ASSIGNMENT INSTRUCTIONS Interim/Final: Final First/Resit FIRST Assessment Code: Academic Year: 2016/17 Semester: Module Title: Managing International Business Module Code: MOD003497 Level: 6 Module Leader: Weighting: 50% Word Limit: 3000 words Submission Date: This assignment must be received by WRITING YOUR ASSIGNMENT • This assignment must be completed individually. • The Harvard Referencing System must be used. • Your work must indicate the number of words you have used. Do not exceed the maximum number of words specified above; all assignments which do so will be penalised. The penalty will be the deduction of marks at the Marker’s judgement. • * The word limit does not include any diagrams or appendences. • Assignment submissions are to be made anonymously. Do not write your name anywhere on your work. 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IKEA Case Study IKEA The IKEA Idea Concept A discussion of IKEA’s current replication mode may usefully begin from the distinction between IKEA’s Idea Concept and a Concept in Practice. This distinction reflects how IKEA explicitly thinks of replication as a hierarchical process, in which some features (embodied in the Idea Concept) must stay fixed, while other ones (embodied in the Concept in Practice) are allowed to be more flexible. The need for such flexibility stems from variation in local markets, as well as the need to modify the format for replication under the impact of new learning. The Idea Concept The IKEA Idea Concept contains the guiding principles, vision, and culture that management wants to underpin IKEA’s operations and development, including its process of internalization. An IKEA manager explains that the IKEA concept has evolved over more than 50 years as a result of serious opportunities and experiences, both large and small in many different areas. The result today is a strong, tried and tested concept, which has proved that it is possible to combine global business ideas with local business opportunities. The Idea Concept is described as the unique asset that differentiates IKEA from the competition.9 A manager at Inter IKEA Systems elaborates on the nature of the Idea Concept: [It] outlines how we shall offer products for the many people, our business idea, how to work with low prices, etc. There are certain eternal truths that will never change. This is the starting point for all that we do. y The Idea Concept is something that we will never adjust. For instance, we shall always offer the lowest price, we shall serve the many people, etc. The Concept in Practice The Idea Concept is a set of overall guiding principles that, while replicated across the IKEA network, offers only general instructions on store design, HR management, etc. As a manager at Inter IKEA Systems explains: Everything shall not be clear and in detail. Because then it will not move. We are an organism that takes the opportunity. If we should have clear definitions, then it would turn into a lubricated machine and it would not be IKEA any more. As this suggests, flexibility and a commitment to continuous exploration are at the core of IKEA’s self-understanding. While the guiding principles of the Idea Concept remain unchanged, the Concept in Practice – that is, the current embodiment of the Idea Concept in terms of product offering, store design and location, pricing policy, and so on – is frequently modified. In the words of another IKEA manager: The Concept in Practice relates to our latest proven solutions regarding how to run an efficient home furnishing business, the size of the stores, range, etc. All of those things need to change over time – but it has to be in line with the Idea Concept. In general, IKEA thinking on the Concept in practice stresses its process and learning aspects. Kamprad consistently emphasizes the importance of maintaining the entrepreneurial spirit, and the necessity of always questioning “proven” solutions. According to IKEA lore, for Kamprad the worst situation would be one in which co-workers did not make mistakes. In fact, one of the ten explicit values in the IKEA culture stresses that “making mistakes now and again is the privilege of the dynamic co-worker – they are the ones who have the ability to put things right”. Still, the components that constitute the Concept in Practice are ordered in a hierarchical manner, depending on how much they are allowed to change and vary. IKEA considers the product range as fairly fixed over the short to medium term. Whereas some products, such as the BILLY bookshelves or the KLIPPAN sofas, have been present in the product offering for a very long time, other products may be replaced after just a year. Pricing is also fixed, but only over the 1-year period covered by the IKEA catalogue. Prices are set at the country level, but must follow the Idea Concept guideline that IKEA shall offer “low prices for the many people”. However, a store manager has the authority to lower a price immediately if a similar product is being offered by any competitor at a lower price. In addition to the overall Idea Concept, which is supposed to be replicated across the whole IKEA network, the (current) format for replicating IKEA’s retail part may be described in terms of a set of variables, the key ones being the product range, pricing, store format, store design, standard operating procedures, and local HRM; the variables are allowed to vary within more or less well-defined ranges. Product range The number of products has obviously increased since the founding of the first IKEA store in 1958, but over the last decade has reduced to approximately 9500 products, a significant part of which comprises ready-to-assemble furniture pieces. A persistent feature of IKEA’s replication process since the first expansion beyond the A¨lmhult location in the beginning of the 1960s is that any store, wherever it is located, must carry the core product range (e.g., the BILLY bookcase and the KLIPPAN sofa). Beyond the fixed product range that any store must carry there is considerable discretion for each store and each market with respect to selecting from the overall product range. This means, for example, that a store in Japan may choose to sell smaller sofas than a store in the US. The basic