Critical Thinking and Discussion Questions
1. In a world of zero transportation costs, no trade barriers,
and nontrivial differences between nations with regard to
factor conditions, firms must expand internationally if
they are to survive. Discuss.
2. Plot the position of the following firms on Figure 12.8:
Procter & Gamble, IBM, Apple, Coca-Cola, Dow Chemical,
U.S. Steel, McDonald's. In each case, justify your answer.
3. In what kind of industries does a localization strategy
make sense? When does a global standardization strategy
make most sense?
4. Reread the Management Focus on Procter & Gamble and
then answer the following questions:
EDGE Research Task
globalEDGE.msu.edu
Use the globalEDGETM website (globaledge.msu.edu) to com-
plete the following exercises:
1. Several classifications and rankings of the world's largest
companies are prepared by a variety of sources. Find one
such composite ranking system, and identify the criteria that
are used to rank the top global companies. Extract the list of the
top 20 ranked companies, paying particular
attention to their home countries.
IKEA and Its Strategy of International Business
Walk into an IKEA store anywhere in the world, and you would recognize it
instantly. The warehouse-type stores all sell the same broad range of af-
fordable home furnishings, kitchens, and accessories. Most of the products
are instantly recognizable as IKEA merchandise, with their clean yet taste-
ful lines and functional design.
The outside of the store will be wrapped in the blue and yellow colors of
the Swedish flag. The store itself will be laid out as a maze that requires
customers to walk through every department before they reach the check-
out stations. Immediately before the checkout, there is an in-store ware-
house where customers can pick up the items they purchased. The furniture
is all flat, packed for ease of transportation, and requires assem-
bly by the customer. If you look at the customers in the store, you will see
that many of them are in their 20s and 30s. IKEA sells to the same basic
customers all across the world: young, upwardly mobile people who are
looking for tasteful yet inexpensive "disposable" furniture.
A global network of about 978 suppliers based in 50 countries manu-
factures most of the 12,000 products that IKEA sells. IKEA itself focuses on
the design of products and works closely with suppliers to bring down
a. What strategy was Procter & Gamble pursuing when it
first entered foreign markets in the period up until the
1980s?
b. Why do you think this strategy became less viable in
the 1990s?
c. What strategy does P&G appear to be moving toward?
What are the benefits of this strategy? What are the
potential risks associated with it?
5. What do you see as the main organizational problems that
are likely to be associated with implementation of a
transnational strategy?
2. The top management of your company, a manufacturer
and marketer of smartphones, has decided to pursue
international expansion opportunities in eastern Europe.
To ensure success, management's goal is to enter into
countries with a high level of global connectedness.
Identify the top three eastern European countries in which
your company can market its current product line. Prepare
an executive summary to support your recommendations.
closing case
manufacturing costs. Developing a new product line can be a painstaking
process that takes years. IKEA's designers will develop a prototype
design—a small couch, for example—look at the price that rivals charge for a
similar piece, and then work with suppliers to figure out a way to cut
prices by 40 percent without compromising on quality. IKEA also manufac-
tures about 10 percent of what it sells in-house and uses the knowledge
gained to help its suppliers improve their productivity, thereby lowering
costs across the entire supply chain.
It's a formula that has worked remarkably well. From its roots in Scan-
dinavia, in 2015 IKEA had grown to become the largest furniture retailer in
the world with 328 stores in 28 countries and revenues of $36 billion (32
billion euro). IKEA had 771 million store visits and 1.9 billion online visits
(IKEA.com). With its Swedish heritage, IKEA is particularly strong in Europe,
where it has more than 200 stores, but it also has around 50 stores in North
America. Its strongest growth recently has been in China, where it had 17
stores, and Russia, where it had 14 stores.
Look a little closer, however, and you will see subtle differences be-
tween the IKEA offerings in North America, Europe, and China. In North
Chapter Twelve The Strategy of International Business 353
America, sizes are different to reflect the American demand for bigger
beds, furnishings, and kitchenware. This adaptation to local tastes and
preferences was the result of a painful learning experience for IKEA. When
the company first entered the United States in the late 1980s, it thought
that consumers would flock to their stores the same way that they had in
Europe. At first they did, but they didn't buy as much, and sales fell short of
expectations. IKEA discovered that its European-style sofas were not big
enough, wardrobe drawers were not deep enough, glasses were too
small, and kitchens didn't fit U.S. appliances. So the company set about
redesigning its offerings to better match American tastes and was re-
warded with accelerating sales growth.
Lesson learned, when IKEA entered China in the 2000s, it made adap-
tations to the local market. The store layout reflects the layout of many
Chinese apartments, where most people live, and because many Chinese
apartments have balconies, IKEA's Chinese stores include a balcony sec-
tion. IKEA has also had to shift its locations in China, where car ownership
lags behind that in Europe and North America. In the West, IKEA stores are
located in suburban areas and have lots of parking space. In China, stores
Endnotes
1. More formally, ROIC = Net profit after tax/Capital, where capital
includes the sum of the firm's equity and debt. This way of calcu-
lating profitability is highly correlated with return on assets.
