Globalisation Process enabling financial and investment markets to operate internationally, largely as a result of deregulation and improved communications

(Collins) Globalisation in laymen's terms is the expansion of worldwide trade and markets, mainly developed through importing, exporting, Foreign Direct Investment (FDI) and the breakthrough in technological advancements. Globalisation is the process of transformation of local phenomena into global ones. It can be described as a process by which the people of the world are unified into a single society and function together. This process is a combination of economic, technological, socio-cultural and political factors (Croucher 2003:10) Throughout this essay I will look at why IKEA have traded internationally and the potential risks and rewards they have or will have in the future. IKEA is a privately owned business controlled by the INGKA HOLDING B.V a Dutch corporation. IKEA is an international business that manufactures and sells ready to assemble appliances and home accessories. In August 2010 IKEA employed 127,000 employees with 280 stores in 26 countries worldwide. www.Ikea.com (01/12/2010). In the year ending August 2009 their sales figures reached 21.8bn with nett profits of 2.5bn. Sales figures rose by 7.7% to 23.1bn in year ending August 2010, with profits yet to be released. IKEA perceive themselves as the market leaders within the global market of home furniture. The group's operations encompass developing, purchasing, distributing and selling IKEA products Figure 1: IKEA's worldwide distribution of stores: Adapted from www.ikea.com (28/11/2010) In order for organisations to grow and become more successful they have to take risks in order to reap rewards. There are a number of different techniques businesses can use when moving into international markets which can be seen below: Figure 2: Risks and Rewards Adapted from (Wall et al 2010)

Since Ingvar Kamprad started the IKEA business in 1961 its rapid growth and success clearly illustrates that the company has taken risks in order to attain its expansion and diversification. IKEA is part of the Stichting IKEA foundation (set up by Ingvar Kamprad IKEA's founder) the business structure is illustrated below: Figure 3: Structure of the IKEA group of companies Adapted from www.ikea.com (28/11/2010/) The whole ideology of why companies expand to foreign markets is to increase market share, increase profits and reduce costs. According to George Yip (1992) there were four main drivers of globalisation: 1. Market drivers: The convergence of lifestyles and tastes, increased travel creating global customers, the establishment of world brands and the growth of world and regional channels. 2. Cost Drivers: Continuing advances in transportation industrialised countries. push for and the economies emergence of of scale, newly

3. Government Drivers: The reduction of tariff barriers, creation of trading blocs (EU) and the shift from open market economies from closed communist systems in Europe i.e. the fall of the Berlin wall. 4. Competitive drivers: Increasing levels of worldwide trade, the rise of new competitors and more companies becoming globally centred rather than nationally centred. IKEA have used these drivers to their advantage and throughout e essay it will be clear to see that these drivers have improved the businesses position and strength in their global market. Modern advancements in technology, transport and communications have lead to this globalisation phenomena which is closely involved with three key aspects: Shrinking space, shrinking time and disappearing borders (Wall 2010:14) This has allowed companies to operate much more efficiently with fewer trade barriers and take full advantage of global markets and increased the number of globalisation drivers. In order for a business to expand and compete they must implement strategies many theories and models have been based on this. The two main approaches to strategic choice are:
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 Product-market strategies: Which determine where the organisation competes and its direction of growth (E.g. Ansoff) Competitive strategies: Which influence the action/reaction patterns an organisation will pursue for competitive advantage(E.g. Porter) Igor Ansoff (1668) developed the different aspects of Productmarket strategies in the form of a Matrix. The matrix consisted of four strategic options 1. Market penetration: Gaining larger market share by exploiting existing products. 2. Market development: Taking present products into new markets. 3. Product development: Introducing new products into existing market by focusing on developing and supporting additions to the to the product portfolio. 4. Diversification: Entering into both new markets and products. Figure 4: The Ansoff Matrix www.anythingresearch.com (12/12/2010) IKEA can be related to the matrix as it has strategically undergone changes in these four areas regarding its products. Since IKEA was formed it has ever increased its product portfolio and diversified into new markets yet still based its core success on its original product which was furniture. The company has moved into new markets and countries the first of which was Switzerland. In 1973 IKEA made one of its most important expansion decisions, it opened its first store outside of Scandinavia. In the suburbs of Zurich Switzerland, this was the test run for Kamprad's motto "If it works in Switzerland it'll work anywhere" One of the important reasons for expansions in to the Swiss market was its similarity in culture, one of the major problems with expanding into foreign countries was to acquire new suppliers, once this had been established the culture of IKEA's consumer assembled furniture was integrated with great success. Kamprad's charismatic personality combined with his own philosophy of business management and the Scandinavian style of open management has been one of the main reasons to why the company was, and remains to be so successful.

