Ikea's failure and success on the Japanese market - BAMMC-THESIS BY: ALEXANDRA STOLBA - PURE
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Ikea’s failure and success on the Japanese market
BAMMC-THESIS
BY: ALEXANDRA STOLBA
Supervisor: Henrik Christensen
Aarhus School of Business
Aarhus University
2009
BA thesis 15.04.2009
BA-MMC
Table of Contents
Table of Contents ..........................................................................1
1. Introduction ................................................................................3
1.1 Background ...................................................................................................................................... 3
1.2 Thesis statement ............................................................................................................................. 3
1.3 Delimitations..................................................................................................................................... 3
1.4 Method .............................................................................................................................................. 4
1.4.1 Choice of theory ............................................................................................................................ 4
2. Discussion of theory ..................................................................5
2.1 Reasons for internationalization ................................................................................................... 5
2.2 The Uppsala internationalization process model ....................................................................... 6
2.3 The concept of psychic distance................................................................................................. 10
2.4 Srandardization vs. adaptation ................................................................................................... 11
3. Background............................................................................. 14
3.1 IKEA background information ..................................................................................................... 14
3.2 The Japanese Market background information ........................................................................ 15
3.2.1 The Japanese economy and market situation in the period from the 1970’s till 1990’s. . 15
3.2.2 The Japanese economy and market situation in the period from 1990’s till the time of
second entry .......................................................................................................................................... 16
3.2.3 Japanese Home Furnishing sector and lifestyle preferences .............................................. 16
3.3 Ikea on the Japanese market ...................................................................................................... 17
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4. Analysis .................................................................................. 18
4.1 Internationalization of Ikea on the Japanese market ............................................................... 18
4.1.1 First round .................................................................................................................................... 18
4.1.2 Second round .............................................................................................................................. 20
4.2 Degree of adaptation .................................................................................................................... 21
4.2.1 Product ......................................................................................................................................... 23
4.2.2 Pricing ........................................................................................................................................... 23
4.2.3 Place/distribution ......................................................................................................................... 24
4.2.4 Promotion/marketing communication ...................................................................................... 25
5. Conclusion .............................................................................. 26
6. Bibliography ............................................................................ 27
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1. Introduction
1.1 Background
Ikea is furniture retail company established in 1943 in Sweden. Nowadays, Ikea is the major retail
company that is present in 36 countries around the world. Although there are 279 of Ikea stores in
36 countries, Ikea group owns 247 Ikea stores in 24 countries, the rest being managed by
franchisees in 16 countries.
During Ikea’s expansion on the international market Japan was the first country in Asia that Ikea
considered to enter in 1970’s. The differences between culture, lifestyle and behavior made Ikea
face the failure. Japan is different from other European countries that Ikea was already present in, so
it was difficult to pursue success in the same way. In 1986 Ikea had to withdraw their store out of
Japan because of difficulties and then, twenty years later, they decided to reenter the Japanese
market for one more time. At present, there are six Ikea stores in Japan, last of which was opened in
2009.
Having entered only five European countries by the time Ikea decided to internationalize in Japan,
Ikea’s international experience was rather poor. In this thesis, it will be studied why Ikea chose to
internationalize in a culturally distant country as Japan at the given time as well as analyzed which
cultural and strategic factors were behind Ikea’s failure and success on the Japanese market.
1.2 Thesis statement
The objective of the thesis is to understand factors in Ikea’s internationalization strategy in Japan
that influenced the failure on the Japanese market in the first round but success in the second round.
1.3 Delimitations
The thesis makes use only of secondary data, whereas primary data is not present, due to the
difficulty in accessing the data since Ikea has expanded to Japan for the first time for a long time
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ago. Moreover, executives continually changed, which made it very difficult to find a way of
contacting them.
Customer interviews, which could have been a useful tool for analyzing effectiveness of Ikea’s new
strategy in Japan, are not used in this thesis for the reason of great distance between Japan and
Denmark and language barriers, which made it almost impossible for me, as a student, to
accomplish.
In depth economical analysis of the Japanese market is left out of discussion being considered
irrelevant, since the thesis focuses on external communication. For the same reason analysis of Ikea
company structure and internal communication is not included.
1.4 Method
In the thesis secondary data is used for analysis. Even though secondary data does not possess the
same advantages as primary data, which is collected for a particular research purpose, it is less time
and money consuming, proving a suitable method to solve a specific research problem.1 The
information retrieved by and large form various articles was carefully collated and subjected to
critical scrutiny in order to increase its consistence and reliability. Yet, since Ikea’s first expansion
on the Japanese market took place more then thirty years ago, no articles which would treat the
whole set of strategies employed at that time were available. The information derives mainly from
articles which describe Ikea’s new entry on the market and only refer to the past events. It is fully
acknowledged that this fact can result in a somewhat deficient picture of Ikea’s strategy in the
1970’s, yet the key data relevant for our analysis could still be retrieved from the secondary sources
to form a reliable basis for our research.
1.4.1 Choice of theory
As this thesis is about internationalization process, literature relevant for the topic had been
reviewed. In order to find out why Ikea internationalized on the Japanese market, what factors
influenced the choice of marketing strategy in the fist round and lead to failure, and what factors
made Ikea to review the strategy and succeed in the second round, the choice had been placed on
the following theories:
1
Kotler, P. & Keller, K. (2006). Marketing Management. (12th edition). United States of America: Pearson Prentice
Hall, p. 104.
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1. The Uppsala internationalization process model explains the impact of knowledge and
learning to the firm’s approach to foreign markets. It has been used to understand why Ikea
decided to internationalize on the Japanese market in the first place and how the knowledge
affected the entry mode and strategy choice. Moreover, it is used to analyze why and how
Ikea has changed the strategy when expanding on the Japanese market for the second time
and the consequences of that. Criticism of the theory is taken into consideration when
conducting the analysis.
