CH-ZWA jsmGB IKEA Industry Globalization Potential James Oldroyd Kellogg Graduate School of Management Northwestern University TNRB

CH-ZWA jsmGB Does IKEA have a sustainable competitive advantage?

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

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. 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. IKEA CASE SUMMARY

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).

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

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

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

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).

10 IKEA Current Results $9.6 Billion US dollars Sales per region Asia 3 % North America 17 % Europe 80 % Bang Mug Story