IKEA marketing entry strategy in China

Master thesis in Business Administration

AUTHOR: Jiang Lingxiu

TUTOR: Tomas&Mullern,& & Liudmila&Chikhun&

JÖNKÖPING April&,& &2017

Partial preview of the text

Download IKEA marketing entry strategy in China and more Summaries Marketing in PDF only on Docsity!

Master thesis in Business Administration

AUTHOR: Jiang Lingxiu TUTOR: Tomas Mullern, Liudmila Chikhun JÖNKÖPING April , 2017

Master thesis in Business Administration Title : IKEA marketing entry strategy in China Author : Jiang Lingxiu Supervisors : Tomas Mullern , Liudmila Chikhun Date : April, 2017 Key words : internationalization, market selection, entry mode, timing of entry ABSTRACT Nowadays, with the big background of economic globalization, economic isolation became impossible, therefore, internationalization is necessary for development of enterprise. IKEA is a Swedish multinational group which was founded in 1943. Under the big background of economic globalization, IKEA sizes every opportunity to entry foreign markets And nowadays IKEA had already become the world wide largest furniture retailer since 2008. IKEA actually has already entered into Chinese market as early as 1998 .The success of IKEA in Chinese market is very outstanding. But it’s not difficult to find on IKEA strategy map of China that the most retail stores are concentrate distributed in the first-tier cities, such as Beijing, Shanghai, Guangdong. And there are very less retail stores in Chinese inland cities and some of areas are still the market vacancy. China as a country who has the most population on the world is never lack of purchasing power. Therefore, a reasonable marketing strategy should be analyzed to help the expansion of IKEA in Chinese market. The research purpose of this thesis is to analyze a reasonable marketing entry strategy of IKEA for the further expansion in Chinese market. This research would follow the classical foreign market entry strategies analysis with three steps. And the research focus on answering these three questions: Where should be selected as new target market location of IKEA in China? Which entry mode of IKEA should be applied in the future Chinese market? Which factors would influence IKEA timing of entry in Chinese market? Which is through the multi research method. Summarizing IKEA marketing entry strategy in China is a gradual process. IKEA should firstly select the market location in the areas with lower cultural distance and high level of GDP and GDP per capital, and then gradually expand in to the areas with relatively higher cultural distance and relatively lower level of GDP and GDP per capital. And in general, this process also could be viewed as the expansion from the eastern costal area to the inland cities of China. And the gradual “internationalization” of IKEA in Chinese market also reflected on the entry mode choice. From the “joint venture” run to the coexisting of “joint venture” and “wholly owned subsidiary”, and finally run to the “wholly owned subsidiary” as the only entry mode of IKEA in Chinese market. Finally, as for the timing of entry, IKEA should catch the “window of opportunity”, accumulate “near market knowledge” and pay attention to “world-of-mouth” to remain the good reputation of IKEA in China to complete the earlier entry as a gradual process with the “stepwise internationalization” into Chinese new target market.

1 INTRODUCTION The first section is to give a brief and clear introduction through the background to research topic. Problem discussion is followed the background in the order of introduction. Research purpose and research questions are designed in the problem discussion. 1.1 Background This study attempts to explain a reasonable marketing entry strategy of IKEA in China based on the existing literatures. The starting point of this master thesis is the background. And it is necessary to mention economic globalization and enterprise internationalization when to analyze marketing entry strategy of multinational enterprise. Because all of the multinational companies reach the goal of realize enterprise internationalization under the big background of economic globalization, and internationalization is a necessary process for enterprise to expand their business into foreign market. Later on, IKEA as a multinational enterprise which has already entered into China will also be introduced with the successful business entry ideas and the future development tendency in China. 1.11 Economic globalization, enterprise internationalization and international marketing entry strategies. Economic globalization George (2007) aimed that economic globalization is one of the four dimensions of globalizations, as well as the other three dimensions: political globalization, cultural globalization and financial globalization. James (2007) aimed the components of economic globalization includes: labor markets, international capital markets, and international commodity markets. And according to Gao (2000) economic globalization is an inevitable trend of social development. “Economic globalization refers to the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies.” Gao ( 2000 ,P.1) Economic globalization usually operationalize in three different kinds of variables: foreign trade, foreign direct investment and foreign portfolio investment (George, 2007). From the perspective of enterprises, the process of economic globalization influenced the competition and interdependence, because enterprise always has to found new markets (Hartungi,2006). Kotler and Armstrong ( 2001 ) emphasized the obbligato importance of expansion to new international markets. The expansion of international market could help with the promoting enterprises’ development and competitive capacities (Zahra, 2000).