2. The concept of psychic distance is implemented to gain understanding of factors that
hampered the successful internalization and explain how the perception of the cultural
differences influenced choice of a marketing strategy.
3. Geert Hofstede’s cultural dimensions have been used to define cultural differences between
countries of interest.
4. Standardization and adaptation approaches are used to elaborate on the strategies used on
the Japanese market, and explain how the degree of adaptation contributed to failure in the
first round and success in the second. Furthermore, advantages and disadvantages of both
strategies are discussed.
2. Discussion of theory
In this section theories that are considered relevant for the study are presented and discussed.
2.1 Reasons for internationalization
The retailer’s decision to internationalise is in most cases driven by the sales growth. Sales growth
is a measure of success and if the desired growth could be achieved on the domestic market,
according to Kotler, most companies would prefer to remain domestic. However, it is much easier
to grow sales by increasing the store network than by getting more sales out of existing stores, and
if the domestic market is not large enough any more, foreign markets give the retailer an
opportunity to grow. The international arena gets attractive when the company discovers higher
profit opportunities than on the domestic market, when it needs a larger customer base to achieve
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economies of scale, when the company wants to reduce its dependence on a particular market or
gives an opportunity to counterattack the competitors that attack the company on its domestic
market on their home markets.2
In general, a company prefers to enter countries that rank high on market attractiveness, that are low
in market risk, and in which it possesses competitive advantage.3
2.2 The Uppsala internationalization process model
Once a firm has reached a decision to internationalize, the next step would be to choose a strategy.
The internationalization strategy is a first step to success or failure. The choice of the country and
the way to approach it require knowledge of foreign markets. The Uppsala internationalization
model reflects on how the knowledge development influences the market choice and international
marketing activities, and is employed in this thesis while analyzing Ikea’s expansion on the
Japanese market.
The Uppsala internationalization model was developed by Johanson and Vahlne in 1977 and is
based on Johanson and Wiedersheim-Paul study of internationalization of four Swedish firms.
There are two assumptions that the model is based on: first, firms want to increase their long term
profit at one site, but at the other site want to keep risk-taking at a low level; second, the lack of
knowledge about foreign markets is a major obstacle to the development of international
organizations, and that the necessary knowledge can be acquired mainly through operations
abroad.4 It focuses on four aspects that firms should face while going abroad: market knowledge
and commitment, and commitment decisions and current activities which are divided into stage and
change aspects that interact with each other in a cycle.
2
Ibid., p. 669.
3
Ibid., p. 674
4
Johanson, J. & Vahlne, J.E. (1977) The internationalization process of the firm – a model of knowledge development
and increasing foreign market commitments. Journal of international business studies, vol. 8, no.1, p. 23., p.27
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The two state aspects market knowledge and commitment decisions are resources committed to
foreign markets.
Market commitment is measured as the amount of resources committed to foreign markets on the
one hand, and the degree of commitment on the other hand. The amount of resources committed is
easy to grasp. “It is close to the size of the investment in the market, using this concept in a broad
sense, including investment in marketing, organization, personnel, and other areas.”5 The degree of
commitment is related to the difficulty of finding an alternative use for the resources and
transferring them to it. “The more specialized the resources are to the specific market the greater is
the degree of commitment.”6
Market knowledge is classified into two types. Objective knowledge can be taught and on its basis
it is only possible to formulate theoretical opportunities. Experiential knowledge can only be
learned by personal experience and provides the framework for perceiving and formulating
opportunities. Johanson and Vahlne view the experiential knowledge as critical, for it cannot be so
easily acquired as objective knowledge. It must be gained successively during the operations in the
country. Another way to classify knowledge is to make a distinction between general knowledge
and market-specific knowledge. General knowledge concerns, in the present context, marketing
5
Ibid., p. 27
6
Ibid., p. 27
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methods and common characteristics of certain types of customers, irrespective of their
geographical location, depending, for example, in the case of industrial customers, on similarities in
the production process. It has been argued that the market-specific knowledge relates to
characteristics of the specific national markets such as its business climate, cultural patterns,
structure of the market system, and, first and foremost, characteristics of the individual customer
firms and their personnel. While general knowledge can be transferred from one country to another,
market-specific knowledge can be achieved mainly through experience in the market.7
The two change aspects are current business activities and commitment decisions. They are of more
variable nature then the state aspects.
Current business activities are all of the activities undertaken by a firm at a certain moment. There
is a lag between current activities and the consequences of these activities. The longer the lag, the
higher is the commitment of the firm. Marketing activities are a good illustration of this. Current
activities are also the prime source of experience. Market experience can be also obtained by hiring
people with this experience or to make an appeal to external advisors. To clarify the roles of these
alternative ways of integrating experience into the firm in the internationalization process, the
authors of the model make a distinction between firm experience and market experience, both of
which are essential. Persons working on the boundary between the firm and its market must be able
to interpret information from inside the firm and from the market. “The interpretation of one kind of
information is possible only for one who has experience in the other part.”8 The authors conclude
that, for the performance of marketing activities, both kinds of experience are required; and in this
area it is difficult to substitute personnel or advice from outside for current activities. The more the
activities are production-oriented, or the less interaction is required between firm and its market
environment, the easier it will be to substitute hired personnel or advice for current activities. On
the other hand, the more market-oriented, the more difficult it is to rely on hired personnel or
external advice because they lack the necessary firm experience.
