Ikea in China An Arduous Journey Case Analysis Paper: How has IKEA adapted to the Chinese market since 2008? What measures did it take to improve profitab

Ikea in China An Arduous Journey Case Analysis Paper:

How has IKEA adapted to the Chinese market since 2008? What measures did it take to improve profitability?
What are the concerns relevant to IKEA as it plans future expansion in China?
How should IKEA respond to new trends in China, such as online retail sales?

Note: Your answers should be around 1000 – 1200 words, plus exhibits.

The Paper needs to be submitted via TURNITIN. Please cite all outside source D’Amore-McKim School of Business
New Product Development
Ravi Sarathy
Northeastern University
Week 2 L2
1
D’Amore-McKim School of Business
Product Development
Adding new products to an existing line: product proliferation
Selling existing products into new markets
Developing new lines of business: highest risk, greatest
promise? Hence, importance of market size
2
D’Amore-McKim School of Business
New Product Development
Design: desired attributes and features
Product adaptation; base product platform, proliferation of variety on
the base; technology generations
Phased introduction across different country markets
Influenced by product life cycle phase differences
However, product life cycles are getting compressed
May be necessary to simultaneously launch new products in multiple
country markets
Where to locate research and development (R&D)? Listening,
responding to key markets, and customer needs; multiple locations
Customer Feedback in developing new products
Minimizing time to market
Integrating R&D, marketing, and production
3
D’Amore-McKim School of Business
New Product Development—
The Platform Concept
New products as outcomes of the meeting of a
company’s knowledge and its customers’ needs
Build products on a bedrock of core competences
Build product platforms, then product families
4
D’Amore-McKim School of Business
Figure 1
A Framework to Integrate Markets, Platforms, and Competencies
Markets
Tiers of Price-Performance
1 through N ….
Segments 1 through N ….
Derivative Products or Services
with Development Time/Cost Efficiency and Attractive Price-Performance Positioning
Product or Service Platform
Subsystem A
Int erfacei….n
Subsystem C
Subsystem B
Common Design Rules and Tools
Competencies
Market Insights
Product
Technologies and
Design Processes
Production
Processes and
Technologies
Organizational
Capabilities and
Infrastructures
5
Marc Meyer, 1999
D’Amore-McKim School of Business
Automotive
International
Drills, sanders, saws, etc ..
Better
Drills, sanders, saws, etc ..
Best
Consumer
Outdoor
Drills, sanders, saws, etc ..
Consumer
Indoor
Drills, sanders, saws, etc ..
Markets
Good
Figure 2
The Integration of
Markets, Platforms,
and Competencies in a
Manufacturer
Other Power Tool Groups …
Saws
Sanders
Product Platforms
Drills
Common Subsystems
Universal motor
Field & armature
Mot or housing
Geat , Chuck, Switches
P ower supplies, Cords
Fasteners
Plastic molding
Designed in
metric
Automated packaging
Automated balancing
and testing
Loctite bonding
Powdered-metal gears
Automated motor
manufacturing
Magnesium die-casting
Marc Meyer, 1999
6
D’Amore-McKim School of Business
Technology Intensive Environments
Incremental innovation verses next generation
revolutionary innovation
Cannibalize existing product sales
Build on core capabilities
One approach:
Develop products for specific customer segments
Use new technologies to focus on leading-edge customers
Alliances are helpful
Use financial targets to control new product process
7
D’Amore-McKim School of Business
Where to Develop New Products?
One or many country locations for R&D?
Critical to receive information on market needs from all
major markets
Allows adaptation to local use conditions, legal
considerations early in product development
Allows participation in domestic market R&D consortia
Necessity of coordination and control of multiple R&D
sites
8
D’Amore-McKim School of Business
Japanese Approaches
One or many country locations for R&D?