Enterprise internationalization process Nowadays, with the big background of economic globalization, economic isolation became impossible, therefore, internationalization is necessary for development of enterprise. The concept “internationalization” was came up by Johanson and Vahlne earlier in 1977 with their UPPASLA mode, which explains how enterprise gradually increase their business activities participation in foreign markets base on the analysis of Sweden enterprises. And the mode mainly aims that “internationalization” is as a gradual process (Johanson and Vahlne ,1977). In the process of “internationalization”, firstly, enterprise should accumulate market knowledge and international experience from domestic market to international market, as well as from international market with low “psychological distance” to those international market with higher “psychological distance”(ibis). Johanson and Vahlne (1977) also came up the concept “psychological distance”, which is defined as a concept composed with a series of factors, for example, life style, language, education….. Secondly, in the process of “internationalization” market knowledge would cause market commitment (ibis). Johanson and Vahlne (1977) also pointed the mutual relationship between the market knowledge and market commitment. The more knowledge towards market obtained by the enterprises, the more valuable of enterprises’ resources would be. Therefore, enterprises should have a strong level of market knowledge and market commitment. Third, “internationalization” is aimed as a process also because market knowledge and market commitment have interplay with enterprise activities and commitment decision. Johanson and Vahlne (1977) indicated that the current activity is very important, because market knowledge always gained in the process of implement current activities through the experiences. Enterprise catch opportunities through knowledge and experience, sometimes, will cause market commitments (ibis). The level of risk and opportunities always influence the commitment decision, and awareness of risk and opportunities always relay on the experiences from market activities. Not only the risk and opportunities from experiences will influence the decisions taking, but also the existing and future risk which could be calculated. Therefore, internationalization is generally operated as a process. Kotler and Armstrong (2001) also defined “internationalization” as a process but in different dimension with Johanson and Vahlne (1977). And according to Kotler and Armstrong (2001) multinational enterprise usually solve internationalization process in five stages. First, enterprise should decide whether to expand their business abroad. Second, enterprise should decide where to entry, and this is about the international target market location. Third, enterprise should decide how to entry, and this is about the operation mode abroad. Fourth, enterprise should decide to advance their business in a global level. Fifth, enterprise should decide to set up global marketing organization. Corresponding to the research of Kotler and Armstrong (2001), Erissson et al boosted their findings in 1990 and proposed the importance of entry timing. They consider that in the process of internationalization always faced a lot of difficulties, for example, too early foreign entry would cause negative influence for enterprise (Erissson et al,1990). International marketing entry strategies “To say that a company cannot afford to plan an entry strategy is to say that it can not afford to think systematically about its future in world markets” Root ( 1994 ,P.3) According to Osland, Taylor and Zou(2001) that under the big background of economic globalization, enterprise

marketing entry strategy in China: where to entry, how to entry and when to entry (Kim,1992; Woodcock and Beamish ,1994; Gaba,pan,2002; Gallego,2009). IKEA has already successful expand into Chinese first-tier cities such as: Beijing, Shanghai, Shenzhen, Chengdu in the past two decades. However, there are still market vacancy of IKEA in Chinese small or medium cities. Selecting reasonable international target market location is also very important for IKEA in China, therefore, it is necessary for IKEA to analyze potential target market and solve the question of “where to entry”. Ojala and Arto(2007) explained international target market selection should take three different factor into the consideration : cultural distance, geographical distance and market size. And also according to Ojala and Arto(2007) target market with low cultural distance , low geographical distance and big market size would be a good target market location for multinational enterprise. The question in this part is to make certain which factor will really influence the target market location of IKEA in China. There are two different entry mode of IKEA in China: “wholly owned subsidiary” and “joint venture”. According to the studies of Isoble and Robin ( 2008 ) that there are three different measurement index to distinguish the two international marketing entry mode: degree of risk, level of control, and flexibility. To deal with the question of “how to entry” in Chinese market is necessary to choose a reasonable entry mode for IKEA. Timing of entry is associated with four different dimensions of factors: window of opportunity, stepwise internationalization, near market knowledge and word-of – mouth ( Yannick and Khoa, 2014). In the case of IKEA deeply entry into Chinese market in the future, the timing influence factors should also take into the consideration. 1.3 Research Purpose The research purpose of this thesis is to analyze a reasonable marketing entry strategy of IKEA for the further expansion in Chinese market.

