Internationalization of IKEA in the Japanese market and Chinese markets

Abstract
Date Level Authors June 4, 2008 Master Thesis EFO705, 10 points (15 credits) Wannapa Chaletanone (05-11-1982, Thailand) Wanee Cheancharadpong (03-09-1983, Thailand) Internationalization of IKEA in the Japanese and Chinese markets Leif Linnskog Why did IKEA internationalize into Japanese and Chinese markets? And what factors did influence IKEA’s success in Chinese market but failure in the Japanese market of the first round? The aim of thesis is to understand the internationalization of IKEA in Asia by comparing between Japanese and Chinese markets. This master thesis based on qualitative approach in order to investigate the internationalization of IKEA in Asian markets as a case study since it is beneficial in understanding the observation and explanation of behavior in the certain cases. IKEA is considered as retailer internationalization who expands into Japanese market as a result of deregulation and asset-based advantage while internationalize into Chinese market because of supporting environments such as political, social and economic conditions as well as transaction advantage. To success and failure, psychic distance and learning, strategic decision making process, degree of adaptation of retail offer, entry strategy, characteristics of organization and management characteristics are the influencing factors on internationalization of IKEA in the Japanese and Chinese markets. Internationalization, IKEA, retailer internationalization, influencing factors

Title Supervisor Problems

Purpose

Method

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Acknowledgement
Our thanks are due to our advisor, Assistant Professor Leif Linnskog, School of Sustainable Development of Society and Technology of Malardalen University for advice and encouragement in this Master Thesis. We are grateful to Assistant Professor Leif for his interest and his many suggestions. This Master Thesis would never be completed without your support and confidence in us. The greatest gratitude of all, however, we reserve to our parents. They have been a source of warm and enthusiastic support throughout our days in the Master program. We would not have passed through all difficulty and problems without them. Needless to say, any errors or shortcoming in fact or interpretation in this thesis is our responsibility alone.

1.1 Background
IKEA was established in 1943 by Ingvar Kamprad in order to sell pens, wallets and picture frame. In 1958, IKEA was introduced as a leader of Swedish Furniture Company. They started from producing local furniture by local manufacturers and gained positive attention from customers. Later, they began to create furniture for flat packs and self-assembly in order to reduce storage space which is the prominent style of IKEA. They are also expanding the business line such as restaurant and kitchenware. IKEA, the largest furniture display in Scandinavia, opened the first store in Almhult, Sweden. Then, they opened more stores in other countries such as Norway, Denmark and Germany. They do not only offer inspiring home furnishing solutions to customers while keep the prices affordable for people but also locate in less-expensive areas in different countries. Nowadays, IKEA is the major retail company that experience in 36 countries around the world. Though, there are 279 of IKEA stores in 36 countries, IKEA group owns 247 IKEA stores in 24 countries and the rest is managed by franchisees in 16 countries. The only two Asian countries that IKEA group owns their stores are in Japan and China. (IKEA Group Corporate sites, n.d.) Japan is the first country in Asia that IKEA considered to enter while most countries were closed off the outside world. The differences between culture, lifestyle and behavior make IKEA face the failure. Japan is different from North America or Europe so it is difficult to pursue success in the same way. In 1986, IKEA needed to withdraw their shop out of Japan because of difficulties and then twenty years later, they decided to reenter Japanese market for one more time. At the present, there are three stores of IKEA in Japan which are in Tokyo (Funabashi), Kokoku (Yokohama), Port Island (Kobe) and about to open another store in Osaka this April 2008. China is the second Asia country that IKEA decided to enter. First of all, IKEA entered into China, Beijing in 1998, Shanghai in 2003, Guangzhou in 2005, Chengdu in 2006 and Shenzhen in 2008. There are five stores of IKEA in China until now and they are going to open one more stores in Daming July 2008. As we know that, Chinese market is not only a huge market with a high power purchase of populations but also has a unique culture which is different from western countries. To invest in China, IKEA provide cheap labor, abundant resources and the potential business market to comfort for its investment. However, there are some challenges for IKEA to enter because of bureaucracy system, high duty rates and customer’s behavior. IKEA creates an enterprise myth and becomes the biggest furniture retailer in the world. Japan has a unique characteristic market though it locates in Asia as same as China. Then, the company seems to need adaptation in Japanese market more than it Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022 1

does in Chinese market since IKEA entered into Japan twice in order to establish in the market. In our thesis, we studied why the biggest furniture retailer internationalizes its firm into those two countries. There should be other factors behind the success and failure of IKEA in entering Chinese and Japanese markets.

1.2 Research problem
- Why did IKEA internationalize into Japanese and Chinese markets? - What factors did influence IKEA’s success in Chinese market but failure in the Japanese market of the first round?

1.3 Aim of thesis
The aim of thesis is to understand the internationalization of IKEA in Asia by comparing between Japanese and Chinese markets.

1.4 Target group
The outcome of this research can be beneficial to the retail companies and other private firms who are interested in understanding the internationalization of Furniture Company, especially in Asia.