The implementation of new suppliers such as Lithuanian forests, leads us to an important aspect of globalisation, International trade (Imports and exports): "Exports are goods and services produced by a firm in one country and then sent to another country. Imports are goods and services produced in one country and brought in by another country"(Rugman 1995:6) IKEA's most important raw material is wood used for the production of its room designs. Because IKEA require a plentiful supply of wood at low costs they sought to buy large areas of forest's, I will know focus on why IKEA import from Lithuania, one of their largest importers of wood. Lithuania a country in the Baltic state belongs to the trading block the European Union (EU) Its situation is a major factor to why it is one of IKEAS main importers. As 204 of their stores are located in European countries, this allows IKEA to save money on transportation due to its proximity to countries such as Sweden the UK and Germany. Large amounts of forests and wood processing plants were bought up by the IKEAS subsidiary group Swedwood at low costs. The countries vast amount of wood relates to David Ricardos theory of comparative advantage. "Holds that nations should produce those goods for which they have greatest relative advantage"(International Business. Rugman :1995 Figure 5 illustrates Lithauania strong wood exporting trade as compared to other products in 2001 Figure 5: Lithuanian Comparative Advantage The acquisition allowed IKEA to control the production process from raw material to the finished product. This helps to eliminate problems that many companies have when importing from other countries. As IKEA will know have complete control from the tree being cut down to it being turned into the finished product. This relates to the concept of vertical integration which is the degree to which a company owns its upstream suppliers (i.e. Swedwood own raw materials and wood processing plants) and its downstream buyers (e.g. IKEA itself). This can have a huge impact on a company's global positioning with respect to differentiation, cost, and other strategic issues. Other benefits would include a reduction in transportation costs if common ownership resulted in closer geographical proximity. It also helps IKEA capture upstream and downstream profit margins and improves the supply chain co-ordination.

Because IKEA have vast amounts of forest and wood processing plants in Europe it can transport at lower costs, it also has processing plants in Canada and America to remove potential problems and costs that come with long distance transportation. Transportation has improved over the last decade but heavy increases in oil ($87.79) www.oil-price.net (accessed 11/12/2010) have lead to the price of transportation soaring. In order for a company such as IKEA to contend with this issue they use Bulk Reducing. Alfred Weber (1868-1958) pioneered the work on location of industry way back in 1910. His theory was based on the principle that a business would seek to locate where costs could be minimised. This is why IKEA produce and import from countries such as Lithuania where raw materials are located in close proximity to production plants and stores or harbours. Also because the vast majority of IKEA's home designs are flat packed, they take up less space on containers and in stores and warehouses, all leading to a reduction in costs. IKEA follows the concept of "Prosumers". Prosumers are half consumers and half shoppers.(Normann, 1993). The concept is that the consumers have to assemble the products themselves. Which results in lower costs for the company, which are then passed on to the consumer. IKEA have a vast product portfolio so they do not just rely on wood processing plants that they have acquired. In order for the company to keep costs down to a reported 3050% below those of its competitors. While the price of products from other companies continues to rise over time, IKEA claims that its retail prices have been reduced by a total of 20% over the last four years. Adapted from www.qfinance.com accessed 07-12-2010 It has implemented a successful global supply chain "The network of retailers, distributors, transporters, storage facilities and suppliers that participate in the sale, delivery and production of a particular product." www.investorWords.com accessed 09-12-2010 IKEA stores are supplied through 31 distribution centres, or directly from the 1350 suppliers located in more than 50 countries around the world. In terms of purchasing, Europe represents 69%, Asia 28 %( China 22%) and North America 3%. Sales figures consist of 82% Europe, North America 15% Asia and Australia only 3%. (2007 figures)