Develop a product concept—price target, utility
Broad R&D, focus on materials, processes
Product Design: multiple parameters
performance, efficiency, style, safety, features, environmental
effects, addressing different tastes and segments
Importance of supplier relations, global sourcing
Examples: Japanese cars
9
D’Amore-McKim School of Business
Incremental Innovation
Small continuous changes to product resulting in better
customer value
Enables firm to keep ahead of competition
Requires technology stability
Danger that firm does not see new technologies
emerging, competitors may develop new generation
products first, obsoleting current product line
Utility of global benchmarking and continuous quality
improvement
10
D’Amore-McKim School of Business
Acquisitions, Divestments, and The Product Line
International acquisitions allow quick expansion
of product line, diversification
Extend geographic reach, penetrate new markets
Can lead to product sprawl—need to occasionally
refocus on value chain concentration and
contribution; hence, divestments
Product line extension facilitated
Quick response to competition’s new product
moves
11
D’Amore-McKim School of Business
New Product Development Teams and
Management
Use of cross-functional nationally and culturally diverse
teams
Team composition:
Representation from each function
Physical co-location to build team culture, communication, and
conflict resolution processes
Speed over perfection? Launch early versions with beta
customers, learn, refine
Clear plan, goals, milestones, budgets
Top management must accept the risks, be involved
12
:
IKEA IN CHINA: AN ARDUOUS JOURNEY1
Li-Qun Wei wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or
ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to
protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.
Copyright © 2018, Ivey Business School Foundation
Version: 2018-08-13
In mid-2017, the IKEA Group (IKEA) named Jesper Brodin as chief executive officer (CEO). Lars-Johan
Jarnheimer, the chairman of IKEA, said that IKEA’s strategy to further boost growth in China by opening
three stores per year from 2013 would not change under Brodin’s leadership.2 Jarnheimer explained that
“the strategic direction the company has remains in place, and even if [Brodin] will mold it, he has been
part of the development of the strategy together with [the previous CEO] in his previous role on the
management team.”3 Moreover, Jarnheimer told Reuters, “Brodin would need to focus hard on integrating
stores, new store concepts and e-commerce services.”4
The company’s expansion started in 2008 when IKEA China announced a decision to turn a profit with a
full range of strategic adjustments, the most typical and effective of which was price reduction by cost
cutting. “Our expansion plan started in 2008, 10 years after IKEA became established in the local market
with only four stores, and the successful results from the new stores we opened during the past two years
proved that our business model of building our own stores does work here,” Gillian Drakeford, the then
country retail manager said in 2011.5 Fourteen stores had been opened by the end of 2013, and IKEA hoped
to then open at least three stores per year in national cities and some developed capital cities.6 In fact, IKEA
successfully opened one store in 2014 in mainland China, and in 2015, 2016, and 2017, it opened three
more stores each year (see Exhibit 1).
Due to the contradiction between IKEA’s value proposition and the attitudes of Chinese consumers, IKEA
was caught in a dilemma. However, IKEA kept opening more stores in China, and the volume of sales and
number of customers confirmed the success of IKEA’s strategies in the Chinese market, showing IKEA’s
confidence in the Chinese furniture market for the future.
By fiscal year 2016, China represented 26 per cent of IKEA’s global purchasing. The company had 21 stores in
China, and in that fiscal year, achieved ¥12.5 billion7 in sales, 89.3 million customers, and 16.34 million IKEA
FAMILY members.8 However, there remained the question of whether the furniture giant was able to keep up
this momentum and become more profitable. Could IKEA’s strategy function over the long term? How could
IKEA respond more effectively to the incoming competitive environmental and business model changes to
maintain its competitive edge and develop sustainably? Should IKEA consider promoting online sales?
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9B18M111
TRENDS IN CHINA’S RETAIL FURNITURE MARKET
In China, furniture was a traditional industry, but there was still room for growth. The 2009 international
recession caused a decline in furniture exports from China, but the industry’s overall development since
2010 had been good, thanks to state support and the recovery of the world economy.9 People in China were
increasingly willing to improve their residential environment, which promoted the prosperity of the
furniture market. From 2004 to 2011, the annual sales value in the furniture industry grew by an average
rate of 31 per cent. In 2012, the growth rate slowed to 26 per cent (total sales of ¥137.5 billion), but in 2015,
total retail sales grew 10.7 per cent (reached ¥33.23 trillion), and in 2016, consumer goods sales continued
to grow, increasing 9.6 per cent.10
China’s furniture industry was distributed in five main regions. Specifically, the furniture industry was most
concentrated in the Pearl River Delta, while furniture businesses were developing the fastest in the Yangtze
River Delta. The Northern and Northeastern regions centring on Beijing were famous for their abundant
wood resources. The Western and Central regions were still in their nascent stages.11
There were many brands offering products of various grades in the Chinese furniture retail market.