1.5 Disposition
This thesis is separated into seven parts. First section introduces the area of subject background and problems that authors would like to investigate. Next, relevant literature review is presented in section two. Following, conceptual framework is brought up in section three. In part four, authors describe how the research and methodology are conducted and empirical data are gathered in section five. Part six presents the analyzed data of case studies. Finally, conclusion and recommendation are discussed in section seven.

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2. Literature Review
This section based on the three main themes of theories that relates to our research problems. Firstly, we illustrated the retailer internationalization theory in order to understand the internationalization of Retailer Company. Secondly, concept of psychic distance and relevant factors are presented. Thirdly, concept of learning is brought up to explain the relevant factors that affect the retailer company.

2.1 Retailer internationalization theory 2.1.1 Scoping retailer internationalization
Dawson (2007) stated that internationalization is an important stage in its continuing integration into a consumer driven which globalizes economy in the retail sector. Retailing is shifting from being the sales agent for manufacturing and agriculture to be the production agent for consumers. The latest stage of retailer internationalization has been facilitated by the fundamental innovation in retailing which are the convergences of information and communication technologies. Retailer internationalization therefore can be seen within the wider discourse associated with the changes in the global economy and in the more focused temporal discourse of the shaping of retailing through successive innovations. (Dawson, 2007) How does retailer internationalization conceptually differ from manufacturer internationalization? Most academic study of internationalization has focused on production (for example Dunning, 1993; Calori, 2000 and Blomstermo and Sharma, 2003). International perspective on service industries often has been approached within the production oriented OLI paradigm with limited attempts (Erramilli, 1990; Dahringer and Muhlbacher, 1991; Valikangas and Lehtinen, 1991; Buckley, 1992 and Arvidsson, 1997). As discussed by Dawson (2007), in order to understand the retailing internationalization, identifying the characteristic of retailing is imperative so as to distinguish the differences between retailing and production. 1) Strategic objective Sales growth is one important strategic objective for retailers to expand their store network to foreign markets. Beside strategic objective to increase retail sales, there are push and pull factors that are the reasons for internationalization. On the contrary, for the manufacturing firms, searching for cost reduction encourages internationalization of production capacity. It can be argued that manufacturers seek low cost production as mush as possible so that prices can be reduced and sales increased whilst retailers need to constantly lower their costs in order to compete on price and increase their sales in the market. However, both of them view sales growth and cost reduction in different ways. The strategic difference is significant not only when the firm is successful and expanding but also when seeking to retrench. In Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022 3

retrenchment, manufacturing firms often reduce their cost operations on their home country and open manufacturing plants in foreign market, where the cost can be reduced, while retailers close their foreign stores to focus on their home market. Therefore, difference in strategic objective in internationalization result in difference recovery strategies of retailers and manufacturers. (Dawson, 2007) 2) Local nature of the market The market for large international retailers is local. This excludes the Internet-based retailers. On the other hand, the market of large manufacturers can be international or even global. Hess (2004) and Wrigley (2005) stated that the local nature of the market requires retailers to be aware of local attributes of culture and local aspects of consumption. The aspects of consumption and buyer behavior are more important in retailing than in manufacturing. Retailing internationalization requires retailers to understand local consumers’ cultures that can be different from those in the home market while manufacturers do not have to vary the systems and processes as retailing does. 3) The outlet is the retailer’s product What retailer sells are services not items. Their services will be bringing together in a sales outlet. Customer consumed the sales outlet. The outlets may have difference appearance each of which has different attributes, and different mixes of services. Creating economic value is the result of retail product. On the other hand, simple idea of manufacturer’s product is acceptable. This difference in concept of product leads to a high level of asset specificity for the retailer. In an international context, the product of retailer is affected by social, economic and political environment. The product design and operation have the implication of considerable cultural inputs. Therefore, the process of locating the outlet as product for the retailer is very different from the location process for an international manufacturer. (Dawson, 2007) 4) Network structure of retail organizations The structure of retailing comprises of dis-aggregated trading units that operate within a network. The network structure of retailing results in particular economic intra and inter firm relationships within firm. The efficiency of network and the flows amongst the local units are important aspects of retailer operation which exist alongside the efficiencies of the internal trading unit. The links and relationships of different local units to head office and to other local units are a significant factor affecting the efficiency of a local unit. Efficiency within local unit, for manufacturing sector, is more important than network efficiency amongst manufacturing plants. (ibid.) 5) Large number of suppliers and customers Retailers often characterize by a large number of suppliers. The relationships of the retailer with suppliers are central nature of the retail firm. The retailer operates a large portfolio of relationships with suppliers of which are many different types from shortterm transactions to long-term strategic alliances. The retailer creates value through the management of relationships with suppliers and the creation of ranges of items for sale while manufacturers generate value through transforming physical items. Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022 4