This supply chain helps to create transparency and improve communications within the business. Which helps to overcome a potential risk from globalisation which is stock levels. It is imperative that warehouses and stores have the necessary amount of inventory available to the consumer if not sales figures will decline and customers may move towards competitors. In order to overcome such problems and to help reduce costs. IKEA use the implementation of Just In Time (JIT) According to IKEA's logistics manager, "there are a lot of Just-In-Time concepts built into how we're trying to do business"(Chandler, 1993). IKEA has developed its own global distribution network. By utilizing control points in the distribution cycle, IKEA is able to ensure, (JIT) deliver of products to retail stores all over the world. Internationally, IKEA stores range in size from 20,000 to 30,000 square feet in Hong Kong and in Singapore to 500,000 square feet in Stockholm, Sweden. (Retail Business, 1995). A multinational firm is one that engages in foreign direct investment (FDI) and owns or controls value-adding activity in more than one country' (Dunning: 1995) FDI involves much more of a risk to companies but if carried out effectively it can lead to success on a global scale. (See figure 2) "Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin." www.economywatch.co.uk (12/12/2010) As I have mentioned earlier, the reason IKEA have set up production and retail in foreign markets is based on a number of reasons. But when a company directly invests in foreign markets there are a larger amount of potential problems/risks such as: Cultural issues Language Taxation Legislation Government stability

