Paper 2 Exam Practice Question (Section B) - IKEA

IKEA is a multinational company (MNC) that designs and sells ready to assemble furniture, home
appliances, kitchen services, and home services. IKEA’s vision is “To create a better everyday
life for the many people”. The company offers a wide range of well-designed, functional home
furnishing products at competitively low prices so that as many people as possible will be able to
afford them. One of IKEA’s aims is to achieve high quality products at affordable prices through a
range of strategies including optimization of its supply chain, long term relationships with its
suppliers, investments in capital expenditure and automation, and manufacturing in bulk.
(a) Define the term multinational company. [2 marks]
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IKEA was founded in Sweden in 1943. By the end of 2020, IKEA operated 422 stores in more
than 50 countries worldwide. Approximately 70% of IKEA stores are located in Europe. Around
15% of the company’s annual sales come from Germany and approximately 14% from the USA.
Apart from opening new stores in different countries, IKEA’s growth strategy includes a wide
product range of more than 9,500 products. IKEA’s product lines include (are categorised as)
furniture, beds and mattresses, storage and organisation, baby and children, kitchen and
appliances, decoration, lighting, kitchenware and tableware, winter collection, textiles, and home
smart. IKEA has also broadened its markets by operating IKEA restaurants and coffee shops
within many of its furniture retail stores.
(b) Apply the Ansoff matrix to two growth strategies used by IKEA. [4 marks]
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The company uses a franchising strategy as part of its extensive expansion plans. Potential IKEA
franchisees are evaluated through a stringent process, given further guidance, and trained
accordingly. Successful franchise operators are authorized to market, sell (the entire product
range) and operate (the sales channels) of IKEA goods. In return, IKEA franchisees pay the Inter
IKEA Group an annual fee of 3% of their net sales revenues. Franchisees also provide valuable
input based on their own consumer and local market insights. This provides further opportunities
to expand and collaborate.
(c) Explain one advantage and one disadvantage to IKEA from its franchising strategy. [4
marks]
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IKEA plans to explore and exploit the growing Indian market. With just one large store in
Hyderabad, India in 2018 the company has expanded online in Pune and Mumbai. The furniture
retailer aims to integrate its brick-and-mortar format (of physical) stores with online stores. IKEA
announced the opening of its store in Navi Mumbai on 18th December 2020. This became one of
the company’s signature and largest stores along with its small-format stores in the country.
IKEA aims to target 100 million customers in India by 2022. The demand for furniture is
increasing in India and consumers are open-minded to foreign retailers and suppliers. The
government has eased the process of expansion in India by supporting MNCs. Legislative
practices have been improved, and new contracts have been formed to source other
unconventional materials from India. The mandate by the Indian government is to ensure that
30% of all goods sold in IKEA’s Indian stores are sourced locally. The Indian domestic furniture
market is expected to expand at a rate of around 13% between 2020 and 2024. The global
furniture market is estimated at US$1.1 trillion, from which the Indian market size is
currently less than 5%.
However, consumers are price-sensitive and have loyalty towards Indian stores. The market is
dominated by local vendors and well-established brands such as Godrej, Zuari, and Yantra.
These companies have a well-proven market presence. Moreover, firms such as Pepperfry and
Urban Ladder are generating high amounts of sales revenues through online platforms,
indicating the success of e-commerce in India’s furniture industry. The country’s infrastructural
developments and investments in technology are also the key objectives of the Indian
government.
(d) Discuss the impact of the external environment on the growth and expansion of IKEA in
India. [10 marks]
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Power of Active Love (PAL)

Read the stimulus materials and answer the questions that follow.

