International Business: IKEA's Strategic Analysis for Vietnam Market

This report provides a comprehensive analysis of IKEA's potential expansion into the Vietnamese market. It begins with an introduction to IKEA and its global presence, followed by a critical evaluation of the benefits, costs, and risks associated with doing business in Vietnam, considering factors such as economic growth, infrastructure, labor costs, corruption, and intellectual property rights. The report then critically assesses different market entry modes for IKEA, including franchising, joint ventures, and wholly owned subsidiaries, ultimately recommending franchising as the most suitable option. Furthermore, the report delves into the impact of cultural differences on IKEA's business practices, using Hofstede's cultural dimensions to compare Sweden and Vietnam. Finally, it examines the relative merits of fixed and floating exchange rate regimes, concluding with a recommendation for the most appropriate system for IKEA's operations in Vietnam. This analysis aims to provide insights into the strategic considerations for IKEA's successful entry and operation in the Vietnamese market.

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1.0 Introduction
IKEA is a Swedish multinational furniture company that has established itself as a global
leader in the furniture business in the six decades after its establishment in 1943. IKEA sells
affordable, ready to assemble furniture, home accessories, kitchen appliances, and many
customized furniture for home and office. Currently, it operates in around 52 nations, with
almost 433 stores and in 2018, the total revenue of the company was worth of almost €38.8
billion or USD 44.6 billion (Ikea.com, 2020). IKEA aims to expand its business in Vietnam, and
thus, the critical evaluation of the benefits, costs, and risks of doing business in Vietnam will be
done in this paper. The discussion will also contain a critical assessment of the market entry
modes of franchising, joint venture and establishment of wholly owned subsidiary to choose the
most appropriate one, the influence of cultural difference on IKEA’s business practices, and the
relative merits of the fixed and floating exchange rate regimes to choose the most suitable
system.
2.0 Critical evaluation of the benefits, costs, and risks associated with doing business in
Vietnam
While expanding a business in a different country, it is important for the company to
evaluate the potential benefits, costs and risks of business in that country as that would give an
idea about the potential profitability of the company in the new country. According to
Doingbusiness.org (2020), the lower middle income country of the East Asia and Pacific region
scores 69.8 for doing business and thus, holds 70th rank among 190 countries. Regarding the time
and cost of starting a new business in Vietnam, the country scores 84.4 and 97.2 respectively,
which is considered as excellent. The benefits of establishing a business in Vietnam include
strategic location, the growing score of doing business in each year, trade openness and

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increasing number of trade agreements, stable growth of GDP with an average of 6.46% yearly
since 2000 and 7.08% in 2018, increasing GDP per capita (USD 2,587 in 2018), openness to
FDI, increasing population and domestic demand from 95 million population, young
demographics with 52% of the population having working age, comparatively lower business set
up costs, competitive labor cost of USD 3 per hour and 22.5% growth in labour productivity in
between 2008 and 2016 and continuously developing infrastructure (Nguyen, 2019).
While Vietnam has various advantages of doing business, there are some costs also.
According to Barai, Le & Nguyen (2017), the main challenges include corruption, bureaucracy,
lack of sufficient infrastructure, lack of sufficient skilled labor, insufficient Intellectual Property
Rights (IPR) enforcement and lack of transparency in some of the Vietnamese law. The nation
has 10 procedures for starting up a business. The Construction Permit takes around 110 days and
11 processes along with many more departmental interventions. Electricity arrangement is a
highly time and cost consuming complex process. It takes around 115 days and costs a
significant portion of the income per capita to get electricity for business set up. Property
reinsertion takes 57 days, higher than OECD average (Pwc.com, 2020). Although credit
environment is stable, but situation is not much smooth for foreign companies. Investor
protection process is one of the worst in Vietnam, making it 169th in the world ranking.
Corporate tax payment process is another major challenge with 32 different types of taxes to be
paid, that takes an average of 872 working hours. On the other hand, cross border trading is
cheaper but the processes are quite complicated due to high level of bureaucracy and red tapes.
Lastly, the process of enforcing the contracts takes around 400 days to finish with 34 processes.
The process of resolving insolvency is laborious taking an average of five years with a very low
recovery rate (Pwc.com, 2020). Thus, it can be said that the procedures of setting up new

