International Business Sample – 3

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International Business Sample - 3

1. Introduction

Ikea makes use of a transnational strategy to increase its international standardization of products along with satisfying the local requirements of the consumer. Various globalization factors like deregulation, higher disposable income, increasing housing market, and economic growth have generated several opportunities for growth from which Ikea has gained a lot in several countries. Despite the global presence of the organization, it is noteworthy to illustrate two facts. Firstly 82 percent of the total revenue of Ikea is generated from Europe alone. Approximately 15 percent of the revenue is generated from the North American market. Secondly, due to the economic downfall in both North America and Europe, the furniture retail industry is under a lot of pressure on pricing and competition (Amal et al 2010).

To decrease the social-demographical and political-economic threats that are present within the region, Ikea started to focus on diversifying its operations into emerging markets. By expanding into emerging markets, Ikea can take advantage of the opportunities that are presented by these markets (Barreto & Rocha 2001).

The present strategy framework that Ikea applies while entering an emerging market is International Franchising. In this framework the limited rights, making use of the Ikea brand name and products are sold for some amount of money along with the share in profits. It appears to be very sensible this Ikea can continue its expansion in the emerging markets. Still, before Ikea enters a new emerging market several factors are required to be taken into consideration to select the appropriate market. In this assignment, Ikea’s plan to expand further globally into the South American market is taken into consideration. Over the years, South America has observed a strong economic growth a pattern which would be continuing in the coming years (Brouthers & Hennart 2007). The largest country in South America is Brazil and it has all the attributes to attract global organizations to its shores for expansion specifically in the furniture industry. The following is a critical analysis to determine the success or failure of Ikea in the Brazilian market.

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2. Overview of the industry

The home furnishing retail segment is inclusive of floor coverings, household textiles, and furniture. The international home furnishing sector is dominated by the sales of furniture which is approximately 64%. IKEA has the biggest share in the worldwide market of home furnishing. It has shared records for 2.3%.

Europe represents 43.1% of the value in the retail segment and the compound yearly development rate of the segment in the duration 2004-2008 was approximately 2.6%. UK is IKEA’s best market. However is being kept down by the trouble of getting new stores, and low customer certainty because of the economic logjam (Chan & Makino 2007).

The housing market of the UK has moderated significantly and with house costs and the number of transactions estimated to fall this year, this must be terrible news for furniture retailers. In 2008, there were various losses, including Sleep Depot and New Heights. In the meantime, furniture retailers are confronting phenomenal levels of rivalry from outside of the market from Tesco, Asda, Woolworths, Argos, Homebase, B&Q, and even Next and M&S (Fleury 2011).

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3. SWOT analysis of Ikea

IKEA was positioned as one of the best worldwide brands far and wide in 2008. Yet, even though IKEA’s solid image of brand supports the group’s development into new markets and new product offerings, the lull in the UK and the USA housing market because of constrained housing supply and increased costs are contrarily concerning the incomes of the organization. Moreover, it appears that IKEA’s idea has accomplished development in the greater part of European markets. Even though IKEA has needed to reevaluate many components of its strategy, it has completed a distinctive business sector situated in various nations.

Planning consents are a noteworthy issue for the organization in many nations, particularly in the UK where the concentration of sales is much greater than anyplace else.

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4. Identification of the new market

Though the North American floor covers and furniture business sector is at present experiencing troublesome times, South America has kept solid development in quality, a pattern that is intended to bear on rising. In 2010, IKEA entered the South American business sector. The main IKEA store was assigned in Santo Domingo, Dominican Republic.

The South American market for floor covering and furniture produced a total revenue of $19,802 million in 2008, speaking to a compound yearly development rate of 7.4% from 2004 to 2008. Sales of living room furniture have demonstrated to be most lucrative for the furniture and floor covers market in South America in 2008, thereby garnering a total revenue of $8,420 million, equal to 38% of the business sector’s general worth. Brazil Be that as it may, Brazil drives the market of South American furniture and floor covers, representing 62% of the business sector’s worth.

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5. Ikea in South America (Brazil)

There are a few alluring angles for IKEA to put resources into the region of the furniture industry in the Brazilian business sector. Above all else, the furniture market in Brazil is appealing because of a major estimation of imported furniture and it keeps developing increasingly. Also, the work expense is less expensive compared with Europe and America.

Market examiners additionally evaluated that the import of furniture particularly institutional furniture, for example, furniture utilized as a part of healing centers and lodging will increment altogether.