idea with a core product range is that the consumer should be able to recognize the IKEA store and IKEA products no matter whether he or she visits a store in Sweden or in Japan. Having one core range, of course, also implies possibilities for economies of scale and lowering costs. The product range and price is part of the Idea Concept, and viewed as holy to the business idea. So rather than adapt the product range to local markets, it is the product offering that is adapted to fit the taste and homes of that market’s consumers. Pricing Overall, IKEA’s competitive strategy emphasizes cost leadership. IKEA positions itself as a vendor for people who happily trade off service against lower costs (Porter, 1996). When designing a new product, the price tag always comes first, as it were (Edvardsson, Enquist, & Hay, 2006). However, recently sustainability has been added to that strategy, aiming for more sustainable products, production, and distribution. However, the emphasis is not just on low prices, but on stable prices. When the yearly IKEA catalogue has been published, prices cannot change until the next catalogue is printed. Finding the “right” price level in new markets is particularly important in order to attract the target consumers. This is an example of local adaptation. This has been especially challenging in markets with high import duties, such as China and Russia. Such challenges have led to a need for more local production, as it is difficult to change the consumers’ view of acceptable prices – a lesson learned in the Polish market, where it took IKEA several years to convince consumers that it had lowered its prices to meet “the many people”. The issue of finding the right price level was a big concern that was extensively discussed before the market entrance into Japan in 2006. However, when falling back to the Idea Concept, IKEA decided to fit with the strategy of offering products at low prices. Store format and design IKEA stores follow a fixed basic format. The size of an IKEA store has increased over the years. Currently the smallest standard stores that are built are 32,000 square meters and the largest are 45,000 square meters. Having standard stores is also in line with the general cost-efficiency goal. As land is expensive to buy in some markets, IKEA has currently developed buildings with several floors, with parking lots both in the basement and on the roof. This is an example of how the Concept in Practice needs to be adjusted to meet local peculiarities. A selection of furniture is displayed in room-like settings, adjacent to which is the self-service warehouse section, with the ready-to-assemble furniture placed in boxes on pallets. All stores also follow a “traffic flow” that takes customers through the store in a manner that maximizes the exposure of IKEA products in different settings. All stores have a restaurant with essentially the same menu (IKEA is Sweden’s largest food exporter), in-store child care in the form of supervised play areas and ballrooms, hot dog/hot sausage stands, and food markets with traditional Swedish food near the exits, etc. As stressed, the characteristic blue and yellow facade emerged in the mid-1970s, and has been an IKEA fixture ever since. Standard operating procedures IKEA’s early expansion phase was characterized by the establishment of standard operating procedures in new stores by means of instruction of new employees by experienced IKEA personnel. During the 1980s standard operating procedures became increasingly codified, and the number of manuals detailing procedures has been increasing ever since. However, expatriates play an important role in ensuring that standard operating procedures actually function in new stores. It is stressed that it is important to understand the IKEA culture and the IKEA Idea Concept in order to implement and apply standard operating procedures. Prior to the entry into Japan in 2006 there was a concern that Japanese employees would consider best practices as eternal truths. An experienced store manager was therefore recruited in order to share his experiences about the difference between the Idea Concept and the Concept in Practice. HRM While IKEA is extremely “HRM conscious” at the corporate level, local stores have considerable discretion with respect to such practices as job rotation within stores, “buddy” arrangements (used to socialize and educate new employees), and recruitment. Managing Flexible Replication: Mechanisms for Intra-IKEA Knowledge Sharing IKEA management stresses that a fundamental facilitator of its internationalization process is corporate-wide knowledge transfer, notably the transfer of changes in those practices that constitute the IKEA format for replication. In fact, the emphasis on knowledge sharing has clearly increased over the years. In a strategic company document, the 2001 document Ten jobs in Ten Years, the importance of knowledge transfer and sharing is strongly emphasized: When managers and co-workers are genuinely interested in sharing and accepting ideas from each other, then we will be using the competence and resources of the whole company. For this to happen we must be prepared to move our people and to move information across borders. We must break down all barriers between functions and markets, and build an open and trustful working climate, and that way, act as one IKEA. Another goal set out in the document is that in 2010 IKEA will have “a new generation of home grown managers, building an even more trustful and motivating working climate, sharing knowledge across the organization and bringing IKEA’s business and culture forward”. The organizational mechanisms that are deployed in the service of IKEA-wide knowledge sharing are: dedicated organizational units; standard operating procedures for gathering, codifying and disseminating experiential knowledge; documents (manuals, internal journals); values; and the use of expatriates. Standard operating procedures for gathering, codifying and disseminating experiential knowledge The IKEA policy of intensive documentation and codification of routines and solutions has, if anything, been strengthened over the last three decades. The mandatory routines and solutions that must be implemented at