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Chinese Business Environment: Analysis of IKEA in China

Presentation · March 2020

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Adasa Nkrumah
University of Electronic Science and Technology of China
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Background/History

Overview

Five Forces/SWOT analysis

PESTEL

Conclusions
• Swedish private company, 1943
• Parent company Ingvar Kamprad
• INGKA Holding B.V.
• Company culture
• Togetherness, Cost-consciousness,
• Respect, Simplicity
• Products
• more than 10,000 in its range
• Social responsibilities:
• WWF, UNICEF
• 1943 IKEA was founded by Ingvar Kamprad
• 1951 The first catalog was published
• 1958 The first IKEA store opens in Sweden
• 1963 IKEA arrived in Europe
• 1985 IKEA arrived in USA
• 1990 The first environmental policy
• 1997 IKEA website & Children’s IKEA
• 1998 IKEA arrived in China
• 2001 IKEA rail
 IKEA’s Layout
• Entrance upon the store
• Unique Design
• Display set up
• Upper level “showroom”
• Lower level “Marketplace and Warehouse”
• Scandinavian furniture
• Compact, stylish furniture
• The IKEA vision
• Unique business concept
 International business
7

IKEA stores around the world：

"United States, Denmark, Germany, Spain, Israel, Saudi Arabia,"

© 2017 Adasa Nkrumah K. F.

IKEA in China belongs to IKEA Group and operates as a joint venture. This
venture served as a good approach to test the market, understand the local
needs and adapt strategies to gain competitive advantage.
 Threat of
New
Entrants

Bargaining Bargaining
Power of Rivalry Power of
Suppliers Buyers

Threat of
Substitute
Products
 Low –Supplier Power
Multitude of various suppliers available to IKEA

IKEA is not restricted to one supplier and therefore can demand high quality
at a low price, and if not accepted by one supplier, can be offered to another.

Example is the case of Joyme

 Chinese buyer power: High
Main factor which has changed IKEA’s strategy in China.

Chinese consumers always expect high quality but at the same time also
look for the lowest price. (Tian, 2007)

When IKEA first entered the Chinese market, although their prices were
seen as low to other European counterparts, relative to the Chinese
consumer they were quite high.

Due to this fact IKEA was forced to lower prices, which in turn caused a chain
reaction within the value chain, forcing IKEA to look for ways to reduce costs in
all areas.
Threat of New Entrants
Low due to the Chinese market culture.
IKEA entered the market through the support of a joint venture in 1998 and also had
roots established from its procurement activities.

The Chinese market poses many trade barriers in the form of law

foreign companies to enter into a joint venture if they wish to enter the market.
Most companies are becoming direct competitors with IKEA and now have a similar
knowledge competency.

The intensity of rivalry

IKEA also faces online competition with the

multiple retailers that sell on sites such as Taobao.
Threat of substitutes

Many manufacturers in China can effectively copy

not only the products, but also the store experience.

An example of this can be found in Kunming,

where a furniture store has essentially created
a pirate version of the Ikea store layout.
SWOT analysis - Strength
Ikea’s strengths lie in its strong brand image
internationally

They also have years of international experience and low cost culture experience.

These combined offer them a strong understanding of the

marketplace and the competencies needed.
 IKEA now faces an uneasy relationship with its suppliers as it
continuously demand lower prices but still wants high quality goods.

SWOT analysis - weakness

Could cause major supply chain management problems not only
for the Chinese business but also their other international stores.

Another weakness is the European culture.

Although it attracts Chinese consumers, it is also hard for
IKEA to align the European and Chinese culture.

This is also relevant to the IKEA DIY culture.

Many Chinese consumers prefer to have the furniture assembled

for them, and so IKEA had to begin to offer a delivery and
instillation service. Due to the vast numbers who need these
services, IKEA had to also significantly lower the delivery prices.
 Growth of the middle class and Chinese GDP

SWOT analysis - Opportunities

meaning that the purchase power of the Chinese consumer is
improving.

IKEA is also
continuing its
growth plan by
moving into
middle size
cities such as
Ningbo, which
will help IKEA
achieve their
overall growth
strategy.
(Scutt, 2015)
SWOT analysis - Threat
The power of the Chinese government and legal system, which
tend to favor domestic firms.

This can be seen in the difficulty of intellectual property

protection in China, which could result in more and more fake
IKEA stores appearing.

IKEA also is under threat by the popularity of online shopping

merchants, who can provide similar products at lower prices.
One of the major problems, resulting in profit loss by IKEA, was their pricing strategy.

