Mark scheme

a.  Define the term multinational company.  [2 marks]

A multinational company (MNC) is a business that operates in its home country as well as in at least one other country. The head office is located in one country (usually the home country), which coordinates the management functions across all offices.

Award 1 mark for a basic definition that conveys partial knowledge and understanding of the term multinational company.

Award 2 marks for a full, clear definition that conveys knowledge and understanding of MNC, similar to the answer above.

b.  Apply the Ansoff matrix to two growth strategies used by IKEA.  [4 marks]

Possible responses include an explanation of:

• Market penetration: Opening of more stores in India including Mumbai, Hyderabad, Pune, as well as adding online platforms.

• Product development: IKEA’s wide/broad product range, with over 9,500 products.

• Market development: Expansion in different regions and countries of the world, including Europe, the USA, and India.

• Diversification / related diversification: IKEA restaurants and coffee shops within its furniture retail stores, providing new offerings targeted at different and/or the same set of customers.

Award 1 – 2 marks for a response that shows some understanding of the Ansoff matrix. Application is somewhat limited.

Award 3 – 4 marks for a clear understanding of the Ansoff matrix, with accurate application of the growth strategies used by IKEA.

c. Explain one advantage and one disadvantage to IKEA from its franchising strategy.  [4 marks]

Possible advantages to IKEA include:

• Franchisees pay the Inter IKEA Group an annual fee of 3% of their net sales revenue – this helps to increase the return on investment and profits for IKEA as a MNC.

• Franchisees provide valuable input based on their consumer and local market insights. This increases the probability of success of IKEA operating in the host countries as well as reducing the risk of failure due to limited local knowledge of overseas markets.

• Faster expansion across the globe – IKEA operates 422 stores in more than 50 countries. Such a large-scale expansion is possible due to its franchising growth strategy.

• Economies of scale – by operating on such a large scale, IKEA is able to reduce the average cost of its furniture and related products. This helps to give all franchisees and IKEA a cost advantage over its local and international competitors.

• Strengthening the brand name across all IKEA stores. Brand recognition and brand loyalty bring further benefits to the Inter IKEA Group.

• Accept any other relevant advantage, written in the context of the IKEA case study.

Possible disadvantages to IKEA include:

• IKEA may find it difficult to control the standards and quality of customer service across some franchisees, spread across the world.

• The brand image of IKEA as an organization may be negatively impacted by just a handful of franchisees operating outside of the standards and practices expected by the Inter IKEA Group.

• Franchising is a slower growth strategy (due to the stringent processes involved) when compared to mergers and acquisitions.

• Accept any other relevant disadvantage, written in the context of the IKEA case study.

Mark as 2 + 2. 

Award 1 mark for identification of a relevant point (advantage and disadvantage)

Award 1 mark for application of this point to IKEA.

d.  Discuss the impact of the external environment on the growth and expansion of IKEA in India.  [10 marks]

The external environment presents opportunities and threats to IKEA. This can be presented through the use of PEST analysis, STEEPLE analysis, or any other similar tool.

The following points are possible areas to be covered in the discussion:

Social: Indian consumers are open-minded while purchasing from foreign companies such as IKEA. The Indian market is also a very large one (with around 100 million customers being targeted by IKEA). This provides immense business opportunities for IKEA in its growth and expansion plans. Furthermore, as consumers are price-sensitive and IKEA provides products at relatively cheap / affordable prices, this could help to attract even more customers in the future. However, many Indian customers are loyal towards domestic business and retail stores, so this will be an initial constraint for IKEA in its pursuit of growth.

Technological: Improvements in technology (such as investments in Internet technologies and e-commerce) will allow IKEA to better integrate designs, products, and markets using various online platforms. The Indian government’s commitment to infrastructural developments and investments in technology should also reassure IKEA with its growth plans.

Economic: Increasing demand in India provides many business opportunities for IKEA to explore. The Indian domestic furniture market is expected to expand at a rate of around 13% between 2020 and 2024. Growing demand also provides opportunities for IKEA to experience further economies of scale. However, competition from local producers, such as  Godrej, Zuari, Yantra, and Pepper Fry, provides customers with various choices. Hence, competition in the domestic market can be a threat to IKEA’s growth plans in India. Competitors including Pepperfry and Urban Ladder are able to generate high amounts of revenue through their own online platforms. Their success and market presence will also be constraints on the ability of IKEA to expand and succeed in the Indian market.

Political: The Indian government has eased the processes of expansion of foreign MNCs in the country, as well as providing support for these companies. Hence, the political climate in India provides a conducive environment for IKEA to explore in its pursuit of further growth in India.

Legal: The legislative practices have been refined, and new contracts have also been formed to source other unconventional materials from India. Support of the government should encourage IKEA with its ambitious growth plans. Also, the mandate by the Indian government to ensure that 30% of all goods sold in IKEA’s Indian stores are sourced locally will assure regular supplies from local businesses in India. Such partnership agreements should also lead to win-win outcomes for all parties involved. However, some local suppliers may be expensive and/or lack the quality standards expected by the Inter IKEA Group.

Apply the marks using the generic level descriptors and assessment criteria for 10-mark questions in Paper 2.

Award 1 – 2 marks for a response that shows limited understanding of the demands of the question. Only a few business management tools, techniques, and theories are explained or applied, and the use of relevant business management terminology is lacking. There is little, if any, reference to the stimulus material.

Award 3 – 4 marks for a response that shows some understanding of the demands of the question. Some relevant business management tools, techniques, and theories are explained or applied, and some appropriate terminology is used. There is some reference to the stimulus material but often not going beyond the name of the organization.

Award 5 – 6 marks for a response that shows understanding of most of the demands of the question. There is relevant use of business management tools, techniques, and theories which are explained and applied, and appropriate terminology is used throughout most of the answer. There is some reference to the stimulus material that goes beyond the name of the organization. There is some evidence of a balanced response. Some judgements are relevant but not substantiated.

Award 7 – 8 marks for a response that shows a good understanding of the demands of the question. There is relevant use of business management tools, techniques, and theories which are explained and applied well, and appropriate terminology is used. There is good reference to the stimulus material, and good evidence of a balanced response. The judgements are relevant but not always well substantiated.

Award 9 – 10 marks for an answer that shows a good understanding of the demands of the question, including the impacts on the organization. There is relevant use of business management tools, techniques, and theories which are explained clearly and applied skilfully, with appropriate terminology used throughout the response. There is effective use of the stimulus material in a way that significantly strengthens the response. There is evidence of balance, which is consistent throughout the response. The judgements made are relevant and well substantiated.

Teachers can download a PDF version of this exam practice question to use with students in class.