Swedishfurniture major IKEA, has made a global presence in the futuremarket. Entry into the Mexican market can be expected to followtrusted approaches that the firm has applied in other markets. In thecase of entry into the US, Australia, UK and other Europeancountries, the firm applied the export approach. This approach hasremained reliable to the firm for its expansion strategies. Sinceinception, IKEA has mainly relied on third party suppliers whomanufacture its products. However, the firm designs its own furnitureand related equipments. There are more than 1,220 third partysuppliers spread over 26 countries (IKEA).
Entryinto the Mexican market can be best done through exporting. Thisstrategy requires little initial capital outlay and allows the firmto benefit from economies of scale as it can source more quantitiesfrom suppliers and thus keep costs low. However, there are hightransport costs and higher tariffs for finished products and poorcontrol of the market given the physical distance between suppliersand the market. The option to manufacture in Mexico requires heavyinitial capital outlay that can be even more expensive in the eventthe firm chooses to divest from the market. Furthermore, this optiondenies it the flexibility that comes with sourcing from third partysuppliers.
Exportingis better supported by developing its own technology as opposed tobuying it. As aforementioned, the firm designs and develops each ofits products in Sweden where it is also assigned a unique name. Thedesigners utilize the best combination of environmental friendly andlow cost materials to design over 9,500 pieces of furniture (Steven1). Buying such technology would interfere with the firm’s designpolicy and incur additional costs. However, acquiring an establishedlocal designer gives the firm the chance to respond to local culturein terms of the design of furniture.
Alsosuited to the exporting strategy is the establishment of a jointventure with an already established firm. The joint venture can allowthe local enterprise to handle the distribution and marketing in thelocal market using already established networks. This option ispreferable to acquisition because it allows the firm to maintain abetter understanding of the local market conditions. A joint venturewith a well established entity in the Mexican market allows IKEA toexploit and benefit from the experience of the venture partner in theMexican market. This is especially critical in relation to culture.Understanding local culture is more influential on the success ofmultinational firms than the issue of funding and otherconsiderations (Paul 544). Additionally, a joint venture allows thefirm to retain the local appeal in the Mexican market. Thearrangement can also be modified to allow the use of the IKEA brandto capitalize on its brand equity. The exit strategy under a jointventure arrangement is less costly and less complicated compared toan acquisition. The joint venture approach is thus recommendedbecause it affords the firm needed flexibility in the short term andis less costly.
Thereare minimal legal restrictions for operations in Mexico. As a memberof NAFTA, it implies that most of Mexico’s investment laws maybesimilar to those of the US. The Mexican foreign investment law doesnot place any limits on the type or amount of ownership foreign firmscan have in Mexico (“Prosec decree” 2006).
Withthe above considerations, it is recommended that IKEA should continueto develop its own technology and designs for its products. Giventhat the firm relies on third party suppliers, it should continuewith the exporting business model in Mexico. However, it shouldestablish a joint venture with an already established firm with agood distribution network.
Lief,C. (2008), IKEA:Past, Present and Future. IMDInternational.
Kelly,Steven. International supply chain management. 2010. Web. 11thMay 2015.
IKEA.IKEA Milestones. 2015. Web. 11thMay 2015.
Paul,Justin. International business. New York: PHI Learning. 2011.
Prosecdecree. 2006. Web. 11thMay 2015. < http://www.mexicanlaws.com/scfi/PROSEC_decree.htm>