almost doubled in 2009, compared to 2005. These economical indicators shown that Brazil is an attractive market for IKEA since this market is growing for years. The Brazilian political situation has changed compared to the past.Brazil is a republic, and current has Luiz Inacio Lula da Silva of the Workers’ Party as left-wing president, with 61% of the vote. The past years both left and right politicians have shown their respect for democratic institutions. Both sides are bringing efforts to highlight this as evidence of the political, but especially democratic maturity of Brazil.
The political situation in Brazil is not comparable to democracies in Europe, but Brazil is working hard on their democracy to work fair and correct. Although corruption scandals come to light, the democracy in Brazil is on its way to develop into a stable democracy.Conclusion Sourcing Concept South America When possible IKEA will therefore make use of near-shoring as sourcing strategy for the South American market. This concept is already used worldwide by IKEA and would also fit the expansion to South America. It also fits to Shedwood’s production concept to produce all products as cost efficient as possible, by at the same time taking social responsibility and environmental responsibility. IKEA wants to expand further by entering the South American market through expand to Brazil.This would be the good country to go to in South America, since Brazil has over 4.
6 million hectare of forest, which can be used for locally sourcing. The advantage of sourcing locally is based on IKEA’s idea to “think global and act local”, which means that multinational corporations are encouraged to build their own roots. Furthermore Brazil? s economical situation is growing and will keep growing, since Brazil is one of the key emerging economies today. The political situation in Brazil has improved a lot over the years and is becoming more stable with time.These factors together make Brazil an attractive market and once IKEA has opened a first store in Brazil, the South American market is entered. This opens up the possibility for IKEA stores to expand to countries like Mexico which will be able to use sources from Brazil, or other countries on the South American continent, due to near-shoring. Overall Recommendations Taking everything into account the recommendation to IKEA is as following.
IKEA should firstly change their centrally controlled marketing strategy to a transnational organization as hierarchical entry mode.This would be a managerial fit to the problems on demographical and cultural differences, that IKEA is currently facing when entering new markets. IKEA should take some time to implement this new hierarchical entry mode, so that the currently problems and weakness concerning rapid growth will be solved, and could become a strength of IKEA. As an entry mode IKEA is currently using franchising. After analyzing other entry mode options and when taking into account that IKEA would change their centrally controlled marketing strategy to a transnational organization, franchising would still be the best fit.In combination with a transnational organization IKEA would get more control on their franchisees and would be able to adapt better to local needs. Taking everything of above into account IKEA should not enter the South American market on the short term.
Next to this the high tariffs, relatively small size of the Brazilian market and lack of experience within the South American market, are also the main reasons for not yet entering the Brazilian market. On the long term the South American market could be a could option for IKEA to expand to.The economical situation is improving every year and also the political situation is getting more stable with the years. By changing to the transnational organization developing relations with suppliers, and looking for suitable franchisees within Brazil, IKEA would be able to enter the South American market with success. When entering the South American market on the long term, IKEA could make use of near shoring to supply the stores in Brazil. This fits IKEA’s production concept, to produce their products on the hand of low cost efficiency and at the same time taking social responsibility and environmental responsibility.
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