Ikea Global Supply Chain

INTRODUCTION

This coursework proposes to use IKEA as the real life company been chosen to analyze their international supply chain networks. Through the analysis, it seeks to gain some insights from the Swedish firm furniture maker’s internationalization strategies, by using the theories of internationalization to show how they can move into a new location.

                        INTERNATIONAL BUSINESS STRATEGY

IKEA is the world's largest furniture retail chain which has more than 300 stores globally. IKEA is very successful at home in Sweden and from there; it spreads around the world using the focused cost leadership strategy and differentiation, this strategy made IKEA’s products and services well suited and appreciated at every host locations they internationalized into. As already known IKEA has several stores globally and have chosen IKEA in China as an example to talk about. In 1998, IKEA started its retail operations in China. Chinese market is not only a huge market with a high power purchase of population, but also has a unique culture that is different from western countries. And for IKEA to enter China is very hard due to China’s bureaucracy system, so to meet local laws, they had to form a joint venture to start operating in China. The venture served as a good platform to test the market, understand local needs and adapt its strategies accordingly. This joint venturing helped IKEA to understand early that Chinese apartments were small and customers required functional, modular solutions. In short, it means IKEA customizes their products based on local needs of the locations they are.

SUPPLY CHAIN PROCESS

IKEA has developed its distribution network worldwide.  IKEA is able to ensure timely delivery of products to retail stores all over the world by utilizing control points in the distribution cycle. IKEA has over 1,800 suppliers located in over 50 different nations (The IKEA Group, 2012). IKEA’s suppliers are mostly located in low cost nations with close proximity to raw materials and distribution channels. IKEA possesses a big network of suppliers closely attracted to supply chain processes that helps in gaining industrial knowledge continuously and enhances information flow facilitation and operational efficiency.  IKEA’s supply process starts from the design phase because IKEA has its own design center where designers design new products, after that the purchase and manufacturing process begins. After manufacturing is completed, the finished products will be transported to retail warehouse and from there it would be transported to different stores in different areas, where customers would choose to buy the finished products.

IKEA uses an integrated supply chain and the element which IKEA uses is the manufacture/distributor storage with customer pick up. This process involves inventories been stored at the warehouse or IKEA’s local store and customers come around to pick it up by themselves. This helps IKEA as inventory costs are low and transportation is relatively low as customers come around to pick up the products themselves saving IKEA transportation costs. IKEA emphasize on several activities to just keep its costs low. From the supply starting point of the design process phase to consumer it’s all a process to keep prices low because instead of relying primarily on third party manufacturers, IKEA’s engineers design low-cost, modular furniture ready for assembly by customers.

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INTERNATIONALIZING INTO NEW LOCATION

IKEA is an operational retailing firm which means they would be going on an operational internationalization when moving into a new location. However, Alexander and Myers (2000) explained that the assets possessed by an organization are the driver of movement. This occurs by good feature of firm’s operation and development within origin market which IKEA possesses. The internal facilitating competencies are the way the firm transfers the advantages which are concepts or skills within international markets. In the internal facilitating competencies, firms will adopt strategies; choose entry methods and location to the expansion of the firm (Alexander and Myers, 2000)

For IKEA to move into a new location and be successful, the psychic distance factor must be considered and according to Nordstrom and Valhne (1994) definition, psychic distance are the factors preventing or disturbing firm’s learning about and understanding a foreign environment. The perception of cultural distance do not gain prominent attention as psychic distance, cultural distance is defined as international marketer’s perceived socio-cultural distance between home and foreign country, namely, differences in language, business practices, political systems and marketing infrastructure (Lee, 1998). Cultural distance is derived from Hofstede’s (1991) aspect of national culture as culture shapes the way people think, behave and evaluate (Hofstede, 2001; Schneider and Barsoux, 2003, cited in Hoffman, 2007). Though, cultural distance and psychic distance are closely related as inter-country-specific distances, psychic distance focuses on inter-firm distances and has influenced by the experience of the firms involve (Hallen and Wiedersheim-Paul, 1979; Nordstrom and Vahlne, 1993). Psychic distance is a concept that significantly influences on the international expansion which can be the driving force of expansion patterns for IKEA’s internationalization.

IKEA must tend to enter into a new market location they can easily understand and perceived market uncertainty is low, with fewer cultural and psychological barriers to cross. By doing so, the new market been entered into would be a great success. However, IKEA may develop franchising or joint venture entry strategy in the new location to kick off as always do, so as to be able to handle with the distance market in order to minimize financial exposure and psychic distance will play as a pivotal role for IKEA at choosing the right mode of entry.