The second change aspect is the decision to commit resources to foreign operations. According to
Johanson and Vahlne, these decisions are made because there are problems or opportunities in the
7
Ibid., p. 28
8
Ibid., p. 29
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market. Problems and opportunities are mostly discovered by parts of the organization working in
the market (marketing personnel, salesmen). But opportunities can also be seen by individuals in
organizations with which the firm is interacting; these individuals may propose alternative solutions
to the firm in the form of offers and demand. The probability that the firm will be offered
opportunities from outside is dependent on the scale and type of operations it is performing; that is,
on its commitment to the market.9
There are two kinds of commitment decisions: scale-increasing commitment decisions and
uncertainty reducing decisions. Scale-increasing commitments are influenced by factors such as
competitive or political stabilization of the market, which means that the firm can function
peacefully and obtain market knowledge through experience, that way increasing market
commitment by declining uncertainty about the market, and increase of total returns of the firm or
more aggressive approach towards risk, which leads to increasing market commitment by raising
the maximum tolerable risk level. Uncertainty-reducing commitment can be occasioned by decrease
of maximum tolerable risk level or increase of existing risk in the market.10
Another aspect of the model, the stage model, is that firms develop their activities abroad over time
in an incremental fashion, based on their knowledge development, in two dimensions. One
dimension is mode of operation which illustrates the market commitment, and the other is market
dimension which illustrates the geographic diversification. There are 4 stages of entering an
international market in the mode of operation. First stage is no regular exports activities, stage two
is export via independent representatives, third stage is establishment of a foreign sales subsidiary,
and fourth stage is foreign production and sales subsidiary. The successive stages represent higher
degrees of market commitment.11 International activities require knowledge when entering new
markets, which is emphasised in the market knowledge aspect of the model. The better the
knowledge about the market the more valuable are the resources and the stronger is the commitment
to the market.
Even though the empirical research confirms that commitment and experience are important factors
explaining international business behaviour, some criticism concerning the model has been
9
Johanson and Vahlne, op.cit., p. 29
10
Johanson and Vahlne, op.cit., p. 29
11
Hollensen, S. (2001). Global marketing: A market responsive approach. (2nd edition), p. 48.
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expressed.12 Studies have shown that the model is not valid for service industries, because the
growing reinforcement of foreign commitments implied by the process model is absent. Given that
Ikea is not a service but a retailer only including subordinate services, this criticism will be seen at
as not relevant in this particular case. Another criticism of the model is based on studies claiming
that firms seem lately to skip the early stages of the establishment chain entering psychically distant
markets at an early stage and to “leap-frog some intermediate entry modes in order to move away
from the sequentialist pattern and more directly to some kind of foreign investment”.13 As
Hollensen explains, this is possible, because the level of uncertainty is reduced by the fact that
markets are becoming more homogenous, psychic distance has decreased, and services and
information offered by international consulting firms reduce the level of uncertainty by providing
knowledge about foreign markets. This does not exclude, however, that the firm’s international
activities develop in the incremental fashion based on their knowledge development, but means that
the process of knowledge development is going faster.
2.3 The concept of psychic distance
The internationalization process is also explained by the concept of psychic distance, with firms
expanding first into markets which are psychically close and most easy to understand and into more
distant markets as their knowledge develop. Psychic distance is defined in terms of factors such as
differences in language, culture, and political systems, which disturb the flow of information
between the firm and the market.14 The higher is the level of psychic distance, the more knowledge
is required in order to reduce the uncertainty level. However, there has been some criticism
concerning among other things the measurement of the psychic distance. According to the model,
psychic distance is caused by individual decision-makers perceived uncertainty, which means that
the distance exists in the minds of individuals. As a result, “the concept does not refer to an
objective concept or measurement of a cultural distance which may influence corporate behavior.
Hence, the psychic distance may not capture the influence of cultural differences on firm’s
internationalization process.”15 Seen from another perspective, however, cultural distances among
countries have an influence on the individual’s perception. The greater the cultural distance of the
12
Ibid., p. 48
13
Ibid., p. 51
14
Ibid., p. 49
15
Bjorkman, I. & Forsgren, M. (1997). The nature of the international firm. Copenhagen: Reproset., p. 144.
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foreign country to the home country, the less knowledge about the new environment is likely to be
available and the more difficult it is to understand and learn about the foreign country on the
individual level as well. Thus, according to Sousa and Bradley analysis, there is a positive
relationship between cultural and psychic distance: the greater the cultural distance between the
home and the foreign market, the greater is the psychic distance.16 According to Sousa and Bradley,
cultural distance, and thus psychic distance, can be measured using Hofstede’s study on cultural
differences. Bjorkman and Forsgren argue, however, that Hofstede’s results concern cross-cultural
differences in people’s relationship with one another when they act as employees, i.e. intra-
organizational relationships across nations. They do not explain cultural differences in general, for
instance, cross-cultural differences in consumer behavior.17 Still, cross-cultural differences in intra-
organizational relationships and consumer behavior have the same root, which is the difference
between cultures in general and lack of its understanding. Hofstede’s cultural dimensions, which are
power distance, individualism, masculinity, uncertainty avoidance and long-term orientation,
describe the cultural differences on the intra-organizational level because they explain the cultural
differences in these areas in general, thus giving an insight in the culture. So, even though they
cannot explain psychic distance and consumer behavior completely, they still do highlight some
preferences and can be useful in an analysis of cultural differences.
This conclusion will be used when dealing with the psychic distance concept in this thesis.
The concept has also been criticized in other aspects. First of all, for that it assumes that all firms at
a given stage of internationalization are influenced by cultural differences in the same direction and
by the same intensity. This does not justify that multinational companies are not influenced by
cultural differences in all aspects of their international behavior as small companies. Secondly, it
may be problematic to use the country as a unit of analysis when dealing with psychic distance.
What really matters is the gap between actual and expected behavior.18 This critic is considered
when conducting an analysis.