Economic factors
Competitive advantages in the western markets in terms of low cost pricing,
was not realized in China, as a low cost culture was the norm.
As a result of buyers great bargaining power, IKEA’s pricing strategy was
under strain.
As a result, IKEA reduced prices, which in turn translated to lower profit margins
and in some cases losses.
 Country specific factors
There are many legal implications for entry into the Chinese market. In order
to overcome these trade barriers, IKEA had to enter into a joint venture, even
though they controlled the management, it did halt the expansion process as
land ownership was only acceptable through the Chinese partner.

This limited IKEA’s reach in the Chinese market and in turn limited the pool of
potential customers.
 Cultural factors
For a long time IKEA did not adjust its business operations to fit into the Chinese
culture. Chinese consumers favor western styles and often try to emulate them in
many areas in their life including furnishings.

IKEA’s products are seen as high quality and so high prices are also expected.
Balancing these expectations with the low prices of the Chinese furniture
markets, caused many difficulties for IKEA.
 Cultural factors
Many Chinese consumers also did not own a car, so locating in suburban areas with
a well-established public transport system was vital. This challenged IKEA is terms of
store scale, as finding a location that would be large enough for the store and
nearby a good public transport system was hard to come by.

These cultural factors meant a drastic change in the business operations of IKEA.
IKEA had to build on and improve its delivery and installation service for Chinese
customers, as the culture of DIY was in little existence in the furniture market, as
unlike western counterparts, labour costs were inexpensive and had to be built into
the total IKEA service.
 Entry strategy
• The biggest difficulty for IKEA when entering China was the legal systems and
trade barriers.

• Initially Ikea’s presence in the Chinese market was purely procurement, with
most of its purchases of materials from other store from China.

• In 1998 Ikea then went on to establish itself in the Chinese retail area, when it
opened its first retail store in Shanghai.

• The store was opened as part of a joint venture with Beijing Northern Sweden
Limited Company, as policies at the time did not allow for foreign companies to
build wholly owned stores. (Wang, 2011)
 Entry strategy
• One of the major benefits of the joint venture was the risk mitigation for IKEA.
• Entering into the Chinese market came with many uncertainties, and the
entering into the joint venture was less risky than if they had entered on
their own.
• It also allowed IKEA to get over trade barriers and fulfil legal requirements of
market entry.
• The partner they chose, also had strong affiliations to the Swedish Chamber
of commerce in China, who could provide both partners vast amounts of
information regarding the Chinese marketplace.
• However a joint venture prevented IKEA from maximising its expansion and
also led to compromise in their store design, as it wasn’t until IKEA had full
control in that the first “real” IKEA store was redesigned and built in
Shanghai.
 Entry strategy
• After a while, polices began to relax, allowing foreign companies more freedom
in the Chinese market.
• After China joined the WTO, foreign firms could build wholly owned stores.
• IKEA then changed its entry mode by purchasing the remaining shares from their
partners and began building wholly owned stores and gained ownership of their
previously built stores.
• This allowed IKEA to continue its expansion plans in China and fully control store
operations.
• Originally the stores were not capable of accommodating the “all day” Chinese
shoppers, but since wholly owning the stores, have been able to adjust the
layouts to maximise the Chinese consumer experience and as a result have
increased in popularity with Chinese consumers attributing to a 17% increase in
sales in 2013, making China one of Ikea’s fastest growing markets. (BBC News,
2013)
It has been difficult for the company to set prices at a
level that is good for both customers and the company.

IKEA faces strict quotas and has difficulties in importation

IKEA has been hit with heavy import taxes in China

UK-based B&Q, the largest DIY retailer in Europe and
the third-largest in world, has several stores in China.

IKEA’s biggest worries

Many international and Chinese chains
and companies counterfeit IKEA products.

“The more popular IKEA becomes, the more competition we have”

, “Some furniture stores keep IKEA catalogues in their store and tell
customers that they can reproduce the furniture at a lower price”
Companies should find out what their motivation is

there is a very big difference between a population and a market

and companies need to really find out why they're going to China
 “There's always a story behind the story”
“There’s a person behind the person “

Make decisions on the basis of quality and important information

 Role of the government
Control and influence in key sectors in the oil and gas
sector, in transportation in railroad transportation, in media

“having one definition for what it means to do business in China is impossible”

Kent Kedl,

“it is very different to do business in Beijing versus Shanghai “

38

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