IKEA Background



IKEA Case Study 1238251186815Team members:Astrid CobosMarjon FarzadpourKhongorzul GanbatCalifornia State UniversityOctober 22, 2014We analyzed IKEA’s historical steps and strategies, which have help them to becoming a large, successful and well-known furniture that we see today. We also took a look at IKEA’s next steps for global expansion.IKEA BackgroundIngvar Kamprad founded IKEA in Sweden in 1943; he began his business selling fish and Christmas magazines in the shed of their family farm. The name IKEA was an acronym, I and K being his initials, while E stood for Elmtaryd, the name of the family farm, and A stood for Agunnaryd, the name of the village in Southern Sweden where the farm was located. (Hill, Jones, & Schilling, 2015) That same year he added furniture and published his first catalog. Over time IKEA goal/ mission was established to provide stylish functional designs furniture that could be manufactured cost efficiently and sold at prices low enough to allow most people to afford them. Furniture at the time in Sweden was considered a family heirloom, passed down across the generations. He wanted to change this to make it possible for people of modest means to buy their own furniture. Cutting out the retailers and establishing self-assembly became a key feature that IKEA offered, making it unique and different. By 1965, IKEA was generating €25 million and continuing to expand into neighboring countries. (Hill, Jones, & Schilling, 2015) IKEA has continued to contribute innovation to the furniture market and has changed how the world purchases furniture. IKEA’s Business Level StrategyThe IKEA Company pursues two main business level strategies to attract customers, differentiating its products from its competitors and cutting the prices of its furniture. These two strategies allow youngsters and low to middle class families or people, who search for trendy designs but low prices, to easily purchase furniture. (Hill, Jones, & Schilling, 2015) The first strategy IKEA uses is differentiating its products. By distinguishing its furniture from other furniture companies, IKEA fits the taste of a wide variety of buyers. Differentiating key features that IKEA was soon known for were flat packaging and self-assembly. Flat packaging became very effective to IKEA and its customers. The furniture pieces are taken off and flat packed from the store. Then, the customers assemble the furniture at their homes. These concepts make the furniture always readily available for the customers, which prevents them from waiting 2-3 days after purchasing. (Hill, Jones, & Schilling, 2015) This was all very useful for customers, and the efficiency drew a distinction between IKEA and other furniture companies.IKEA also provides stylish designs with “minimalist lines.” (Hill, Jones, & Schilling, 2015) With the stylish and trendy furniture, the company maintained to keep everything at a considerably low price. In addition to modern style and low price, IKEA offers its customers high quality and wide range of products. Moreover, IKEA uses large showrooms for its furniture and offers uniquely designed warehouse type stores to its customers. The interior of the store is structured like a maze, which encourages customers to pass by each department and showroom to get to the check out. (Hill, Jones, & Schilling, 2015) Thus, customers are able to check every available department at one visit. The showrooms provide the chance for shoppers to see the furniture set up and in use (e.g. kitchens, bedrooms, living rooms, etc.). In addition, IKEA formed self-service checkouts and merchandise pick up areas. At the end of the store, shoppers can pick up their flat packed furniture and check out. (Hill, Jones, & Schilling, 2015) This self-service pick up method eliminates the long lines and hassle for waiting stores attendant to help customers. The customer can enter the warehouse anytime they want at their convenience. Along with their modern designs, IKEA experimented with adding an in-store restaurant to its warehouses. This new addition allowed customers to relax and refresh themselves while shopping; it also further distinguished the company from others. The restaurant was a hit and became an essential feature of all IKEA stores. (Hill, Jones, & Schilling, 2015) Majority of IKEA stores are usually located on the outskirt of the city, rather than the crowded downtown. These locations offer IKEA customers easy access roads and plenty of parking spaces. (Hill, Jones, & Schilling, 2015)The second strategy used by IKEA is the low cost leadership strategy achieved by keeping their furniture prices to a minimum. (Hill, Jones, & Schilling, 2015) This strategy helped IKEA get ahead of its rivals and become the cost leader in the furniture industry. By having lower prices, a large number of people can easily afford the company’s products. To be able to cut prices, IKEA changed a number of things. First, IKEA started to flat package its furniture, after Gillis Lundgren stumbled upon the cost