2.4 Srandardization vs. adaptation
16
Sousa, C. & Bradley, F. (2006). Cultural Distance and Psychic Distance: Two Peas in a Pod? Journal of
international marketing. Vol.14. no 1, pp 49-70. p. 53
17
Bjorkman & Forsgren, Op.cit. p. 144
18
Ibid. p. 144
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Once a company has decided which markets to enter, it needs to deal with the cultural differences
identified on the foreign market and choose a marketing program accordingly. The following theory
reflects on the strategy choice and will be used to analyse it in case of Ikea on the Japanese market.
International companies must decide how much to adapt their marketing strategy to local
conditions. At the one extreme are companies that use a globally standardized marketing mix
worldwide, whereas at the other extreme is an adapted marketing mix, where the producer adjusts
the marketing program to each target country. Standardizing the marketing program has advantages
such as economies of scale in production and distribution, lower marketing costs, consistency in
brand image, ability to leverage good ideas quickly and efficiently.19 It is said to offer the
possibility of building a uniform worldwide corporate image, a world brand or global brand with a
global image. However, only few products and brands allow for a fully standardized approach.
Differences in consumer needs, wants, and usage patterns for products, consumer response to
marketing-mix elements, differences in brand and product development, competitive environment,
legal environment, marketing institutions and administrative procedures all make it necessary for
the company to place the choice between standardized and differentiated marketing strategy. Some
changes in product features, packaging, channels, pricing or communication are needed in different
global markets in order to make sure that the company’s marketing is relevant to consumers in
every market. The degree of adaptation can be influenced by product category, the company’s
organization and management, homogenization of consumer needs and tastes, product life cycle and
brand positioning or, for instance, by psychic and cultural differences.20
Depending on the situation, company can engage in dual adaptation, adapting both the product and
the communication to the local market, or adapt only one the above mentioned. The process is
described by the model below:
19
Kotler & Keller, op.cit., p. 678
20
De Mooij, M. (1998). Global marketing and advertising: Understanding Cultural Paradoxes. California: SAGE
Publications., p. 27
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Communication adaptation happens at several levels. The company can use the same message
everywhere, varying only the language, name, and colours. Other possibility is to use the same
theme globally, but adapt the copy to each local market. The third approach is to develop a global
pool of ads, from which each company selects the most appropriate one. Media and sales promotion
techniques also require international adaptation dependent on the environmental conditions.21
Pricing is also an important issue. When selling abroad, companies have to deal with price
escalation, transfer prices, dumping charges, and grey market. Because of the cost escalations
varying from county to country, a company has to decide on how to set prices. There three
opportunities. The first one is to set uniform price everywhere, but then profit rates would be
different in different countries. It can also lead to prices being too high in a poor country and too
low in a rich country. The second opportunity is set a market-based price in each country, where the
charge is what each country can afford, but this strategy ignores differences in the actual costs from
country to country. The third strategy is to set cost-based prices in each county, where a company
would use a standard markup of its costs everywhere, but this strategy might price the company out
of the market in country where the costs are high.
Setting transfer prices for goods that a company ships to its foreign subsidiaries can also be
problematic. If the charges are too high, it may end up paying higher tariff duties, although it may
pay lower income taxes in the foreign country. If a company charges to low, it may be charged with
dumping. “Dumping occurs when a company charges either less than its costs or less than it charges
in its home market, in order to enter or win the market.”22 Often government does not allow
21
Kotler & Keller ,op.cit., p. 682
22
Kotler & Keller, op.cit. p. 684
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dumping by forcing a company to set a price close to what is charged by other competitor selling
similar products.
3. Background
In this section background information relevant for the analysis is presented.
3.1 IKEA background information
IKEA is a Swedish company which was founded in 1943 by Ingvar Kamprad. Today Ikea Group is
owned by Stichting INGKA Foundation. INGKA Holding BV is a parent company for all IKEA
Group companies and owns the concept and brand name IKEA.23 Owning 262 stores in 24 countries
and being represented by 296 IKEA stores in 36 countries, IKEA can be called one of the largest
global furniture retailers.
The company’s three distinct features are function, quality and low price. In the 1950’s IKEA
developed its own way of doing things, using, for example, non-traditional materials for furniture
such as plastic. That strategy made IKEA different from other furniture retailers and in that way
developed a competitive advantage. “After that, we (AC: IKEA) basically copied the concept
worldwide from the 1970s until now.”24 Now the vision of IKEA is “To create a better everyday
life for many people”.
Business idea is “To offer a wide range of well designed, functional home furnishing products at
prices do low that as many people as possible will be able to afford them” and market positioning
statement: “Your partner in better living. We do our part, you do yours. Together we save
money.”25
The key IKEA messages all have their roots in the Swedish origin of IKEA and IKEA’s CEO
Anders Dahlvig says that apart form the product range, IKEA’s Swedish values and culture are the
factors that contributed to IKEA’s growth on the international market for the reason that Swedish
way of doing business is different from the way they do it in many other counties. For him, an
origin and unique idea is a key to international success. 26
23
Ikea group corporate site n.d., About the Ikea Group. Cited from (08.05.2009) http://193.108.42.168/?ID=25
24
Dahlvig, A., Kling, K. & Goteman, I. (2003). Ikea CEO Anders Dahlvig on International Growth and Ikea’s Unique
corporate culture and brand identity. The academy of management executive, vol.17, no.1, pp. 31-37
25
Ikea n.d.. About Ikea. Student info. Cited from (27.04.2009)
http://www.ikea.com/ms/en_GB/about_ikea/press_room/student_info.html
26
Dahlving A., et.al., op.cit.