Relationships with suppliers are more significant for retailers than for manufacturers. In international retailing context, the same firm can possess different portfolio of supplier relationships in different countries. In retailing, items for resale can be assembled in many different ways, and can be changed, even over a relatively short time. The need for different assortments in different local markets is particularly important in internationalization, but the firm need to have a core of items that characterizes itself (Mukoyama, 2000). Retailer has a dynamic nature of assortments which means relationships with suppliers are more dynamic in both national and international context. Manufacturers often try to standardize the products they make while the retailers attempt to produce their items and products responding to the local needs of their potential customers. The need for alignment of managerial style with consumer culture reflects the high level of customer contact of retailers. (Dawson, 2007) 6) Cost structure The cost structure of retailing and production are not similar. This results from the different nature of processes in the firm and competition between firms. Non-price competition and price discrimination policies are tactics which use much more in retailing. Retailing has great variations in costs and competition because demand and competitive processes are local. This leads to local monopoly power for retailers. Variation in costs of retailing results from rapid changes in prices and nature of consumer demand. As a result, labor requirement of retailers is different from those of manufacturing. (ibid.)

2.1.2 The internationalization process of retailing
International retail has been studied within strategic, marketing and foreign direct investment before discovering the classical or neo-classical assumptions of international activity. Thus, the necessary conditions of international activity are included in that activity. Sternquist (1997) identified the asset-based advantages 1 which result from the market-based antecedents of change. The market will depend on a process of “structural competitive challenge” which will lead to redefinition of the asset that possess by local firms (Alexander 1997, cited in Alexander and Myers, 2000, pp. 340). Therefore, internationalization process of retailing has to be viewed as a company-based management process and a market-based process (Alexander and 2 Myers, 2000). The existing of comparative and absolute advantages within the international environment is emphasized which means that markets possess some advantages. Then, consideration has to be given to the unequal structural conditions. The factors that facilitate retail operation between the market of origin and
1
According to Alexander (1997, cited in Alexander and Myers, 2000 pp.340), the market will be subject to a process of “structural competitive challenge” and will lead to a redefinition of the assets that local firms possess. 2 Comparative advantage will occur when a country has a comparative advantage in the production of a good if it can produce that good at a lower cost relative to another country. Absolute advantage will occur when a country has an absolute advantage in the production of a good relative to another country if it can produce the good at lower cost or with higher productivity.

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exchanging between markets must be understood (Alexander and Myers 2000). Linder (1961) claimed that markets which have the same level of development will be attractive for international retailers since international expansions are the extension of domestic activity. Alexander and de lira e Silva (2002, cited in Alexander, Rhodes and Myers, 2007) explained the growing of retail investment on emerging market during the 1990s. Geopolitical, economic and competitive condition change direction of expansion of retailers from higher order markets to lower order markets. Retailers will have a variety of options in internationalize to foreign market which depend on some factors such as access to capital, area of activity and control and risk attitude of management. These things affect entry method strategies and may increase or reduce the attraction of host markets. (Alexander and Myers, 2007) Dunning (1981, 1988) suggested that there are three key factors driving of internationalization. First, ownership advantages were seen as motivating force for internationalization. Second, environmental constraints were factors that shape market entry mode. Finally, location specific advantage was a factor which influence firm’s direction of expansion. In the international product life cycle (IPLC), Vernon (1966) highlighted the significant of market of origin in the development of products. The diffusion of product to secondary and tertiary market through the actions of companies within the primary market and companies within the secondary markets are described by the international product life cycle. This concept has implication for retailers when they internalize in secondary market. (Alexander and Myers, 2000) The framework developed by Alexander and Myers (2000) will use to illustrate the internationalization process of retailing. The framework is viewed from corporate perspective and based on characteristics of the retail organization within the context of markets. Asset-based and transaction-based advantages are identified as the drivers of change. In the context of retailing, they are conceptual and technology-based or skills-based advantages which may be brand owned by retailer or economies of scale exploited by the operation. (Alexander and Myers, 2000) Brown and Burt (1992, cited in Alexander and Myers, 2000, pp. 81) described asset-based advantages as “a retail brand, with its associated image for consumers, across national borders”. These advantages are the innovation product in the origin market which may be derived from the social, economic or cultural characteristics of the market place or development of retail structure. Therefore, advantage of a retailer may derive from the opportunity to develop a format within the origin market in a way that has not been possible in other markets. Sternquist (1997) suggests transaction based advantages as volume buying. Transaction based advantages are things connected with the companies’ abilities to move product from producer to customer. Volume buying may be perceived as advantages gained from operating in one market and benefit receives from economic and corporate development. Consequently, transaction advantages which attained from multinational operations are experienced later in the internationalization process. Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022 6

Internal competencies within the retail organization will determine the capability of the retailer to internalize. Vida and Fairhurst (1998) have noted that this character of firms may be determined by qualities and capabilities of leadership to organize different areas within the firm in an international context. In figure 1, the model developed by Alexander and Myers (2000) explained that the assets possessing by an organization are the driver of changes. This occurs by good feature of firm’s operation and development within origin market.

