Activating Stakeholders: An Approach by MNCs in Emerging Markets

Chapter 3

Activating Stakeholders: An Approach by

MNCs in Emerging Markets

Veronika V. Tarnovskaya

Abstract

A proactive stakeholder approach by a multinational firm is explored asregards to the ways to choose and influence key political, social and businessactors in a market. The stakeholders are assessed in terms of their power,legitimacy and urgency of action as well as degree of their support of the firm’smarket entry. The study is based on the case study of IKEA entering Russiaand China, composed of 44 in-depth interviews with managers and suppliers.The results suggest that during its market entry, a firm chooses those localstakeholders that can provide it with the most support and activates them withparticipative roles. This approach allows it to successfully alter the marketcontext and create the win-win situation for itself and local actors. The studysuggests a novel stakeholder classification into reactive (resistant), passive,reactive (supportive) and proactive types, contributing to stakeholder andmarketing strategy research.

Emerging economies represent the world’s fastest growing markets for most productsand services. Hence, multinational corporations (MNCs) engage themselves moreand more actively in these markets. Still, most of MNCs struggle to developsuccessful strategies for these markets. Indeed, most global firms (e.g. IBM,

Business, Society and Politics: Multinationals in Emerging Markets

International Business and Management, Volume 27, 45–68

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Microsoft, GE, Nokia, Intel, Disney, McDonalds, Toyota, Louis Vuitton, IKEA,Siemens, Zara) still derive not more than a third of their earnings outside their homemarkets, even less from emerging markets (Wood, Pitta, & Franzak, 2008). Asubstantial part of the problem is that MNCs underestimate the critical role of thelocal institutional context, which is very different from their home market. Thus,political and social systems, openness of the economy, product, labour and capitalmarkets in the emerging countries can be radically different from the developed ones.Such challenges as the government’s interference in businesses, lack of reliableconsumer information, weak trade unions and so on can determine the success orfailure of any business strategy. The literature suggests that MNCs need to carefullymap each country’s institutional context and decide on the strategy adaptation ineach particular case (Khanna, Palepu, & Sinha, 2011). This work starts fromidentifying the strategic stakeholders and the ways to get their support for thecompanies’ operations in the market.

The stakeholder approach (Freeman, 1984) is especially relevant to study in thecontext of MNC’s entry into emerging markets. Recent studies offer some examplesof critical actors that a firm has to consider during its market entry, for examplepolitical and social actors (Elg, Ghauri, & Tarnovskaya, 2008) as well as businessactors, that is suppliers (Ghauri, Tarnovskaya, & Elg, 2008; Harris & Cai, 2002;Jaworski, Kohli, & Sahay, 2000). However, having a good knowledge of who thecritical stakeholders are might be not enough as the company needs to build therelationships with them in a way that supports an overall marketing strategy, whichcan also differ between adaptation and change orientation (Kohli & Jaworski, 1990;Narver & Slater, 1990; Jaworski et al., 2000). The latter approach is especiallyrelevant for firms in the transition economies, since the opportunities for inducingchange to the institutional context are considerable (Khanna et al., 2011). On thewhole, the existing research does not advance our knowledge on how to choose thestrategically important stakeholders in the emerging markets and how to align theirinterests with the goal of a firm.

Therefore, the purpose of this study is to explore the ways in which a firm choosesand mobilises local stakeholders to support its entry strategy into emerging markets.More specifically, the study contributes by

� explaining how a firm chooses the strategically important stakeholders duringdifferent phases of its market entry;

� investigating the different roles that stakeholders can play in supporting and/orresisting the firm’s activities in the market and

� building the understanding of how the firm can act upon its knowledge ofstakeholders to create a win-win situation.

The ambition is to enhance our theoretical understanding of a firm’s stakeholderperspective that can facilitate their entry into emerging markets. This is achieved by

46 Veronika V. Tarnovskaya

merging the insights from market orientation research with the postulates fromstakeholder literature (Ambler & Wilson, 1995; Atuahene-Gima, Slater, & Olson,2005; Donaldson & Preston, 1995; Freeman & Liedtka, 1962; Gannon Martin, LockeEdwin, Gupta, Audia, & Kristof-Brown Amy, 2006; Gregory, 2007; Mahoney, 1994).Empirically, this study focuses on IKEA’s market entry into Russia and China.

3.1. Theoretical Background

As stated in the landmark study by Freeman (1984), ‘The stakeholder approach isabout groups and individuals who can affect the organization, and is aboutmanagerial behaviour taken in response to those groups and individuals’ (p. 48). Anumber of different approaches classify stakeholders based on their importance for afirm, among them primary/secondary (Gannon Martin et al., 2006) and external/internal (Donaldson & Preston, 1995; Freeman & Liedtka, 1962; Mahoney, 1994).The general view, however, is that stakeholders can be classified based on the degreethat they can influence the strategy formulation in the focal firm.

Mitchell, Agle, and Wood (1997) provide a descriptive framework for stakeholdersalience defined as ‘the degree to which managers give priority to competingstakeholder claims’ (p. 854). They propose three attributes: power, legitimacy, andurgency, which capture the salience of stakeholders and allow defining its degree.Power is the actor’s ability to impose its will on the focal firm. Legitimacy concernsthe actor’s support from generally accepted social norms, values and so on, whileurgency reflects to what extent a stakeholder claim requires a firm’s immediateattention. Stakeholder salience is determined by the cumulative impact of theseattributes and defined as low if stakeholders possess only one attribute; moderate ifthey possess two attributes and high if they have all the three attributes in place. Thedeveloped framework provides a set of guidelines for managerial actions. Forexample, managers are expected to give their attention, in the first place, to the highlysalient stakeholders, followed by the moderately and low salient ones. Besides, themanagerial decision making depends on their perceptions of stakeholder importance,which are, of course, highly subjective. This study has been broadly cited but used toa very limited extent (Agle & Caldwell, 1999; Parent & Deephouse, 2007). Althoughcontributing to a better understanding of a firm’s stakeholders, it has a strongnormative approach and promotes a defensive type of firm–stakeholder relationship,which does not fully reflect the practices of modern firms encouraging stakeholderparticipation in their activities.