effective, key feature of IKEA. This new feature reduces the cost of transportation and warehouse, which means it also lowers the cost of the actual product. (Hill, Jones, & Schilling, 2015) Not only did the new idea lower the prices of the furniture, it also reduced the number of furniture breaking during the shipping process. The customers seem to be willing to pay a lower price in return for the task of the assembly. (Hill, Jones, & Schilling, 2015)With the self-assembly concept, IKEA cut retailers and Kamprad was able to undercut the prices of established retail outlets, much to their annoyance. (Hill, Jones, & Schilling, 2015) “The established retailers responded” by claiming that IKEA imitated their products, and other furniture manufacturers were pressured to not to sell to IKEA. (Hill, Jones, & Schilling, 2015) This scene forced IKEA to “design more of its products in house” and lead Kamprad to find a furniture manufacturer in Poland. (Hill, Jones, & Schilling, 2015) “Kamprad discovered that furniture manufactured in Poland was 50% cheaper than furniture made in Sweden;” this allowed him to lower their prices even more. (Hill, Jones, & Schilling, 2015) Since, Kamprad discovered the cheaper furniture manufacturer in Poland, he started looking cheaper manufacturing and cheaper labor in different countries. Now, IKEA has more than 2,000 suppliers in over 50 countries. (FAQ - IKEA) As of 2012, IKEA’s top five supplying countries are China (21% of supplies), Poland (17%), Italy (8%), Sweden (6%), and Germany (6%). (Hill, Jones, & Schilling, 2015) Cheap labor lowers the furniture manufacturing cost and enables IKEA to charge its customers lower price. According to Hill, Jones, and Schilling (2015), IKEA manufactures 10% of its products internally and 90% of its products are from independent suppliers.Moreover, IKEA’s strong long-term relationship with its suppliers enables IKEA to cut the process even more. Kamprad’s “established relationship with Poles becomes the archetype for future relationships with suppliers.” (Hill, Jones, & Schilling, 2015) Working with IKEA, the suppliers have three advantages. First, “all the decision was one man’s decision and the supplier can rely upon what had been decided.” (Hill, Jones, & Schilling, 2015) Second, “the suppliers are given long-term contracts and are able to plan in peace and quiet.” (Hill, Jones, & Schilling, 2015) The third advantage is that “IKEA often helps its suppliers to purchase and develop new technologies and the suppliers can make the IKEA products at lower costs.” (Hill, Jones, & Schilling, 2015).IKEA’s Revolutionize Furniture Retailing, First in Scandinavia.IKEA’s strategic plans further expanded the company as well as revolutionizing furniture retail. IKEA had soon started internationally expanding throughout Europe. The company met with great success in the countries. It was the largest furniture retailer in a few countries. Although, as stated by one former manager, they had made big mistakes, nevertheless, customers kept constantly coming to shop for furniture and the money poured in. Some of the expansions were considerably revolutionary. (Hill, Jones, & Schilling, 2015) Nevertheless, Kamprad claimed that growth opportunities should be limited and started off little by little with their development. (Hill, Jones, & Schilling, 2015) One of their extensions included Scandinavia. The IKEA expansion created a dramatic change to the furniture retail in Scandinavia. The furniture markets in Scandinavia were “largely fragmented and were served by high cost retailers downtown selling rather expensive furniture that was not always available.” (Hill, Jones, & Schilling, 2015) IKEA brought a new light to Scandinavian shoppers with elegant designs, low prices, and immediate availability, as well as their self-service store format. By 1973, IKEA was the largest furniture retailer in Scandinavia with 9 stores. (Hill, Jones, & Schilling, 2015)Along with Scandinavia, IKEA had also traveled through the rest of Western Europe. They started off with Switzerland and rapidly expanded throughout the years. IKEA had met success with West Germany with 15 stores by the late 1980s. (Hill, Jones, & Schilling, 2015) With the development of IKEA in other countries, the company almost met universal success, although making massive mistakes. However, customers continued to pour into the shops as well as the money. IKEA greeted customers with spirit allowing them to have the cheapest solution for furniture. (Hill, Jones, & Schilling, 2015) High Value, Low CostIKEA’s founder Ingvar Kamprad’s theory was that “good furniture could be priced so that the man with the flat wallet would make a place for it in his spending and could afford it.” IKEA’s goal to offer low-priced but well-designed furniture is reinforced by its efforts in minimizing manufacturing costs. Finding the right suppliers to minimize costs for each item is primordial to IKEA’s business plan. In the beginning, IKEA was getting their furniture designs made by Swedish manufacturers. By