Evaluating IKEA's Expansion into Russia: Risks and Strategies Analysis

This report evaluates IKEA's market entry into Russia, identifying risk factors and strategies for establishing a strong presence in an underserved market. It analyzes external factors using PEST analysis, highlighting political instability, economic volatility, social dynamics, and technological challenges. The report discusses the importance of understanding market size, growth potential, and competitive landscape. IKEA's strategy of establishing large shopping complexes is examined, emphasizing the need for strategic alliances and adaptation to local conditions. The case study concludes that IKEA's expansion in Russia faced significant hurdles due to corruption and political instability, suggesting the need for partnerships with local companies for sustainable growth. Desklib offers this and many other solved assignments for students.

Running head: INTERNATIONAL BUSINESS AND GLOBAL MARKETS
International Business and Global Markets
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Executive Summary
This report had evaluated the given case and the external factors of IKEA to identify the risk
factors for entering into Russia. It had also identified all the elements required for establishing a
strong presence in an undeserved market. The report would conclude by discussing IKEA’s
strategy for establishing large shopping complexes instead of standalone shopping centres.
IKEA is the market leader in this segment offering home accessories, kitchen appliances and
ready-to-assemble furniture’s. The report conducted analysis based on the case study of IKEA in
Russia. The expansion made in Russia was not at all suitable for the organization and if they
wanted to sustain in that market they should have formed partnership with local companies to
avoid the political instability and corruption.

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Table of Contents
Introduction......................................................................................................................................3
Crucial external Factors for Market Entry.......................................................................................3
PEST of Russia................................................................................................................................5
Risk faced by IKEA.........................................................................................................................8
Establishing Strong market presence...............................................................................................9
Establishing large shopping complexes instead of standalone shopping centres..........................10
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Introduction
This report will evaluate the given case and the external factors of IKEA to identify the
risk factors for entering into Russia. It will also identify all the elements required for establishing
a strong presence in an undeserved market. The report will conclude by discussing IKEA’s
strategy for establishing large shopping complexes instead of standalone shopping centres.
IKEA is the market leader in this segment offering home accessories, kitchen appliances and
ready-to-assemble furniture’s. Ingvar Kamprad is the founder of the company and it’s a Dutch
multinational company founded by a Swedish person (IKEA, 2018). The organization has been
known for providing modern furniture at minimum prices taking into consideration a eco
friendly approach towards its resources.
Crucial external Factors for Market Entry
The different external factors affecting the market entry of a company are socio-cultural
factor, competitive environment, country risk, demand uncertainty, market size and market
growth (De Villa, Rajwani and Lawton, 2015). Market size is a crucial factor in making an
international entry because large countries large countries require large investments and
commitments such as equity participation and wholly owned subsidiaries. Market growth is the
next key factor as companies invests in markets with future potential growth. The markets such
United States, Germany, United Kingdom European countries and Japan have string well
developed market. There are industries in these markets that are already saturated such as
consumer electronics, automobiles and retail. Therefore, the growth of these countries is
declining due to it saturation and countries that are still developing will have the plenty of

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opportunity of growing. Therefore, investing in such countries would prove to be more beneficial
for the companies in the international market.
The legislative framework of the foreign market will greatly affect the market selection
for companies. This is due to the fact that local government rules and regulation may to extra
barriers to entry by adding cost and other restrictions to protect the local companies in the
market. The gulf countries have made it compulsory to form partnership with the local
companies to operate in their market. The level of competition in the foreign market also has to
be considered so as to identify the market forces operating in that country (Cavusgil and Knight,
2015). Therefore, the organization will have to identify ways to respond to the competition in the
global market to increase in the level of competition. The infrastructural aspect of the foreign
market is also an important factor as in order to commit more resources into the market the
roads, telecommunication, railways, market channels and financial institutions have to be
developed. The infrastructural development of any country attracts more foreign market entries
and the best examples are Dubai, Hong Kong and Singapore where the level of investment
increased due to their infrastructure.
A firm have to always identify the risk factors before entering into the market which
could be political, operational and economic. The political instability will have a deep impact on
the resources of any organization and they will not be able to commit more resources into the
market. The economy of the target market has to be stable and should have potential growth. The
factors such as exchange rate volatility, balance of payment upheavals will affect the resources
and marketing activities (Lee et al., 2015). Moreover, it is tough to maintain operations in
countries where the inflation rate is high. Demand uncertainty is a phenomenon where the

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company is unable to identify the fluctuations in demand. The countries where the fluctuation is
demand is high will have the risk in maintaining their inventory.
In context to the case study of IKEA in Russia it can be seen that IKEA did not analyse
the political environment of Russia effectively. The political instability affected their business at
all times due to the change in the government official. Moreover, they were not aware of the
rules and regulations which made them face issues from the health, fire and safety department.
The level of corruption in Russia is high and the company would have to either change their
policies and cooperative with the government officials by paying them bribes or not entering in
to such markets. The market size in Russia is huge but the negative factors had prevented IKEA
from using their resources to the fullest.
PEST of Russia
In the current context, PEST analysis would be used for studying the external factors that
would be having an influence on IKEA in Russia. The PEST analysis would be inclusive of the
four factors: political, economic, social and technological.
Political Politics and policies in the Russian Federation saw
many changes since the selection of their current
president Putin in 2000. The country has become
internationally active and crucial for foreign
companies (particularly Finnish firms) because of a
lot of factors: abundant natural resources,
geographical position, geopolitical tension with
other countries and military capability. It is a
federal presidential republic with centralized