Differing in price, quality, and marketing strategies, these Chinese furniture retailers could be categorized
as high, middle, or low class. Jin Hai Ma and Chun Shen Jiang were two low-end chains with large
exhibition areas and low prices, but they were inconsistent in quality and had generally vague positioning.
B&Q plc (B&Q), the OBI Group (OBI), and Red Star Macalline were the main middle grade chains,
grouped into two different business models. B&Q and OBI sold furniture as daily necessities in large
supermarket-like outlets, while Red Star Macalline built furniture malls and made a profit on rental to other
manufacturers. BoConcept, from Denmark, and DaVinci, from Singapore, were the outstanding high-end
companies. Both their operating patterns and the style of their products resembled those of IKEA, but
BoConcept and DaVinci targeted high-end consumers.
The huge market created excellent opportunities, but the journey of furniture retailers in China had not been
smooth. In September 2012, The Home Depot Inc. (Home Depot) withdrew completely, closing all its
stores. In March 2017, B&Q closed 42 of its 63 stores, blaming the housing slump China was then
experiencing.12 Some retailers tried to consolidate others but this was not easy; for example, in early 2014,
Red Star Macalline, a Chinese furniture retail firm, unsuccessfully attempted to acquire Ji Sheng Wei Bang
(JSWB). As a strategic collaboration, JSWB licensed its commercial brand to Red Star Macalline. Until the
end of 2017, B&Q, the largest do-it-yourself (DIY) retail chain in China, with about 40 stores, was seen as
a major competitor for IKEA.13 HOLA, a brand of Taiwan’s Testrite Group, entered the Chinese market in
1992. It was regarded as IKEA’s fiercest rival in China’s home decorating market. Like IKEA, HOLA
displayed its products in a simulated home layout to inspire its customers and it exhibited global trends in
home decoration. As of January 2017, HOLA had 38 stores in mainland China, covering all the major cities
located in economic centres, each serving more than two million families.14
The increasingly competitive furniture industry was even more dynamic and promising due to the rapid
development of online business. In recent years, China was probably the market with the fastest online
business development globally in many areas. Firms were embarking on marketing online to promote their
brands and to boost turnover and reduce inventory. In 2017, Tmall.com (Tmall),15 the Chinese-language
website for business-to-consumer online retail, operated by the Alibaba Group Holding Limited, achieved
8 per cent of its total sales—¥168.2 billion—with home decorating and furniture products. Of the top 50
stores in Tmall, 10 of them were in the furniture industry.
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9B18M111
IKEA IN CHINA
In 1943, at the age of just 17, Ingvar Kamprad created IKEA in southern Sweden. By 2018, it was on Forbes’
list of the World’s Most Valuable Brands, ranking 41st.16 IKEA’s vision “to create a better everyday life
for the many people” was aligned with its business idea “to offer 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.”17
IKEA was the largest franchisee of Inter IKEA Systems B.V. As the world’s largest furniture retailer, IKEA
had 355 retail stores and employed 149,000 people globally by the end of fiscal year 2017 (see Exhibit 2).
IKEA’s global sales in 2017 increased almost 3.8 per cent to €36.3 billion18 (see Exhibit 3); store visitors
reached 817 million, in sharp contrast to the 309 million in 2003; and IKEA’s websites were visited 2.1
billion times (see Exhibit 4).
In 1998, IKEA opened its first store in China in Shanghai. After more than a decade of development, the
firm’s performance in China was considered satisfactory, even though it had been unprofitable for the first
10 years. During those first 10 years, IKEA adopted a conservative strategy and opened only four new
stores in China. IKEA’s original value proposition and market positioning was poorly attuned to Chinese
consumers’ consciousness: 19 its original target market was customers from the low to middle income
classes, but IKEA’s pricing was considered too high and its products were considered high-end. The
inconsistency between what IKEA’s target market could afford and what the company’s advertised as “low”
prices caused confusion among Chinese customers and created a problem for IKEA.20
To resolve the problem, IKEA made several strategic adjustments in China, including re-positioning and
lowering prices. These adjustments turned out to be effective. By October 2017, IKEA had opened a total
of 24 stores in China, including three shopping malls in Wuxi and Beijing. The malls consisted of three
main blocks: a hypermarket and cinema, a shopping centre, and a mall anchored by an IKEA Blue Box
Store. In fact, eight of the 10 largest IKEA outlets in the world were located in China.