The lack of focus on the ways in which a stakeholder might contribute to a firm isacknowledged in the literature (Ambler & Wilson, 1995). It is argued, for example,that stakeholder theory does not clearly distinguish between those stakeholders whoare just affected by corporation and those who contribute to it. As a result, managersgive equal attention to both groups of stakeholders, which might potentially damage

Activating Stakeholders: An Approach by MNCs in Emerging Markets 47

a firm’s business performance. Therefore, some authors (Ambler & Wilson, 1995;Mahoney, 1994) suggest that stakeholder theory should be verified by distinguishingbetween active stakeholders that are voluntarily involved in the company and passivestakeholders that do not cooperate with the company in any way, allowing thecategorisation of participant versus nonparticipant stakeholders to emerge. In asimilar vein, Savage, Nix, Whitehead, and Blair (1991) identified supportive, non-supportive and marginal stakeholders. Although pointing to the need for a morereciprocal categorisation, these studies do not provide any empirical evidence to itsrelevance for managers. Besides assessing stakeholder’s potential to support orboycott the organisation, literature suggests principles of stakeholder managementsuch as (1) acknowledge, (2) monitor, (3) listen, (4) communicate, (5) adopt, (6)recognise, (7) work, (8) avoid and (9) acknowledge conflicts (Clarkson, 1999, p. 4).Following the argumentation above, even these measures do not suggest any activecooperation between the firm and its stakeholders. Using the findings as support, thisstudy will argue for the importance of assessing the degree of stakeholdercooperation for stakeholder management in general and by a firm entering emergingmarket, in particular.

The traditional stakeholder perspective views a firm as the focal point of a set ofdyadic relationships with stakeholders. Each stakeholder has expectations and rightsin relation to the particular firm, and they can reward or harm it by limiting orincreasing the level of resources offered and shared (Clarkson, 1995; Freeman, 1984).The dyadic character of firm–stakeholder relationships is criticised in the marketingliterature for its inadequacy in the practices of modern firms. For example, Polonsky,Suchard, and Scott (1999) stress the need for an extended model of marketingrelationships that considers how interaction with a broad set of stakeholders cansupport a firm’s strategy. Buysse andVerbeke (2003) and Verbeke (2003) discuss anenvironmental strategy that also requires a deeper and broader stakeholderapproach. The market orientation studies (Gannon Martin et al., 2006; Greenley,1995a, 1995b; Greenley & Foxall, 1998; Greenley, Hooley, & Rudd, 2005) also stressthe importance of adopting a multiple stakeholder orientation.

The stakeholder orientation needs to be viewed in connection to the firm’s overallmarketing strategy in the local market. The literature talks about three generalstrategic options that a firm can choose in a new market: (1) it can adapt its businessmodel to the local market context, (2) it can change the market context or (3) it canstay away from the market (Khanna et al., 2011). The first two approaches arebroadly discussed in the market orientation literature and conceptualised as areactive or market driven (Kohli & Jaworski, 1990; Narver & Slater, 1990) and,correspondingly, a proactive or market driving approach (Atuahene-Gima et al.,2005a; Jaworski et al., 2000; Kumar, Scheer, & Kotler, 2000; Narver, Slater, &MacLachlan, 2004). These approaches differ in their general view of the market asgiven (market driven) or a subject to change (market driving) as well as in theirstakeholder perspective. While the former is narrowly focussed on customers andtheir expressed needs (Kohli & Jaworski, 1990; Narver & Slater, 1990), the latter


emphasises the broad range of stakeholders and their latent needs (Narver et al.,2004).

Besides the scope of their stakeholder perspective, the two mentioned approachesdiffer in the ways the key actors are approached by the firm. Hence, the market-driven approach talks about customers as passive actors, whereas competitors areseen as objects for benchmarking (Narver & Slater, 1990) and the hostileenvironment of a firm (Gannon Martin et al., 2006; Greenley et al., 2005). Theroles of other key stakeholders such as employees are mainly discussed in relation tocustomers and competitors, for example as a means for generating the market data(Kohli & Jaworski, 1990). Very few authors pay special attention to the role ofsuppliers and other actors in the value chain, for example Elg (2007, 2008).

As far as the market driving approach is concerned, Harris and Cai (2002) suggestthe active role of market players such as suppliers, achieved via cooperation with thefirm. Elg et al. (2008) discuss the supportive roles of social, political and businessactors and the importance of long-term, trusting relationships for market change.Kumar et al. (2000) talk about employees as crusaders and the visionary role of firms’founders. Although providing valuable insights into the alternative stakeholder roles,these studies are limited to few empirical cases and thus lack a big picture.

On the whole, there is a dearth of empirical and conceptual studies that view thestakeholder roles in the context of the specific market approach taken by the firm:market driven, market driving or a combination of those. Given its focus onemerging markets, the present study looks more deeply on the stakeholderorientation of the firm pursuing the market driving approach. As suggested bysome studies (Jaworski et al., 2000; Khanna et al., 2011), the changing marketenvironments present very good opportunities for powerful global players that cantransform industry standards and reach other far-reaching consequences in thesemarkets. Using stakeholder theory as a basis, the study focuses on political, socialand business actors’ salience and participation in the MNC’s marketing activitiesduring its entry into emerging markets.

3.2. Focus on MNCs’ Entry into Emerging Markets

An emerging market is a country where the establishment of a free-market systemhas initiated a rapid pace of economic growth (Arnold & Quelch, 1998). Developingeconomies of Asia or Latin America are usually distinguished from the transitioneconomies, such as the former Soviet Union and China. These countries emerged outof a long history of state planned resource allocation, ownership of property andstrictly regulated market relationships. The state was historically the only institutionin power over the local market, enacted through a bureaucratic control system(Hoskinsson, Eden, Lau, & Wright, 2000). Through the liberalisation of the marketregulations and the encouragement of private enterprises, these economies opened up


for Western enterprises, although the role of the state continues to be strong inRussia and China. The drastic development within the political, economic and socialsystems resulted in continuously undergoing changes in the market regulations ofthese countries and the society as a whole.