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legislative and political power. However, with
elections and new leadership possibilities, the
business environment is running at a risk. IKEA
must also take into account the factor of corruption
while entering Russia. High level risks include
corruption, bureaucracy, irregular payments and
bribes across all sectors.
Economic The Russian economy is extremely volatile and
unpredictable, highly dependent on oil prices. From
the 2008 global economic crises, Russia continued
running on recession till 2015 also. The crisis
reduced the demand for furniture products, but it
was later on managed. In case of the furniture
industry also, labour productivity is inefficient in
comparison with other Western countries. Low oil
prices, international sanctions and geopolitical
tensions pushed Russia into remaining in recession.
The unemployment rate remained stable between 5-
6% since 2012. Russia’s floating exchange rate has
helped the country adapt a lot to different external
shocks stabilizing the inflation. Other than that,
there are a lot of domestic risks and uncertainties
like household saving attitude and exchange rate
volatility. The economy is majorly dependent on
their energy exports, but the financial sector is

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stabilized and there is a growth in the domestic
business confidence.
Social Social factor has a significant impact on the
furniture segment in Russia. One of the most
important aspect in this factor is the growth in
population. The population of the country is
increasing every year and along with it is growing
the amount of young families, which in turn is
looking forward to an increase in the demand for
furniture products. However, there are major
differences in the population density levels of the
country. There are some basic administrative and
infrastructural services, which, however, get
affected by the lack in modernization and
corruption. The country’s physical infrastructure is
rather poor and ineffective, which in turn limit
economic growth, income opportunities, labour
mobility and the whole welfare of the country.
IKEA needs to focus on big regions when entering
the country, like Saint Petersburg and Moscow. In
the Russian society, among the 50-79year olds
there is a prevalence of shortened working lives
and unproductivity. Due to this, there is an
upcoming demographic crisis in Russia. The
Russian social security system, however, has seen

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advancements. The Russian Orthodox Church
influences the values and beliefs of the Russian
society.
Technological In general, Russia is a poor performer in main
innovating, apart from their successful software
exports. A major reason is due to the state-owned
enterprises blocking competition, as they are
dominating the market and taking away the
required skills and finance for development and
innovation. The country’s state education system
quality is poor, especially in terms of research and
development. The economic crisis negatively
affected the R&D and innovation development.
Digitalisation and the growing internet services
have been playing a crucial role in conducting
businesses in Russia. The retail market turnover of
the country has seen steady growth, which can be
beneficial for the furniture market also. There is
scope for R&D, innovation and new technology in
Russia, along with skills and expertise.
Table: (Theseus.fi, 2013)
Risk faced by IKEA
Understanding the PEST analysis in the previous section has given the outcome that there
are a lot of risk factors that IKEA has to face if they are operating in Russia. IKEA needs to be

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very much aware and conscious of the possible corruption and inefficiency in the country’s
judicial system and the legal and regulatory issues in Russia. IKEA would be subject to poor
level of openness, with existence of complex tariff structure and both domestic and foreign
market access. In terms of doing business in Russia, IKEA has to face problematic factors like
tax regulations, access to financing, inflation, inefficient government bureaucracy and policy
instability (Theseus.fi, 2017). IKEA also has to take note that the Russian society rapidly
experiences changes, waiting for an impending demographic change. IKEA would have to
constantly monitor these changes, along with keeping their distribution chain short. IKEA still
has to make sure that the social media and internet needs to be properly utilized in the furniture
industry in Russia, keeping in mind at the same time that their culture is focused on
extravagance. Based on these factors, it can be said that Russia’s furniture industry is improving
and there are major rooms for improvements.
Establishing Strong market presence
Globalization has the market scenario effectively where the underserved market presents
the opportunity of accessing a million-trillions dollar market. These untapped markets are offer
the chance of building significant revenue and add to the social needs. However, there are certain
risk factors in entering into an underserved market so the company will have to analyse these
factors before entering into such markets. There are five key factors which should be used by the
companies before entering into an untapped market. These factors are mining and translating of
information, changing the internal incentives, challenging the cultural assumptions, making
changes to the business model according to the realities in communities, strategic alliance,
partnership and make improvements in the enabling environment (Karakaya and Parayitam,
2018). This shows that before making an entry the organization will have to gather all the

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necessary information about the market so that they are fully aware of the opportunities and
threats they will face if they invest in the untapped market. This will enable them to launch a
new format to a country and there are many aspects in which these countries are lagging behind.
Therefore, introducing a new product and idea is crucial for gaining success in untapped markets.
Innovation is the key to sustaining in a developing market where there is increase in growth due
to the increase in competition from the other global competitors trying to make an entry into the
market.
The organization will have to make changes to their business model according to the
market requirement in the foreign country. Flexibility within the organization would provide the
organization with the chance of taking advantage of the positives in the market. The safest way
to make a strong presence into an underserved market is forming strategic alliance. The
organizations already present in that environment are well aware of the market characteristics so
forming partnership will enable them to easily grab on to the opportunities in the market and
avoid the threats.
Establishing large shopping complexes instead of standalone shopping centres
IKEA’s idea of developing large shopping complexes instead of stand alone shopping
centres was absolutely logical as large shopping complexes generated more revenue than the
standalone shopping centres. Moreover, the market size was huge so would have been able to
serve a large number of consumers. However, the analysis of the entry barriers was not accurate
as they were not aware of the taxation policies or they did not take that into consideration. The
cost of setting up such malls were high and the company had to pay 25% tax for importing their
furniture. This increased their cost significantly as they were required to produce 30% of their

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furniture in Russia but they managed to make only 13%. This shows that IKEA was short sighted
and hasty in making an expansion into a country with political instability, corruption and trade
barriers.
Conclusion
The conclusion drawn from the report is that IKEA made major blunders in accessing the
external environment. The expansion made in Russia was not at all suitable for the organization
and if they wanted to sustain in that market they should have formed partnership with local
companies to avoid the political instability and corruption. This shows the significance of
external analysis while making an entry into the market.