using their self-assembly and self-service pick up concepts they were able to offer lower prices than its competitors. Established retailers and outlets were not happy about IKEA’s competitive advantage and they pressured manufacturers not to sell to IKEA. Kamprad then was forced to look for manufacturers elsewhere. This lead to him finding manufactures in Poland whom, to IKEA’s advantage, were about 50% cheaper than Swedish manufacturers. This made IKEA’s price advantage even greater and allowed them to cut prices even further. From there on, IKEA strives to find the cheapest manufacture for its products. Along with its international expansion, IKEA aimed at finding manufacturers in the areas where it expanded in order to save transporting costs and/or reduce manufacturing costs. This eventually lead them to find its top supplier in China producing 21% of their products and Poland remains the second biggest supplier producing 17%. (Hill, Jones, & Schilling, 2015) IKEA’s motto is “We make the price tag first and then we make the piece.” This means that they would set a price for a piece of furniture and then literally start the process of making it. Devoting considerable time and attention to finding the right supplier for each product is crucial for IKEA’s business strategy. (Hill, Jones, & Schilling, 2015) Once they have decided on the next product they look for the cheapest manufacturer for the specific piece, depending on materials and other cost. Once they have figured a production plan that fits the target price, they go ahead and produce it. ?IKEA sets prices for prospective products before developing them and usually their prices are set 30-50% below competitor’s prices. IKEA’s CultureIKEA’s culture is strongly based on its founder’s entrepreneurial and humble character. It started as a small business that Kamprad handled from his family farm, in the village of Agunnaryd in Sm?land, south of Sweden. The village was known for its humble means and simple life. People had to get by with very little and make the most out of the scare resources. Kamprad, having grown up with this mentality, became an innovation driven entrepreneur who always looked for ways to make changes and make his business grow, without forgetting his humble and simple beginnings. (Inter., 2014) It is said of Kamprad that although he is one of the richest men in the world, he is a very frugal man who travels coach and takes the subway to work. (Hill, Jones, & Schilling, 2013) His frugality is part of IKEA’s DNA, and an important factor of the company’s success. Management is not allowed to travel on first class and they are expected to share hotel rooms during business trips. (Hill, Jones, & Schilling, 2015) Kamprad’s management style was informal, non-hierarchical and team based. In general IKEA prefers to hire people with no experience and promote from within. Everyone is a coworker and executives do not wear suits and ties. The offices are on the main floor plan and open to everyone and decorated with IKEA’s furniture. IKEA often enforces non-bureaucracy week by having its executives come work on the floor helping customers, or as cashiers or unloading trucks. IKEA often prefers to hire non-experienced people over highly educated status oriented applicants because the latter have trouble adjusting to the ways and values of the company. (Hill, Jones, & Schilling, 2015) Kamprad stated in an interview that the fundamental key for good leadership is love and he considered his team an extended family. (Hill, Jones, & Schilling, 2015) This way of management makes IKEA a team-oriented place of work in which values such as family; teamwork, innovation, and democracy are highly regarded. Often workers stay at IKEA because “they like it” and the company is a good fit to their personality and life style. (Hill, Jones, & Schilling, 2013)IKEA is very family-oriented; family values have been a strong bone to its operations and contributed to the company’s growth. Influenced from the fact it started in a family farm to the way that the IKEA shopping experience is designed today. Since the beginning, a trip to IKEA was considered something like a family outing. Throughout the times, Kamprad has been implementing ways to make the IKEA experience more comfortable and amicable to middle class families, whom are the primary target market. (Hill, Jones, & Schilling, 2015) IKEA offers a child-care facility to make the shopping experience easier for families with small children; usually these are located at the entrance to the store. IKEA’s restaurant is also another convenience offered to make customers more comfortable while shopping and make of the shopping experience something more of a family outing, without the worry to leave at some point to get something to eat or pick up their kids, everything is conveniently located at the store. Every now and then IKEA offers a free meal at the restaurant for the purchase of $100 or more worth of merchandise. Customers can eat the restaurant and take their receipt