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3.2 The Japanese Market background information
In this section information about the Japanese market relevant for this thesis will be provided. Since
Ikea entered the Japanese market for the first time in 1974 and pulled out again in 1984, the
Japanese economy and market situation overview from 1970’s till 1990’s is considered to be
relevant in order to understand what outside factors influenced the decision to enter and pull out.
For the same reasons information about the Japanese market in period from 1990’s till the second
entry time in 2001 is important. Tendencies in the Japanese furnishing sector and lifestyle
preferences by the time of the second entry are mentioned as well to gain understanding of factors
that made Ikea’s new strategy successful.
3.2.1 The Japanese economy and market situation in the period from the 1970’s till
1990’s.
After Second World War Japanese economy grew rapidly from less-developed to developed status
and in 1968 with an annual GDP growth of about 10 percent Japan’s economy became the world’s
second largest, behind only that of United States. The percentage of Japanese living in the cities
almost doubled between 1950 and 1970, thus increasing demand for services. From 1974-1979
economic growth slowed to 3,6 percent, caused by double-digit inflation and the Middle East oil
crisis that reduced private investments. In spite of that Japan’s major export industries still remained
competitive by cutting costs and increasing efficiency. In the 1980’s, the GDP growth slightly
increased to 4,4 percent. Later in 1985 the value of yen rose increasingly to three times its value in
1971. Corporate investment, stock prices, new equity turned to rise exceedingly. As a consequence,
government considered to tighten the value of asset, especially land, with monetary policies while
higher interest rates sent stock prices into a downward curved. In 1993 the recession bottomed out,
but has been recovering slowly since then.27
27
Asian info n.d. Summary of Japan’s economy. Cited from (01.05.2009) http://www.asianinfo.org/asianinfo/japan/pro-
economy.htm
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3.2.2 The Japanese economy and market situation in the period from 1990’s till the
time of second entry
In the 1990’s, in order to keep the inflation level low, Japanese government undertook deflationary
measures which triggered a decline in the Japanese economy. This decline resulted in higher
unemployment though layoffs, once considered unthinkable in Japan due to its traditions of
“lifetime employment” for selected workers and strong employee loyalty. To avoid these massive
layoffs, many companies initiated a policy for reducing salaries and wages, thus lowering the living
standard and decreasing spending, which, in turn, has prolonged the economic decline. Because of
the decline, in 1996 Japan tried to restructure the financial sector by introducing the so-called “Big
Bang” reform measures. Later, in 1997, the Asian crisis emerged and was considered as external
economic factor of downturn. The economic decline in the 1990’s which inclined the Japanese
government to encourage foreign investment by liberalizing the economy together with pressure
from its trading partners and competitors forcing to open the market to foreign competition initiated
deregulation reforms. It removed an enormous number of restrictive government regulations and the
country moved from being a well-protected economy practically closed to foreign investments to a
more open economy, although there are still some restrictions limiting the flow of imports. 28
3.2.3 Japanese Home Furnishing sector and lifestyle preferences
Japan's home furnishings sector has experienced considerable expansion since the 1990’s, growing
to 3.92 trillion yen in sales and 3,860 stores in 2003. The move beyond the usual retail practice of
selling only products to stores adding value to customer’s shopping experience by giving innovative
ways to solve household problems has become a prominent trend. Consumers have changed the
way they thought of products in households by encouraged to search for home management
solutions. Japanese consumers are known to value quality in a high degree. A demand for higher
life quality and varying consumer styles are now met by home furnishing stores presenting their
merchandise in coordinated settings.29
In general, Japan’s consumer market is witnessing the growing presence of two generations that are
pursuing new lifestyles: the first is the “baby boomers” – those born during the late 1940s and who
are now approaching retirement years and enjoying high disposable income and time; the second
28
Encyclopedia of nations n.d.Japan. Cited from ( 05.05.2009) http://www.nationsencyclopedia.com/Asia-and-
Oceania/Japan.html
29
www.jetro.go.jp/en/reports/market/pdf/2005_50_l.pdf
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group is their children – the so-called “second-generation baby boomers” – who are currently
establishing households of their own. These two groups are expected to generate robust demand for
lifestyle-related products and services.30
3.3 Ikea on the Japanese market
In 1974 as the economic expansion in Asia emerged, Ikea, which was highly successful in most of
its international markets, entered Japan with a local partner, but failed to win over Japanese
consumers and pulled out in 1986.31 When entering the new markets, Ikea is not just selling
products, but also s philosophy: this is how things are done in Sweden. However, putting a Swedish
accent on another country’s way of living wasn’t a success in Japan. Ikea encountered the failure as
a result of rush into Japanese market and Japanese customers being not ready for flat pack living
and not convinced of assembling their own furniture.32 According to David Marra, a principal at
management consultants AT Kearney in Tokyo, “multinational companies entering Japan often do
not spend enough time to understand the nature of the competition here, which is usually fairly
fierce, and the so-called unique needs of Japanese consumers”.33 Ikea’s Japan K.K. CEO, Tommy
Kullberg, commented on the failure: “The Japanese market and consumers were not ready for Ikea,
and Ikea was definitely not ready for Japan at the time”.34
Since Ikea was not successful from the first time it entered Japanese market, in 2001 Ikea decided to
re-enter Japanese market in part due to deregulation of Japan’s Large-Scale Store Law, which made
it beneficial for large retailer to enter Japan, and in 2002 established Ikea Japan K.K. with the
assistance of JETRO.35 In April 2006, after planning the return strategy for five years, first Ikea
mega-store in Japan opened east of Tokyo. CEO of Ikea Anders Dahlvig thinks that Ikea will have a
better time in Japan the second time around. “Japan is much more open, and we are a much stronger
30
Jetro Japan External Trade Organization n.d., Attractive sectors. Retail. Cited from (10.05.2009)
www.jetro.go.jp/en/invest/attract/retail/retail2009.pdf
31
The Local n.d. (16.04.2006) ”Size matters as Ikea returns to Japan”. Cited from ( 09.05.2009)
http://www.thelocal.se/3566/20060416/,
32
Lewis, E. (28.03.2005). Is Ikea for everyone? Cited from (10.05.2009)
http://www.brandchannel.com/features_effect.asp?pf_id=256
33
The Local n.d. (16.04.2006) ”Size matters as Ikea returns to Japan”. Cited from ( 09.05.2009)
http://www.thelocal.se/3566/20060416/,
34
“IKEA: The Japanese Misadventure and Successful Re-entry”,
http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/IKEA-
Japanese%20Misadventure%20and%20Successful%20Re-entry.htm
35
Jetro Japan External Trade Organization n.d., Attractive sectors. Retail. Cited from (10.05.2009)
www.jetro.go.jp/en/invest/attract/retail/retail2009.pdf
17BA thesis 15.04.2009
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company”, he says. “Today is the right time to come to Japan”.36 However, Ikea’s biggest barrier is
these time the same that it was first time around. “Japan’s notoriously fussy consumers will not be
open to the idea of building furniture themselves.”37 This does not bother Kullberg, who thinks that
this time Ikea is prepared and has done its homework. “We are meeting the most demanding
customers in the world, used to high quality and high service levels. Anyone operating on this
market has to satisfy these demands”, Kullberg says.
