The Benefits of Globalisation in IKEA and Other Similar Businesses around the World - Case Study Example

INDIVIDUAL ESSAY: TOPIC 3 Using IKEA as an example, analyse how globalisation has benefited similar businesses worldwide Introduction The result of reduced trade barriers is the globalisation of markets and production associated with technological change. Notably, companies and individuals are the ones that facilitate the phase of globalisation as multinational corporations commence to expand into new markets and people begin to migrate for labour. Like many other associations of companies, IKEA is not an exemption with its vast global presence. This paper is geared to discuss the benefits of globalisation in IKEA and other similar businesses around the world. IKEA/ Similar Businesses and Globalisation IKEA is a multinational group of businesses involved in designing and selling ready-to-assemble furniture (i.e. chairs, desks, and beds), appliances, and home accessories. Founded by Ingvar Kamprad in Sweden last1943, IKEA actively participates in the retail industry serving global markets, including Europe, Asia, North America, Oceania, and Africa. In particular, at the end of the financial year 2013, IKEA Group had a total of 303 stores located in 26 countries, 32 distribution centres in 16 countries, and 60% of its production took place in Europe.1 With its immense global presence, the Group is regarded as the world’s largest furniture retailer.2 Notably, the success of IKEA’s business operations can be primarily associated with the integration of economic, financial, trade, and communications, or simply—globalisation. It is a process by which international integration arises from the interchange of goods, services, ideas, and other aspects of culture.3 Benefits of Globalisation The major benefit of globalisation to IKEA is the company’s ability to expand into new geographical markets to reach its target market, construct new distribution centres to facilitate distribution process, and to establish new production centres in few countries where it operates to reduce production costs. In particular, IKEA experienced incremental sales revenue and net income for the period of 10 years, from FY03-13. From 2003 to 2013, the company recorded an increase of its sales revenue by 1.5%,4 and its net income plummeted by 22.8% in just a period of 3 years, from Fy2010-13.5 The company’s stable financial position is a result of the integration of its retail, distribution, and production processes in a global scale. Retail Considering globalisation results in economic growth, countries allow integration via trade and direct investments.6 IKEA used this opportunity to expand into new geographical markets by opening new stores and efficient provide products to its target market. The company has 215 stores located in Europe—its largest customer base. It also has a total of 50 stores in North America, 19 stores in Asia, 14 stores in Russia, and five stores in Australia.7 Other than these 303 IKEA Group stores, 42 additional stores were operated under franchise agreements with Inter IKEA Systems B. V.8 Subsequent to the market research conducted by the company, it decided to expand into Europe more than any other markets because of the market’s high purchasing percentage—69%. In other words, the market has the largest contribution to the company’s profits due to its increasing demand for the company’s products. Following Europe is the North American market where 16% of the total sales come from. Moreover, Asia and Australia have the highest purchases accounting to 33%, and China, in particular, is the highest purchasing country, accounting to 23%.9 In response to this, IKEA will open the world’s biggest IKEA store in Gwangmyeong, Seoul, South Korea.10 From this perspective, globalisation allows firms like IKEA and other similar companies worldwide to expand into new markets through launching of new stores and engage in business-to-customers and business-to-business transactions under a franchise system. Thus, from internationalization to liberalization, such as the presence of free-trade agreements between countries and among nations, helps companies to enter from one country to another.11 Distribution Another benefit of globalisation is the ability of businesses to build distribution centres in areas where they can optimally save cost and efficiently allocate resources. IKEA Group placed its distribution centres in regions where market potential is highly perceived, such as Europe, North America, and Asia. The company also has a distribution centre each in Australia and Russia. As of FY 2013, the company had a total of 32 distribution centres in 16 countries.12 Given this, globalisation introduces similar