In addition, the vast majority of Brazilian furniture makers are little and family-possessed organizations which just determine a populace in southern Brazil as an objective business sector. For the above reasons, it may be accepted that there is still a substantial piece of the pie for remote speculators to put resources into Brazilian furniture production. Another reason is that exchange liberalization began in 1990; it is obvious that the Brazilian exchange framework changed to be more open and aggressive. The last reason that bolstered IKEA to venture into Brazil was a million hectares of planted wood (Chen & Hu 2002). IKEA’s statement of purpose expressed to be a cost administration and to gather quality items with parts from everywhere throughout the world using multilevel upper hands, ease logistics, and huge straightforward retail outlets in rural zones. Along these lines, IKEA ought to consider Brazil to be an accomplice since Brazil has a plenitude of wood supply with ease for creating and appropriating dependably. Another reason is the import charge for furniture in Brazil is low around 6-16 for every penny, urging IKEA to coordinate operations in Brazil. Because the significant end-clients of furniture like to buy from eminent and solid suppliers, this connection may be a guess that IKEA, which is the world’s biggest and most acclaimed furniture retailer can be perceived by Brazilian furniture beau and expand its business.

From the incorporated key heading through franchising, it causes certain challenges, for example, the many-sided quality of logistics framework, the trouble to national needs and social affectability issues, the wild franchisees, and the developing demographic patterns. In this way, the internationalization of the IKEA procedure should be adjusted between nation-level self-sufficiency and brought together the framework. Since all section modes have both favorable circumstances and disadvantages; the exchange-offs between every mode are critical (Chaio et al 2010).

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6. Factors that affected Ikea’s entry into the South American market (Brazil)

Several factors influenced the entry of Ikea into the South American market. These factors are classified into two segments firstly country level factor and then the firm level factor (Doz 1986).

a. Country-level factors

Political

Even though the political soundness in Brazil does not have the same standard of security as other OECD’s, the political steadiness in Brazil is enhancing relentlessly. Brazil’s leader is thought to be more sensible than other South American liberal pioneers. What’s more, although the President tries to secure national organizations, she is likewise mindful that numerous Brazilian organizations are not exceptionally effective. In the wake of being re-chosen, the president has invited FDI to Brazil with open arms.

Also, as the poverty circumstance in Brazil is still high, the Brazilian government and its populace are thus exceptionally dynamic about social projects. There are significant government programs that help to handle the issues of wage imbalance and access to credit. Projects, for example, Zero Hunger give low-wage families contingent money exchange bases to achieve about one-quarter of Brazil’s populace.

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Economic factors:

With developing markets catching financial investors’ consideration, numerous are turning their concentration towards the markets of South America. Solid exports, high merchandise costs, and expanded ventures have been contributing components to development inside a large number of Latin American markets.

Amongst all of the neighboring countries, Brazil is the only nation that gives its populace the most astounding power of purchasing. Thus, Brazil appeared an exceptionally appealing business sector for IKEA, particularly since its furniture imports have encountered a development of 16% amid the second from last quarter of the year 2006. The furniture imports in Brazil are controlled by the United States with 38% of the share, trailed by Germany with 35% and Italy with 11%.

An economic danger identified with the imports of furniture starts from the Brazilian increased government debt staying at 52% of the GDP, regardless of a relative decrease in 2004. These debts resulted in building import charges as well as exacerbated the estimation of Brazilian money. This surely meant awful news for IKEA as its low-cost technique depends on high-volume deals. Then again, IKEA could have worked with an organization with one of the 13,500 Brazilian furniture producers. The issues, however, emerged due to the size of such producers (Peng et al 2008). The manufacturers of Brazilian furniture are little privately-run companies that are unrealistic to take care of IKEA’s broad demand.

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Social:

Although Brazil has a developing populace of 190 million individuals and encounters 87% education levels, pretty much as in the majority of the LDCs, the disparity hole is still a significant issue in Brazil. There are gigantic wage holes between the rich individuals and the destitute individuals. “The 10% wealthiest individuals procure half of the absolute wage and the 10% poorest individuals just get under 2%. Thus economic well-being is extremely important, particularly for the white-collar classes. As IKEA has been extremely capable in offering ways of life to its clients the status significance amongst Brazilians could end up being profitable for IKEA. Nonetheless, credit choice is amazingly restricted among most purchasers in Brazil, and buyers hope to pay for their merchandise in portions. At times, customers settle on a specific item, not on account of its quality, but rather given the installment offices. Customers can pay for a TV £310 in 11 installments and without any additional interest. IKEA ought to unquestionably know about buyers’ purchasing conduct to not have any issues concerning its liquidity proportions.

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b. Firm-level factors

The best market entry segment for IKEA to re-set up its furniture industry in Brazil is vital organizations together, alluded to helpful assertion between potential or real contenders. This technique runs the extent of the joint endeavor which signifies a course of action where a firm is required to share value and control of an endeavor with an accomplice from the host nation. Building up a key partnership with a Brazilian organization has numerous favorable circumstances. First off, IKEA profits from the possibly Brazilian furniture contenders, inside decorators, and models’ information about aggressive conditions, and culture and demographic contrasts since they are individuals who prescribe styles to clients (Fabian 2006).