The emerging markets are very different business environments compared to thedeveloped markets. Among the major hurdles for Western companies in theirestablishment process are the different socio-political context and businessenvironment, not to mention the culture in general. The influence of socio-politicalinstitutions in the emerging markets is extremely high (Sheth, 2011). Governments,business groups, religion, region and local communities largely influence and limitthe free-market competition (Hoskinsson et al., 2000). This increases the level ofuncertainty for new entrants as laws and regulations can be changed by the localgovernment in a quick and unexpected manner (Xie & Boggs, 2006). The dominantrole of the government greatly impacts the business activities of firms. They mightencounter problems in the establishment of a distribution and sales networks due tostrict government regulations on the choice of distributors and the overall localchannel structure (Arnold & Quelch, 1998; Xie & Boggs, 2006). Managers need toclearly identify a country’s power centres, such as the bureaucracy, media and civilsociety, and decide whom to partner with (Khanna et al., 2011).

Scarcity of resources is a common situation in emerging markets, whether this is ina production, exchange or consumption context (Sheth, 2011). Furthermore, the lackof reliable market data and difficulty in obtaining it hinders effective marketingactivities and increases the firm’s dependence on local actors (Xie & Boggs, 2006). Inspite of emerging markets’ large populations, multinationals often have troublerecruiting skilled workers and managers because the quality of stuff is hard toascertain (Khanna et al, 2011).

The literature discusses different ways to approach the challenges of the emergingmarkets, among them are the formation of relationship networks as an effective wayto deal with political instability and lack of the rule of law (Fletcher & Fang, 2006)and the importance of good government relationships for gaining access to marketchannels and decision makers (Xie & Boggs, 2006). The study by Melewar, Badal,and Small (2006) on DANONE’s entry into China exemplifies that politicalsensitivity towards power relations in the country and ability to win and keep thegoodwill of influential businesspeople and politicians are crucial for the firm’s marketacceptance. In addition, Arnold and Quelch (1998) stress the role of strongrelationships with local business partners for setting up a distribution network in themarket. They even suggest the firms to develop a special ‘partner policy’, in whichlocal partners play other than traditional roles, for example carry out marketingresearch. On the whole, the establishment of close relationships or partnerships isstressed as one of the most important success factors for firms in emerging markets(Ghauri & Holstius, 1996; Ghauri et al., 2008).

The recent research increasingly argues that global firms can use establishedstakeholders relationships to transform the market environment in the emerging


markets and achieve the win-win situation for themselves and the country. Khannaet al. (2011) describe the ways in which Metro Cash & Carry has changed contexts insocially beneficial way in several Asian countries. The firm has pioneered businesslinks between farmers and small-scale manufacturers in rural areas for improvedquality of its meats and vegetables. Metro has also induced farmers in China to investmore in their operations as well as lobbied with governments for higher qualitystandards. Government, in its turn, have remained on the firms’ side in thesemarkets.

As far as the process of market entry as such is concerned, Ghauri and Holstius(1996) make a distinction between the search, entry and establishment phase. In thefirst phase, a firm gathers information about the market, which implies selectedcontacts with some key actors. In the entry phase, it develops the relationships withdecision makers, other firms and customers. In the establishment phase, it improvesits overall position in the market. Several other authors also express the view thatstakeholder management is a step-by-step process (Gregory, 2007; Maignan,Ferrell, & Ferrell, 2005; Voss, Voss, & Moorman, 2005), making the longitudinalstudy of stakeholder approach during firm’s market entry especially relevant.

3.2.1. Method

The research purpose of the study justifies an inductive and exploratory researchmethod that could assist us in theory building (Eisenhardt, 1989; Ghauri, 2004). Withthe objective of studying a firm entering the emerging markets, the choice made wasto use IKEA, a truly global company pursuing the market driving approach (Kumaret al., 2000; Yin, 2003). Russia and China were chosen due to their strategicimportance for IKEA from both retail and supply perspectives. Besides, they areexamples of transition economies with a strong role of the state and dynamicbusiness climate, implying the significance of the political and business actors for thefirm’s market entry processes. The research constitutes a part of the broader in-depthcase study of IKEA at the corporate and local levels conducted in the periods of2002–2005 and 2008–2009.

The single case study approach was used to generate insights into the firm’s andstakeholder activities. The embedded design with two markets as sub-cases was usedto eliminate the shortcomings of a single case (Ghauri & Grønhaug, 2010). Forty-four in-depth interviews with managers representing different functions – marketing,communications, property, purchasing, HRM, sales and new product development –were conducted in Russia (Moscow and St. Petersburg) and China (Shanghai) in2003–2009. In addition, three suppliers were interviewed in Russia (2003) and threein China (2009).

Each interview lasted for approximately one and a half hours. The focus was onhow managers develop relationships with different stakeholders: customers, potentialemployees, competitors, suppliers, other industry participants and social actors overtime (from the market entry to the early establishment phase). The researcher


suggested specific topics such as the history of relationship, respondents’ self-identification and roles in it as well as examples of critical events but, on the whole,allowed the respondents to talk freely around these topics. It is important to notethat the quality of interview data was higher for Russia than for China, especially forpolitical actors, due to having better access to Russian respondents. Because of that,it was not possible to carry out a comparison between the two markets. Instead, themost interesting examples from each market were brought together and analysed forcommon trends.

In addition to interviews, multiple sources of secondary data were used to developconverging lines of inquiry (Yin, 2003). The internal data included corporatebrochures, business plans, information on IKEA’s homepage and intranet, localnewspapers and the book by Dahlgren, a former country manager, published inRussian in 2010. The use of multiple sources has been carried out with specialattention being given to the different contexts for each source so as to do thetriangulation (Ghauri & Firth, 2009).

All interviews were transcribed and analysed in their original languages to avoidthe cognitive problems with translation (Ghauri, 2004). The data analysis followedthe procedure by Miles and Huberman (1994) and Ghauri (2004). First, data weresummarised and coded at thematic and conceptual levels. The major unit of analysiswas the specific activities aimed at different stakeholders and type of relationshipswith them, from the perspective of the individual interviewee. All data pertaining to arelationship with one particular category of stakeholders were coded accordingly.Each stakeholder was tentatively assessed by the authors in terms of perceivedpower, legitimacy and urgency of action, based on respondents’ accounts. As it is notalways possible to dissect the managerial perceptions into particular attributes, wedid not classify the stakeholder salience based on the sum of those but, instead, try touncover the ones that guide managerial actions. Finally, the data on each particulartype of stakeholder – political, social and business actors – was brought together andpresented in the form of a story for each market. Given the single critical case studyand the research technique used, the results will primarily lead to analyticalgeneralisations and theory development (Eisenhardt, 1989; Yin, 2003).