2. T. Copeland, T. Koller, and J. Murrin, Valuation: Measuring and
Managing the Value of Companies (New York: John Wiley &
Sons, 2000).
3. The concept of consumer surplus is an important one in eco-
nomics. For a more detailed exposition, see D. Besanko,
D. Dranove, and M. Shanley, Economics of Strategy (New York:
John Wiley & Sons, 1996).
4. However, P = V only in the special case in which the company
has a perfect monopoly and in which it can charge each customer
a unique price that reflects the value of the product to that cus-
tomer (i.e., where perfect price discrimination is possible). More
generally, except in the limiting case of perfect price discrimina-
tion, even a monopolist will see most consumers capture some
of the value of a product in the form of a consumer surplus.
5. This point is central to the work of Michael Porter, Competitive
Advantage (New York: Free Press, 1985). See also chap. 4 in
P. Ghemawat, Commitment: The Dynamic of Strategy (New
York: Free Press, 1991).
6. M. E. Porter, Competitive Strategy (New York: Free Press, 1980).
7. M. E. Porter, "What Is Strategy?" Harvard Business Review,
On-point Enhanced Edition article, February 1,2000.
8. Porter, Competitive Advantage.
9. D. Naidler, M. Gerstein, and R. Shaw, Organization Architecture
(San Francisco: Jossey-Bass, 1992).
10. G. Morgan, Images of Organization (Beverly Hills, CA: Sage
Publications, 1986).
11 Empirical evidence does seem to indicate that, on average, inter-
national expansion is linked to greater firm profitability. For
some recent examples, see M. A. Hitt, R. E. Hoskisson, and
354 Part Five The Strategy of International Business
are located near public transportation, and IKEA offers a delivery service so
that Chinese customers can get their purchases home.
Sources: J. Leland, "How the Disposable Sofa Conquered America," The New York
Times Magazine, October 5, 2005, p. 45; "The Secret of IKEA's Success," The
Economist, February 24, 2011; B. Torekull, Leading by Design: The IKEA Story (New
York: HarperCollins, 1998); P. M. Miller, "IKEA with Chinese Characteristics,"
Chinese Business Review, July-August 2004, pp. 36-69.
CASE DISCUSSION QUESTIONS
1. Why do you think IKEA uses a floorplan that "forces" the customers to
move along a certain path in the store?
2. Is it appropriate for IKEA to customize their furniture to each geographic
location, for example, differences between U.S. and European furniture?
Some companies do not make these changes, but IKEA does; why?
3. IKEA entered the United States in 1985 and China in 1998. But the
company started in 1958; why did it take so long to move into the
United States and China? Why do you think IKEA is not in more than
28 countries today (there are almost 200 countries in the world)?
H. Kim, "International Diversification, Effects on Innovation and
Firm Performance," Academy of Management Journal 40, no. 4
(1997), pp. 767-98; and S. Tallman and J. Li, "Effects of
International Diversity and Product Diversity on the Perfor-
mance of Multinational Firms," Academy of Management
Journal 39, no. 1 (1996), pp. 179-96.
12. This concept has been popularized by G. Hamel and C. K. Prahalad,
Competing for the Future (Boston: Harvard Business School Press,
1994). The concept is grounded in the resource-based view of the
firm; for a summary, see J. B. Barney, "Firm Resources and Sus-
tained Competitive Advantage," Journal of Management 17 (1991), pp.
99-120; and K. R. Conner, "A Historical Comparison of
Resource-Based Theory and Five Schools of Thought within Indus-
trial Organization Economics: Do We Have a New Theory of the
Firm?" Journal of Management 17 (1991), pp. 121-54.
13. J. P. Womack, D. T. Jones, and D. Roos, The Machine That
Changed the World (New York: Rawson Associates, 1990).
14. M. E. Porter, The Competitive Advantage of Nations (New York:
Free Press, 1990).
15. Example is based on C. S. Trager, "Enter the Mini-Multinational,"
Northeast International Business, March 1989, pp. 13-14.
16. See R. B. Reich, The Work of Nations (New York: Alfred A.
Knopf, 1991); and P. J. Buckley and N. Hashai, "A Global Sys-
tem View of Firm Boundaries," Journal of International
Business Studies, January 2004, pp. 33-50.
17. D. Barboza, "An Unknown Giant Flexes Its Muscles," The New
York Times, December 4,2004, pp. Bl, B3.
18. G. Hall and S. Howell, "The Experience Curve from an Econo-
mist's Perspective," Strategic Management Journal 6 (1985),
pp. 197-212.
19. A. A. Alchain, "Reliability of Progress Curves in Airframe
Production," Econometrica 31 (1963), pp. 697-98.