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Case Study Scenario THE IKEA WAY
Keep making furniture less expensive, without making it cheap. IKEA’s battle plan
The furniture and furnishings industry is a mature one, not one which, superficially at least, lends itself to creative strategic thinking, to global activity, or even to innovation.
It is an industry with relatively stable, slowly growing markets, and is very much part of the old economy. Ingvar Kamprad founded IKEA in Sweden in 1943 as a mail-order
company. The name IKEA is an acronym for Ingvar Kamprad Elmtaryd (the name of his family farm) Agannaryd (the name of his home village). Its Swedish origins are
unmistakable even today, although it has moved its management centre to the Netherlands and is Dutch-owned.
Kamprad is a man with a clear vision and a supporting philosophy, which was expressed in the book, Leading by Design: The IKEA Story ( Kamprad and Torrekull, 2000):
- He wished to promote the ‘democratization of consumption’ by offering good value furniture and furnishings at a price that all could afford.
- He believed that everyone deserved to have an aesthetic sensitivity enhanced rather than diminished by the immediate environment.
- He believed in a non-hierarchical world and was distinctly anti-bureaucratic in his attitudes.
- He wished to empower his staff.
- He wanted to set a good example of frugal living, travelling economy class and sharing hotel rooms with his sons on business trips when they worked for IKEA. His most striking act was to give IKEA 100% to a Dutch-based charitable trust in order to avoid conflict between his three sons and the possible break-up of the company.
IKEA opened its first showroom ten years after its foundation. Initially the growth of IKEA was steady and gradual. Only internal funding was used to support the growth, and
therefore significant debt avoided. The norm was to reinvest the equivalent of at least 15% of revenue each year. From a global perspective, there have been four
distinct stages in the growth of IKEA
YEAR No. of outlets Countries Co-Workers
(000’s)
Catalogue Circulation
Turnover in million of euros 1954 1 1 15 285000 1 1964 2 2 250 1000000 25 1974 10 5 1500 13000000 169 1984 66 17 8300 45000000 1216 1988 75 19 13400 50535000 5870 2001 172 32 70000 110000000 11300 2003 190 85000 131500000 12370
- (^) The first, starting in 1963, was restricted to the Scandinavian region.
- The second, from 1973, saw an extension to Western Europe, which was to become its major market centre, with Germany at its heart. This move into an area with a similar culture and a similar market was comparatively smooth.
- The next move, in 1974, beginning very quickly after the second, was into North America, first into Canada but then gradually into the USA. The initial strategy came under pressure during this stage, but the difficulties were overcome.
- The final stage, as difficult as the move into North America, was first into Eastern Europe and next into Asia, both undertaken during the 1990s. Both moves have benefited from the previous move into the USA. This expansion is still in process.
to extend its reach. Currently IKEA is moving into Japan, opening two stores in the Tokyo region and a further new store every six months. It is a sign of its confidence that it is venturing into such a different and, for outsiders, difficult market. However, the current crisis in Japan has created favourable conditions for such an entry, for example a desire for low-cost furniture and furnishings. IKEA, having learnt from its American experience, produces a range of products suitable for the small spaces characteristic of Japanese homes. At the same time IKEA is consolidating its position in existing markets. Up to now IKEA has opened one or two stores in North America each year. In 2003 IKEA became more aggressively competitive in that market, planning to open as many as five stores a year for a ten-year period. To serve the new stores in the USA, IKEA opened two new distribution centres in 2003, one on the east coast and one on the west. It has been seeking an advertising agency to help promote this campaign. The wide coverage is a considerable achievement, given how culturally sensitive the demand usually is for furniture and home furnishings (Table 2.2). The aim has always been, in the words of IKEA’s website, ‘to bring the IKEA concept to as many people as possible’. In 2003 it was estimated that around 347 million people visited IKEA stores worldwide. IKEA has become the world’s largest home furniture and furnishings retail chain.