businesses worldwide to new market opportunities by finding new geographical areas where channels of distribution can become more effective and efficient. Notably, this aspect is essential to the company’s competitive advantage. International firms entering in the local markets are the ones that create greater competition, not just on the part of the local competitors, but as well as the foreign firms. However, foreign firms, such as IKEA and other similar companies across the globe, can establish their distribution centres in the geographical market to efficiently distribute its products.13 In such a case when companies decide to place its distribution centre in one geographical area, tariff costs will mostly likely affect the pricing of their products when they are exported.14 Therefore, constructing new distribution centres in the different areas of the world allow companies to reduce product shipment costs and other related distribution costs that affect the pricing of products in the market. From this perspective, globalisation assists in the cost reduction and helps promote greater efficiency of business operations for multinational corporations. Production Economies of scale are another benefit of globalisation that is essential to the business of companies having global operations. Economies of scale refer to the advantages of cost that companies obtain arising from scale of operation in which cots per unit of output generally reduces with increasing scale because fixed costs are widely spread over the total produce.15 IKEA enjoyed economies of scale, particularly in Europe, where it has 36 production units. The company also has five production units in Russia, two production units in Asia, and one in North America. Other than production units, the company has 27 trading service offices as support in the process of purchasing products from its suppliers. The benefit of globalisation allows suppliers of IKEA and IKEA’s production units to produce IKEA products and either send them directly to different stores or to distribution centres wherein deliveries and stocks are supervised.16 From this perspective, technological change plays in important part in the distribution channel of the company. While the primary basis for the locations of these production units is low labour cost, the basis for the location of the trading service offices includes locations of stores, distribution centres, and suppliers. With this setup, IKEA can effectively transact with its suppliers and customers and can efficiently produce IKEA products mainly out of low-cost operations. Conclusion The discussion of this paper focused on the benefits of globalisation to IKEA and other similar businesses worldwide. The main benefits of globalisation these businesses are reduced production costs, market expansion, and increased sales revenue and profitability. These are all resulting from effective and efficient business operations, specifically in the retail, distribution, and production activities of the company. Because of globalisation, IKEA could expand into international markets by opening new stores, new distribution centres, new production units, and trading service offices. As of 2013, it had a total of 303 stores, 32 distribution centres, 44 production units, and 27 trading service offices worldwide. The basis for its diverse geographic presence includes low labour cost, high demand, and accessibility of resources, and this result in a reduced cost per unit of output due to economies of scale. References Cheng, J. et al., ‘Poang! IKEA Hits Headwinds in Korea’, The Wall Street Journal, 26 June 2014, http://blogs.wsj.com/korearealtime/2014/11/18/poang-ikea-hits-headwinds-in-korea-as-it-preps-largest-store-ever/, (accessed 1 December 2014). Ching, H. S. et al., ‘Economic Benefits of Globalization: The Impact of Entry to the WTO on China’s Growth’, Pacific Economic Review, vol. 16, no. 3, 2011, pp. 285-301. IKEA, ‘IKEA Group: Yearly Summary FY 13’, 2013, http://www.ikea.com/ms/en_US/pdf/yearly_summary/ikea-group-yearly-summary-fy13.pdf, (accessed 1 December 2014). IKEA, ‘Welcome Inside: 2011’, 2011, http://www.ikea.com/ms/es_ES/pdf/yearly_summary/Welcome_inside_2011.pdf, (accessed 1 December 2014). Scholte, J. A., ‘Defining Globalisation’, The World Economy, vol. 31, no. 11, 2008, pp. 1471-1502. Sirota, D., ‘Ikea Joins the Race to the Bottom’, The Herald, 16 April 2011, Available from Proquest, (accessed 1 December 2014). Spencer, G. M., ‘Creative Economies of Scale: An Agent-Based Model of Creativity and Agglomeration’, Journal of Economic Geography, vol. 12, no. 1, 2012, pp. 247-271. Villaverde, A., and A. Maza, ‘Globalisation, Growth and Convergence’, The World Economy, vol. 34, no. 6, 2011, pp. 952-971. Read More