The new concept of Ikea on the Japanese market is “making an ideal home” and Kullberg also
explains that it is the idea they want to inspire people with.
4. Analysis
In this section Ikea on the Japanese market in round one and two is discussed and analyzed based
on theories presented above as a tool to answer the research problem. Empirical data is utilized to
analyse the cases. First, the Uppsala internationalization process model and the concept of psychic
distance are used to answer the question why and how Ikea internationalize to Japanese market.
Then, the market strategy and factors that made Ikea a failure on the Japanese market in the first
round and success in the second round are analyzed using the concept of standardization and
adaptation.
4.1 Internationalization of Ikea on the Japanese market
4.1.1 First round
According to the Uppsala internationalization stage model, firms develop their activities abroad
over time in an incremental fashion, based on their knowledge development, starting from nearby
countries that are psychically close to the home market.38 Ikea, the biggest home-furnishing
retailer, started the international expansion from the nearest countries, such as Norway (1963),
Denmark (1969), Switzerland (1973), Germany (1974) and so on.39 Little geographic and psychic
36
Capell,K. (26.04.2006). Ikea’s New plan for Japan. Cited from (01.05.2009)
http://www.businessweek.com/globalbiz/content/apr2006/gb20060426_821825.htm
37
Lewis, E. (28.03.2005). Is Ikea for everyone? Cited from (10.05.2009)
http://www.brandchannel.com/features_effect.asp?pf_id=256
38
Hollensen, S., op.cit., p. 48.
39
Ikea group corporate site n.d., Ikea group stores. Cited from (28.04.2009) http://www.ikea-group.ikea.com/?ID=11
18BA thesis 15.04.2009
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distance between Sweden and the above mentioned countries, measured according to Hofstede’s
dimensions, reduced the uncertainty level and made the internalization easier not requiring a lot of
new experiential knowledge.
After a successful entry in these countries, Ikea decided to invest in distance country in Asia, Japan.
Internationalization of Ikea in Japan was shaped by environmental conditions such as economic and
regulation. After the Second World War, due to the economic growth Japan became attractive for
foreigner to invest as the economy expanded rapidly and turned Japan from less-developed into the
second largest market in the world40 as well as the growing city population made the demand for
services higher.41 Ikea considered the Japanese market attractive and decided to enter it in 1974.
Hofstede’s dimensions describe Japan as culturally distant from Sweden in a very high degree.42
According to the Uppsala internationalization model, the more psychically distant is the market, the
more knowledge is required to reduce the uncertainty level and develop a right strategy. However,
in the critic of the model it is stated that some companies still enter the distant markets at an early
stage, skipping stages of the establishment chain.43 Ikea, entering Japan in the 1970’s right after
entering the closest markets, was not an exception. As it is mentioned in the critics of the psychic
distance concept, the unit of analysis is not the country but the gap between actual and expected
behaviour. Lars Petersson, president of Ikea Japan K.K., said that the strategy Ikea chose for
entering Japanese market in the first round was the same as in the countries entered before.44 That
means that by the time of first entry, Ikea perceived the psychic distance being smaller, which
reduced the level of uncertainty and contributed to the expansion decision at an early stage.
Perceiving the uncertainty level and the psychic distance as small leads to the conclusion that the
knowledge development can be kept at low level too. At that point, general and objective
knowledge, as well as market specific knowledge about home country and the nearest markets, can
seem to be enough for the new entry. That explains Ikea’s choice to transfer their European strategy
to Japan.