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businesses faces tough challenges from the procedures which are quite time taking and cost
consuming.
The risks of business include the lack of enough strong enforcement for IPR protection.
The country has laws but there are not enough measures for strong enforcement and that is a big
challenge. Secondly, the cyber security is also not strong enough in Vietnam, which is a major
challenge for the global businesses, as they are highly dependent on cyber techniques for running
the business. The new cyber security law was introduced on January 1, 2019, however, it would
take time to be implemented completely. Thirdly, Vietnam often faces challenges from natural
disasters like tropical cyclones, which disrupt the daily lives, infrastructure and economy. Flash
floods, landslides and localized flooding are very common in Vietnam that affect regional areas
considerably and thereby affects the businesses. Lastly, corruption and bribery is quite common
in the Vietnamese system, which is a demotivating factor for the foreign investors, like IKEA, as
they do not face such high level of corruption in their own system (Tmf-group.com, 2020).
Thus, it can be said that Vietnam has quite a few significant costs and risks for setting a
new business. Although there are laws to deal with these challenges but the nation still has a long
way to go to eliminate these challenges. On the other hand, from the economic and geographic
perspectives, the nation has quite a few benefits that would be beneficial for IKEA to establish
its presence in the East Asia and Pacific region. Vietnam has growing GDP, growing population
and growing demand and many beneficial trade agreements, and this is a significant factor for
starting up a business.

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3.0 Critical evaluation of market entry modes: franchising; a joint venture with a host-
country firm; or setting up a new wholly owned subsidiary in Vietnam, and
recommendation for the most suitable one
There are quite a few foreign market entry mode and among those, IKEA has narrowed
down to three market entry modes: franchising; a joint venture with a host-country firm; or
setting up a new wholly owned subsidiary in Vietnam. Under franchising, the business rights and
licenses are given to semi-independent business owners of the host country by the franchisor,
and the franchisee can use the trademark and some specific business processes and systems for
selling the products under their original brand name. In this mode of entry, the nature of business
of the franchisor is followed by the franchisee. As stated by Madanoglu, Alon & Shoham (2017),
franchisee mode of entry allows a firm to reduce their risk of business while entering a new
market. For example, the initial set up cost of establishing stores in a new country is often shared
by the semi-independent business owners who purchases the rights of the business from the
franchisor. Hence, in case there is a business failure, the burden of loss is shared by both the
franchisor and franchisee. On the other hand, the franchisees get support from the franchisors in
terms of marketing activities and cost, giving training to the employees hired by the franchisees,
technical and administrative assistance and setting up the décor and infrastructure of the stores
(Jell-Ojobor & Alon, 2017). The benefits lie in the fact that the local business owners understand
the market demand better than the foreign based franchisor and therefore can help in the growth
of the company by channelizing their business ideas, innovations and supply in the right
direction. Moreover, the franchisor gets an already established market and a supplier base if it
enters by using franchisee mode of entry (Fakos & Merino, 2017).

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IKEA considers joint venture as another option for entering into Vietnamese market.
Under this mode of entry, IKEA would require to collaborate with a local firm operating in the
same industry for entering Vietnam, while both would maintain their distinct identities. This is a
legal agreement in which both parties come together and pool their resources for their common
goals. Under this, each of the partners is accountable for costs, revenues, profits and losses
(Nippa & Reuer, 2019). Joint venture provides the benefit of accessing the local expertise,
technology and resources for the foreign based investor company, which also helps it to get
control in the foreign market rather than having resellers. The capacity of production and supply
increases. The costs and the risks are shared by both the parties (Parameswar & Dhir, 2019). For
example, IKEA could go for a joint venture with a marketing company in Vietnam and transfer
the marketing responsibility to them.
However, there are some disadvantages of joint ventures, such as, there can be restricted
flexibility, conflict of cultures, leadership and management style, lack of common long term
objectives can lead to lack of commitment as well as lack of transparency in communication and
accounting process, imbalances can arise in the level of expertise, investments and assets from
different parties and chances of success is ambiguous as well as time consuming (Sestu &
Majocchi, 2018).
Thirdly, IKEA also thought about going for the option of wholly owned subsidiary. The
wholly owned subsidiary implies that the parent company, that is, IKEA would hold all the stock
of a company in Vietnam to enter the furniture market. In other words, its entire stock would be
held by IKEA, however, the company may run its operation independently regarding the
management structure, client base or products. However, in this case, the wholly owned
subsidiary would sell only IKEA’s products in Vietnam market. The advantage of having a