3.3. Empirical Findings

3.3.1. Political Actors

In both countries, the relationships with government officials were prioritised andstarted decades before the market entry. By the time of entry and in the earlyestablishment phase, managers faced different situations: an intensifying powerstruggle and conflicts between officials in Russia and the opacity of a seeminglymonolith power in China.


IKEA has had contacts with Russian officials since the early 1990s but opened itsfirst store only in 2000. The major challenges were purchasing the land for the storeand changing the existing customs rules that calculated customs duties for importedfurniture on the basis of its weight. Both tasks required the involvement of politiciansand different officials and their active cooperation. As far as the store opening wasconcerned, it was top officials in Moscow, particularly the mayor, who were firstcontacted by IKEA managers. However, it was not the officials’ title but theirwillingness to provide the timely support that was the most important criteria.

IKEA managers held several rounds of negotiations with the Moscow MayorYury Luzhkov who wanted to set up IKEA’ s first store in central Moscow, but ‘theCity set up an astronomical price on that spot and did not want to decrease it to areasonable level’ (Dahlgren, 2010). At the same time, managers negotiated with localauthorities in the suburb of Khimki who helped to acquire a much more reasonablypriced, large piece of land at a distance from the centre. Trusting relationships withthe head of the Khimki administration enabled IKEA managers to set up the actualdate for the first store, an unheard of practice in Russia. As was commented by thecountry manager: ‘At the moment of laying the first stone of our first store we did notget all permissions but the Khimki officials promised to keep their eyes closed forsome time’. ‘All necessary documents were obtained post factum!’ (Dahlgren, 2010).Caught in the conflicts between regional authorities and City Hall, IKEA often choseto play by regional rules that allowed faster and easier decision making. As seen fromthese examples, both central and local authorities possessed high legitimacy andpower upon other actors, but they were assessed mainly on the basis of their abilityto urgently support IKEA’s plans in the Moscow region. It was, therefore, theirpower upon the local actors and the perceived urgency of action that played themajor role for managers.

Parallel to the building of a first store, IKEA’s managers continued lobbying forthe lower customs duties for imported furniture. The country manager accompaniedby the purchasing manager recalled visiting ‘numerous officials, ministers and viceministers of all sorts’. And ‘As soon as we saw light at the end of the tunnel, therewas a next change in the government and we had to start from the very beginning.From 1998 to 1999, 5 consecutive Prime Ministers came to power in Russia’(Dahlgren, 2010). In the end, IKEA’s managers managed to submit their ideas to aspecial commission led by the prime minister who, in opposition to a powerfuldomestic furniture industry lobby, supported the so-called IKEA law. This wasseminal for the company as it decreased the customs duties by 50% and enabledmanagers to set reasonable prices at IKEA’s Russian stores. Thus, in a criticalsituation after market entry, IKEA’s managers sought the support of an official withthe highest power, legitimacy and urgency of action in the market. However, due tothe on-going power struggle between officials in Russia, the gained support couldhave never been regarded as a guarantee for future cooperation.

Officials have also created a lot of problems for IKEA, which managers called‘challenges’ and seemed to appreciate as a stimulus for the firm’s development. A


completely finished store and trading centre in Samara could not open for more thantwo years. In 2009, IKEA said it would temporarily stop investing in Russianprojects due to the huge losses it suffered as a result of delays in permissiondocumentation. I. Kamprad (IKEA’s founder) has even published an open letteraddressed to the Prime Minister V. Putin and President D. Medvedev. The RussianMinistry of Economic Development got involved in this situation and promised tosolve the problem. However, in spring 2010, the situation was still unchanged. Bystating their intentions to freeze their investments in Russia, managers elevated theurgency of the situation to the responsibility level of central authorities, thus forcingthem to take action. These managerial actions were aimed not only at the currentproblem with the store opening but also at triggering more profound changes insociety. On the whole, the authorities in Russia played mainly reactive roles in therelationships with IKEA.

IKEA has been present in China since 1998 and managers were in close contactwith both central and district government. Through the development of Guanxi,managers gradually became the integral part of the network and could use it tosupport their actions on the market. The respondents explained that in the beginning,it was very difficult for them to know whom to talk to and how to choose whichofficials’ help they should seek in specific situations. They sometimes spent hourssitting in the meetings ‘without having a clue of what had really happened, whetherthey got anywhere’, but later they started to understand the value of these meetings.As explained, when the relationship is functioning, any problem can be solved:

It’s a little small talk you could say, it’s you go into a meeting, you say a few nice things about

each other but then you state your business and you say this is the situation, this is where we

need help and support or whatever it is. (Expansion Manager, China)

A striking feature of managerial accounts is that they never mentioned the namesand positions of Chinese officials, which was mainly due to the extreme opacity ofpower structures in China, and as the country manager of China commented: ‘inChina you are dealing with the government, not specific officials’ (country manager,China). The officials were described as being ‘indiscriminate’, while at the same timesending clear signals to company representatives, interpreted by them as the overallhelpfulness and predictability of the relationships. Nevertheless, the respondentshave described the hierarchy of officials to contact, in which the city authorities(where IKEA opened or planned a store) were ‘number one’, followed by district andcentral authorities, the construction companies, Labour Bureau and police. On thewhole, they did not clearly distinguish between more and less powerful, legitimateand urgent actors but stated that an achieved good relationship with one officialwould normally cause him to ‘respond and point out different officials who can helpyou to deal with this problem. And then you say OK well that’s what we’ll do, andshake hands and then you leave, and then everything starts to work’ (expansionmanager, China). The respondents stressed that they have always ‘relied very heavily’on the government and have been open about each other’s plans:


We have increasingly close contact with central government and with central government

advisors so we are linked to the process that is going on, we’re aware of what’s happening.

I think that we will be regarded as what we want to be seen as and that is a retailer that will

contribute in the home furnishing sector. (Country Manager, China)

Managers mentioned the continuous support they got from different officials inChina. At their regular meetings, officials shared the industry development plans thatcould affect IKEA’s retail expansion, for example plans for new highwayconstructions in central China, new labour laws and even some market data, whichwould otherwise be hard to obtain. Thus, in China, Guanxi with officials oftenfunctioned as a proactive form of support when authorities took the initiative toinform managers about changing laws and facilitated the entry process.

