IKEA: Entering Russia
To keep pace with the increasing competition in the global environment, Ikea needs to keep expanding its activities to maintain its market presence in Russia. It has not been able to ease itself into the Russian market by acquiring existing businesses or by establishing a joint venture with a profitable native organization or franchising agreement. It has been moving into the country by establishing its operations through internally generated organic efforts.
The Ikea concept provides for functional and well-designed furniture at the lowest prices so that the maximum number of people can afford them. Its low price furnishings are offered in aiming to create a better quality of life for people and in keeping with these concepts and view of the immense popularity already gained by the company in Russia, there was ample scope to find other strategic means to strengthen its presence in the country.
Possibly a company can create extensive subsidiaries in foreign countries to expand its business interests. There are four different types of strategies for entries that are used by most companies in introducing global business activities. They are licensing, franchising, indirect importing and exporting, and direct importing and exporting. In the prevailing circumstances, Ikea could also have established a significant presence in the Russian market by establishing its operations by using the franchising route. Franchising is a good strategic option to increase its presence and consolidate its market in Russia.
Franchising implies providing the right by the parent company (franchisor) to another autonomous company (franchisee) to do business about its goods and services in a given prescribed method as agreed between the two parties. Such rights can be assumed in selling the products of the franchisor by using its name, techniques of production, and marketing strategies; or by using its universal approach to business. Normally franchising entails an amalgamation of the different elements in this regard.
The ideal strategy for Ikea in Russia in adopting the franchising route would be to use the manufacturer retailer system which will enable it to make rapid strides in terms of market potential and financial gains. In the face of some of its competitors having entered Russia with large plans, Ikea must initiate expansion on larger scales which in the present context is best possible by adopting the franchising option. The need to adopt alternative means becomes essential given the entry into the country of other players in this segment.
In adopting the franchising mode Ikea has much to gain since this method is most effective when products are standardized, and most of its furniture and furnishings are standard in being almost uniform as supplied throughout the world. More important in helping the company through the franchising model is the fact that the company enjoys international recognition of its products.
Expansion by franchising will imply that Ikea will approach a relatively smaller, unknown, and higher-risk market. The Ikea expansion group is active in this regard just as much as it is regarding opening subsidiaries owned by the company. Franchisees will be required to provide the basic items and can be given the freedom to plan and design the other aspects of the product mix in fitting the requirements of the local markets. The basic core products and their items comprise approximately 12000 in number and are quite straightforward and functional products. The Ikea head office will be responsible to assist in the process of selection and in providing advice and support.
All the products will have to be sourced from the product lines of Ikea. In efforts to ensure logistic standards, quality, and service, the individual franchisees will be audited periodically and observed and compared regarding overall corporate performance. Operational support and broad training will be provided from the Ikea headquarters and all franchisees will be required to pay Ikea Holdings the franchise fees. Responsibility regarding promotional advertising and catalogs will be accepted by Ikea. It is noteworthy that Ikea has realized the potential in using franchising as a vehicle to the generic focus strategy of the company.
By adopting the franchising route Ikea will be able to have its concepts reach more people in Russia who will benefit from the wide range of functional and well-designed products at the lowest prices. Ikea will be able to maintain centralized control regarding the different functional actions while benefiting from the enhanced quality and low costs that will result from the international suppliers. Ikea stands to gain by reaping the benefits from economies of scale and skilled manpower in Russia. Additionally, there is increased control over strategic direction and a reduction in functional redundancies.
In expanding via the franchising route Ikea will have to face several challenges that are like being disadvantages in adopting this choice. The significance regarding the centralized strategic directions will be considerably increased and the complexities of the logistic systems will also increase. The franchising route entails difficulties in responding to culturally sensitive issues and national needs. There is a tendency for franchisees to expect additional controls over operations and Ikea has to make additional efforts to cope with the emerging demographic trends. They will compel the organization to adopt a broader strategy in focusing on efforts to respond to the varied consumer groups. To maintain a global organizational structure the company will have to find a suitable balance between centralized intervention and country-level autonomy.
Colin White, Strategic Management: The Ikea Way, 2008. Web.
Ikea Franchising, Inter Ikea Systems B.V. Web.
Sam Greene, Ikea Sets Big Russia Presence, 1999, The Russia Journal.