1. 3 1 Research Question This thesis devotes into answer these following questions: RSQ1.Where should be selected as new target market location of IKEA in China? RSQ2.Which entry mode of IKEA should be applied in the future Chinese market? “Wholly owned subsidiary” or “joint venture”? RSQ 3 .Which factors would influence IKEA timing of entry in Chinese market?

1.4 Delimitation This research is consisted with three different concept aspects: market selection, entry mode and timing of entry. And the delimitation is narrowed down with these three parts. This research is focus on answering the three different questions in order to formulating the IKEA marketing entry strategy in China. And another delimitation factor is that this research is concentrated only on Chinese market rather than the market in global wide. Therefore, the delimitation has been narrowed down from the logical perspective and geographical perspective.

2.11 Cultural distance in target market selection Cultural distance is considered as one of the most important aspect when selecting a target market location, because cultural distance will influence the sales volume of product and service with the consumer needs and wants (Ojala and Arto,2007). Under the view of Ojala and Arto(2007), it’s helpful to firstly grasp the definition of “cultural”. Culture is a shared value in a common society, and cultural will not only effect the consumer behavior in market, but also influence the implementation of enterprise market strategies. And according to Johanson and Wiedersheim ( 1975 ) that different language, level of education, political, and development all of these factors will influence the cultural. Brouthers(2002)stated that it is a good start to take the variate which was caused by cultural into the consideration of foreign market entry decision. Hollensen (2011) defined the social cultural distance as the difference of code conduct and values between enterprises’ home country and business expanded foreign countries. A previous research of Singh (1998) also takes a similar opinion towards national social cultural distance, and according to him this concept is as a level of cultural standard when measure the business home country and host country, and Singh (1998) also aims that the far social cultural distance will influence the market entry in a lower control level. According to Hollensen (2011) in some case social cultural distance could take more influence than any other factors, and it would be a consideration of religion for this point. Life style, language, tradition, and religion …these are all the part of cultural, but Hollensen (2011) aims that none of the cultural aspect could compare with religion in the cultural distance influence factor. Through the analyze of previous research ,consequently, the more far distance between the enterprise home country and host country , the more flexibility and less resource commitment of market entry. There are a great deal of studies have already confirmed the importance of cultural distance between home country and target market. Firstly, the concept of “cultural distance” or “physical distance” was come up by Beckerman (1956). But the concept really became popular in the studies of Johanson and Wiedersheim ( 1975 ) and Johanson and Vahlne, ( 1977 ). Especially became popular after the proposing of Uppsala mode (Johanson and Vahlne, 1977 ). The mainly idea of this study is to define “internationalization” as a process in which enterprise is trying to increase their international activities participation. The mode which came up by Johanson and Vahlne ( 1977 ) explains how enterprises gradually increase their activities participation in foreign markets on the basis of analysis internationalization process of Sweden enterprise. The mainly characteristic of the Uppsala mode (Johanson and Vahlne , 1977 ) firstly aims that the firm should accumulate the marketing experience and market knowledge in the domestic market and foreign market with less cultural distance, and then they should apply these successful experiences and knowledge in those markets with more cultural distance. And the Uppsala mode (Johanson and Vahlne, 1977 ) firstly came up the concept of “psychological distance” (defined the concept : as a gather of factors which could influence the information flow to the market , for example, language ,education……). And the study also aims that the multinational enterprise should expand their foreign operation gradually from those cultural closer areas to those target market areas which has more cultural difference. After the coming up of these traditional studies, there are a great amount of researches following up on the concept of “cultural distance” or “psychological distance” According to Ojala and Arto(2007), there is not a fixed measurement of cultural distance, and the concept of “cultural distance ” is various, but there is really lack of agreement towards the definition of this concept. Hofsted(1980) aims that cultural is in different dimensions which came up with a framework of cross-cultural