3.3.2. Social Actors

Media represents an important social stakeholder for IKEA; however, its role insociety is country specific. Thus, in Russia, newspapers and the TV have historicallyplayed the role of the major opinion makers and are used by public as the mosttrusted sources of information. Due to that, at the search phase and early marketentry, IKEA’s managers perceived media in Russia as having a great amount ofpower, legitimacy and urgency and sought their support. The urgency was due toboth negative and inadequate coverage of IKEA by some Russian newspapers.

In order to improve the situation, IKEA’s managers actively developed relation-ships with the Russian leading newspapers such as Vedomosti, Kommersant andIzvestia. They provided journalists with full access to all corporate materials andeven organised trips to IKEA’s headquarters in Sweden. These actions created ‘acultural shock’ among journalists, since they went contrary to the established secretpractices of Western companies. According to many respondents, ‘the openapproach’ to journalists facilitated the fair and positive media coverage, helping tolegitimise the company as a responsible retailer in the public’s eyes. Besides, byeliminating the urgency of the situation, managers received continuous mediasupport. When in spring 2000 the company faced problems in opening the MegaMall in Khimki, due to the obstacles posed by environmental officials, the mediaplayed a decisive role in solving the conflict. As was recalled by the country managerat that time:

That was a surprise to me that the media stood as the one opposing the authorities. Soon, the

Moscow region governor, unwilling to see the scandal get any bigger, had to write to the mayor

of Khimki and order him to allow the opening. (L. Dahlgren in Moscow Times, August 28,

2009)

Thus, in the establishment phase, media status changed from being one ofresistance to active support.

In China, the media serves as a direct channel for authorities rather than as anindependent opinion maker. This is why managers mentioned the media only in


relation to authorities who demanded the information on product safety issues. Forexample, IKEA’s managers practised open press conferences for the media, in whichproduct safety and environmental issues were discussed. In China, the media seemedto be dealt with from legitimacy and sometimes urgency perspectives and mainly usedfor spreading important information to the public.

The empirical case provides other examples of social stakeholders whose supportwas sought by managers in Russia and China. Joint activities with WWF,1 a globalnonprofit company, included the development of responsible forestry managementand certification of IKEA’s wood suppliers in Russia and China. The special globaltoolkits developed by WWF were used by managers for educating and training localsuppliers as well as for raising awareness of local communities through the media inboth countries. Another stakeholder – a global testing company Intertek – becameIKEA’s partner in China. This partnership allowed IKEA’s managers to simplify thetesting and approval process for electric products, which were previously tested atIKEA in Sweden. These global stakeholders were treated by IKEA’s managers aslegitimate and powerful groups, since their standards were used as norms forsuppliers. Their urgency of action was not considered high because they were notcapable of influencing local actors directly.

3.3.3. Business Actors

3.3.3.1. Suppliers

In both countries, the relationships with suppliers started before the market entry (inthe 1970s in China and 1980s in Russia), developed steadily and intensified in theentry and establishment phases. In 2005, there were around 50 local suppliers inRussia and more than 200 suppliers in China. While Chinese suppliers accounted for18% of global output in 2005, the role of Russian suppliers was less significant (lessthan 1% in 2005) with output intended mainly for Russia. On the whole, the caseshows that in Russia managers selected the suppliers who lacked power but hadlegitimacy and urgency of a various degree (i.e. survival), while in China they focusedon the most salient actors in the industry. These differences were due to the varyinglevels of market and industry developments in the two countries.

When in 2000, IKEA started retail operations in Russia, managers faced a numberof challenges, the most serious of which was the prevailing Soviet era managementstyle. Since starting production in Russia was crucial for guaranteeing the low pricesat the newly opened stores, managers ‘vacuum-cleaned Russia’ for a new generationof entrepreneurs. Thus, personality fit was used as a major criterion for choosingsuppliers who would potentially be the most influential in introducing the Western-like management style to the industry (high potential urgency of action). From the

1World – The World Wide Fund for Nature, NGO.


interviews with three of IKEA’s Russian suppliers, it was obvious that all of thempossessed a Western way of thinking, since they have competitiveness, high qualityand efficient production as major goals.

In contrast, China for a long time has been considered by IKEA’s managers as a‘full-blown market economy’ and ‘a country of entrepreneurs’ (purchasing manager,Russia). Therefore, in China, ‘the game there was to sort out the best manufacturersto work with’ (expansion manager, Russia). Managers chose among the mostefficient and financially strong suppliers, in other words, the most powerful actors inthe market who also possessed legitimacy and influence via their good reputation inthe industry.

Suppliers in Russia and China demonstrated a varying degree of support foractivities to implement the changes according to the IWAY Code of Conduct,2

compliance to which enabled suppliers to become a part of IKEA’s global supplychain. In Russia, the respondents used the expression ‘pushing the local industry todo something’ to stress the general unwillingness of factory owners to adopt the newstandards. Interestingly, all three Russian suppliers introduced flat packageproduction and delivery in their factories, but only one of them mentioned theadherence to IKEA’s standards as a critical factor for their growth. One supplier hasdemonstrated reluctance while the other a clearly opportunistic behaviour. Thus, thesuppliers’ support of IKEA’s market strategy in Russia was partial while theirbehaviours were quite reactive. This was also reflected by the division of rolesbetween corporate managers as ‘experts with product knowledge’ and local suppliersas sloppy trainees: ‘They cannot find new ways, they cannot get capital, they cannotthink in the capitalistic, market-economic way’ (trade manager, Moscow). Theinteractions were usually initiated by IKEA managers, there was a very limited newproduct development by suppliers and a check and control system was actively usedin Russia.

In China, managers were more successful in implementing the basic requirementsof IWAY at local factories and worked on the next stage of minimising overtimework and payment misbalance at suppliers. This was due to the fact that Chinesesuppliers were more proactive than the Russians, faster to comply to IWAY’s basicnorms and eager to require the compliance with IKEA norms from their ownbusiness partners. All three interviewed Chinese suppliers considered IWAY as aquality certificate and a mark of their own competitiveness. They also contributed tothe increasing acceptance of IKEA’s quality norms as new standards in theirrespective industries. Compared to Russia, managers treat Chinese suppliers aspartners, seen, for example, from supplier-driven communications, suppliers’initiatives in new product development as well as a radical change from controlrelationships to cooperation: ‘In the past we saw a lot of failure through auditing

2IKEA Code of Conduct with suppliers.


approach only. It never created trust, it kept playing the mouse-and-cat game, and itdid not lead anywhere’ (IWAY manager, Shanghai). Thus, Chinese suppliersprovided much more support to IKEA’s market strategy, allowing the increase oftheir global output to 20% in 2009.