Resource 1 – Power of Active Love (PAL)

Power of Active Love (PAL) is a small, and privately owned social enterprise affiliated with the
Healman Clinic, the first and the only licensed physical therapy clinic in Wuxi, China. PAL was
set up in 2022 by co-founders Jason Shi, the owner of Healman Clinic, and Zhu Tingting, a
former high school teacher.
The social enterprise focuses on promoting social education to students in Wuxi and its
surrounding areas, including commercial educational courses such as introductory sports
science and public health management. It also organizes social public welfare activities and
learning development programmes to raise public health and well-being awareness.
PAL’s mission statement is “To explore and develop high-quality resources and courses to
support students, teachers, and people with love and knowledge in society.”
The three sustainability pillars (people, planet, and profit) serve as the foundation for the
organization's operations. These represent social, economic, and environmental sustainability.
PAL uses three mascots, Sussi, Soci, and Savi. The organization is driven by three core values:
compassion, responsibility, and efficiency.
Figure 1 – PAL’s mascots and core values
Resource 2 – Authorizations, collaborations, and community work
PAL is an authorized service provider of the Duke of Edinburgh’s Award (DoE Award) and it is
also a partner of the China Education Association for International Exchange. The annual fee for
keeping the authorization is 11,000 Chinese yuan (around $1,560).
In addition to these collaborations, PAL actively participates in different public welfare projects
each month, such as walking for social and physical benefits and charity activities to provide
support for those in need. PAL also provides free first aid and safety knowledge courses for
children and participates in cross-school public welfare activities, such as volunteering work for
animal shelters. PAL also has between 20 to 30 student volunteers at any point in time.
Resource 3 – Financial position
During its first year of establishment, PAL organized numerous public welfare activities and
learning development programmes as part of its promotion and to raise brand awareness, with all
costs being funded by the co-founders’ own money. It currently generates minimal revenue.
For the sustainable development of the social enterprise, PAL needs to earn a financial surplus
to survive. For this reason, Zhu Tingting has developed a plan of summer programmes targeted
at teenagers in the local community. The fees for these programmes will also help to fund future
free events as well as helping the community’s social and mental development, such
as PAL’s free first aid course (see Figure 2). Other key financial data are shown in Table 1
below.
Figure 2 – Example of PAL’s free first aid course

Table 1 – Key financial data for PAL

Item Forecast expenditure ($)

Cost of renewal of DoE certificate $1,560

Cost of organization registration $310

Cost of supporting the current projects $1,415

Co-founders’ salaries (combined) $8,500 per month

Price of summer programmes (5 days) $990

Price of summer programmes (2 days) $285

Resource 4 – Internal Presentation Slides

At a recent meeting, Jason Shi shared a short PowerPoint presentation with some key
stakeholders. A summary of each of the main slides is shown below.
Slide 1: Overview of PAL
PAL is a newly established social enterprise that promotes public health and well-being through
its social welfare activities targeted at young people.

Slide 2: Financial Information

In the past year, PAL's total revenue was ￥1,000 (approximately $140), which is almost nothing
for a business. PAL’s expenses were more than ￥30,000 ($4,245). This has been mainly paid by
Jason Shi using his own salary from the Healman Clinic.

Slide 3: Operational issues

The co-founders of PAL wish to ensure the sustainability of the organization’s social welfare
activities, whilst being able to manage the costs of its commercial summer courses as well as
effectively engaging with its stakeholders through various marketing activities.
Resource 5 – Email between the co-founders
From: [email protected]
To: [email protected]
Dear Jason
Just to confirm our earlier discussion, PAL will now be focusing on public health and well-being
by developing new commercial summer courses for students. These programs will include sports
science, rehabilitation science, rebuilding of recovery space for those with disabilities, and
emergency medicine programmes to promote a healthy and active lifestyle.
These programmes are commercial in nature. With tuition fees, we will use the money to help
improve the premises and to fund AED (automated external defibrillators) in the designated
community.
A possible way forward is to adopt either a cost-focus strategy (if we want to remain in our
narrow market) or a differentiation strategy (if we intend to increase our market growth).
Alternatively, we can consider using other strategies that promote our mission and values. We
can discuss this next week.
Our aim is still to generate additional funds to support our mission and continue to promote social
welfare activities that benefit those in need.
Thanks
Zhu Tingting
Power of Active Love (PAL)

CONFIDENTIAL: This email from PAL and any files transmitted with it are confidential and
intended solely for the use of the individual or entity to whom they are addressed.

Questions
Answer all the questions.
(a Using an appropriate business management theory, describe a human need that Power of Active Lo
) social welfare activities to local students.

(b
Explain two possible challenges facing PAL as a relatively new social enterprise.
)

Using all the information provided and your knowledge of business management, recommend a pos
(c) the sustainability of PAL for the next five years.