communication, and the Hofsted’s cultural dimensions theory(1980) also described how does the society cultural effect it’s members. But Kogut (1988) take a disagreement with Hofsted(1980) and set up composite index. And there are also many researches a trying to explain the incorrectness of evaluating the culture value with cultural distances. As well as Edwards and Buckley (1998) announced that comparing with other measurements of cultural distance, the cultural familiarities would be more approachable. And in order to confirm their studies, they made a clear comparison of UK and Australian to support their studies. Robertson and Wood (2001) proposed in their studies that cultural environment in target market is the most important factor which influence the multinational enterprise to select market and make decisions. Although these studies are different from each other in detail, but all of the studies are trying to explain the relationship between the cultural distance with the target market selection. Consequently, according to the summary study of Ojala and Arto(2007) could summarize as this : Multinational enterprises would like to select target market with low cultural distance. 2.12 Geographical distance in target market selection Ojala and Arto(2007) also aims that, geographical distance is also one of the most significant factor to consider when multinational enterprise selecting a target market location, because this is mainly from the perspective of geographical distance will influence the transportation cost of production(Clark and pugh,2001).As the importance of geographical distance will influence the international trade was paid a high attention by Srivastave and Green (1986) in their studies. And also according to traditional theory of Johanson and Vahlne ( 1977 ) “internationalization” is as a process, and enterprise should operate their internationalization process from those target market with smaller geographical distance to those target market with bigger geographical distance. For most enterprises “internationalization” is a necessary strategy process (Melin, 1997), and this process usually operated from low geographical distance to high geographical distance. Because market knowledge and international experience usually obtained and gained in this process, and there is more common language culture and business style in the low geographical distance market, and it would be a good way of accumulate international experience and international market knowledge (Johanson and Vahlne , 1977 ). And following up, Dow (2000) also confirm the veracity of Johanson and Vahlne ( 1977 ) in his own studies. But besides the process of obtaining market knowledge and experience, Dow (2000) also aims that low geographical distance will help multinational enterprise to reduce the cost of operation, such as: transportation, management…… Summing up, according to the literatures above, that multinational enterprise usually tend to select target market in a low geographical distance at first, and this is mainly because of two reasons. Firstly, the business operation of multinational enterprise could be more frequently in a target market with low geographical distance, and the experience and knowledge will be more easier to be obtained by multinational enterprise in a target market with

Consequently, according to the literatures above when multinational enterprise selecting a foreign market, it is necessary to consider the market size, and the measurement of market size is usually the GDP index and GDP per capital (Ojala and Arto,2007). And according to the summary study of Ojala and Arto(2007) could summarize as this: Multinational enterprise tends to select international market with high level of GDP and GDP per capital. 2.2 International market entry modes Foreign markets’ operations of international enterprise always are dependent on its entry mode choice. Selecting a befitting entry mode is of great importance for an enterprise when to entry into a new foreign market (Herrmann and Datta, 2002). Once enterprise chooses an entry mode, and then the entry mode would be put into administration in a long term, because entry mode is unmodifiable in a short term (Petersen and Pedersen,1999). As well as Hollensen, Boyd and Ulrich (2001) also aimed that entry mode choosing is quite important decision which would influence the future prospect of enterprise on foreign market. Peng and Mike (2008) categorized the entry mode in two different categories: equity mode and non-equity mode. And also there are two mainly types of entry mode (Peng and Mike,2009) : joint venture and wholly owned subsidiary which are divided through the measurement index- equity modes category. Managers usually start a venture in new international market with these two different entry mode options. 2.21 The comparison of “wholly owned subsidiary” and “joint venture” If an enterprise once decided to expand its foreign market share and reach more target audiences, and this enterprise has to make an available guide as entry mode (Carazo & Lumiste, 2010). There are many studies have already researched the factors which would influence the market entry mode choice. According to Buckly (1998) there a serious of factors will influence the foreign market entry mode, and the factor would be the business cost in abroad, as well as including other factors which respectively are market location, internalization, variability of finance , cultural aspects and market competitive strategy. All of these studies in the aspect of classified have certain deficiency. But among of these studies, Isoble and Robin( 2008 ) would be the most reasonable and rational. According to Isoble and Robin ( 2008 ) that different entry mode is distinguished by these three mainly factors: degree of risk, level of control and flexibility ( Isoble and Robin,2008). These three mainly factors would be made a brief introduction in the follows paragraph. Factor 1: Degree of risk