3.3.3.2. Employees

The study highlighted the important role of employees and showed that they were ofhigh priority during the whole market entry process. There was, however, a cleardistinction between the focus on international managers and local staff. While thecorporate managers were seen as a ‘guarantee for building up IKEA of a highquality’ in Russia and China, the local staff was seen as ‘potentials for IKEA growth’(country manager, Russia). Selected, very experienced managers formed projectteams to develop the retail operations in both markets. In 2004–2005, they stilloccupied many top positions in Russia and China in order to secure the transfer ofculture and management principles to local staff.

In the early phases of market entry, managers perceived local staff in bothcountries as having high legitimacy, moderate/low urgency and low power toinfluence other actors and the firm. This was seen in the clear division of roles wheninternational managers were referred to as ‘value ambassadors’, ‘experts’, ‘security’and ‘crown of the tree’ while local employees were talked about as ‘future guys’, ‘newbranches of the tree’ and ‘grass’. An indication of the low power of local staff wastheir alleged cultural misfit with IKEA’s values, mostly striking in Russia. Forexample, Russians were characterised as individualistic people, keeping knowledge tothemselves and rather inefficient. In this market, some respondents argued that only3% of Russians fit IKEA’s values. Therefore, managers took urgent actions to teachthe local staff new behaviours in line with IKEA’s values such as teamwork,knowledge sharing and efficiency. In China, managers perceived staff as generallyfitting well with IKEA’s values and unproblematic to work with. They talked aboutthe balance of working practices from IKEA and China as well as training. In bothcountries, IKEA’s managers practiced value recruitment aimed at attracting ‘theright’ people to IKEA and, in doing so, minimising the value misfit. In both markets,the respondents mentioned several cases of local colleagues who filled topmanagement positions in their own countries and abroad. These employees werereferred to as ambassadors of IKEA’s values.

3.3.3.3. Customers

In 2009, IKEA had seven stores in mainland China with its first store in Shanghaiopened in 1998. There were 12 stores in Russia, among them several Mega Malls withthe first one opened in 2000 inMoscow. In the search phase, customers were perceivedby managers as having high legitimacy but low power and urgency of action. Firstly,customers had no or a very limited knowledge of the brand. Secondly, their purchasingpower was very low. Thirdly, managers did not focus on learning about their existing


needs and wants, for example no serious marketing research was done before theoperations were set up in Russia. Similarly, in China, managers did not learn about themarket during the first eight months of operations and admitted making seriousmistakes, such as setting prices too high. The situation changed in the entry andestablishment phases when the real customer needs such as ‘the size of the wallets’(their purchasing power) were taken seriously. Besides, numerous customer surveysand home visits were carried out to learn about local customer living situations. Forexample, planners for the new Beijing store interviewed 124 Chinese families abouttheir daily lives. The accumulated customer knowledge was used to adjust the prices to‘reflect the real price situation in the market’ (marketing manager, Russia).

Managers spoke of different measures undertaken in Russia and China to gaincustomer acceptance of the brand. Since IKEA was totally new to Russians, the firstmain goal was to introduce the concept to customers. As commented by themarketing manager in Moscow, the strategy was ‘to bring people as much as possibleto the store so that they learn about IKEA and have a positive attitude towards it’. InChina, the customers had the image of IKEA as an expensive brand. Therefore,IKEA’s strategy was to attract customers by slashing prices. To help customersunderstand the IKEA concept, in-store instructions were placed in the stores, inaddition to catalogues and websites in native languages. The TV spots andnewspaper ads showed the ways to transform traditional Russian and Chineseapartments into IKEA style spaces. This can be interpreted as empowering customersby providing them with the brand knowledge.

The major step in gaining customer support of the brand was their acculturationin the IKEA concept. Managers emphasised the need to change customers’established perceptions and habits to fit IKEA’s value proposition. Thus, in Russiathe low price was generally associated with low quality, making it especiallyimportant to stress the good quality of IKEA’s products and the ways to create theirlow prices. In China, customers traditionally followed an ‘all’ or ‘nothing’ approachto interior design while IKEA conveyed the idea that change can be achievedgradually, with small steps. One of the most effective change strategies was to designroom settings that reflect the ‘heart of the home’ in the respective countries (kitchenin Russia and living room in China). An important way of changing customerperceptions was lowering the prices on the key items in both markets, up to 70%since the start.

The respondents emphasised the development of close and trusting relationships,with customers, which can be interpreted as obtaining customers’ broader support ofthe brand. Treating customers as friends was mentioned by respondents in bothcountries. In Russia, IKEA Mega Malls are the most visited shopping centres in thecountry (around 50 million visitors a year). In China, customers treated IKEA storesmore as theme parks and relaxation centres than real stores. On weekends, thousandsof visitors poured into Beijing and Shanghai stores – they hopped into beds, took anap, posed in sofas for cameras, met friends in the restaurant and as a result spent thewhole day in the store (Beijing Times, January 2009).


Thus, in the establishment phase, customers gained a higher power over the brand.Their roles have also changed from new to experienced shoppers and even friendswho exhibited branded behaviours and even created consumer trends (e.g. theScandinavian style has become popular in Moscow and St. Petersburg).

3.3.3.4. Competitors

The competitive situations were very different in the two markets. In Russia, wherethere were few direct competitors, the focus was on indirect ones such as homeelectronics, cars and tourism who competed for the same share of the householdbudget, while in China, where competition was cut throat, the direct competitorswere constantly benchmarked for the lowest price. However, in both markets,competitors were treated as stimulants for brand development rather than obstacles,seen, for example, from the fact that copycatting practices were not considered asdamaging the brand in China: ‘We will get copied and we will have enormous impacton the style of furniture offered in China’ (country manager, China). In Russia,IKEA’s managers practiced cooperation with both direct and indirect competitorssuch as Metro, Cash & Carry, Auchan, Benetton and others who became tenants atIKEA-owned Mega Malls. Respondents saw this development as beneficial forIKEA, since it triggered changes in customer shopping behaviours: ‘If you change thewhole pattern of behaviour, you will become more used to shop at IKEA’ (storemanager, Moscow). In China, managers developed business networks with otherWestern firms and used these contacts for lobbying the government.