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wholly owned subsidiary in a foreign country is to have a larger target market and thus larger
revenue. The parent company gives training to the employees of the subsidiary and they integrate
their knowledge to meet the domestic demand. The intellectual property is protected as the
subsidiary is entirely owned by the parent company. The parent company controls the financial
assets of the subsidiary and therefore takes the decision on the amount of spending according to
the performance of the business in the new market. This way the risk of financial loss is reduced
(Sestu & Majocchi, 2018). However, the major disadvantage is the cost associated to acquire a
wholly owned subsidiary company. On one hand, acquisition of a local company can have many
benefits in terms of establishing the business, having an established market and accessing
resources, on the other hand, it is quite expensive to acquire a company in an overseas market
and if the business does not perform well, then the loss margin would be high (Dau, 2018).
Hence, by evaluating the advantages and disadvantages of all three market entry modes,
it can be said that franchising would be the most suitable option for IKEA to expand in the
Vietnam market. On one hand, the local business owners can invest some capital in establishing
the stores of IKEA and hiring local employees, which would also be helpful in minimizing the
clash of cultures, and addressing the market demand more efficiently, on the other hand, the risk
of business failure is minimized, which would also reduce the chance of losses for IKEA in the
new market.
4.0 Impact of cultural differences on business practices
In case of global business ventures and expansion, culture plays a very significant role in
the business performance. People’s attitude are considerably influenced by the culture of the
nation, and when a foreign company expands in a nation, the difference in the cultural dimension

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is reflected in the behavior of the employees, which affects their motivation level and
productivity and in turn, affects the business performance (Minkov et al., 2019).
Figure 1: Country comparison: Sweden vs. Vietnam
(Source: Hofstede Insights, 2020)
According to Geert Hofstede, differences in people’s attitude and behavior can be
explained from cultural differences and there are six cultural dimensions that can illuminate the
cultural differences between the countries across the world. Those are, power distance,
individualism vs. collectivism, masculinity vs. femininity, uncertainty avoidance, long term
orientation and indulgence vs. restraint (Favaretto, Musse & Costa, 2019).
The image above shows the comparison of Sweden and Vietnam on the basis of the
Hofstede cultural dimensions. It is found that power distance is much higher in Vietnam than in
Sweden, implying rigid hierarchical structure in business. Secondly, individualistic approach
towards work is more preferred in Sweden, while the Vietnamese people emphasizes on the
group effort. Thirdly, aggressiveness and competitiveness are higher in Vietnam than in Sweden.

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Fourthly, both the nations have almost equal uncertainty avoidance attitude. Regarding the long
term orientation, both have similar attitude, while the restraint attitude is more among the
Vietnamese than the Swedish (Cakanlar & Nguyen, 2019).
Therefore, it can be inferred that while expanding in Vietnam, IKEA must employ the
local workforce and the conflict of culture would arise in terms of organizational hierarchy,
collectivist attitude of the employees and their community concerns, competitiveness and their
responsibility towards more work and less indulgence in the leisure time. Their behavior will be
restrained as per the social norms. A score of 57 in long term orientation indicates that Vietnam
has a pragmatic culture, and they have the ability to adapt the traditions as per the new business
conditions of IKEA (Hofstede Insights, 2020). The global furniture company would succeed in
Vietnam if the new stores maintain strict organizational hierarchy, emphasize on the group
performances and community benefits, motivate the employees to have aggressiveness and
competitiveness in their performance, have long term goals, and more restrained work
environment.
5.0 Relative merits of fixed and floating exchange rate regimes. From the perspective of
IKEA, critically appraise the most important criteria in a choice between the systems
Fixed and floating exchange rate regimes are two aspects of the exchange rate systems
and both come with their own merits and demerits. According to Sweeney (2019), fixed
exchange rate represents a nominal rate of exchange, which is set strictly by the monetary
authority of an economy with respect to another foreign currency or a basket of foreign
currencies, on the contrary, floating exchange rate represents the rate, which is determined in the

