Introduction
Companies, both local and international, have, for the longest time, thrived in conducting business in the Asian region. As evidenced by business reports and journal articles, Asia’s GDP has grown with the optimal growth of its business markets (O’Neil, 2023). This growth has been led by China, whose GDP stood at 17.73 trillion in 2021, Japan at 4.9 trillion, and the ASEAN countries at 3.66 trillion, according to a report by the World Bank (2022). These numbers incentivize companies to shop in Asia and tap into the rapidly growing market through relationship building.
Businesses in Asia are based on relationship building. Businesspeople in these countries prioritize trust and personal connections and may want to spend significant time getting to know their counterparts before making a deal. China and Japan will be the focus of this essay. In China, Guanxi is a foundational element of society that focuses on building trust to reduce uncertainty (Tian, 2020). On the other hand, Japan focuses on Nakama to build networks and relationships that can be leveraged for business opportunities. Developing and nurturing these relationships can be crucial to doing business successfully (McHugh et al., 2010).
Despite the impressive GDP numbers and business environment mentioned above, significant challenges have affected companies’ operations in Asia over the past few years. This essay will focus on three challenges the Swedish global brand IKEA faces in Japan and China. After that, recommendations for each challenge will be given to help counter the fall of business in these countries. The conclusion will finally draw on the ideas discussed to create a definitive answer to the question posed.
The first challenge has been the impact of COVID-19. The World Health Organization (WHO) labeled the coronavirus (COVID-19) outbreak a pandemic on March 11, 2020. COVID-19 claimed the lives of hundreds of thousands of people worldwide, challenged healthcare professionals with significant issues, and revealed the flaws of company economic strategies around the world. These economic flaws led to unprecedented disruptions to significant companies, including IKEA (Liu et al., 2020). Since it opened its doors 79 years ago in 1943, IKEA has grown to over 62 markets, with the bulk situated in Europe, America, and Asia (IKEA, 2023). COVID-19 affected 94% of all Fortune 1000 companies’ supply chains, with three-quarters of these companies negatively affected. Additionally, the research found that 71% of most companies did not have contingencies for an outbreak that lasted more than a few weeks (Accenture, 2020).
IKEA faced numerous challenges due to the pandemic and could not weather the challenges due to its lack of resilience on the supply side. The pandemic disrupted global supply chains, causing delays and shortages of raw materials and finished products. This disruption impacted IKEA’s ability to manufacture and deliver products to customers in Asia and Europe, leading to inventory shortages and supply chain challenges. Production in major countries like China had to be stopped due to supply-side shock (G. Zhu et al., 2020). The pandemic led to increased raw material prices and a labor shortage in every manufacturing plant, which negatively affected inventories (Mallick et al., 2023).
Due to the severity of the challenges, the company had to devise measures to stop the bleeding, despite negatively affecting people. The first was the closure of retail stores in Japan and China due to reduced footfall. With people staying home due to the pandemic, footfall in IKEA’s physical stores in the Asian market reduced significantly. Reduced footfall resulted in lower sales and revenue for the company. Additionally, there was a shift in consumer behavior. The pandemic also changed consumer behavior, with many people spending more time at home and focusing on home improvement projects. This change created different opportunities for IKEA to market products that support remote work and home organization. Some of the workers that ran the retail stores were left without employment.
The severity of the COVID-19 pandemic also led to IKEA cutting production costs. Planned expansions were brought to a halt leading to communication problems between the company and countries where these manufacturing expansions were bound to occur. This communication breakdown led to fractured business relationships as the company needed a strategy to cushion itself from the effects of the COVID-19 pandemic. These cost decisions affected the company’s Guanxi relationship with the government leading to a fresh round of negotiations after the pandemic subsided.
One recommendation to reduce the severe effects of COVID-19 would be to ensure flexibility in operations. To adapt to the changing market conditions and ensure business continuity, IKEA could be part of the first wave of large businesses to introduce flexibility in its operations. These changes include adjusting store opening hours, reducing staffing levels, and implementing remote working arrangements where possible. While also targeting remote working arrangements, a company goal should be to invest and build on e-commerce. As discussed, many people, after the advent of COVID-19, adopted the online shopping culture. With physical stores closed or operating at reduced capacity, IKEA would greatly benefit from investing in its e-commerce platform to meet the increasing demand for online shopping. To keep competition at bay, the company can provide new features, such as virtual showrooms, and expand its online product range to provide customers with a seamless shopping experience.
Another challenge that has affected the workings of IKEA in Asia is the green transformation of enterprises. As described by Nylund (2012), green logistics is the company’s ability to “produce and distribute goods in a sustainable way, taking account of environmental and social factors.” Establishing a green growth model for businesses is built on the synergistic impacts of both internal and external forces. First, businesses must adapt to the trend toward green development because of new trends like supply outpacing demand, green consumer preference, and tightening resource limits. Second, to encourage businesses to undertake green transformation, the green development concept and environmental management system set additional standards for them (Wang et al., 2022).