Figure 1: Operational internationalization (Alexander and Myer, 2000) The internal facilitating competencies are the way the firm transfers the advantages which are concepts or skills within international markets. In the internal facilitating

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competencies, firms will adopt strategies, choose entry methods and location to the expansion of the firm. (Alexander and Myers, 2000) The drivers of change and the ability of managers to exploit advantages will determine the location decisions, entry method and strategy. Therefore, companyspecific is the factor that determines the internationalization process which will occur only in environment that supports that process. (ibid.) The location decision, entry method and strategy will in turn change the internal facilitating competencies of the organization since firms have different capabilities in learning in markets where they operate. The organization’s capability to respond to the international market environment will hence influence the drivers of change. (ibid.)

2.2 The concept of Psychic distance
Vahlne and Wiedersheim-Paul (1977), Nordstrom and Vahlne (1994) and Lee (1998) defined that “psychic distance is the distance between home market and foreign market resulting from the perception, learning and understanding of business differences”. Then, O’Grady and Lane (1996) refined that psychic distance is a degree of uncertainty about foreign market in a firm and argue that psychic distance is also the consequence from both cultural differences and other business difficulties that present barriers to learning about market and operating there. Psychic distance is the combination of the word “psyche” and “distance” (Evans et al, 2000, pp. 70). Psyche refers to the mind or soul (Sykes 1987, cited in Evans et al, 2000) but it is not the simple existing of external environmental factors that decides the degree of distance between home market and overseas market. On the contrary, it is the perception of individual of these factors that constructs the position of psychic distance while distance relates to similarity and difference in term of the amount of the separation between two points. (Evans and Bridson, 2005) Although the perception of cultural distance do not gain prominent attention as psychic distance, cultural distance is defined as international marketer’s perceived socio-cultural distance between home and foreign country, namely, differences in language, business practices, political systems and marketing infrastructure (Lee, 1998). Cultural distance is derived from Hofstede’s (1991) aspect of national culture as culture shapes the way people think, behave and evaluate (Hofstede, 2001; Schneider and Barsoux, 2003, cited in Hoffman, 2007). Though, cultural distance and psychic distance are closely related and are conceptualized as inter-country-specific distances, psychic distance focuses on inter-firm distances and has influenced by the experience of the firms involve (Hallen and Wiedersheim-Paul, 1979; Nordstrom and Vahlne, 1993). Nevertheless, the findings of Nordstrom and Vahlne (1993) supported that the aspect of psychic distance and cultural distance are different but it is an overlapping phenomena while Lee (1998) treats cultural distance as synonymy with psychic distance. Then, we agree to use the term of cultural distance or psychic distance as the same meaning in this thesis. Psychic distance is a concept that significantly influences on the international expansion which it can be the driving force of expansion patterns of international Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022 8

business action (Alexander et al, 2007). Thus, firm tends to start internationalization by entering into market that they can most easily understand and perceived market uncertainty is low (Johanson and Vahlne, 1990), explicitly, there is fewer cultural and psychological barrier to cross (Nordstrom and Vahlne, 1994). Therefore, they expected that similar market will lead to greater success (Johanson and Vahlne, 1977, 1990, Johanson and Wiedersheim-Paul, 1975; Nordstrom and Vahlne, 1994 and Vahlne and Wiedersheim-Paul, 1973, 1977). In figure 2, Evans (2000) found that psychic distance, the determinant of market expansion patterns, cannot explain performance between countries alone. Then, there is a number of other factors associated with international process of retailers that should be considered as well. Evans (2000) suggested that other factors, namely, strategic decision making process, degree of adaptation of the retail offer, entry strategy, organizational characteristics such as structure of decision making, retail format, size and ownership and international experience can be partly supported international expansion of retail firms. Moreover, management characteristics such as country of origin and experience in the foreign market are also included in his framework. Firstly, strategic decision making process is the factor in order to make a decision in entering overseas market. Then, managers will have to obtain information in order to deal with environmental uncertainty which is a result of cultural and business differences though the information is limited. (Evans et al, 2000) In this case, the international success comes from appropriate planning and research into consumer preferences, competition and possible locations (White, 1995). On the contrary, lack of research and poor understanding of the market may lead to poor international performance (Clarke and Rimmer, 1997 and White, 1995). Secondly, Morosini (1994a; 1994b, cited in Evans et al, 2000) found that degree of adaptation of the retail offer involves since the relationship between psychic distance and organization performances seem to be different by the adaptation strategy they adopted. Standardization and adaptation were thought of as binary continuum which most companies adopt a strategy somewhere between the two pillars (Chhabra, 1996; Ozsomer et al, 1991; Whitelock and Pimblett, 1997). In an international retailing context, McGoldrick (1998), McGoldrick and Blair (1995), McGoldrick and Ho (1992) expressed that “the degree of standardization or adaptation refers to factor of retail offer which includes commodities quality, range and fashion, level of services, facilities, layout, atmosphere, location, quality of display, advertising, general character, trustworthiness, price and image in general” (cited in Evans and Bridson, 2005, pp. 73). The study of Boddewyn (1989, cited in Evan et al, 2000) found that US multinational companies operating in European Common Market between 1973 and 1993 used the standardization of market practices and later in 1990s, it turned toward greater adaptation. Boddewyn (1989, cited in Evan et al, 2000) also asserted that differences in government regulations, consumer behavior, nationalistic sentiments, and competition and technique requirements are the key factors that hinder standardization. These findings show that cultural and business differences tend to be the consequence of different marketing strategies. Furthermore, the study of Clarke and Rimmer (1997), McGoldrick and Ho (1992) and White (1995) argue that the Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022 9