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foreign exchange market based on the market demand and supply and therefore, it is
continuously fluctuating.
The merits of fixed exchange rate regime are: the currency fluctuations resulting from
uncertain exchange rates can be avoided by applying fixed exchange rate. The valuation of the
imports and exports can remain stable and that reduces the risk of potential losses from uncertain
and fluctuating product prices (Santana-Gallego & Pérez-Rodríguez, 2019). Secondly, fixed
exchange rate results in stability in the purchasing power parity between economies and that
encourages greater investment. Thirdly, the inflation in the economy can be kept low through
fixed exchange rate. This regime provides firms incentives to continue cutting the costs for
remaining competitive in the market. When the currency value is not fixed and uncertain, then,
currency and exchange rate devaluation creates inflationary pressures. Consequently, the
aggregate demand in the nation increases, the demand for exports rises too, and that results in
increase in the import prices. That gives the firms less incentive for cost cutting and hence,
inflationary expectations remains low (Sweeney, 2019).
Therefore, it can be derived that the regime of fixed exchange rate leads to decreased
transactions costs, generated by the uncertainty in the exchange rate, and it discourages the
global trade and investment, followed by a low inflationary monetary policy in the economy.
However, the intervention of the central bank of the nation increases significantly, as they need
to maintain the exchange rate in the foreign market at an officially set level (Willett & Wihlborg,
2019) and hence, there is no autonomous monetary policy when there is fixed exchange rate.
Merits of floating exchange rate includes autonomous monetary policy. In other words,
the exchange rate is adjusted as per the market condition in the economy and that is beneficial to

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maintain the economic growth. The central bank does not intervene in the foreign exchange
market and when there is recession in the economy, the autonomous monetary policy leads to
measures to boost domestic demand and thus, the effect of economic shocks on the domestic
employment and output is reduced (Sweeney, 2019). The government also has low level of
interference in the monetary system under this exchange rate. Secondly, market efficiency
increases under floating exchange rate. Countries are often insulated from the macroeconomic
issues in other countries, such as, increasing inflation in the USA devalues the dollar and that
reduces the American demand for imports from another country and that helps to enhance the
domestic market competitiveness, which would not have been possible under fixed exchange
rate. Thirdly, the probability of speculations is less as the market adjusts itself with the changing
exchange rate in the international economy. Hence, there is automatic stabilization in the
economy under floating exchange rate regime (DA Vann, & Jacquet, 2019).
Vietnam has been following the fixed exchange rate system and the currency,
Vietnamese dong is pegged to the US dollar. The government started to change the exchange rate
regime to a free floating one, however, the system has not been adopted to prevent the currency
depreciation. As highlighted by Thuy & Thuy (2019), in 2015, the State Bank of Vietnam (SBV)
made various attempts to devalue the dong, when almost all the Asian countries were adopting
currency devaluation measures. However, the dong went down to the lowest of the trading band
in December 2015, resulting in growing pressures on the exchange rate, increased hoarding of
dollars, and fall of reserves to around $28.3 billion, worth of loss of imports of two months. This
led to the once again pegging of the dong to the USD to prevent sharp currency depreciation.
However, the exchange rate policy in Vietnam is currently called managed float policy.

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As mentioned by Nguyen (2019), majority of the times, dong is overvalued and Vietnam
has high inflation rate and that has reduced the competitiveness of Vietnam’s domestic and
export production. Thus, from the perspective of IKEA, flexible exchange rate policy in Vietnam
is preferred to achieve business success in the global market. A floating exchange rate would
lead to enhanced competitiveness for the IKEA operations in Vietnam. It is also preferred
because Vietnam’s economy is susceptible to the shocks of the terms of trade, which are
generated from the exposure of the commodity exports to the fluctuations in the world price.
Therefore, it can be said that as IKEA will have a global operational base, hence, it will have
exposure to the fluctuating global prices for its products in the domestic and international
market, and if the nation has floating exchange rate, IKEA would have a market with improved
competitiveness and a growing economy, with a moderate inflation. When currency devaluation
taking place, the capacity of Vietnam’s financial sector in managing currency risks will be
improved. Furthermore, as imports would be costlier due to dong depreciation, the domestic
market’s efficiency would be improved and exports would rise. This would not only help IKEA
to grow their business in Vietnam, but would also help in the growth of Vietnamese economy in
the long run.
6.0 Conclusion
It can be concluded that among the East Asian countries, Vietnam has a growing
economy with a growing rank in the ease of doing business every year. IKEA would be facing
certain benefits as well as challenges while expanding in Vietnam and it should opt for the
franchising mode of market entry. This would help IKEA to share the cost of establishing the
business with the franchisees in Vietnam and also to reduce financial risk of business failure.
Conflict of culture would be an issue as there are some major difference in the cultural