IKEA first opened stores Japan in the mid 1970s as part of an early wave of expansion in Asia. Following a long struggle, IKEA pulled out of Japan in 1986. The reason for this failure was mainly due to the fact that IKEA did not understand the Japanese consumer and their culture. Because IKEA have created their own culture they try to get consumers to come around to their way of thinking in terms of kitchen design. IKEA returned to reopen a giant store on the outskirts of Tokyo in 2006 with a new focus on small space living "Small-space living will be a characteristic throughout the entire store," said Tommy Kullberg, the head of IKEA's Japan division. "We have visited hundreds of homes and really gone through in detail how the Japanese live, how they cook, how they sleep." Los Angeles Times (Accessed 12/12/2010) Lars Petersson, CEO of IKEA's Japan operations, sees the IKEA of today as a very different company to that failed in the Japanese market over 20 years ago. As a result of IKEA's first and failed attempt in Japan, Petersson says, "We learned that there is the humbleness of understanding. It's not good enough just to land here and hope that everything is going to work. You need to have everything in placethe whole supply chain, the well trained co-workers and an organization that can actually expand and grow." IKEA now a success in America also experienced problems when they set up, as well as experiencing problems in terms of culture there was also problems with the size of IKEAS standardized products being too small. Because IKEA sell standardized Scandinavian designs globally Americans found the following problems: The beds were too narrow and measured in cm not inches, and they didn't sell matching bed suits that Americans liked. Its kitchen cupboards were too narrow for the large dinner plates needed to pizza Drawers in bedroom chests were too shallow as Americans store bulky clothing in them like sweaters The company realised if they were to succeed in the American market they would have to re design their product range and came up with the following remedies. IKEA now sells American style king and measured in inches, and it sells them as bedroom suites. queen size beds, part of complete
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 The company underwent a massive redesign in its kitchen department in order to better meet the American style of dining. The drawers on bedroom chests were designed to be 2 inches deeperand sales immediately increased by 30 to 40%. Because IKEA aimed at lower income families in America they have to market differently, because these lower income families come from a more traditional culture thus wanting a more tradition kitchen of living room. But because IKEAS Scandinavian approach to stylish room designs is mandatory they exaggerated their traditional range which was 20% to 40%, they designed there stores to have traditional kitchens at the entrance of the shop which relaxed customers and made them feel comfortable then gradually incorporated more stylish and modern Scandinavian designs throughout the store which consist of 80% of IKEAS range which the consumers found appealing and decided to purchase. These radical changes in IKEA's traditional strategy paid dividends. Between 1990 1994 IKEA's North American sales had tripled to $480 million. This example in America, helps to illustrate how IKEA have identified potential issues in foreign markets and seek to resolve them in order to achieve success. In order to help IKEA to understand countries cultures and operates with more success they could analyse the work of Geert Hofstede (1980), Hofstede's model is the result of empirical research. The creation of the model began with analysing data of surveys that were carried out among IBM employees at companies in different nations in the late 1960s.The analysis showed differences between countries that could be linked to five dimensions. These five dimensions that allow to quantify and compare cultures are seen in the arrows, in figure 5 below. Later studies by Hofstede and other independent researchers supported the findings and enhanced the list of countries for which data is available. These dimensions are quantified by an index, allowing measuring and comparing national cultures. Figure 5 shows these dimension measures. Other models or dimensions that are of potential interest in this field do exist, e.g. Schein's model of cooperate culture. So by using this model and using the score index it would allow IKEA to gain more of an insight and understanding of a countries culture, thus increasing the chance of success. If we use for example China which is a market IKEA have expanded to. Hofstede's rankings found China had the highest Long-term
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orientation score of 118 which indicates they have an attitude of preserving. Their low Individualism score is a result of communist rule which means they follow strict lifestyles and cultures. They have a high masculinity score which would suggests that males are very assertive. Because the scores of countries can be compared to an average it helps companies such as IKA to analyse and make important decision or strategies before expansion. Figure 6: Hofstede's five dimensions of culture Other impacts have affected IKEA in terms of globalisation, in the form of exchange rates and tariffs. IKEA experienced problems in America due to exchange rates, in 1985 the exchange rate was $1=8.6 Swedish kronor; by 1990, it was $1=5.8 Swedish Kronor, at this exchange rate, many products imported from Sweden did not look inexpensive to American consumers. As the dollar had strengthened against the kronor IKEA couldn't get as much for their money. To help fight against this problem, the company boosted the amount of products being sourced locally form 15% in 1990 to 45% in 1994, a move that make the company less vulnerable to exchange rates. As I mentioned earlier IKEA sources vast amounts of products from the Baltic country of Lithuanian one of the main reasons for this is due to Lithuania's low tax burden one of smallest in the trading bloc the EU. Co-operation tax is 15% and land tax for businesses is only 1.5%. This helps to reduce costs for the company which allows them to increase profit margins. Figure 7 illustrates Lithuania's low tax levels as compared to other EU member states: Figure 7: EU tax burden 2008: http://www.lda.lt/en/TaxesAndCosts.html (12/12/2010) Another reason IKEA have avoided large amounts of taxation is that it is owned by Stichting INGKA foundation.(See figure 3) This is a Dutch registered charity which is a tax exempt, non profit making legal entity. Because the IKEA group belongs to this parent foundation in 2004 tax bills came to a mere 19million from a combined profit of 553million. Being part of this foundation which Ingvar Kamprad has control makes it virtually impossible for an aggressive takeover to happen. The economist accessed (07/12/2010)