IKEA’s sales in China reached more than ¥13.2 billion in 2017, an increase of 14 per cent over the previous
year; store visits reached 90 million, for an increase of 11 per cent over the previous year; and website visits
reached more than 90 million, which was 11 per cent more than the previous year. 21 In addition, IKEA
introduced its FAMILY membership system, and by 2017, IKEA’s total membership in China exceeded 18
million (a 12 per cent increase on the previous year), with approximately 9 million fans through its various social
media platforms. The Chinese market stood out worldwide with double-digit yearly growth and accounted for
almost 3 per cent of IKEA’s global sales, in contrast to 2005 when it was no more than 1 per cent.22
These achievements, and careful forecasting, led IKEA to accelerate its expansion in China by opening three
stores per year, even though consumers in the target cities had no experience with flat-pack furniture.
IKEA’S STRATEGIC ADJUSTMENTS IN CHINA
IKEA made some strategic adjustments to achieve profitability in the Chinese market. IKEA’s initial target
audience in China was defined as the low to middle classes, because those classes were understood in Europe
and North America. However, prices seen as low in Europe and North America were still considered high by
Chinese consumers. A customer survey conducted by IKEA in China in 2009 showed that customers thought
that IKEA targeted the middle or high classes.23 This situation did not change until the end of 2017, especially
for people in Tier 2 cities, where IKEA was opening stores. The price sensitivity and product quality concerns
of Chinese consumers led IKEA to change its target to the “white collar” group: young, middle-class
professionals, either single or families with a double income. This customer segment was well-educated and
open to a Western lifestyle, which helped IKEA as a representative of Western brands.
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9B18M111
Low prices had always been a key factor in IKEA’s success globally. Yet, in China, IKEA found its “low”
prices were higher than those of local furniture firms. To move away from Chinese consumers’ impression
of IKEA as a luxury store, IKEA kept lowering its prices during its early operational period in the Chinese
market.24 Between 2000 and 2018, IKEA had reduced its prices by approximately 60 per cent. For example,
the Lack table, initially sold in the Chinese market for ¥120, was reduced to ¥39. To keep lowering prices,
IKEA China had to cut costs, which meant sourcing raw materials and products locally. IKEA continuously
increased the proportion of its products sourced in China, from 14 per cent in 2001 to 22 per cent by 2012,
and to 30 per cent in 2013. In August 2013, IKEA built a manufacturing factory in Nantong, in the province
of Jiangsu, to avoid high import taxes. The factory was located near IKEA’s two warehouses in Shanghai.
By December 2016, about 65 per cent of IKEA’s total sales in China came from local sourcing,25 mainly
from China’s original equipment manufacturers (OEMs).
As part of its global strategy, IKEA also adopted environmentally-friendly measures in China. Besides flatpacks and brown cardboard, which were cheaper and environmentally friendly, IKEA developed an internal
tool in 2010 to measure the sustainability of products. IKEA’s sustainability report in 2016 indicated that
61 per cent of wood came from sustainable sources; its goal was 100 per cent by 2020. As part of its
sustainability strategies, IKEA also installed 730,000 solar panels on IKEA buildings worldwide. To
become independent in resources and energy, IKEA operated 327 wind turbines.
IKEA was criticized for selling standardized products on the global market, but it did tweak its product
range to satisfy customer needs. In China, IKEA introduced a wide range of localized products, such as
chopsticks, to attract more consumers from the local market. IKEA also adjusted its product range to suit
the Chinese market. For example, IKEA opened its first store in Kowloon, Hong Kong in 1975. The Hong
Kong-sized beds were initially sold in China, but IKEA quickly switched to selling standard beds once it
realized that the Hong Kong-sized beds were too …
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