At the end of the day, this section mode expands the level of inclusion of accomplice. The primary point, the Scandinavian headquarter can enhance innovation know-how, abilities, and resources, the best-in-class hardware, the quality standard of furniture to a neighborhood organization, fulfill client request, and separate items. A second point is that the remote unions who know unmistakably about their business condition, smooth the advancement of passage into the Brazilian market. This result can be seen clearly in the case of Warner Brother. Keeping in mind the end goal to explain the many-sided quality of endorsement procedure and conveyance in China, Warner Brother goes into the Chinese business sector by taking an interest in the two Chinese accomplices. At that point, the joint endeavor in China permitted Warner Brother to enter the Chinese market effortlessly, appropriate films, and even create movies for Chinese TV. Additionally, both remote firms and neighborhood accomplices can share the settled expense of growing new items and lessen the level of danger incorporating the contention with nationalization or government obstruction.

Be that as it may, key organizations together additionally have a few impediments, for example, exchange innovative know-how to the accomplice which results in the danger of unmanageable and wild innovation, and the fights between accomplices which convey to the bartering force of endeavor colleagues. To wrap things up, to pick up the great organization together, IKEA needs to be concerned with the other three elements which are accomplice choice, union structure, and the administration style of the accomplice.

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7. Lesson learned by international business manager

From the above example of Ikea, international business managers can learn several lessons. For instance, a market that looks lucrative and attractive may be so until and unless proper research has been conducted to determine the feasibility of the market. Also, before entering the market all the factors of the country in which the country is looking to expand must be taken into consideration specifically economic factors. The most important factor that must be taken into consideration is that of the firm level.

8. Conclusion

The conclusion to be drawn is that the unified control by headquartering through franchising in Brazil conveys the disappointment of IKEA. Consequently, IKEA necessities to adjust its approach and procedure to pass the Brazilian business sector by monitoring social and demographic contrast. Additionally, picking, on the other hand, the section mode as key unions for extending the IKEA furniture industry worldwide will pass on various great outcomes.

Also, Brazil’s business sector can be a new sourcing zone for IKEA to advance the furniture business. Be that as it may, IKEA is required to overview market headings of the furniture industry in Brazil keeping in mind the end goal to accomplish business objectives. At the same time, IKEA can change other promoting section techniques, for example, permitting, franchising, and trading to suit circumstances in Brazil. The organization needs to understand that nobody’s methodology is the best as a general rule.

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9. References

Amal, M.; Raboch, H.; Awuah, G.B.; Andersson, S. (2010). The internationalization of multinational companies (MNCs): An intra-sector comparison among firms from developing and developed countries. In: ENCONTRO DA ANPAD, 34. p. 1-17.

Barreto, A., Rocha, A. (2001). Patterns of internationalization of Brazilian firms and the decision to establish subsidiaries abroad. In: C.N. AXINN; P. MATTHYSSENS (org.), Advances in International Marketing. Amsterdam, JAI Press, p. 70-132

Brouthers, K.D.,  Hennart, J.F. (2007). Boundaries of the firm: Insights from international entry mode research. Journal of Management, 33(3):395-425.

Chan, C.M., Makino, S. (2007). Legitimacy and multi-level institutional environments: implications for foreign subsidiary ownership structure. Journal of International Business Studies, 38:621-638.

Chen, H.,  Hu, M.Y. (2002). An analysis of determinants of entry mode and its impact on performance. International Business Review, 11(2):193-210.

Chiao, Y.C.; Lo F.Y.; Yu, C.M. (2010). Choosing between wholly-owned subsidiaries and joint ventures of MNCs from an emerging market. International Marketing Review, 27(3):338-365.

Doz, Y. (1986). Strategic management in multinational companies. Oxford, Pergamon Press, 243 p.

Fleury, A. (2011). Brazilian Multinationals: Competences for Internationalization. Cambridge, Cambridge University Press, 440 p.

Johanson, J. & Vahlne, J.E. (1977). The internationalization process of the firm: a model of knowledge and increasing foreign market commitment. Journal of International Business Studies, 8(1):23-32.

Kogut, B. & Singh, H. (1988). The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19(3):411-432.

Peng, M.W, Wang, D.Y.L.; Jiang, Y. (2008). An institution-based view of international business strategy: a focus on emerging economies. Journal of International Business Studies, 19(5):920-936.

Fabian, S. (2006).International Business Strategy: IKEA. Solvay Business School. [Online] Erramilli, M. K. (1991). The Experience Factor in Foreign Market Entry Behaviour of Service Firms. Journal of International Business Studies, 22(3), 479-501. Available at: http://www.actuarisk.be/files/IkeaSite.pdf [Accessed: 11 April 2016].

Ikea (2015). For business – Office, Retail & more – IKEA. [Online] Available at: http://www.ikea.com/ae/en/catalog/categories/business/ [Accessed 11 April. 2016].

Erramilli, M. K. (1991). The Experience Factor in Foreign Market Entry Behaviour of Service Firms. Journal of International Business Studies, 22(3), 479-501.

Root, F.R. (1994). Entry Strategies for International Markets. New York, Lexington Books, 269 p.

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