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This case study of IKEA's transnational strategy provides insight into the company's strategy and operations. It highlights the company's aim to produce high-quality products at low prices to achieve a competitive advantage, drawing buyers' attention and increasing profitability. The success of the company can be attributed in part to the loyalty of its customers. This is evidenced by the number of young and price-conscious consumers who have bought into the IKEA concept. We will analyse Ikea's transnational strategy and the various challenges that IKEA has faced in its international expansion. This will reveal the company's solutions to specific problems and how their global strategy helped the company become one of the most successful furniture retailers in the world.
Before we get into the main discussion of IKEA's transnational strategy, let's find out about its history.
An introduction to IKEA
IKEA is a furniture and home décor company founded in 1943, in Sweden, by Ingvar Kamprad. After years working with furniture makers and suppliers, the young entrepreneur was able to establish a method that involved supplying furniture to be assembled directly by the customer in their home. The company started by developing innovative modular designs and sourcing components from Eastern Europe. The company then expanded throughout Scandinavia.
Stores were located in areas that could accommodate a large number of vehicles. The design and layout of the IKEA store remained the same throughout the years. The store's inventory is always large and customers can pick out their own furniture. In most cases, they do so without waiting for the store to deliver their order. Furniture can be assembled in various configurations, and the buyer can decide on the size and style of the pieces. Additionally, IKEA is a company that makes the purchasing journey an experience in itself.
INGKA Holding BV is the parent company of the IKEA Group companies. This includes the Swedish furniture retailer IKEA of Sweden, the industrial group Swedwood, which makes the furniture for IKEA, sales companies and the purchasing and supply functions relating to IKEA.
IKEA Transnational Strategy
There are four types of international business strategy: Global Standardisation Strategy, Transnational Strategy, International Strategy, and Localisation strategy (See Figure 1). The matrix emphasises two types of pressure faced by a multinational company when expanding abroad: local responsiveness and cost reductions.
Fig. 1 - International Business Strategies, StudySmarter
Due to its poor performance in the 1990s, the company was forced to move to a transnational strategy that emphasises cooperation and interdependence of the home country's headquarters and its international subsidiaries and stores. To keep design and furniture at an affordable price, Ikea also adopts a global standardisation strategy so that its products, services, branding, and marketing strategies retain a level of 'sameness' everywhere. Some adaptations, however, are made to advertising and products offered in local markets.
The organisation of IKEA follows a matrix structure where each country has a Service Office (SO) and a national headquarter with support units. The SOs are responsible for the development and expansion of the stores in their local markets. Depending on the complexity of the project and the market conditions, Ikea may even choose to establish a country manager and a retail director for a country.
For IKEA, the importance of transferring corporate values, culture and concepts throughout their global divisions emphasises the need for knowledge sharing.
Knowledge sharing is the act of distributing existing knowledge from the headquarter to subsidiaries by a multinational firm.
The advantages of knowledge-sharing include:
Capitalising on market advantages of foreign operations (such as labour costs, proximity to natural resources, or shipping lanes)
Competitive edge in local markets
Organic, locally-driven decisions and organisational structure
Wider market penetration and brand awareness
IKEA's knowledge sharing is primarily supported by a matrix organisational structure where each country's service office is linked to the Global Service Office at its core. Through this network, knowledge and information are shared throughout the organisation. Training also plays an important role in information sharing. Through onboarding programmes, each new employee is familiarised with the company's history, culture, and working methods. This is best reflected in IKEA's HR policy:
As an IKEA employee, you are willing to share your knowledge and experience with all IKEA employees.
Being an open company is another key factor, allowing IKEA to promote knowledge sharing among its employees. All the company's projects, important news, financial data, etc. can be viewed on bulletins and corporate newsletters.
IKEA's hybrid strategy
The IKEA hybrid strategy combines cost leadership and differentiation strategies. This allows companies to create differentiated products at low cost while still satisfying the expectations of their customers (see Figure 2 below).
The hybrid strategy is one where the company tries to gain two competitive advantages at the same time: low prices and high-quality products.
IKEA's strategy aims to achieve a competitive advantage by producing at the lowest cost. It allows the company to charge lower prices and increase profitability. To achieve its goals, IKEA cuts costs and is always looking for the least costly suppliers. It also tries to offer lower prices to its wider audience.
Differentiation strategy
To gain a competitive advantage, IKEA aims to offer products that are perceived as being different and better than their competitors.
The goal of the differentiation strategy is to create a compelling brand image by focusing on the quality of their designs.
Focus Strategy
The cost focus and differentiation focus are the two aspects of the company's main strategy.
IKEA uses a combination of these strategies to achieve its vision. One of the strategies it uses is its cost leadership strategy. This part of the strategy involves trying to produce at the lowest possible cost to maintain a competitive advantage.
To support its hybrid strategy, IKEA has a clear policy that applies to all of its activities, which incorporates elements of cost leadership and differentiation focus strategies. This policy is designed to ensure that the company's activities are carried out in line with its strategy, and is constantly improved.