Asian countries have begun to highly advocate for low-carbon and carbon neutrality, so IKEA needs to face the greening of products and business development. In its course to green transformation, IKEA will have hurdles to overcome to ensure success. The first will be in acquiring raw materials. While IKEA has committed to sustainable sourcing of raw materials and reducing its carbon footprint, its supply chain is complex and spans multiple countries. Ensuring sustainability throughout the supply chain can be challenging and requires close collaboration with suppliers. The IKEA logistics managers must decide whether to use low-cost raw materials or high-cost environmentally friendly materials that cost more. In addition to limiting the logistics managers’ options, accessibility to the environmentally friendly material and transportation options of these materials might lead to further expenses incurred by the company.
The second hurdle IKEA would have to go through in green transformation would be waste management. As a home furnishings producer and household products, IKEA generates significant waste. While the company has committed to reducing waste and increasing recycling, managing waste across its global operations remains a challenge (Nylund, 2012). While implementing a circular economy waste management system is viable in curbing this challenge, it may be expensive. Upfront costs are associated with transforming operations to be more sustainable, but IKEA must balance its sustainability goals with the need to remain financially viable.
The final hurdle in green transformation would be transportation. The transportation of products and materials contributes to a significant portion of IKEA’s carbon footprint. While the company has made progress in reducing transportation emissions, there are still challenges in finding more sustainable transportation solutions, particularly in some of the markets where it operates. Another obstacle brought abought by transportation is the maintenance and disposal of company vehicles. How can IKEA effectively ensure the number of vehicles they dispose of to reduce their carbon footprint? And how can the maintenance department ensure the vehicles have prolonged life?
Despite the problems mentioned above linked with the green transformation of IKEA, some recommendations can help the company overcome them. The first recommendation is the implementation of a circular economic waste management system. The circular economy is offered as an alternative to the traditional linear economy, where companies would make a product, use it, then dispose of it (Wikurendra et al., 2022). The first principle of a circular economy waste management system is to reduce waste at the source. This principle is possible through minimizing packaging, designing products for longevity and recyclability, and promoting sustainable consumption patterns.
The second principle is to maximize the use of resources by reusing and refurbishing products. It involves repairing and refurbishing products to extend their lifespan and reduce the need for manufacturing new products. This principle can also be used to tackle the problem of transport, where the logistics manager finds a way to increase the use of company vehicles and reduce their carbon footprint. The third principle is to maximize the recovery of materials by recycling them. The final principle is to recover energy from waste materials that cannot be reused, refurbished, or recycled.
The third and final challenge facing IKEA in doing business in the Asian region is complexities in regulatory compliance. These laws may differ in financing and investment, operation and regulatory environment, and other business dynamics. Taking into account the countries of China and Japan, which are the focal points of this essay, the governance of how business is done in these two countries is different. The rules and regulations governing businesses such as IKEA in China and Japan differ. The company must create different business strategies to navigate these differences in approaching both countries.
As per (Y. Zhu, 2023b), Japan has one of the most business-friendly environments in the world. Of 186 countries globally, Japan ranked 23rd in economic freedom while ranking 4th out of 38 countries in the Asia-Pacific region in 2021. In sharp contrast, China continues to exert restrictive measures on the investment environment while also having cases of widespread corruption. China ranked 107th in the economic freedom rankings out of 186 countries globally and 20th in the Asia-Pacific region in 2021. In operation, IKEA has a challenging time operating in China compared to Japan, which has favorable conditions to open, operate and run a business.
Another difference in regulation is financing and investment. China ranked 159th globally in the financial freedom pillar in 2021, in contrast to Japan, which ranked 38th (Y. Zhu, 2023a). The Chinese government is open to opening the financial sector to foreign investors but maintains a tight grip on the financial system. China has a negative list detailing what sectors foreign direct investments cannot be made. These investments are sometimes allowed subject to approval, qualification, licensing measures, or requisite legal procedures (China Briefing, 2022). China has historically been restrictive to foreign investment due to; national security concerns, economic control, and political considerations. In contrast, the Japanese financial system offers more favorable conditions with flexible regulatory and supervisory actions.
To navigate these regulations in different countries, IKEA should establish local partnerships. Companies can establish local partnerships with businesses and individuals with experience and knowledge of the regulatory environment in the region. These partners can help companies navigate the local regulatory landscape, build relationships with government officials, and identify potential business opportunities. These partnerships can help smoothen negotiations and create favorable working standards agreeable to both parties. With thorough research as the backbone of these partnerships, IKEA could also work closely with regulatory authorities in each country they operate. This relationship would help seek guidance and advice, build relationships with government officials, and comply with local laws and regulations.
In conclusion, all businesses face challenges in every environment they venture into. Still, the ability to find a workaround is what leads to the success and expansion of a business on new ground. As discussed in this essay, IKEA has faced three major challenges in the Asian region as we specifically look at China and Japan: the COVID-19 pandemic, the green transformation of the company, and the different rules and regulations required to operate in those countries. Navigating these challenges requires research and strategy, as evidenced by the recommendations given where a company should survey the country’s business ecosystem, analyze protocols and plans to combat the challenges, and configure these protocols to create a balanced environment for business.
References
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