40
Japan fact sheet n.d., Japans economy in an era of globalization. Cited from ( 30.04.2009) http://web-
japan.org/factsheet/pdf/04Economy.pdf
41
Asian info n.d. Summary of Japan’s economy. Cited from (01.05.2009) http://www.asianinfo.org/asianinfo/japan/pro-
economy.htm
42
Itim international n.d. Geert Hofstede Cultural Dimensions. Cited from (01.05.2009) http://www.geert-hofstede.com/
43
Bjorkman, I. & Forsgren, M. op.cit p.144
44
Lane, G. (09-10.2007). Failed businesses in Japan: a study of how different companies have failed, and tips on how
to succeed, in the Japanese market. Cited from (28.04.2009)
http://findarticles.com/p/articles/mi_m0NTN/is_73/ai_n21081525/pg_4/
19BA thesis 15.04.2009
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However, the real cultural distance ended to be larger then Ikea had expected. Petersson commented
that Japan is not just another country. “There are a lot of local things you need to understand. You
need to have local people employed right from the start, at a high level, that understand what this
country is about”.45 General and objective knowledge were in a high degree not enough to deal with
the Japanese market, and the lack of experiential and market specific knowledge while
internationalizing on an early stage, together with outside factors such as instability of Asian
economic growth and inflation46 among other things lead to failure and Ikea chose to withdraw
stores out Japanese market in 1986.47 Anders Dahlvig, Ikea group president, commented on that: “I
think last time in 1970s it was way too early to come to Japan”. According to him, the early entry
was a big mistake and right decision was to leave and wait until they were ready.48
4.1.2 Second round
After almost thirty years since Ikea unsuccessfully had tried to launch a store in Japan, in 2001 they
finally felt that the time was right to re-enter the Japanese market, and in 2002 established Ikea
Japan K.K. in assistance with JETRO ( Japan external trade organization is a government-related
organization that works to promote mutual trade and investment between Japan and the rest of the
world, with the focus toward promoting foreign direct investment into Japan and helping firms
maximize their global trade potential).49 In 2006 the first Ikea mega-store was opened Tokyo
(Funabashi).50
By the time of the second entry Ikea was already present in the most important markets of the
world, such as USA (1985), Canada (1976), China (1998), Russia (2000) and Australia (1981),
which contributed to Ikea’s international experience. This, together with deregulation changes in
Japanese economy and large scale retail store law in 1990’s, which made the country much more
open to foreign investments, created favourable conditions for the new entry. As discussed in the
section “Japanese home furnishing sector and lifestyle preferences” Japanese generations of “baby
boomers” and “second-generation baby boomers” were pursuing new life styles thus increasing the
45
Ibid.
46
Asian info n.d. Summary of Japan’s economy. Cited from (01.05.2009) http://www.asianinfo.org/asianinfo/japan/pro-
economy.htm
47
Lane G., op.cit.
48
News Gate NY n.d .. Ikea confident as new store opens in Japan. Cited from (01.05.2009)
http://newsgateny.net/site/news/newsfile.php?titolo=Ikea%20confident%20as%20new%20store%20opens%20in%20Ja
pan&persona=Anders%20Dahlvig
49
Jetro n.d., op.cit.
50
Ikea group corporate site n.d., op.cit.
20BA thesis 15.04.2009
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demand for life style related products and services. In general, Japanese customers have changed a
little too, and now were warming to “do it yourself” shops, whereas Ikea’s modern aesthetic seems
to appeal to Japanese taste.51 Moreover, it was a great challenge for Ikea to overcome cultural
differences and maintain their advantages while using their experiences in the past to conquer lack
of foreign knowledge.
This time around, Ikea has done its homework and after five years of preparations was ready to
meet the Japanese consumers. Realizing the cultural differences, Ikea was not content with general
and objective knowledge any more, but learned from mistakes by gathering market specific
knowledge.52 In order to understand customers and cultural pattern of Japanese, Ikea made a survey
and visited more then hundred of homes.53 Market specific knowledge favoured the uncertainty
decline and together with political stabilization of the market and changes in consumer tastes
contributed to the commitment decision.54 According to Kullberg, now the time to expand on the
Japanese market was right.
4.2 Degree of adaptation
When entering a new market, a company should choose how to approach it and to which degree it
must adapt their strategy to the local conditions.55 In general, Ikea uses a rather standardized
approach to the foreign markets. Having a unique concept, doing things the other way around than
the traditional furnishing business and benefiting from Scandinavian style, Ikea stood for something
different from the local, domestic competition on the foreign markets. Having three distinct features
– function, quality, and low price – the company basically copied the developed concept
worldwide.56 The standardized approach, according to the theory, gives many benefits, such as
economies of scale in production and distribution, lower marketing costs, consistency in brand
image, ability to leverage good ideas quickly and efficiently.57
Moreover, it contributed to Ikea in building a global brand with a global image. According to
Mooij, a global brand is “one that shares the same strategic principles, positioning and marketing in
51
Capell, op.cit.
52
Johanson & Vahlne, op.cit., p. 28
53
Capell, op.cit.
54
Johanson and Vahlne,op.cit. p.28
55
Kotler and Keller., op.cit. p. 677
56
Dahlving A., et.al., op. cit.
57
Kotler and Keller., op.cit. p. 678
21BA thesis 15.04.2009
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every market throughout the world, although the marketing mix can vary. It carries the same brand
name or logo. Its values are identical in all countries, it has a substantial market share in all
countries and comparable brand loyalty. The distribution channels are similar.”58 Ikea as a brand
matches to that description in a rather high degree. The concept all over the world is the same.
Worldwide Ikea’s main target group is younger people and young families. The uniqueness of the
concept, including a light Scandinavian furnishing style, showrooms, flat-pack and self assembling,
gave Ikea the same advantages in each country that it had in Sweden in the early days.59 Moreover,
a part of Ikea’s strategy is to inspire their global customers with Swedish family values. “In our
world, home is the most important place and having children is the most important thing. Go home
in time to see your children. That is the concept we want to inspire in people here”, says Kullberg.60
However, even a global brand that seeks to educate consumers, as Ikea does, can not allow a fully
standardized strategy. According to Dahlvig, different countries, languages, laws, and all other
factors have to be taken into consideration.61
As Ikea entered Japan for the first time in 1974 on a rather early stage in their internationalization
process, the strategy for Japan was very similar to the one it used on its nearest markets. The degree
of adaptation was very low, conveyed mainly in the small size of the store, 62 based on the fact that
smaller stores are what the Japanese consumers were used to.63 But the lack of market specific and
experiential knowledge at that time brought Ikea into disappointment. First of all, for the reason of
its small size the store has not attracted enough attention and Japanese consumers were not willing
to assemble Ikea’s do-it-yourself kits.64 This leads to a conclusion, that the low degree of adaptation
and the wrong direction that it has taken is a consequence of Ikea relaying too much on the general
knowledge and lacking the market specific one.