According to Isoble and Robin ( 2008 ), when to choose an entry mode at the process of enterprise internationalization, one of the most important factors to consider is the degree of risk at foreign market. Holensen (2001) also aims that risk level as a mainly influence factor of entry mode selection should be taken into the consideration of entry. And also Risks are from different aspects such as the political stability and currency fluctuations of host country (ibis).Wholly owned subsidiaries take higher risks than joint venture. Because the risk is shared by more than 1 enterprise in a joint venture. As for the wholly owned subsidiaries, the parent enterprise at abroad will take the full risk by itself. While if the operation of business will take any failure, then the risk should be separated to be taken by different enterprise in the joint venture. Factor 2 : Level of control Rajan and Pangarkar(2000) evaluated that enterprises require a certain level of control to guarantee its operation at foreign market entry mode. Because of the different ownership structure between joint venture and wholly owned subsidiaries, the level of control is also different. Joint venture is set up and controlled by two or more than two enterprises, and the relationship between the companies may be equal control or one of the enterprises takes more control towards business activities. However, the wholly owned subsidiaries are controlled by the only enterprise. So the level control of wholly owned subsidiaries is higher than joint venture. Factor 3 : Flexibility Multinational enterprises always faced many uncertain factors in foreign market, therefore, it is necessary for multinational enterprise to recognize the change of market environment, and then adapt to these changes of market environment (Hitt,2004). These adaptations of international market environment require enterprises have a certain of flexibility. At the entry mode of wholly owned subsidiaries will have more flexibility than joint venture, and this is also because of the ownership structure. Table 2.1: Comparison of Foreign Market Entry Modes ( Isoble and Robin,2008) Entry mode Degree of risk Level of control Flexibility Wholly owned subsidiary Higher Higher Higher Joint venture Lower Lower Lower Wholly owned subsidiary would be the most expensive method of entry mode for multinational enterprise to entry into foreign market, because of the high risk high control and high flexibility (Isoble and Robin,2008).Enterprise which uses this entry mode usually takes a term view at foreign market (ibis). These enterprises believe their product or service will have a long-term market potential at a relatively political and currency stable foreign market (ibis). And the full ownership of wholly owned subsidiary will provide a higher level of control and flexibility in the foreign market business operation (ibis). The evaluation of “expensive method of entry mode” ,which is not only because of high level of control, but also because of the high degree of risk (ibis). Risk as a subsequent withdrawal will make enterprise cost extremely. These cost not only in terms of finance, but also in terms of reputation in international and domestic market. Isoble and Robin( 2008 ) also aims wholly owned subsidiary entry mode usually requires enterprises have a certain market knowledge which