It can be argued that both direct and indirect competitors were perceived bymanagers as legitimate, urgent but lacking power, although some of them were reallypowerful global firms. The firms decreased their power by dictating their own rules ofcooperation or by diverting the customer interest from their products to homefurnishing. Competitors also played different roles to their traditional roles ofbusiness rivals, namely, as business partners and benchmarks for the brand.

3.4. Discussion and Contributions

3.4.1. Choosing Stakeholders in the Process of Market Entry

Table 3.1 summarises the findings as regards to the major criteria of choice used bymanagers for implementing stakeholder activities during different phases of marketentry into Russia and China. First, it shows that managers actively used theattributes of stakeholder salience: power, legitimacy and urgency of action, although,they did not always rely on them in making decisions of how to deal with a particularstakeholder. In some cases, the willingness of the stakeholders to support the firm viaa positive attitude, trust or active cooperation was considered more important thantheir perceived salience. For example in Russia, managers often chose to work with


Table

3.1:Summary

offindings.

TypeofStakeholders

Examplesof

Stakeholders

CriticalAttributes

ofSalience

Support

of

theFirm

ManagerialActions

Aim

edat

Stakeholders

Changes

of

Stakeholder

Behaviours

Reactive

(resistant)

stakeholders

Opportunisticofficials

inRussia

Power,legitim

acy

No

Ignore

Create

more

hurdles

Opportunisticmedia

in

Russia

atmarket

entry

Power,legitim

acy,

urgency

ofaction

No

Open

approach,present

facts

Providefairandpositive

coverage

Competitors

inChinaat

market

entry

Legitim

acy,urgency

No

Use

forbenchmarking

Continuecopycatting

practices

Passive

stakeholders

Officialsin

Chinaat

market

entry

Power,legitim

acy,

urgency

ofaction

Low

Buildlongterm

Guanxi

relationships

Acceptinto

thenetwork

Customersin

Russia

andChinaatmarket

entry

Legitim

acy

Low

Introduce

concept,bring

tothestore,educate,

slash

prices

Shopmore,gain

knowledgeof

furnishingstyles

Suppliersin

Russia

at

market

entry

Legitim

acy,urgency

Low

Seekentrepreneurs,

train

Increase

competitiveness

Reactive

(supportive)

stakeholders

Cooperativeofficialsin

Russia

atmarket

entryand

establishment

Power,legitim

acy,

urgency

ofaction

Moderate

Cooperatebutnever

rely

uponcompletely

Providepolitical

support

Officialsin

Chinaat

establishment

Power,legitim

acy,

urgency

ofaction

Moderate-strong

Cooperate

andrely

uponcompletely

Providepoliticaland

economic

support

Globalorganisations

Power,legitim

acy

Strong

Seeksupport,cooperate

Provideglobal

standardsandnorm

s

Suppliersin

Chinaat

market

entry

Legitim

acy,urgency,

power

bysomeactors

Moderate-strong

Choose

most

powerful,

create

bestexamples,

partnership

Increase

turnover,

reputationboost,

internationalisation

Power,legitim

acy,

urgency

Moderate

Continuecooperation

Negotiate

conditionsof

cooperation

Table

3.1:Continued

TypeofStakeholders

Examplesof

Stakeholders

CriticalAttributes

ofSalience

Support

of

theFirm

ManagerialActions

Aim

edat

Stakeholders

Changes

of

Stakeholder

Behaviours

Reluctantsuppliersin

Russia

at

establishment

Employeesin

Russia

andChinaatmarket

entry

Legitim

acy,urgency

Moderate

Employrightpeople,

teach

new

behaviours

Gain

cultural

knowledge,learn

new

behaviours

Directandindirect

competitors

inRussia

atmarket

entry

Legitim

acy,urgency

Low-m

oderate

Cooperate

insteadof

competing

Buildretailalliances

Proactive

(supportive)

stakeholders

Media

inRussia

at

establishment

Power,legitim

acy,

urgency

Strong

Open

approach,involve

inactivities

Faircoverage

Key

suppliersin

China

Power,legitim

acy,

urgency

Strong

Integrate

inglobal

supply

chain

Increase

turnover,

internationalisation

Experiencedcorporate

andlocalem

ployees

Power,legitim

acy,

urgency

Strong

Export

toother

markets

Brandambassadors

globally

Customers-friendsat

establishment

Power,legitim

acy,

urgency

Strong

Create

advocates

Brandchampions

less powerful officials who showed their good will. In China, the acceptance intoGuanxi network was considered valuable irrespective of the officials’ position in thehierarchy. The more pronounced the support intentions were, the higher wasmanagerial propensity to build trust and invest resources into the stakeholderrelationship (e.g. share information, provide training, etc.). Besides, managersconsidered the stakeholder’s ability to exercise an influence on other market actors,which can be also viewed upon as a potential support of the firm’s strategy in themarket.

The significance of differentiating between supportive and non-supportivestakeholders is hypothesised in the literature (e.g. Ambler & Wilson, 1995), towhich this study adds important empirical evidence. More specifically, itdemonstrates that managers are, indeed, choosing their strategies based on thestakeholders’ support and/or influencing ability rather than on who they are, whichcontradicts the commonly held opinion in the literature (Polonsky & Scott, 2005). Itdoes not mean that stakeholder attributes of power, legitimacy and urgency of actionare regarded as less important indicators of their significance for the firm. Asdiscussed further, although managers use these factors in their assessment ofstakeholders’ potential influence on the market, they do not treat them as given,stable characteristics of these actors but rather try to change the stakeholder status ina way that benefits the firm. Since this usually requires the investment of resources(e.g. time, trust), managers might consider acquiring an immediate stakeholdersupport as an important first step in the relationships. It might be argued that gettingstakeholder support is especially critical during the earlier phases of market entry,while at its later phases, the achieved support allows managers to implementnecessary changes in the local markets.