Analysis of IKEA's transnational strategy
This section will analyse IKEA's transnational strategy and the various challenges that IKEA has faced in its international expansion. It will also reveal the company's solutions to specific problems.
An example of this is China, where IKEA opened its first store in Beijing in 1998. It took IKEA five years to understand the Chinese market, as the culture of Asia and Europe are very different. Below are the challenges that IKEA faced.
Challenges:
How to provide low prices and compete with local markets in China? High import taxes made it almost impossible for the company to offer low prices.
IKEA considered how to compete in China's cluttered market, where many local firms and products copied each other.
The low-income levels in China made it difficult to reach many people.
Solutions:
IKEA had to source local products and materials to compete with prices in China. This resolved the problem of high import taxes in China.
IKEA started performing local quality inspections, closer to the manufacturing stage, to save on repair costs and offer low price products in huge volumes. IKEA hoped to win over some of the competitors in the Chinese market.
IKEA targeted the young middle-class population as this category has a higher income and is more aware of Western styles. Targeting this segment helped IKEA project itself as an aspirational western brand.
Instead of using the IKEA catalogue to promote its products, they used Chinese social media and micro-blog website Weibo to target the urban youth instead.
One of the main challenges for IKEA in China was how to provide low prices.
This was a massive change in IKEA's strategy as it was targeting the mass market in other parts of the world.
Every year, IKEA conducts an annual survey to measure how consumers perceive the company's products and store layout. The goal of the survey is to find out if local adaptation is necessary to create the IKEA business concept, which is to create a better everyday life for many people by offering a variety of well-designed, functional products at prices that are as low as possible. In new markets, it is important to find a price level that is appropriate for the company and its customers. To attract people, the products offered must be perceived as good quality at low prices.
The challenges of IKEA's transnational strategy
IKEA is a very strong brand. Its strong brand identity, and its ability to attract customers, makes it stand out from its competitors. This is the reason IKEA is successful at achieving a hybrid strategy. However, challenges include reacting to changes in the environment, including the ability to deal with price wars. The external environment is IKEA's main threat. It can be measured using various factors, such as political, economic, social, technological and environmental factors.
Political refers to the various laws and regulations that affect a business.
Economic factors that affect businesses include interest rates, inflation, and exchange rates.
Social trends refer to the various changes that are happening in society. This includes the rise of the millennial generation and the decline of the baby boomer generation, for instance.
The level of automation and the technological advancement that businesses must adapt to are some of the factors that affect the profitability of businesses.
The impact of various environmental factors on businesses, like global climate change or health and safety laws.
To learn more about PESTLE, check out our explanation on external environments!
IKEA has faced many challenges along the way. One of them is uncontrolled child labour in countries that supply them with woven products. Due to the prevalence of child labour in countries such as India and Pakistan, the company has limited control of its suppliers. This issue usually affects the families and communities in these areas. So far, they have been unsuccessful in their attempts to control this issue.
Conclusion
IKEA's transnational strategy is inspired by the concept of combining high quality with low prices which adapts to a countries' needs. The company aims to produce furniture that is both functional and affordable. As a highly integrated company, IKEA, through its internalisation strategy, has been able to reduce costs and improve its overall product offering globally. This strategy and the many advantages it provided, were developed to compete against other furniture retailers and to grow globally. IKEA's strategy is to replicate its successful model in different markets. This can be achieved through the use of a transnational strategy.
IKEA's Transnational Strategy - Key takeaways
IKEA's transnational strategy is inspired by the idea of combining high quality with low prices. This way the company aims to produce furniture that is both functional and affordable.
IKEA is the largest furniture retailer in the world.
The company started by developing innovative modular designs and sourcing components from Eastern Europe.
IKEA uses a transnational and global standardisation strategy.
- IKEA follows a matrix structure where each country has a Service Office (SO) and a national headquarter with support units.
- The IKEA hybrid strategy combines cost leadership and differentiation strategies. This allows companies to create differentiated products at low cost while still satisfying the expectations of their customers
Sources:
1. Types of International Strategies, Open Text BC, n.d. 2. What Is a Transnational Strategy? + 5 Examples, Smartling, 2022.3. Riddhima Chopra, Ikea Case Study, Aeunike Lecture, 2009.
4. Warren Shoulberg, 'Why Ikea Succeeds Around The World While Other Retailers Falter', Forbes, 2018.
6. Eray Aydin, Ikea Knowledge Sharing, Slideshare, 2015.
7. Ikea Standardisation and Adoption, Celtic FC Paradise, 2014.Learn faster with the 6 flashcards about Ikea Transnational Strategy
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Frequently Asked Questions about Ikea Transnational Strategy
What is IKEA's international strategy?
To keep design and furniture at an affordable price, Ikea also adopts a global standardisation strategy so that its products, services, branding, and marketing strategies retain a level of 'sameness' everywhere.
Is IKEA a transnational company?
Yes, Ikea is one of the companies that follow transnational strategies.
Does IKEA use standardization or adaptation?
IKEA uses a global standardisation strategy.
What type of global business is IKEA?
IKEA is the largest furniture retailer in the world.
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