Business internationalization encompasses investing in foreign territories for reasons such as mass production, the economy of scale, reduced competition, and increased investments. The strategy involves curbing competition and geographical challenges to the investment. Cultural differences also influence the business strategies adopted in different regions.
Question 1
Firms pursue international strategies for different reasons such as:
- Reduced internal competition- non-dominant firms resolve to expand to internal markets when they face stiff competition from the dominant firms in their home markets. The expansion is because dominant firms enjoy “advantages such as reputation, economies of scale, cumulative learning, setting the industry standard, and preemption of preferred supplies, distribution channels, or customers,” (Mascarenhas, 2017, p. 1).
- Lower costs due to economy of scale- international markets allow more production process. The increased production allows for discounts on the acquisition of raw materials which leads to lower and competitive international prices.
- New markets allow for diversification of products. New regions require that the product is customized hence introducing new designs and processes to the international companies. The diversity is encouraged for competition purposes because new designs may be adopted for other markets (Baird, Lyles, & Orris, 1995, p. 1).
- Higher return- the increased markets generate higher revenue.
- Reduced risks and stable revenue- the foreign markets lessen the risk factors and allow the firms to stabilize. The economic factors such as competition and taxation vary in different countries hence the companies suffer limited risks (Mascarenhas, 2017, p. 1).
Ikea’s Strategic Entry in China Compared to North America
Ikea is an international company dealing in furniture products. In 1998, it sought to grow its market to China (Chu, Girdhar, & Sood, 2013, p. 1 para 3). Though the company was successful in its endeavour, it faced problems. In comparison to challenges faced by Ikea in North America
- , the challenges include;
- The lower product prices in America were considered high in China. This was due to the high costs of production and import taxes in China. Hence the firm commisioned the project of designing the furniture from local materials, “About 65 percent of the volume sales in the country come from local sourcing,” (Chu, Girdhar, & Sood, 2013, p. 1 para 5). From this, the retail prices have reduced by about 60%.
- Ikea furniture was originally made for the Western culture. Considering that the middle-income population consisted the more significant market percentage, they had to design small furniture to fit the small apartments.
- Ikea sought to expand its market. The big Chinese population allowed for a bigger market. Besides the competition was minimal especially considering Ikea’s dominance in the international market.
Cultural Difference in China
Chinese traditions are not keen on Do-It-Yourself (DIY) projects which Ikea had formerly heavily invested in. Thus, the firm designed new ready-for-use furniture. Also, the Chinese population does not favour big furniture due to the small apartments. Ikea was forced to redesign its products to the preference of the population. Ikea outlets were set up in the outskirts of cities because they were mostly, “connected to the rail and metro networks,” (Chu, Girdhar, & Sood, 2013, p. 1 para 11). This was because most people rely on public transport.
Question 4
Ikea faces counterfeit challenges in China. The problem is manageable through patents to ensure that the designs are limited to Ikea. Ikea imports up to 35% of the raw materials which are heavily taxed during importation. This raises the retail prices, thereby reducing the profit margins (Miller, 2004, p. 1). As a solution, the firm could ensure that these materials are locally sourced and in the process reduce the retail prices.
Conclusion
In choosing China, Ikea realized the potential in the country due to the growing economy. Brazil is another rising international market; the rising consumption and exports from the country are evidence of the rising economy (Luo, Xue, & Han, 2010). Besides the Brazil government has reduced import taxes to encourage foreign investments.
References
Baird, I. S., Lyles, M. A., & Orris, J. B. (1995). The choice of international strategies by small businesses. Journal of Small Business Management, 32(1), 48. Retrieved from https://search.proquest.com/openview/2631b676f2656aea84a39699449033e1/1?pq-origsite=gscholar&cbl=49244
Chu, V., Girdhar, A., & Sood, R. (2013). Couching Tiger tames the dragon. Business Today. Retrieved from https://www.businesstoday.in/magazine/lbs-case-study/how-ikea-adapted-its-strategies-to-expand-in-china/story/196322.html
Luo, Y., Xue, Q., & Han, B. (2010). How emerging market governments promote outward FDI: Experience from China. Journal of World Business, 45(1), 68-79. Retrieved from https://www.sciencedirect.com/science/article/pii/S109095160900025X
Mascarenhas, B. (2017). International Strategies of Non-Dominant Firms. Journal of International Business Studies, 17(1), 1-25. Retrieved from https://link.springer.com/article/10.1057/palgrave.jibs.8490414
Miller, P. M. (2004). IKEA with Chinese Characteristics. Shanghai: China Business Review. Retrieved from https://www.chinabusinessreview.com/ikea-with-chinese-characteristics/
