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Re-Entry Into the Japanese Market - Essay Example

Ingvar Krampard founded IKEA in 1943 and began operations purchasing and selling on stationary out of his family kitchen (Bartlett et al. , 2008). IKEA is now the worlds largest furniture retailer posting global sales of 21. 2 billion for the financial year 2008/2009 (Wearden, 2009). IKEA currently owns 267 stores across 25 countires, whilst a small number are owned and run by franchisees (IKEA. com). IKEA was chosen as it seems to break all the rules of previous retail literature, and has experienced success worldwide in different markets with a standardised retail product.

However IKEAs entry into Japan will be the focus for analysis. In 1974, during the early years of its global expansion, IKEA entered Japan launching a franchising deal, only having to withdraw twelve years later in 1986 due to poor sales (Wijers-Hasegawa, 2006). However in April 2006, twenty years later, IKEA once again entered Japan by opening a store in Fanabashi on the outskirts of Tokyo (Jonsson, 2007). Japan was therefore chosen in order to attempt gain a deeper understanding as to why various strategies may not work across nations.

The theoretical focus of the article will be on the process of IKEAs internationalization, drawing from the literature carried out by Johanson & Wiedersheim-Paul (1975) and Johanson & Vahlne (1977) and the Uppsala model. The article will also critically evaluate IKEAs current international strategic orientation and its suitablility for the Japanese market, considering the Intergation-Responsiveness (I-R) framework proposed by Bartlett & Ghoshal (1989). Based on the findings from the analysis suitable conclusions and strategic recommendations will be made.

Critical Literature Review The Uppsala Model of Internationalization The Uppsala model was developed between 1975 and 1977 by Jan Johanson, Finn Wiedersheim-Paul and Jan-Erik Vahlne at the University of Uppsala (Tayeb, 2000). Barkema (1996) describes how it is based on the behavioural theory of the firm, which suggests organizations learn from previous experiences and operations (Cyert & March, 1963). Johanson & Wiedersheim-Paul (1975) appreciated that the majority of previous research carried out on the internationalization process examined large corporations, mainly from the US.

They believed that many organizations expand internationally when they are still relatively small and so Tayeb (2000) explains how Johanson and Wiedersheim-Paul (1975) examined the internationalization of four Swedish firms (Atlas Copco, Facit, Sandvik and Volvo). Johanson & Wiedersheim-Paul (1975) assumes that the firm develops in its domestic market first, before undergoing internationalization via a set of incremental decisions. They also assume that the most important obstacles firms face during the process are the lack of knowledge and resources.

They propose that as the process evolves the obstacles “are reduced through incremental decision-making and learning about foreign markets” (Johanson & Wiedersheim-Paul, 1975, p. 2). The firm then engages with foreign markets via a gradual sequence of four stages known as the establishment chain (see figure 1). Johanson & Wiedersheim-Paul (1975) explain how each successive stage requires an increase in resource committment from the firm. But as the stages progress market uncertainty decreases due to experiential learning.

Johanson & Wiedersheim-Paul (1975) also consider the concept of psychic distance when explaining the establishment chain process. Psychic distance can be defined as “the sum of factors preventing the flow of information from and to the market” (Johanson & Vahlne, 1977, p. 24) and can include language, culture and different political systems. Johanson & Wiedersheim-Paul (1975) predicted that during the early stages of internationalization, firms will enter markets in countries with low psychic distances.

Johanson & Vahlne (1977) investigated the learning process an organization experiences as it progresses through the four stages, and presented their ‘Basic Mechanism of Internationalization’ (see figure 2). The model explains how a firm makes an initial commitment of resources to an uncertain and unknown market. From this investment the firm gain valuable knowledge on the foreign market (Bartlett et al. , 2008). Johanson & Vahlne (1977) then describe how the firm is able to evaluate its current activities and explore opportunities for future investment.

Critics of the Uppsala model have claimed that the process takes too long, and due to cultural convergence and globalization, there is a greater need to commit large amounts of resources quickly in order to maintain competitive advantage (Tayeb, 2000). Figure 3 illustrates the sequential process on a timeline. Other writers have questioned the transferability of the model, given that it is only representative of four Swedish firms. However Tayeb (2000) explains how the model has been validated by many academics for industries in the US (Davidson, 1980) and Japan (Yoshihara, 1978).

The I-R Framework Writers such as Levitt (1983) argue that globalization is leading to the global convergence of consumer tastes and the reduction of national differences, hence MNCs will pursue standardisation strategies in order to fill mass global markets with standardised products (Tayeb, 2000). However Douglas & Wind (1987) suggest that there is very little evidence of this so-called “homogenisation”, and Rugman & Hodgetts (2003) describe how there is still a need to appreciate and respond to changes in consumer tastes and regulations across countries.

MNCs are often therefore grouped into different typologies each having different strategic orientations. Prahalad & Doz (1987) suggested that the strategic orientation of an MNC varies along two key dimensions, pressures for global integration and pressures for local responsiveness, which is known as the Integration-Responsiveness (I-R) framework. The I-R framework is widely used and has been described as “one of the most powerful strategic tools in international business” (Rugman, 2000, p. 178). Harzing (2000) proposes that the development of the model arose due to the complexity of studying multinational organizations.

Placing them into a conceptual framework, allows for easy comparison and a greater understanding of the functioning of multinational firms (Harzing, 2000). Bartlett & Ghoshal (1989) developed the theory further and proposed four strategic orientations of MNCs. Multi-domestic, International, Global and Transnational, which can be plotted onto the original I-R framework (see figure 4). Bartlett & Ghoshal (1989) propose a range of factors that could give rise to either global integration pressures, or local responsiveness pressures on a firm (see table 1).