Ikeain China

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ea in ASIAN CASE RESEARCH JOURNAL, VOL. 11, ISSUE 1, 1–21 (2007)

ACRJ
This case was prepared by Dr Li-Qun Wei of the Hong Kong Baptist University and Dr Xi Zou of The Chinese University of Hong Kong as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative or business situation. Please address all correspondence to Dr Li-Qun Wei, Department of Management, Hong Kong Baptist University, Kowloon Tong, KL, Hong Kong, E-mail: weiliqun@hkbu. edu.hk.

IKEA in China: Facing Dilemmas in an Emerging Economy
In mid-2003, the president of IKEA China, Ian Duffy, and some executives were discussing the market strategies of IKEA China in their Beijing office. After a review of IKEA China’s market development, the executives brainstormed about possible solutions for the difficulties experienced in the Chinese market. In the end, Duffy announced a plan to open another store in Beijing, one in Guangzhou and possibly another one in a southwestern city, Chengdu, over the next five years. More significantly, the board unveiled a long-term plan to open ten more stores in mid-sized cities, such as Dalian and Qingdao, by the end of 2010. This plan would require a US$600 million investment. IKEA’s expansion plans underscored its confidence in China. However, over the past eight years, none of IKEA’s retail stores in China turned a profit, making them the only loss-making stores in the entire IKEA group. Although IKEA strived to implement its differentiation and cost leadership strategies that had brought tremendous success in the market worldwide, the company’s performance in China had not progressed much yet. Could IKEA adopt its usual strategies and repeat its market success in this distinctive developing country? Were IKEA’s furnishing and decoration concepts and retail strategies appropriate for the Chinese market? Could IKEA’s business strategies eventually enhance its competitive advantage in China?

© 2007 by World Scientific Publishing Co.

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ACRJ

COMPANY’S BACKGROUND Specializing in furniture and home decoration, IKEA was a private company owned by Stichting INGKA Foundation registered in Holland and controlled by its founder, Ingvar Kamprad, and his family. By August 2005, the foundation owned a grand total of 220 retail stores in 44 countries/ territories, employing 90,000 people. Among all these stores, the IKEA Group directly managed 196 stores in 24 countries and the others were owned and run by franchisees outside the IKEA Group. In fiscal year 2005, IKEA had an annual turnover of 14.8 billion euros. The IKEA catalog was printed in 52 editions with 25 languages, totaling 160 million copies in 2005. In the western countries, this global giant was the largest home furnishing retailer, dominating this conventionally fragmented industry. In Asia, IKEA’s development was still in its infant stage. The Asian market comprised a mere three percent of IKEA’s total sales, including one store in Malaysia, one in Singapore, one in Taiwan, four stores in Beijing and Shanghai, and four in Hong Kong. These stores were expected to be more successful in the near future. In particular, the sales in Hong Kong needed to be improved. While Ikea was responsible for most of the retail stores in Asia, the four stores in Hong Kong were franchised to Jardine Pacific in 1988, and acquired by The Dairy Farm Company Ltd in 2002. As the Hong Kong stores were managed by an independent business group, IKEA could not include the Hong Kong stores into its larger strategic plan in China. In addition, the contract with the HK business group had a clause forbidding IKEA from opening additional stores in the Pearl River Delta during the franchise period. Still, the limitation to create synergy with other stores in the Greater China area did not curb any of IKEA’s ambitious ongoing plans in the Chinese market. IKEA’s strategic maneuvers in China exemplified its ambitions to dominate this emerging market....
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