the store level are described in manuals that provide instructions on how to present, for example, a sofa in a store, or how to sell food in an IKEA restaurant. In total, IKEA works with approximately 75 manuals, of which the first – known as “the mother of all manuals” – describes the IKEA Idea Concept. Manuals are available in each IKEA store (each store manager owns his or her set of manuals), and on IKEA’s intranet, where other tools for sharing IKEA knowledge are also accessible. In order to support and secure a successful market entry, forward knowledge flows (i.e., knowledge flowing from headquarters) are considered crucially important. In order to support a market entry, best practices and standardized work routines are transferred and implemented locally. Much of this knowledge is explicit, and shared via IKEA’s intranet or manuals from headquarters to subsidiaries. However, there is also a significant amount of reverse knowledge flow – that is, knowledge flowing from lower-level units to headquarters. Thus exploration of new work methods or new products is strongly encouraged, and takes place at a daily basis at the store level in all markets. New store level ideas are passed on to the service office in the relevant store, then on to the service office in the relevant market, and finally to the global service office. The idea may be rejected, or passed on to the next stage at each consecutive stage. If an idea does not fit the Idea Concept, feedback is provided to the store, and it is communicated on an information wall why the idea was not developed further and exploited to other markets. If an idea relates to a product, it is IoS that is responsible for developing this idea further. If an idea relates to a new way to present, for instance, an IKEA product in the store, it is Inter IKEA Systems that is responsible for developing and communicating it via IKEA toolbox and the various manuals. This exemplifies how IKEA learns from the periphery of the organization. There is clear awareness at the corporate level of the importance of reverse knowledge flows to IKEA’s process of organizational learning. For example, when IKEA was planning the entry into Japan (which eventually took place in 2006), the chairman of the board of directors of IKEA Group argued that an entry into Japan, where packaging is crucially important, would probably provide IKEA with valuable experiences that would be of use in making more precise demands on IKEA’s suppliers. IKEA top management in general strongly stressed the new learning experiences that would be produced by the entries into Russia, China, and Japan. Another formal, organizationally embedded routine for identifying new ideas and gathering experiential knowledge from lower-level IKEA units, notably local stores, is the commercial review. This is, first and foremost, an internal audit to ensure that the IKEA concept is followed (specifically, whether the stores adhere to the manuals). However, it is also a means of identifying new best practices and new business opportunities. Those best practices or “proven solutions”, sometimes referred to as “examples from reality”, explored in the review process are published on the intranet or in the manuals provided by Inter IKEA Systems BV, such as Range presentation in the store the IKEA way or How to improve children’s furnishing. Inter IKEA Systems BV is responsible for “identifying, evaluating and sometimes improving certain solutions” (i.e., best practices) found in different markets, as well as for sharing this knowledge with the rest of the IKEA network. A set of manuals is provided to each store manager, and all other IKEA employees receive a light version of these manuals in a booklet called Basic Knowledge. Postscript: in September, 2016 IKEA reported sales of £28.8 billion. 12 new stores had been added in the previous 12 months and new stores in India and Serbia are planned for 2107. IKEA aims to increase sales to 50 billion euros by 2020. Assignment Tasks You have been promoted to the position of International Management Consultant at IKEA and have been requested, by the Senior Vice President for International Strategy, to prepare a report that addresses the following tasks: Answer all tasks in your 3,000 word report 1. Identify and assess the business model that has enabled IKEA to develop from a local Swedish furniture business into the world’s leading home furnishings company. Pay particular attention to IKEA’s core competencies. 20 marks 2. Prioritise the market entry methods open to IKEA in either China, or the USA using a suitable framework that may be used to evaluate costs, risks and return involved in each method 30 marks 3. With reference to typologies of national culture critically evaluate how IKEA might adjust its management style and approach to either China or the USA. 30 marks Evidence of extensive and relevant company research 10 marks An appropriately structured and written report 10 marks Total 100 marks Draw on specific examples you have read, or know about, when responding and make sure that you justify your answers with theoretical support. Within each question you should relate relevant academic concepts and theories and professional practice to the way the organisation operates. You should approach this in a critical and informed way, and with reference to key texts, articles and other publications, and by using a range of organisational examples for illustration and contrast. Credit will also be given for innovative or original suggestions, if relevant or justified in terms of their potential value to an organisation. Marking Guide Task 1 Identify IKEA’s original KFS Identify IKEA’s present KFS Critically evaluate IKEA’s original and present KFS with respect to its success in international markets Task 2 Outline the contemporary corporate global strategy that Zara operates within Critically evaluate IKEA’s present corporate global strategy Critically evaluate IKEA’s future corporate global strategy Task 3 Establish what is meant by corporate culture Outline e.g. Geert Hofstede or Fons Trompenaar’s Model of National Culture Difference Apply and critically evaluate Fons Trompenaar’s Model of National Culture Difference to specific countries where IKEA operate