IKEA Industry Globalization Potential

1. CH-ZWA645-005jsmGB IKEA Industry Globalization Potential James Oldroyd Kellogg Graduate School of Management Northwestern University j-oldroyd@northwestern.edu 801-422-7888 650 TNRB

2. CH-ZWA645-005jsmGB Does IKEA have a sustainable competitive advantage?

3. Industry globalization potential Assessing Industry Globalization Potential Customer Drivers • Common customer needs • Global customers • Global channels • Transferable marketing know-how • and global brands • Location of strategic resources • Differences in country costs • Potential for economies of • scale, innovation, flexibility • Cost of shipping (value/bulk) Cost Drivers Government Drivers • Trade policies • Technical standards • Regulations • Global competitors • Competitors leveraging • global position (i.e. cross • subsidizing). Competitive Drivers Source: Jeff Dyer BYU 2001

4. IKEA CASE SUMMARY • To assess the globalization potential of an industry requires an analysis of customers, costs, competitors, and government. • IKEA transformed the industry from being local to regional/global by overcoming the cost barriers to globalization. Previous barriers included: • a) high cost to transport a bulky product, and • b) costs of damage during transport. • By using knock-down kits (which allowed for volume production) and including the customer in the value chain (e.g., to transport the product, and replace assembly labor in the plant) IKEA created cost advantages over local competitors.

5. IKEA CASE SUMMARY • REMEMBER THAT: • IKEA’s strategy was successful because customers in different countries were willing to buy similar designs/products. • IKEA encounters greater difficulties in markets (e.g., the U.S.) where customers have more differentiated needs (for customized products and services) and where standards are different.

6. DEFINITION OF A GLOBAL INDUSTRY • An industry in which firms must compete in virtually all world markets where the product/service is used in order to be successful and/or survive. In such an industry, a firm’s competitive position is significantly affected by its competitive position in other national markets (due to scale benefits or sharing of resources across markets).

7. General Globalization Forces • CUSTOMER/MARKET DRIVERS • Per capita income convergence among industrialized nations • Convergence of lifestyles and tastes • Increasing travel creating global consumers • Organizations beginning to behave as global customers • Growth of global and regional distribution channels • Establishment of world brands • Push to develop global advertising

8. General Globalization Forces • COST DRIVERS • Continuing push for economies of scale (but offset by flexible manufacturing) • Accelerating technological innovation • Increasing cost of product development and technology relative to market life • Decreasing communication and transportation costs • Emergence of newly industrializing countries with productive capability and low labor costs

9. General Globalization Forces • GOVERNMENT DRIVERS • Reduction of tariff barriers • Reduction of non-tariff barriers • Creation of new trading blocs • Decline in the role of governments as producers and consumers • Adoption of global standards • Liberalization of labor laws

10. Factors Inhibiting Globalization • 1. Heavy transportation or storage costs (i.e low value to bulk products). • 2. A lack of economies of scale (flat experience curve slope). • 3. Strong, established local distribution channels and sales organizations. • 4. A complex, segmented local market in which customers demand very different products (more suitable for a local firm more intimately embedded in it). • 5. High cost/difficulty in providing intensive local customer systems, service, or other needed customer interaction. • 6. Government barriers (i.e. tariffs).

11. IKEA Current Results $9.6 Billion US dollars Bang Mug Story