Strategic Management

1 Introduction

1.1 Problem definition

At present IKEA has expanded to a large degree merely in Europe, Asia and North America. Yet they have not entered Mexico. With this paper I intend to investigate whether or not IKEA is ready to expand into the Mexican market. I will base this upon a thorough SWOT analysis which will include parts of Hofstede's cultural dimensions and the VRIO framework. The Conclusion and Recommendations will state whether or not IKEA should initiate business in Mexico.

1.2 Company Background

The founder of IKEA, Ingvar Kamprad, was born 1926 in Smеland. Starting at a very young age, Mr. Kamprad was always engaged in some kind of a business and in 1943, he received a gift from his father that enabled him to establish his own company. The name IKEA arose from his initials, IK, the farm were he grew up, Elmtaryd, and the city, Agunnaryd, where he is from. In the beginning IKEA offered pencils, wallets, and clocks. Kamprad tried to satisfy every need he could find with a product to a low price. In 1947, the first furniture pieces were introduced to the product line, and they were produced in the surroundings of Smеland with excellent response. In 1951, the founder saw a possibility to become a large-scale low price furniture supplier. Several milestones followed during the year, one in 1956 when the first flat packages were introduced and another in 1965, when an IKEA department store in Stockholm was opened and the self-service concept was launched. After this, IKEA expanded all over the world and by the end of 1999 the company had become a global network with more than 150 department stores in 30 countries on four continents with 53,000 employees (IKEA, 2005).

The fact that Kamprad is from Smеland has had a great influence on the concept of Ikea. Smеland is a part of the southern Sweden where the soil is very difficult to farm. The people there are known to be hard working and to always try to accomplish the best result with limited resources. This philosophy, that everything should be accomplished in an efficient manner, has become the central thinking in IKEA and has resulted in no compromises being made between price and quality. Furthermore, Sweden is internationally known when it comes to safety and quality and the philosophy of IKEA reflects this. Today, IKEA has a network of 186 department stores in 31 countries, approximately 76000 employees in 43 countries and 340 million visitors each year (IKEA, 2005). IKEA positions itself as a company that offers a wide product range of functional home decoration articles at low prices targeting a large audience. With their low price strategy the goal of IKEA is to reach as many people as possible. The primary means of advertisement used by IKEA is the merchandise catalogue. The catalogue works as an aid to the customer and provides them with decorating ideas. Furthermore, the catalogue shows furniture pieces in actual home settings, a feature that gives prospective customers an idea of how the item will actually look in their home. This allows the customer to arrive at the department store with an idea of what they want already in mind. IKEA has kept up-to-date with new technologies and launched an Internet site in 1997. At present, the IKEA website serves as a source of important information and 75 million people visited the site last year.

2 Analysis

2.1 Opportunities

2.1.1 Vast Untapped Market

The most important aspect and biggest opportunity in Mexico lies in the simple fact that it represents such a large market that has yet to see furniture of the type offered by our company. With over 100 million residents, Mexico is one of the world's very populous countries. While 40% of the people were considered to be in poverty in 2001, this means that 60 million people were not. The country had a GDP of 924 billion USD in 2002, with a real growth rate of 7% at that time. For a global company, a market of such large size is a logical next step in its business progression. In addition, Mexico is the second-largest economy in Latin America, after Brazil, so it is a very important to have a presence there in regional terms (CIA World Factbook, 2003).

2.1.2 Aging Population

An attractive aspect of the Mexican population is the age demographic, which is inching more towards the young adult range. The average age of the Mexican citizen has increased from 19 to 24 from 1990 to 2002. This, in addition to the population growth rate of 1.4% (2003), means that the target market for furniture products is continuing to increase in size (CIA World Factbook, 2003).When considering entry into a market for the first time, this growth trend presents an increasingly attractive opportunity to gain new customers, especially young families considering home furnishing purchases.

2.1.3 Geographic Location

Mexico is located near to the equator, and therefore is a suitable intermediary for distribution to both the northern and southern hemispheres. It has a long coastline, over 9000 km, with the Caribbean Sea and Gulf of Mexico to the east and the Pacific Ocean to the west. This feature of the country gives it ample access to seafaring cargo vessels, with seaports being located at Tampico, Veracruz, and Acapulco among other cities (CIA World Factbook, 2003).The ability to utilize sea-based transportation is beneficial in the business sense, especially when shipping goods of a large size, because this allows for reduced transportation costs in comparison to airfreight, especially when coming from Europe and Asia to North America. With specific regards to the furniture business, the ability to have access to sea-based freight is essential because of the low-cost-to-weight ratio of the good.

2.1.4 Political Stability

For a company considering entry into a developing market, one of the most important issues to keep in mind is whether the government will be stable in the future. The reason for this is that many a company has lost control over subsidiaries and other assets due to unforeseen regime changes. In Latin America, Mexico has been one of the most stable countries over the last century. "Inequality is greater in Brazil, violence is far more extreme in Colombia, democracy is weakening in Nicaragua and Venezuela just as it is firming up in Mexico." (The Economist, 2000). Thus, in regional terms, Mexico presents a lower political risk than most other countries and investments into the country will be more secure.

2.1.5 Centralized Distribution of Population