failure of international retail operations are the result of lack of adaptation of retail offer while the success contributed to the willingness to adapt its concept in local situation (Dupuis and Prime, 1996). Then, the retailers who adapt to the new environment will perform better than those who solely use standardized approach. Then, understanding cultural and business differences will be the guide to adapt for their suitable condition (Evans and Mavondo, 2000). Thirdly, Entry strategy deals with the level of investment and financial risk where acquisitions and joint ventures involve high financial risk while licensing and franchising smooth the progress of the expansion with lesser degree of risk (Barkema et al, 1996; Kaynak, 1998; Manaresi and Uncles, 1995 and Treadgold, 1998, cited in Evans et al, 2000) In these modes of entry, retailers can gather research and planning with partner in overseas market so as to reduce financial risk. Moreover, retailers may develop franchising and joint venture entry strategies to handle with the distance market in order to minimize financial exposure. Then, psychic distance will play as a pivotal role for retailers to choose the fitting mode of entry. (Evans et al, 2000) Fourthly, the characteristics of organization comprise of structure of decision making, retail format, size and ownership and level of international experience. Structure of decision making concerns organizational performance and firm’s decision making structure. Martenson (1987, cited in Evans et al, 2000) supported that centralized decision making structure will lead to greater standardization of the retail offer between countries. Conversely, a decentralized decision making structure can reduce not only distance between home and oversea market but also bring negative effect of cultural and business differences on organizational performance (Evans et al, 2000). For retail format, retailers may adapt the format that acceptable to the foreign market which retail format may result in strongly control franchising whilst joint ventures or acquisitions that suitable for mass merchandise retailers (Evans and Bridson, 2005). Size and ownership is the next factor that relevant to choice of entry in international expansion. Agawal (1994, cited in Evans et al, 2000) agrees with Alexander et al (2007) that size of home market will be a main determinant on international activity (Alexander et al, 2007). To clarify, large firms have a better chance to internationalize since they can acquire resources and accept higher risk (Evans et al, 2000). In addition, White (1995) indicated that larger retailers tend to use acquisition to enter foreign market while small retailers seem to use franchising or agent instead (Evans et al, 2000). Next, the study of Cavusgil and Zou (1994) suggested that the performance of export ventures has positive relationship with both international experience of firm and performance of foreign business enterprise. It can be concluded that experience in foreign markets will lead to positive relationship of psychic distance and organizational performance (Evans et al, 2000). Since our case study is a large organization but expands internationally in the different size of stores, we decided to concentrate on the size of stores as a characteristic of organization instead of the size of company. Lastly, Management characteristics consist of country of origin and experience in the foreign market that influence on retail operation. Culture, political and legal between home and foreign markets impacts the market strategy so as to adapt into new environment which are resulting from psychic distance and standardization of retail strategy (Martenson, 1987). Then, to expand into a particular country, it is necessary Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022 10

to carefully consider country’s regulations on overseas investment (Grewak and Dharwadkar, 2002, cited in Huang and Sternquist, 2007). In addition, the more managers have direct experience in host market, the more gap of psychic distance will be reduced as well (Evans et al, 2000).

Figure 2: Theoretical framework of psychic distance and the performance of international retailers (Evans et al, 2000)

2.3 The concept of learning
2.3.1 Uppsala Internationalization model The concept of Internationalization process involves the role of development of knowledge in overseas markets and operations on one hand and balance with a rising commitment of resource to foreign markets on the other hand. In figure 3, Internationalization model was separated in two perspectives, namely, State aspect and Change aspects. State aspect consists of market commitment and market knowledge while change aspect consists of current business activities and commitment decision. (Johanson and Vahlne, 1990) The internationalization of this model can be distinguished in two patterns. Firstly, firms will start to invest in a few nearby countries instead of investing in many countries promptly. Secondly, firms will invest in specific country by learning with psychic distance in new markets. (Jahanson and Vahlne, 1990) Therefore, firms are willing to conquer market after another, only when they can defeat the cultural barriers and obtain their own experience (Carlson, 1996). In Uppsala model, there are two perspectives of learning which can be defined between general knowledge and marketing-specific knowledge. General knowledge focuses on marketing method or types of customers while marketing-specific knowledge concerns with business climate, cultural pattern, structure of market system. (Johanson and Vahlne, 1977) Marketing-specific knowledge inclines to keep the firms within its current business whereas general knowledge can be expected to be a driving force to take steps in new direction (Forsgren, 2002). Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022 11