THE GEOGRAPHICAL LOCATION OF IKEA STORES
Scandinavia 22 Sweden 13, Denmark 5, Norway 4 West Europe 91 Germany 27, France 12, UK 11, Netherlands 8 North America 29 USA 19, Canada 10 East Europe 16 Poland 8 Asia 17 China 7 Others 5 Australia 5 Total 172
Product The IKEA products on offer exceed 12,000 items in number, an enormous range, in the words of Czinkota et al. (2000: 357), ‘from plants to pots, sofas to soup spoons, and wine glasses to wallpaper’. The product is homogeneous worldwide, that is, it does not tend to differ from country to country. There is a complementarity between the large and small items on offer which creates the ensemble effect in IKEA stores. The design is light and modern. There is also a stress on pastel colours and the use of textiles. The emphasis is on individual design which still has a Scandinavian feel. The heart of the company’s design capability was, and to some degree continues to be, a 50-person Swedish workshop. Considerable time and effort goes into the design of each product. The products are redesigned at regular intervals in order to retain the modern feel. IKEA designs but does not manufacture. The products are purchased from a wide range of different sources, both in terms of the network of contracted manufacturers, which runs into the thousands, at present more than 1,800 suppliers, and in terms of countries,
- Because of initial resistance from existing furniture retailers and their attempt to prevent suppliers cooperating with IKEA, from the beginning IKEA had to go to small cheap suppliers outside Sweden, notably Poland in the early years. This meant that IKEA had to play a prominent role in assisting the suppliers. Buying or trading offices, of which there are 43 in 33 countries, and production engineers perform the job of vetting candidates; their decision is then referred to and ratified by headquarters. The policy is to avoid the pitfalls of vertical integration while avoiding the suppliers’ excessive reliance on IKEA.
There is an increasing emphasis on cheap manufacturing sources such as China, now the largest single source, and increasingly Poland, as well as Sweden, and suppliers in the main European markets. A precondition is that these sources maintain the quality of design. Today there are more than 500 suppliers in Eastern Europe alone. IKEA is an example of what is called a strategic centre enterprise, that is, a company which works at the centre of an alliance network, in this case a global alliance network of thousands of manufacturers who supply IKEA with its products. IKEA can afford to outsource activities in which it does not think it has a core competency, notably manufacturing, concentrating on those activities in which it has, such as design, marketing, logistics and distribution/retailing. Some of these alliances have been in existence for many years. As Margonelli (2002: 109) has said, ‘Yet even as IKEA fosters competition among suppliers, it also treats them as long-term business partners’. It is difficult to become an IKEA supplier, but becoming one gives the supplier access to an enormous global market. The trick in maintaining low costs is high volume production. IKEA, through IKEA Engineering, which employs a dozen technicians, is ready to give suppliers technical assistance to reduce costs and improve quality. IKEA does everything, from leasing equipment to suppliers to offering frequent advice, in order to bring production up to world standards and keep down costs. The typical product usually comes in kits which have to be assembled by the customer. The components of the kits, once manufactured, are sent to large warehouses, at present 18 distribution centres worldwide, and from there on to the retail stores which themselves act as mini- warehouses. The cash registers of the retail stores are directly connected to the distribution centres, providing immediate information on changes in demand patterns. The warehouses are at one and the same time storage
facilities, logistical control points, consolidation centres and transport nodes. They are the key to reducing inventory to the minimum while ensuring immediate access to stock by the customer.
Price There is a lot of emphasis on a competitive pricing strategy. IKEA prices are as much as 30–50%, certainly at least 20–30%, below those of fully assembled competing products. The exact level of undercutting varies from country to country and from period to period. There are also BTIs, ‘breathtaking items’, which have a very low price. IKEA does everything to keep the price down. There is a ruthless drive to reduce costs. For example, the Poang chair has been reduced in price from US$149 in 2000, to US$99 in 2001 and US$79 in 2002. This follows the establishment from the beginning of a competitive price. As shown below fixing the level of price comes first. This cost and price leadership is achieved by a combination of strategies – large-quantity purchasing, the push to discover ever-cheaper suppliers in ever-cheaper markets (sourcing in developing economies has risen from 32% to 48%), low-cost logistics, store location in relatively cheap suburban areas, and a do-it-yourself approach to marketing and distribution. Low costs are translated into low prices as IKEA pursues a deliberate price leadership strategy. For example, IKEA does not deliver, although it will organize delivery at the purchaser’s cost, if it is needed. At a cost it will even organize assembly for the customer.
Distribution IKEA has constructed its own global distribution and retailing network, with 18 distribution centres in 2003, most near container ports and major truck and rail routes and 4 more under construction – 70% of the total product line is handled by the centres, the other 30% going direct from supplier to store. Its stores are usually located well outside city centres but with plenty of free parking space. The stores themselves are large and take some time to walk around. IKEA owns the larger scale outlets, but is prepared to franchise in markets which are smaller or carry a bigger risk because of initial unfamiliarity with or hostility to the IKEA concept. They are decidedly family friendly, with supervised crèches and playgrounds or video rooms for older children, both available in order to free the parents from outside distraction in their shopping. There are also free buggies, reasonably priced restaurants and cafes. Such facilities allow for a lengthy visit. The stores have been described as a kind of ‘theme park masquerading as a furniture outlet’ (Margonelli, 2002: 112). In the easy accessibility of the products, the experience of shopping is rather like a supermarket experience, but in the encouragement of family participation, it is more like an outing. The normal rules and expectations of a furniture store do not apply to IKEA. The combination of these superficially contradictory features is one aspect of the achievement of IKEA. It is also true that each store is a meticulously constructed ‘virtual’ Sweden. In some regions, where the cost is not prohibitive, IKEA has used a mail-order system.