For the past two decades the global economy has been undergoing a major realignment (Ohmae, 1985, 1987) Trading blocs have been formed to help stability and the ease of trade within countries. Across the world three main trading blocs occupy worldwide trade; consisting of NAFTA (North American Free Trade Agreement), ASEAN (Association of Southeast Asian Nations) and the EU (European Union) The EU consists of 27 member states the EU allows members to trade freely across borders. The countries that belong to the EU also pay a percentage of the Gross Domestic Product (GDP) this allows for countries to be governed using the super-nations legislation. Because of this when business expand to other smaller countries in the EU they are likely to experience political instability. In 2002 a common currency the Euro was introduced in order to help break down trading barriers further. IKEA operate in many countries i.e. Germany and France who use the Euro which is beneficial in monetary because of the following reasons: Low rates of inflation Increased price transparency Inward investment Removal of fluctuating exchange rates www.economicshelp.org (12/12/2010) As IKEA trade in the three main trading blocs it has help to serve the company in its expansion into other countries. Setting clear guidelines rules and regulations. The trading blocs are a major factor as to why internationalisation has increased and thrived in the last two decades. It is clear to see that IKEA have used the phenomena of globalisation to their advantage, they now operate globally and even through recessions their momentum shows no sign of relenting. It is important that IKEA pay attention to issues such as carbon footprints and being eco friendly which are highlighted by Swedwood. People and governments are now concentrating on such issues and legislation and pressure are being forced upon large Multinationals. "You can't stop business from going global, but you can make it listen to the responsibilities that go with jumping onto

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the globalization bandwagon" Anita Roddick Founder of the Body Shop (Afterquotes 13/12/2010) 1. Bibliography: Books 1. Dunning, John. (1995) The globalization of business. Mackays of Chatham PLC 2. Coyle, Wendy. & Shortland, Relocation. Billings and Sons Ltd Sue. (1992) International Strategic (2010)

3. Wortzel, Heidi. & Wortzel, Lawrence. (1997) Management in a Global Economy. John Wiley & Sons, Inc 4. Wall, Stuart. Minocha, Sonal. & Rees, International Business. 3rd Ed. Prentice Hall

Bronwen.

5. Rugman, Alan. & Hodgetts, Richard. (1995) International Business, A Strategic Management Approach. McGraw-Hill, Inc 6. Ricardo, David. (1817) On the Principle of Political Economy and Taxation, John Murray, London Internet Sites 7. BBC (2002) Q&A: Euro http://news.bbc.co.uk/1/hi/ukpolitics/2417245.stm 8/12/2010 8. IKEA.com - http://www.ikea.com 1/12/2010 9. IKEA.com, IKEA History http://www.ikea.com/ms/en_US/about_ikea/the_ikea_way/history/ind ex.html - 28/11/2010 10. Anything Research.com, Ansoff Matrix http://www.anythingresearch.com/Strategic-Planning/AnsoffMatrix.htm - 12/12/2010 11. Oil Prices - http://www.oil-price.net 11/12/2010 12. Qfinance.com, Operations Management http://www.qfinance.com/operations-management-best-practice 7/12/2010 basics (online) -

13. Investor Words, Supply Chain http://www.investorwords.com/4823/supply_chain.html - 09/12/2010

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14. Economy Watch, FDI - http://www.economywatch.com/foreigndirect-investment/definition.html - 12/12/2010 15. Invest Lithuania - http://www.lda.lt/en/TaxesAndCosts.html 12/12/2010 16. Bnet, Failed businesses In Japan http://findarticles.com/p/articles/mi_m0NTN/is_73/ai_n21081525 12/12/2010 -

17. Russian IT industry, FDI in Russia - http://russianit.blogspot.com/2006/03/fdi-russiaikea-investment-reaches17.html -12/12/2010 18. Itim International, Hofstede's Cultural http://www.geert-hofstede.com -11/12/2010 Dimensions -

19. Intracen.org, Lithuania's comparative advantage http://www.intracen.org/countries/toolpd99/ltu_3.pdf 09/12/2010 -

20. Los Angeles Times, IKEA to try Japanese market again.(2006) http://articles.latimes.com/2006/apr/24/business/fi-ikea24 12/12/2010 21. Afterqoutes http://www.afterquotes.com/great/quotes/globalization.htm 13/12/2010 Articles 22. Potter, Gary (2010) What Is green criminology? Sociology Review, November 2010,Vol 20 Issue2. pp 8-12 23. O'Grady, Sean (2010) No early end in sight for economic crisis. The i, Wednesday 17 November 2010, Issue 17.pp 7 24. Prosser, David (2010) Chinese Consumers: the economy's big hope. The i Wednesday 17 November 2010 Issue 17.pp 43 -

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