State aspect

Change aspect

Figure 3: Basic mechanism of Internationalization-State and Change aspect (Johanson and Vahlne, 1977) Consequently, the essential issue of Uppsala model that deals with learning affects investment behavior of firms, both organization learning and organization behavior (Johanson & Vahlne, 1977, 1990). Assumptions of Uppsala model relates to the lack of knowledge about foreign market (Johanson & Vahlne, 1977) which is the main problem. However, this knowledge can be gained in order to enter in new environment. Second assumption is decision on investing abroad will be made through market uncertainty. Then learning process will carry learning by doing (Johanson, 1988; Lindblo, 1959 and Quinn, 1980). In the last assumption, knowledge is dependent on individuals and cannot be transferred, that is, experience is a crucial factor that can lead to opportunities in market (Johanson & Vahlne, 1977). Although, own experience is significant, firms may also acquire knowledge by imitation learning such as observing (Bjorkman, 1990, 1996; Di maggio & Powell, 1983; Haveman, 1993; Haunschild & Miner, 1997; Huber, 1991 and Lewitt & March, 1988) and hiring people with knowledge to serve as a short-cut (Barkema & Vermeulen, 1998 and Huber, 1991). In this model, firms seem to stick with particular market in order to compete by learning more about that market which is called a reactive aspect instead of trying to find new solutions that called proactive aspect (Forsgren, 2002). In internationalization process, Forsgren (2002) proposed that experiential learning and incremental behavior have the different influences when firms learn from their own experiences in a specific market. Firms will obtain tacit knowledge that can reduce perceived uncertainty and increase the need for incremental behavior. Therefore, experience brings the high confident in making decision and expecting to reduce the entry cost. Furthermore, the concept of learning in Uppsala model (Johanson and Vahlne, 1977) also leads to the study of the ability of firm by Erikkson and Chetty (2003). Erikkson and Chetty (2003) explained that since the firms want to reduce the lack of market knowledge, firms will try to acquire more experience, information, relationship and customer network which this capacity is considered as absorptive capacity of firm. Cohen and Levinthal (1990) defined that absorptive capacity is the ability of a firm to recognize the value of new, external information, understand it and apply it in Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022 12

commercial ways by using prior knowledge, the same as Peteraf (1993) and Teece (1982) suggested that absorptive capacity relates to practical knowledge that can be transferred from one market to another in the firm’s international expansion. External knowledge acquisition and experience with knowledge is the key of potential absorptive capacity (Fosfuri and Tribo, 2008). Then, Absorptive capacity refers to the ability of firms to use their prior experience combined with knowledge and diverse background to recognize value of new information and develop into something creative in a current business (Erikkson and Chetty, 2003). Knowledge is described as the vital resource of firms and economies (Drucker, 1993; Quinn, 1992; Reich, 1992). In addition, Penrose (1959) created knowledge based theory to perceive firms as an organization of knowledge in structure of coordination, cooperation, communication and learning. Then, Lack of knowledge can refer to lack of relationship, resources and cooperation, especially in business relationship, which can be the significant barrier factor in entering new markets or expand within existing markets (Erikkson and Chetty, 2003). In figure 4, three hypotheses were proposed by Erikkson and Chetty (2003) above in this case. First, the more absorptive capacity leads to the more perception of foreign market knowledge. Second, absorptive capacity will be higher as gaining experiences in investing with foreign countries. Third, absorptive capacity will be increased by experiencing with specific customer in specific country.

Figure 4: Hypothesized structural model of the effect of experience on absorptive capacity and of absorptive capacity on ongoing business (Erikkson and Chetty, 2003)

In the results of figure 5, Erikkson and Chetty (2003) found out that firm’s absorptive capacity consists of two constructs which are Dyadic absorptive capacity and Customer network absorptive capacity. Though, absorptive capacity is separate in two entities, both of them are still in mediate level. On one hand of the first hypothesis, the outcome is revealed that the more Dyadic absorptive capacity the firm has, the less it perceives a lack of knowledge since dyadic relationship involves more routine, Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022 13

straightforward information that easy to learn and lead to reducing lack of market knowledge. On the other hand, the more Customer network absorptive capacity the firm has, the more it perceives a lack of foreign market knowledge since network ties relate to innovative knowledge which is complicate to apply. In the second hypothesis, it has been proved that the more diversity of firm’s international experience, the more dyadic relationship experience it gathers since diverse experience can be applied through routine or explicit knowledge but not customer network. In last hypothesis, the result showed that dept of experience with specific customer does not increase Dyadic absorptive capacity but increase Customer networks absorptive capacity as dept knowledge with a customer can be used to increase knowledge of network context of customers in business. Therefore, in order to overcome lacking of foreign market knowledge, dyadic relationship and customer network relationship involve not only competitors, suppliers, customer and government but also moderate relationship between firms’ profitability and growth (Zahra and Hayton, 2008). Collaborating through successful integrating and exploitation of new knowledge and capabilities from foreign markets (ibid.) as well as R&D collaborations can also involve ability to understand and transfer knowledge of the firm (Fosfuri and Tribo, 2008).