Promotion One of the best-known features of IKEA is its catalogue .It is itself well designed, almost a collector’s item. This catalogue has become something of a design icon, rather like the
The object of this section is to show briefly, with one of the humblest of products, the Bang mug, the IKEA method of developing and renovating a product, noting the sequence of steps in the development of a product. This is one of the most popular, although also one of the cheapest, of the IKEA products. IKEA will probably sell as many as 25 million worldwide in 2003. Its history is typical of many products. The product originated from the idea of a co-worker. Typically the first step is to set the price, which is suggested by the location of the product in a matrix of price range and product style created by the strategists. The second step is to choose a manufacturer. Only at the third stage does the company design the product. When the process of design began for the Bang in 1996, the starting point for Pia Eldin Lindsten, the product developer, was the price, set at a very low level of five Swedish krona. This was regarded as a powerful knock-out punch, hence the name, Bang. The concern with cost was comprehensive. This price had to be taken into account in choosing materials, colours and design. For example, the mug is made in green, blue, yellow and white, as these pigments cost less than other shades, such as red. However, price, while the starting point, was not everything. In addition to price there were also requirements of functionality, modern design, environmental sensitivity and production under acceptable working conditions. Some of these were at odds with the cost constraint but all were regarded as important. The team of specialist designers, product developers and purchasers had to satisfy all the requirements. Often the existing suppliers are able to make suggestions for change. One producer of Bang, a factory in Rumania, has been a supplier for 15 years. This is not unusual. Such a long-term relationship helps in developing an awareness of the expectations of both IKEA and its customers. There is often a mutual exchange of suggestions which assists in the continuous improvement of the product. This was certainly the case with the Bang mug. There have been three occasions on which the Bang has been designed and redesigned. In the case of the Bang it is possible to interpret the design aim as maximizing the number of mugs which can be stored on a pallet. Originally 864 mugs would fit, after the redesign with a rim, 1280 and after another redesign 2024. This allowed the shipping costs to be reduced by 60%. The launch of a new Bang in 2001 was an opportunity for further improvement and further cost saving. The new mug became shorter and the handle has been redesigned so that it stacks more efficiently. This helps to reduce costs since it saves space for all concerned, from the manufacturer to the customer. It assists the manufacturer since it makes better use of space in the kiln. The new design also helps in transport, warehousing and store display. Probably most importantly of all it assists the customer in saving cupboard space. The final step is to sell it. The mug is presented in a natural context in the room in which it is likely to be used.
IKEA’s competition Throughout the world the initial competition for IKEA consisted of much smaller companies, often family concerns. Such concerns have neither the negotiating strength to keep costs down nor the opportunity to reap the economies of scale in manufacture or distribution that IKEA has created. They are also accustomed to deliver sometimes weeks, or even months, after the receipt of a specific order. IKEA has been prepared not only to undercut the price of competitors, but to take on the purchasing risk which those
who sell and manufacture to order do not. Calculating the product requirements of each store accurately and in a timely way is critical to ensuring that the products are always available in the warehouse and that the suppliers are producing the right number to maintain this availability. Easy communication of sales information helps. This allows IKEA to supply the consumer with what he or she wants with little or no delay, another product attribute which is very attractive to customers. Inventories are kept down to a minimum. The concentration and coordination made possible by the global coverage of IKEA enables a degree of long-term planning which is unusual for this industry. Planning is absolutely critical in balancing the supply of and demand for individual items of IKEA furniture and furnishings. The existence of IKEA has raised the game of its competitors and stimulated imitation. As time has passed it has become more difficult for IKEA to maintain a competitive advantage. While the strategy for going global and entering different countries has been a carefully prepared and implemented one, some problems have emerged for the strategy. This is best illustrated by the experience of IKEA in entering the North American market. Before entering the largest world market, the USA, IKEA went into the much smaller Canadian market. Entry into the Canadian market was gradual, partly by design, partly because IKEA could not do otherwise. This allowed a significant learning process. In 1976 the first store was opened. By 1986 there were still only nine stores, hardly a Starbucks or McDonald’s pace of store opening. The range of products on offer was about half the total range available in Europe, a range selected on the basis of what the consumer wanted and what IKEA could sell at a competitive price. A central warehouse was set up in Montreal. Demand tended to exceed supply, which was partly countered by the establishment of a network of Canadian suppliers, 30 by 1984. Rather reluctantly the company ran a