Therefore in the second round Ikea being taught by the past mistakes gained the market specific
knowledge and learnt to adapt the level of services. After spending five years on preparations,
making surveys and visiting more then a hundred of Japanese homes, Ikea learned about tastes,
58
De Mooij, M. (1998). Global marketing and advertising: Understanding Cultural Paradoxes. California: SAGE
Publications.
59
Dahlving A., et.al., op. cit.
60
Wijers-Hasegawa, Y.(25.04.2006). Sweden’s Ikea back in Japan after 20-year hiatus. Cited from (30.04.2009)
http://search.japantimes.co.jp/cgi-bin/nb20060425a1.html
61
Dahlving A.,. et.al., op. cit.
62
Capell, op.cit.
63
The Local n.d. (16.04.2006) ”Size matters as Ikea returns to Japan”. Cited from ( 09.05.2009)
http://www.thelocal.se/3566/20060416/,
64
Capell, op.cit.
22BA thesis 15.04.2009
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preferences and lifestyles of Japanese consumers and has developed a new strategy for the Japanese
market based on those cultural differences.
There are four elements of the marketing mix, that global brand can adapt to meet the needs of local
consumers: product, price, place, promotion.
4.2.1 Product
After having visited Japanese homes, Ikea got an understanding of the tastes and living conditions
of the Japanese. Most Japanese homes are small; children usually live together with parents at home
before marriage and also share space with grandparents or in-laws.65 That observation lead to
conclusion, that large sofas, beds and tables which are top sellers in Europe would not attract
Japanese consumers because they simply would not fit into their homes. 66 The adaptation in this
case became a necessity. The decision was made not to adapt the products by, for example,
changing their size, but to adapt the product range by selecting 7500 items out of 10000 suited to
cramped Japanese homes.67 This strategy helped to avoid extra cost and to make the furniture
appeal to the Japanese consumers as well.
4.2.2 Pricing
Kotler and Keller discuss three options of setting prices on the international market. They are:
uniform price everywhere, market based price in each country, and cost-based price in each
country. The strategies are elaborated on in the theory section. If a company uses standardized
approach to pricing, prices would be the same everywhere. However, this is not possible in the most
cases, because in poor countries a company might not be able to sell products due to prices being
too high, and in rich countries it would loose profit due to prices being too low compared to costs
for production, taxes and other factors. Cost-based prices and market based prices are a part of
adaptation strategy, because these pricing strategies take into consideration costs related to a
specific market or its spending power of customers.
To find out what strategy Ikea is using, prices for the same product in Japan and Sweden were
compared. The finding was, that a sleeping couch in Sweden costs 3195 SEK, where as the same
65
Capell, op.cit.
66
Ibid.
67
Wijers-Hasegawa, Y. op.cit.
23BA thesis 15.04.2009
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model in Japan costs 51900YEN, which equals to 4192 SEK at the current exchange rate.68 It makes
clear, that an adaptation approach is used in pricing on the Japanese market. In order to find out
whether it is cost-based or market based pricing, nominal GDP per capita of Japan and Sweden for
2007 is compared. Sweden turned out to be the ninth richest country, whereas Japan is on the
sixteenth place.69 Based on that information, it can be concluded that the prices in Japan are not
market based, because if they were Ikea should have been charging more in Sweden then in Japan.
Thus, prices are cost-based. Having cost based prices has a risk that in countries where the costs are
high company can be priced out of the market. However, it is not the case of Ikea in Japan. “The
prices are still competitive compared to other well-known furniture retailers such as Muji, the “no
brand” home ware retailer.” Customers were also pleasantly surprised by the prices being lower
then they expected Scandinavian furniture to be.70 So it can be concluded that chosen strategy gave
Ikea both: an opportunity to match differences in actual costs and a competitive advantage on the
Japanese market.
4.2.3 Place/distribution
When it comes to distribution, Ikea uses a quite standardized approach worldwide. Ikea makes use
of big size stores with many showrooms to present their products to the customers. “Normally, we
buy land and build a store on it”, says Dahlvig.71 Size of the store is a significant factor. Although
Ikea is a mass retailer, by the time of the first entry on the Japanese market, they tried to adapt the
size of the store by making it smaller, because small stores were what the Japanese consumers were
used to. However, it was not such a good idea and, as discussed above, led to disappointment. Then,
after accumulating market knowledge of the Japanese behaviour from the first round, they
recognized that the size of the store is a matter in selling furniture in Japan.
When entering Japan for the second time, Ikea introduced a mega store with 10,000 product lines
supported by 2,200 car parking spaces, a child-care area and one of Tokyo’s largest restaurants.72
68
Ikea Japan corporate website and Ikea Sweden corporate website
69
http://public.data360.org/pub_dp_report.aspx?Data_Plot_Id=183
70
News Gate NY n.d .. Ikea confident as new store opens in Japan. Cited from (01.05.2009)
http://newsgateny.net/site/news/newsfile.php?titolo=Ikea%20confident%20as%20new%20store%20opens%20in%20Ja
pan&persona=Anders%20Dahlvig
71
Dahlving A., et.al., op.cit.
72
News Gate NY n.d .. Ikea confident as new store opens in Japan. Cited from (01.05.2009)
http://newsgateny.net/site/news/newsfile.php?titolo=Ikea%20confident%20as%20new%20store%20opens%20in%20Ja
pan&persona=Anders%20Dahlvig
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