Figure 5: A revised hypothesized model of the effect of experience and absorptive capacity in an ongoing business (Eriksson and Chetty, 2003)

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3. Conceptual framework
Conceptual framework is based on abovementioned literature review. The applied model for this research is depicted in order to use as a whole picture for analysis and make it easier for readers to follow by proposing a new theoretical framework.

To understand the internationalization and the factors that impact failure and success of IKEA in Japanese and Chinese markets, the suitable three main frameworks are proposed. Firstly, models of Dawson (2007) and Alexander and Myers (2000) are applied to explain why IKEA internationalize in these two markets. Secondly, theoretical framework of psychic distance of international retailers depicted by Evans, Treadgold and Mavondo (2000) is used in order to explain the factors of success and failure. Thirdly, the concept of learning in Uppsala internationalization of Johanson and Vahnle (1977) that involves the concept of absorptive capacity on foreign market knowledge pictured by Eriksson and Chetty (2003) are applied to explain how IKEA cope with problems. These above mentioned theme frameworks will serve as a ground of the new theoretical framework in order to answer the research problems. First of all, we used the concept of Dawson (2007) to show why IKEA is retailer. According to Dawson (2007), the characteristics of retailer that are different from manufacturer are strategic objective, local nature of the market, the outlet of the retailer, network structure of retail organization, large number of suppliers and customers and cost structure. Then, the internationalization process of retailing developed by Alexander and Myers (2000) is applied to describe the internationalization process of IKEA to Japanese and Chinese markets. In our framework, the company possesses some advantages that are identified as the drivers of change. These drivers of change are asset-based and transaction-based advantages. Asset-based advantage is defined by Brown and Burt (1992, P.81, cited in Alexander and Myers, 2000) as “a retail brand, with its associated image for consumers, across national borders”. Sternquist (1997) conceptualized transaction based advantages as volume buying which connected with the companies’ abilities to move product from producer to customer. In figure 6, the internationalization of IKEA is illustrated to answer the first research problem. Firstly, the concept of Dawson (2007) is discussed to describe why IKEA is retailer. Next, the driver of changes depicted by Alexander and Myers (2000) is applied to explain why IKEA is internationalized in Japanese and Chinese markets. These two elements will lead to the international expansion of IKEA to Japan and China respectively.

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Internationalization of
IKEA Why IKEA is retailer
Expansion Expansion

Japanese market

Chinese market

Driver of change

Figure 6: Theoretical framework (research question 1) To understand the factors that effect success and failure, there are many significant factors that should be considered in order to explain IKEA’s expansion to Japanese and Chinese markets respectively. Since psychic distance cannot be explain alone. Then, the relevant factors are provided, that is, strategic decision making process, degree of adaptation of the retail offer, entry strategy, organizational characteristics, and management characteristics (Evan et al, 2000). Therefore, those factors that display in figure 7 by using six square boxes are used to answer the second research problem.

Psychic distance & Learning

Strategic decision

Degree of adaptation

Japanese market

Internationalization of
IKEA

Chinese market

Entry Strategy

Characteristic of organization

Management characteristics

Figure 7: Theoretical framework (research question 2) Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022 16

The first factor is psychic distance and learning, firms have to have capacity to learn new market in order to reduce lack of market knowledge and psychic distance between home and host country. Secondly, obtaining knowledge and dealing with environment are described in Strategy decision. Thirdly, degree of adaptation in retailer involves standardization and adaptation in fashion, quality and level of service. Fourthly, entry strategy deals with level of investment and financial risk in expanding. Fifthly, characteristics of organization involve international experience and timing to entry in distance markets. Lastly, management of characteristics and experiences in the foreign market play an important role in determining retailer performance which relate to retail operation in culture, political and legal between markets. (Evan et al, 2000) However, concept of learning did not help to understand how firm adjust to the psychic distance and new environment only, but the concept of learning in Uppsala internationalization of Johanson and Vahnle (1977) and the concept of absorptive capacity on foreign market knowledge pictured by Eriksson and Chetty (2003) also involve in explaining other relevant components as well. That is firm, in order to learn in new market environment, must have capabilities to acquire more experience, information, relationship and customer network resulting in decreasing of psychic distance between home and host market. Then, learning and firm’s learning capabilities are expected to be the crucial complement of the firm in internationalization (Forsgren, 2002). In figure 8, we have integrated figure 6 and 7 together to display all components that explain both internationalization of IKEA and influencing factors. Therefore, the figure 8 illustrates our whole framework that we used as a tool to answer our research problems.
Internationalization of IKEA in the Japanese and Chinese markets 2008 Master thesis- Group 2022

ussed.