mail-order business, less profitable than its normal business. IKEA took its time in building a platform for rapid growth in what could be its largest potential market, the USA. The American market represented a real challenge to the earlier strategy since it had already been the graveyard of many a European retailer. Bjorn Bayley, who headed the successful Canadian management team, moved on in 1985 to organize its entry into the USA. However, the entry was probably IKEA’s most difficult one to date. This is shown by the fact that between 1985 and 1996 IKEA opened only six stores in North America. The stores were much slower to become profitable than the European stores. Previously in Europe entry into a new market was typically followed by two or three years of loss making but profits began with the third or fourth store after this brief learning and adjustment period. In the USA four years after entry the stores were still losing money. They broke even for the first time in 1993. One problem was an adverse movement in the exchange rate, with the Swedish krona increasing in value, from $1 equal to 8. krona in 1985 to $1 equal to 5.8 in 1990. This had the unfortunate effect of removing the price competitiveness of IKEA’s products. A worse problem was the reluctance of the consumers to buy. They entered the stores but did not buy. American consumers did not find the dimensions of IKEA’s products to their liking. For example, the beds were too narrow and were not sold with matching bedroom suites. Sheets and curtains were of European sizes, not American. Drawers in bedroom cupboards were not deep enough, and glasses too small to accommodate the American liking for ice. The previously successful strategy had to be modified. By 1991 IKEA had decided that it needed to customize its products
or manufacturers, which sell to order. Some of these are specialists, such as the Sofa Workshop in Australia. The resulting product differs according to customer requirements.
The future IKEA has an excellent platform for future growth since it has succeeded in branding itself, which helps it to enter new markets. It has an unchallenged reputation for producing stylish home furnishings at a low cost and continuous innovation. In 1999 it ranked as high as 43rd in the aggregate world ranking by brand value. No other home furnishings company was ranked in the top 60. This is a good indication of its competitive success and the special identity that IKEA has established for itself. One key issue is to manage the brand well. This require a pace of expansion such that there is no loss of quality or efficiency and that sufficient homogeneity is retained to generate the economies of supply which have been so important in the past. Some adjustment of the business model is inevitable, but the main features of the old model will continue. The IKEA model has a lot more mileage in it. The interaction between the core company competencies and the tastes of its customers will be extended to further parts of the globe as the company expands. In 1996, when IKEA became Dutch-owned, it was split into three parts – an organization comprising the retailing operations, one holding the franchise and trademarks of IKEA, and a finance and banking organization. The first two are controlled at arm’s length by the Dutch charitable foundation. The intention is to try and avoid either the break-up of the organization or its takeover by a predator. IKEA diverged from the usual way of doing things in a number of ways.
- In its international activities it continued to stress its Swedish roots, notably in the design of its many products but even in its international advertising, ostentatiously displaying the blue and gold of Sweden.
- It also applied the same formula throughout the world, putting on offer the same range of goods. It conducted almost nothing by way of market research into patterns of potential demand and local tastes. It engaged in very little market analysis and initially almost no customization to take account of local market differences.
- It did not ease itself into foreign markets through acquisition of an existing business, a joint venture with a successful local enterprise or franchising: it moved in boots and all, establishing operations on its own. Its growth was organic, that is, internally generated.
IKEA defined clearly what it wanted to do – produce and sell furniture and furnishings to the largest possible market in a new and creative manner, but it also met the requirements of logistics and management in a way which pared its costs to the lowest possible level. Selling the same products throughout the world allowed suppliers to reap economies of scale. In the words of Normean and Ramirez (1993: 66), IKEA has ‘systematically redefined the roles, relationships and organizational practices of the furniture business’. They go on to point out that ‘IKEA did not position itself to add value at any one point in a predetermined sequence of activities (that is, the conventional value chain). Rather, IKEA set out systematically to reinvent value and the business system that delivers it for an entire cast of economic actors’. These actors included suppliers, customers and the various groups of staff within IKEA itself. In the view of Normean and Ramirez, the case of IKEA shows that the focus of strategic analysis
should not be the company or the industry, but ‘the value-creating system, within which different economic actors – suppliers, business partners, allies, customers – work together to co-produce value’ (p. 66). IKEA is ‘the central star in a constellation of services, goods, design manage management, support, and even entertainment’. It put together a strategy and a business model which was new and highly successful and, most dramatically, contributed significantly to a redefinition of the industry.
