International business – Evaluating success factors of IKEA in china

Keywords: Institution Based View, Institutions and international markets, China and Institution theory, Resource Based View (RBV), OLI model (ownership, location and internationalisation, Internationalisation and RBV, Firm Resources and international markets, Resource theory and impact on IKEA China, Institution theory and impact IKEA China, international business assignment writing services

Introduction

The objective of this report is to examine the success factors of the IKEA in china in the light of institution and resource-based theory.

Moran (2015) stated that Institution theory suggests that formal and informal institutions impact upon the strategic choice made by the company and effect on the operation and performance. MNE prefer to adopt certain entry mode which is encouraged by the host country. Moreover, RBV elaborates that firm performance and competitive advantage in the international market is based on the managerial choices, industry factors, accumulation and deployment of resources and market environment.

IKEA China

IKEA is a giant Swedish furniture retailer which is globally known for its innovative and low price furniture design. IKEA started its operations in china in 1998 through opening a store in Shanghai by forming a joint venture with Beijing northern. The IKEA objective to enter China was selling furniture to large domestic market and export furniture because China signed the WTO. The purpose of the joint venture was because of the entry restriction imposed by the China government (Hill, Jones and Schilling, 2015; IKEA, 2016).

However, in 2003, IKEA revised its entry mode and opened its own stores based on the government allows to open foreign retailers wholly owned subsidiary. IKEA currently operate its 15 mega stores in China in eight provinces. IKEA store in China is based on the sales model that customer should be allowed to test everything in stores before they make a purchase. In 2015, IKEA sales in china raise by 11%  and IKEA have Eight out of ten largest stores in the world is located in China as well as IKEA is planning to open three more stores by 2020 in China (Hatton, 2016).

Literature Review

Institution Based View

Peng, Wang and Jiang (2008) define institutions as ‘rule of the game’ or in formal context institutions are constraints devised by the human actions in order to formalise and structure the relationship between human activities. Furthermore, Kim, Kim and Hoskisson (2010) stated that institutions are normative, cognitive and regulative structures that provide meaning through stabilising human relationship. The dimensions of the institutions are

Types of institutions

Governance

Principles

FormalRegulativeRules and Law
InformalCognitive and normativeEthics, norms and Cross-culture

According to Peng (2013) the institution views of the strategy emphasis on the interaction between the organisation and institutions and elaborate that organisation strategic choices are outcomes of these interactions. The institutions based view theory suggest that strategic choices made by the organisation are based on formal and informal institution framework that established by the management rather looking at organisation capabilities and industry condition (Meyer and Peng, 2016).

The diagram below summarise the interactions between institutions and organisation

The institution-based view of strategy

Institutions and international markets

According to Garita (2015) foreign market entry choice reflects the degree of conformance to which organisation compliance with law and regulation of the host country. Therefore, organisation entry in the foreign country must comply with host country regulation. The foreign entry mode (Franchising, subsidiary, joint ventures or strategic alliance (Brouthers, 2013) is usually based on the rules and regulations of the host country. Organisations prefer to adopt certain entry mode which is encouraged by the host country because of benefits and stable operating environment (Pattnaik and Kumar, 2014).

China and Institution theory

According to Tihanyi, Devinney and Pedersen (2016) OLI model (ownership, location and internationalisation) is useful to explain the success of foreign direct investment (FDI) in the economic context but countries like china institutions have greater influence. Therefore, OLI model is not sufficient to explain the success of the organisation in Chinese context but institutions are important to predict market success. Institutions are immobilised and i.e. affect the capacity of the organisation in terms of coordination cost and transactions cost of the firm (Verbeke and Merchant, 2015).

Resource Based View (RBV)

Chaston (2014) evaluated that resource based view focus on the internal resources and capabilities of the organisation which generate competitive advantage. RBV highlight how resources and capabilities of firm allow the organisations to pursue different strategies which help to grow its international operations and deliver competitive advantage (Lin and Wu, 2014).

According to Barney (1991) the resources (tangible and intangible) are a source of competitive advantage, if they are valuable (implement strategies and improve efficiency), rare (not possessed by competitors), imperfectly imitable and non-substitutable (no strategic equivalent). The resources and capabilities of the firm can be categorised into different firms’ technologies, human capital, psychical assets, information resources and reputation of the organisation (Hinterhuber, 2013; Knott, 2015).

Internationalisation and RBV

The internationalisation decision of the organisation is based on the resources and capabilities of the firm which helps to decide the market entry model and applying distinctive capabilities to achieve competitive advantage (Fletcher, Harris and Richey, 2013). RBV elaborate that firm performance and competitive advantage in the international market is based on the managerial choices, industry factors, accumulation and deployment of resources and market environment. Moreover, RBV suggests that heterogeneity of the firms and immobility of the resources is important in the internationalisation of the firm (Gaur, Kumar and Singh, 2014).

Firm Resources and international markets

Resources are embedded in the organisation to develop capabilities which increase efficiency and effectiveness. Resources and capabilities allow exploiting the opportunities in the foreign market through minimising the cost and risk. The important factors which help the firms to achieve international market success are adaptive capacity, innovation and knowledge capability (Vivas-Lopez, Peris-Ortiz and Oltra, 2013; Campbell, Edgar and Stonehouse, 2016).