Among stakeholder attributes of salience, two were used most by managers:power and urgency of action. The literature argues for the importance of power forstakeholder identification and prioritisation (Mitchell et al., 1997; Parent &Deephouse, 2007), but it does not show whether power is an equally importantattribute for various actors in the network. This study suggests that power was useddifferently when dealing with political, social and business actors. Thus, managersprioritised those political and social stakeholders who could support it with powervia knowledge about norms and regulations, acceptance into the local network andpositive image in the society. The relationships with these actors allowed the firm tobecome a legitimate player in the market and, in due time, gain more power. As far asbusiness stakeholders were concerned, they in most cases lacked power (withexception of some suppliers in China), making it easier for the firm to educate themin new behaviours and norms. The power configuration might change in theestablishment phase when more powerful business actors can contribute to the firm’sactivities in the market.

Another stakeholder attribute actively used by managers was urgency of action.Managers used this stakeholder characteristic to trigger the desired actions, either byusing the actor’s ability and willingness to act or by creating a situation that forced


this actor to take actions. Thus, managers manipulate this stakeholder feature inorder to create an immediate effect on market structure or behaviours of marketactors (e.g. adoption of new beneficial laws in Russia). In addition to power, urgencyof action allowed managers to gain the timely support on behalf of localstakeholders. It might be suggested that urgency of action represents a criticalattribute for firm’s stakeholder approach during the market entry due to the time andfinancial pressure experienced by the firm. More research is needed to test whetherthis attribute is applicable for firms’ overall stakeholder approach and is not time andsituation specific.

Managers did not only differentiate among different stakeholders in their ways totreat them according to their assumed attributes but also fine-tuned their approach todifferent phases of market entry. For instance, urgency of action in relationships withofficials in Russia was prioritised at the market entry but considered less important atthe establishment phase. Managers also showed sensitivity to the different cultures –they emphasised the officials’ ability to make fast decisions to win a power battle inRussia (strong power distance) but downplayed it in China (Confucian values).

To summarise the insights from the study, the stakeholder support seems to be asimportant for choosing stakeholders in market entry as their cumulative salience,while power and urgency of action serve as triggers of getting this support. Althoughbeing a general facilitating factor for a firm’s market entry and establishment in themarket, the stakeholder support is especially critical for the firms pursuing theproactive (market driving) approach, since the changes that the firm brings about canbe dramatic and, therefore, hard to implement without the stakeholders’ good willand active assistance.

3.4.2. Stakeholder Roles and Managerial Actions in the Process of Market Entry

As illustrated in Table 3.1, the stakeholder roles changed from reactive (resistant)ones in the beginning of market entry to more active ones in the establishmentphases. In the first phase, some local actors were completely passive, while otherssuch as selected officials and suppliers exhibited a moderate support of the firm.Some exhibited opportunistic behaviours caused by the unwillingness of these actorsto play by the new rules introduced by the firm. After the market entry, the selectedactors became engaged in the process of active cooperation and learning aboutcorporate norms and brand values. As a result, many of them exhibited supportivebehaviours such as political support by authorities, acculturation by employees,increased production by suppliers and alliances by competitors.

The less supportive stakeholders, such as reluctant suppliers, were, nevertheless,the integral part of the learning process. Certain actors developed the proactivebehaviours such as image boosters (media), norm setters (suppliers), brandambassadors (expert employees) and brand champions (customers). These latteractors contributed most to the firm’s market strategy, since they implemented actualchanges in their respective areas, for example, by introducing new societal norms,


industry standards and behaviour patterns. Although the findings suggest thesequence of roles in different phases of market entry, it is more reasonable to talkabout the general tendency of stakeholders to act more proactively in each followingstage of market entry. This is, of course, under the condition that the firm activelyinitiates these proactive behaviours.

As far as the managerial actions are concerned, the study provides a list ofbehaviours used in dealing with reactive (resistant), passive, reactive (support) andproactive stakeholders: ignore, open approach, benchmarking, build relationships,train, cooperate, select best partners, integrate in the value chain. These findingsprovide important insights to the principles of stakeholder management (Clarkson,1999), as they add the examples of proactive behaviours by managers missing in theliterature. Besides, they offer guidance to managers of firms when to implement aparticular action.

Following the earlier cited literature (Ambler & Wilson, 1995; Mahoney, 1994),this study provides empirical support for the existence of two general types ofstakeholders as regards to the character of their influence relationships with the firm:active and passive ones. The study also suggests the broader typology of the passive,reactive (resistant and supportive) and proactive stakeholders, which makes up atheoretical contribution and provides practical guidelines for managers. It might beargued that this typology is not characteristic for any specific market strategy, be itmarket-driven (reactive), market driving (proactive) or a mixed approach. Neither isit specific for a particular stage of market entry, although some types of stakeholderscan be more and less important to consider at a certain stage.

However, the knowledge about various types of stakeholders and a set ofmanagerial tactics in relationships with them can be used differently by a firmpursuing the adaptation or market change strategy. Thus, a former strategy focuseson the most adaptive and reactive actors to minimise the degree of product/serviceadaptation, resulting in the possible isolation of the more reluctant actors. The latterstrategy, on the contrary, focuses on the whole range of actors with the goals ofselecting the most supportive ones as well as activating the others. In this way, thistypology is of a more value for a market driving firm, since it provides guidance onhow to develop a proactive stakeholder approach – a conscious strategy ofstakeholders’ engagement. Thus, among major managerial implications of the studyare those related to a firm fully pursuing or having the elements of the market drivingapproach in its strategy. Such a firm is advised to involve a broad range of localactors in its activities and prioritise the most supportive ones in order to mobilisethem as company’s advocates in the market. This is best achieved by buildingmutually beneficial relationships and providing stakeholders with the knowledge theylack (via fair HRM, education, sharing of know-how and best corporate practices).Managers are also advised to map the company’s key stakeholders and documenttheir changing salience and support in time, for example by recording the criticalmoments of interaction. Among more general recommendation for the firms enteringemerging markets is exhibiting cultural sensitivity and patience when dealing with the


unknown environment while at the same time being alert for changes that mightaffect the firm in the short and long term. Getting and maintaining the support ofmost powerful political and social actors is also critical for the long-term success ofbusiness operations. On the whole, the study does not only provide valuablemanagerial recommendations but also contributes to the general stakeholderliterature (Ambler & Wilson, 1995; Mahoney, 1994) and the market driving streamof research (Atuahene-Gima et al., 2005a; Jaworski et al., 2000; Kumar et al., 2000;Narver et al., 2004).

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