2.31 Window of opportunity “A strategy window occurs when the best fit arises between a market’s key success requirements and specific firm competencies.” Fornell and Sullivan (1992,P.609). According to Yannick and Khoa ( 2014 ) that the “window of opportunity” could be also explained as “strategies window”. Therefore, when to analyze the opportunity of multinational enterprise, it is necessary to consider external influence factor, such as the target market competition intensity, and country risk (Ruth ,2016). And the internal factors of multinational enterprise should also take into the consideration of timing of new target market entry from the aspect of production and firm size (Yannick and Khoa , 2014 ). “Strategies window” here is devoted to explain the timing opportunity of fit balance between the target market and enterprise itself (ibis). By doing the inductive approach of the internal external influence factors and two mainly reasons which was summarized by Yannick and Khoa ( 2014 ), the following part is trying to explain how does the “window of opportunity” associates with the timing of entry. First is to consider about multinational enterprise itself from the perspective of size itself (Yannick and Khoa , 2014 ). Size of firm emphasizes the availability of firm’s resources, which in general including economic resources and personnel resources (Koch ,2011).When multinational enterprise entry in to a foreign market needs abundant economic or financing resources and personnel resources as the guarantee of entering into host countries(Wrona,Trapczynski,2012).And relevant research indicated firm size as a internal factor will influence timing of foreign market entry with the firm resources(Hollensen,2011). And also ccording to Albaum and Duerr(2011) product and services of the enterprise will influence it’s foreign market entry strategies ,because of enterprises’ brand awareness qualities volume and even packaging of product or services ,and sometimes will also refers to after-sale and services. Therefore, multinational enterprises usually catch the “window of opportunity” through the way of control the firm size at host country (Yannick and Khoa , 2014 ). Second is to consider about multinational enterprise from the external perspective, such as target market competition intensity, and country risk (Yannick and Khoa , 2014 ). Once a multinational enterprise decide to entry in a foreign market, it is necessary for them to realize their possible local competitors (Hollensen, 2011).Multinational enterprise really face great pressure to compete with local enterprise. So, multinational enterprises should strive to exploit their competitive advantage to compete with host country enterprises (Albaum and Duerr,2011). According to Hollensen(2011) multinational company has more uncertainties in foreign market than in domestic market. When choosing a foreign market to entry, enterprises always have to evaluate the risk of country. And these risks are in different levels. In general these levels are appraised in these two different levels: political risk and economic risk (Agarwal and Ramswami, 1992).The stabilization of political will influence the enterprise to make more resources commitment, and favorable policy of government will also reduce the risk of multinational enterprise when entry into foreign market (Dunning, 1998).While economic risk is obviously more complex than political risk, enterprise has to analyze the economic situation of foreign country which desire to entry, such as effect of inflation rate and exchange rate (Hollensen, 2011), and it’s very difficult for a multinational company to manage their business operation at the foreign market in which has a very high inflation rate. And according to Yannick and Khoa ( 2014 ), the less competition and low country risk would provide

“window of opportunity” to the multinational enterprise for earlier entry in target market. Consequently, also according to Yannick and Khoa ( 2014 ): there is not an accurate definition of the concept “window of opportunity”. But when to analyze the timing opportunity of foreign market entry, it would be a better way to consider external and internal factors, which could cause the opportunities (ibis). The best opportunity for multinational enterprise to entry into the foreign market is at the time of “fit balance” between the firm size in host country and target market (ibis). Conclude above: Reasonable opportunity of entry time for multinational enterprise is to meet the balance between firm size at host country and the state of target market. 2.32 Stepwise internationalization According to Yannick and Khoa ( 2014 ), the stepwise internationalization related to the timing of entry is because “internationalization” is as a step-by-step process for multinational enterprise to gradually expand their business to the foreign market. Nowadays more and more enterprises are starting to exploit foreign market and exporting their product to extensive foreign customers, and also devoting to foreign direct investment (Paola, 2016). And there has appeared a lot of research towards the topic of enterprise internationalization. “Internationalization”-this concept has been put forward 30 years ago. But “Internationalization” is really a complex concept, and currently there is even not a common agreed definition for it (Bell and Young, 1998) or even for the international entrepreneurship (Young et al., 2003). However, also according to Welch and Loustarinen (1988) viewed the “Internationalization” as a process of increasing involvement at outside country markets. Beamish (1990) defined internationalization. “ The process by which firms both increase their awareness of the direct and indirect influences of international transactions on their future, and establish and conduct transactions with other countries ” Beamish (1990,P.148). All of these definitions provide the concept- “internationalization” in many different kinds of dimensions. According to all of these dimensions Gao (2008) in his research summarized the concept in three different kinds dimensions: first, the internationalization is a process which usually includes a lot of firm’s strategies and decisions, then the internationalization is including international transfer of products, service, and resources, finally enterprise and firms usually influence internationalization with different factors(Gao, 2008). The most common definition of concept would be the “Internationalization” as a gradual process. According to the research that “internationalization” is as a gradual process, in which multinational enterprise entry into the foreign market (Johanson and Vahlne, 1977 ). When entering a new foreign market abroad, it is necessary for enterprises to have knowledge of market, resources, and a powerful market commitment, and there are also some additional factors (Mitra ,2002 ) such as market selection which is including the size and population

IKEA marketing entry strategy in China, Summaries of Marketing

Related documents

Partial preview of the text

Download IKEA marketing entry strategy in China and more Summaries Marketing in PDF only on Docsity!

IKEA marketing entry strategy in China

Master thesis in Business Administration

TABLE OF CONTENTS