Knowledge capability

Innovation capability

Adaptive capability

The ability to the dissemination of information to develop knowledge and enhanced capabilities. (e.g. resource constraints and market needs)It involves the application of news idea and development of product and processes for the foreign market which adds values. (Technological and non-technological)It marks the ability of the firm to allocate, combine and coordinate resources to satisfy the foreign stakeholders. (e.g. product adaption and marketing)

Research Methodology

According to Creswell (2013) Research methodology is concerned with the design of research and techniques used to collect, analyse and evaluate data. In this report, exploratory research along with deductive approach is used to analyse and evaluate the success factor for IKEA in china. The exploratory research is useful when there is no previous knowledge exists and deductive approach would allow narrowing the theory (Creswell, 2013).

This research involves testing the proposition of institution and resourced based perspective for IKEA success in china. In addition, a qualitative approach is taken to explore the factors because the flexibility it offers. Qualitative research offers insight into the reason and opinion through elaborating the problem and gives descriptive results rather predictive (Saunders et al., 2014).

To generalise the results case study technique is used to generalise the result and presenting the finding. The qualitative secondary data is collected through a wide range of publications such as academic papers, an official publication, books and internet to understand the how IKEA has managed its internationalisation process and achieved success in the china (Farquhar, 2016).

Evidence from IKEA China

Institution theory and impact IKEA China

According to Garita (2015), foreign market entry choice reflects the degree of conformance to which organisation compliance with law and regulation of the host country. IKEA enter the China market because of the restriction imposed by the Government. The impact of the formal institutions on strategic choice and strategy of the IKEA is evident. Moreover, IKEA changed its business model to a company owned stores with the relation of the regulative requirement in China.

IKEA in china have wholly owned subsidiary based on its own norms and meet the taste and preference of the Chinese customers. IKEA opened a new mega store in 2003 based on the same design and concept from the Sweden. The objective was to offer the customer same experience of standardised IKEA (Shenkar, Luo and Chi, 2014).

Institutions are immobilised and i.e. affect the capacity of the organisation in terms of coordination cost and transactions cost of the firm. IKEA initial joint venture has added cost for the company which affect the ability and performance.

Pattnaik and Kumar (2014) highlighted that companies prefer to adopt certain entry mode which is encouraged by the host country because of benefits and stable operating environment. The institutional factor is evident (coercive government policy 1999) and IKEA formed a joint venture and signing of WTO by China has facilitated IKEA to open own stores.

Tihanyi, Devinney and Pedersen (2012) OLI model is not sufficient to explain the success of the organisation in Chinese context but institutions are important to predict market success. Despite, IKEA had ownership advantage but the local regulation has restricted it to develop stores according to its preferences. Nevertheless, adaption to institutional factor is that was driving change in IKEA and was a critical factor in shaping the performance and strategy of the IKEA in china (Verbeke and Merchant, 2012).

Resource theory and impact on IKEA China

Lin and Wu (2014) added that RBV highlight how resources and capabilities of firm allow the organisations to pursue different strategies which help to grow its international operations and deliver competitive advantage. IKEA international experience has allowed the company to replicate success in China by deploying value china (supplier and customer network) and business model of offering innovative lower price products. IKEA retain its management expertise and capabilities (international experience) and used them to manage furniture business in China.

IKEA identified the need of the local Chinese customers and develop knowledge to manage the internal and external business environment. The financial resources, reputation and information resources allowed the company to buy land from the government, started its owned subsidiary and manage the IKEA heritage (tradition) of doing business (Hitt, Ireland and Hoskisson, 2016).

Vivas-Lopez, Peris-Ortiz and Oltra (2013) underlined that Innovation capability involves the application of news idea and development of product and processes for the foreign market. IKEA in China develop mega stores, design products for different (more than furniture) and offering customer to test the product. The adaptive capability of the IKEA through allocating, combining and coordinating resources to satisfy the needs of customer through offer the products based on local taste (Chinese home have balconies).

The range of factors such as layout and presentation of store, home solutions and pricing has been managed according to Chinese culture. The knowledge management has enabled the company to develop service for the local population such as PRC stores and offering DIY products in china. The knowledge management has helped IKEA to understand that Chinese customers do not prefer furniture assembly as labour is relative cheap (Sminia, 2014).

Conclusion

The formal institutions are the laws and regulation and informal institutions are norms, culture and ethics which define structures based on their capabilities and industry environment. IKEA in China has adapted/evolved its strategy based on formal institution. Company has pursed the strategy based on formal and informal institution to follow law and preserve standardised IKEA experience.

IKEA capabilities, assets and knowledge have facilitated the company to implement its global strategies to achieve local efficiency and effectiveness. The knowledge based perspective of have a greater degree of importance in the international markets because of the information asymmetries which has helped the IKEA to understand local customer taste and preferences, effective managed its operations and innovate products and services valued by its local Chinese customers.

Recommendation

  • IKEA should ensure that culture and norms transition to China reduce the transaction and coordination cost to maintain profitability.
  • IKEA strategic choice (new store opening) should be based on adapting to local culture and preference and integration of international experiences for efficiency and effectiveness
  • IKEA needs to combine its innovative capacity and knowledge management to ensure it meet the regulation and adapt to local customer needs to achieve sustainable growth.
  • IKEA needs to address local industry practices and deploy resources to tackle the social and economic challenges.

 

 

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