4.1 Methodological approach nship with suppliers in China and make China became one of important supply center of IKEA in Asia (Carpell, 2006). 5. Characteristics of organization Considering size of company, IKEA, the company has a potential in internationalization (Evans et al, 2000). IKEA has to accept high risk in investing in high psychic distant market and totally different culture compare to the home market. However, those problems seem to be well handled. Risk is reduced by doing joint venture so that IKEA can gain knowledge about local market. This is crucially important for IKEA China as learning by doing may not enough for IKEA to operating business in the dominant high power distant culture characteristic of Chinese market (Mooij, 1997). IKEA has potential capability to acquire resources from local market ( The ability of IKEA to develop and use its existing knowledge and experience to develop their strategy so as to reach large people in China shows the absorptive capacity of the company (Erikkson & Chetty 2003). The strength in furniture design and produce their products locally in China lead to successful of the company resulting from increasing experience from operating business in China over time (Erikkson & Chetty 2003). In addition, the network and dyadic relationship play an important role for IKEA China. The government support in form of law and regulation (Capdevielle, Li & Nogal, 2007) and the creation of supplier relationship (Li, 2007) facilitate the transfer of knowledge in an ongoing business. This is in accordance with Zahra and Hayton (2007) that dyadic relationship and customer network relationship assist the company to overcome foreign market knowledge obstacle.

6.4 Comparison influencing factors of IKEA in the Japanese market and Chinese market
Since there are six issues in explaining the success and failure of IKEA in Asian market, there are similarities and differences in these two markets, Japanese and Chinese markets. Firstly, psychic distance is the main obstacle for IKEA in entering Japanese market as a result of differences in many aspects such as lifestyle, size of products in household and behavior of customer which psychic distance is a barrier in Chinese market as well, especially differences in culture and language. Secondly, lack of suitable plans and poor understanding of IKEA in Japanese market leads to poor strategic decision making process as in Chinese market, IKEA create appropriate planning and research in Chinese consumer market and lead to success as a consequence. Thirdly, degree of adaptation of IKEA in Japanese market is quite low at the first round while there is some degree of adaptation in Chinese market such as translating the name in Chinese. Fourthly, there is similarity in investment with this two distance countries, that is, they invest without directly owned because of lack of knowledge in distance countries. However, they employ the differences in entry mode since franchising is a mode of entry of IKEA in Japanese market while joint venture is the entry mode of IKEA in Chinese market. Fifthly, characteristics of organization of these two markets are different since IKEA entered Japanese market in small size of store from the inception and gained too little attention but very large size of store in Chinese market. Lastly, management characteristic in Japanese market, especially lack of supply network, created the difficulty for IKEA to provide products while IKEA owned their supply centers and distribution centers in China. However, though IKEA did not success in entering Japanese market in the first round, they have learned through their own experience to correct the mistake in the past. Gaining through learning and experiencing in Japanese market could be the lesson for them to gain knowledge and use as a guide to invest carefully in entering other distant markets.

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7. Conclusion and recommendation
In the last part, the conclusion of the thesis is provided to summarize the findings based on the abovementioned research problems as well as recommendation for further study is provided.

7.1 Conclusion
IKEA are considered as retailer internationalization since IKEA plan in organizing strategic objective, understanding the local nature of markets and using outlet as a retailer’s product. Besides, IKEA also has strong relationship of network structure, large number of suppliers and customers and cost structure in order to internationalize. To internationalize, there are different driving forces that push IKEA to enter in Japanese and Chinese markets. IKEA expanded into Japan because of economic constraint, deregulation and asset-based advantage while supporting environments which are political and social and economic conditions as well as transaction advantage are the influences that support IKEA to internationalize in Chinese market. The factors that influence the success and failure of IKEA in Asia, Chinese market and Japanese market, are summed up, namely, psychic distance and learning, strategic decision making process, degree of adaptation of retail offer, entry strategy, characteristics of organization and management characteristics. In brief, firstly, psychic distance creates barriers for IKEA to enter both Japanese market and Chinese market because of differences in many aspects between European and Asia which lead to learning in different perspectives. Secondly, strategic decision in planning leads to achievement in Chinese market while planning and researching are missing in Japanese market. Thirdly, there are too little in degree of adaptation in Japanese market but the adaptations in Chinese market exist. Fourthly, though IKEA invested in both Japanese market and Chinese market without directly owned in order to gain knowledge, there are differences in modes of entry as IKEA applied franchising in Japanese market but joint venture in Chinese market. Fifthly, size of store is matter in characteristics of organization since the store of IKEA in Japan is small but rather big in China. Next, IKEA in Japanese market lacks of supply network while IKEA owns supply centers in China which lead to different characteristics of management. Furthermore, though IKEA do not achieve in expanding in Japanese market but Chinese market later on, internationalization of IKEA in Japanese market for the second round is a big challenge for IKEA to use their learning and experiences to conquer Japanese market over again as well as other distance countries.

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7.2 Recommendation
Due to limitation of time and source of information in studying internationalization of IKEA, we decided to scope only on psychic distance and learning as a major concern. Otherwise, there are other significant aspects that relate to internationalization. For further study, we would like to recommend in studying entrepreneurship and network among entrepreneur, suppliers and customers as well as the relationship among employers, local employee since these linkages will support in illustrating international expansion of IKEA clearer.

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J