to the register, after having spent one hundred dollars worth of purchases, the amount for their meal serves as credit toward their purchase total. This is an attractive incentive to spend more and to enjoy the restaurant facility. IKEA also arranges their merchandise in a way both genders female and make customers can find things that suit their interests close to each other as they walk by the store. Women can look at household things while men look at tools that are strategically placed close by, so husbands don’t get bored while their wives are looking for stuff. (Hill, Jones, & Schilling, 2015)IKEA’s Early Expansion into Western EuropeIKEA’s expansion into Western Europe was rapid and very successful. As in Sweden, the furniture industry was very fragmented and served by high cost retailers in the rest of Europe. IKEA’s low prices, immediate availability and stylish designs were all new concepts for the furniture industry in Europe. Expansion in Europe was fast paced. By 1973, IKEA had already opened 9 stores in Scandinavia, then opened a store in Switzerland and in over the next 15 years, expanded pretty quickly through Western Europe. Germany proved to be a good market; IKEA opened 15 stores in the 80’s. (Hill, Jones, & Schilling, 2015) The concepts introduced by the company of offering good quality at affordable prices, ready availability, modern styles, and the idea that furniture could be disposable instead of a family heirloom, were good selling points that customers rapidly adapted to. IKEA made the attachment to furniture become an idea of the past. (Hill, Jones, & Schilling, 2015) Expansion in the UK was somewhat slow due to another furniture company, Habitat, which was very similar to IKEA’s concept. IKEA strived to make a quick profit and get a positive cash flow going fast. IKEA was able to offer lower prices due to their low-costs strategy in manufacturing and in that way they could compete with other furniture retailers that were more expensive. (Hill, Jones, & Schilling, 2015) IKEA’s expansion though Western Europe:CountryFirst IKEA storeNumber of stores to dateNorway19636Denmark19695Austria19777Spain198019France198129United Kingdom198718Portugal20043Ireland20091IKEA Initially Stumble in the USA and Their Turn AroundIKEA initially stumble when entering into the USA, because of the different cultural market. IKEA’s Swedish style of furniture was not fitting to the consumer’s needs or desires, as well IKEA faced new competitors, whom had competitive advantage.IKEA spend almost a decade struggling with low sales, as competition was the main retailor of furniture at lower prices. A few of their competitors were Wal-Mart, Costco, and Office Depot. IKEA’s rivals’ competitive advantage was established on their brand loyal customers and their fairly low prices. Entering as a new foreign business with a foreign style of furniture did not appeal to the American market. The furniture IKEA was trying to sell in the US was not fitting for the typical American home. The beds were measured differently, in centimeters verses king, queen etc., and American’s found that sheets didn’t fit properly on the IKEA beds; their sofas were too small, drawers’ not deep enough, curtains too short, and kitchens didn’t fit US appliances. It was clear that IKEA’s style offered was not suitable for the American lifestyle. Finally IKEA made some changes in order to compete in the US furniture market alongside its competitors. First they had to redesign new products in order to suit the US consumer’s needs and desires. IKEA also needed to add a ton of new stores and drastically reduce its prices in order to compete with the competition. As IKEA made these changes they also attracted a younger generation that liked IKEA’s elegance and quality. By the changes made, strategies implemented, and attraction to a new demographic, IKEA began to establish itself and move its way up in growth. By 2009 IKEA became the second preferred provider in the US market. (Bhasin, 2012)Overall, this was a learning experience for IKEA. They had to change their designs and reduce prices lower from what they originally were, which created larger expenses. They risked profit growth due to higher costs and market share from rivals, but once they targeted what they had to change, successful applied their strategies they gain competitive advantage and sustainable profit growth in the furniture market.IKEA Strategy of Global PursuitIKEA has become one of the most successful retailers in the world and wants to expand even further into foreign markets. They plan to globally open another 25 stores by 2020 into the nonwestern markets including China and India. IKEA is known globally for its lower prices and innovatively designed furniture. (Chu, 2013) But wanting to pursue this global expansion into China and India they needed a different strategy geared to the different culture of their market.Expanding in India comes with restriction by their government. One restriction was, IKEA is not allowed to put stores near food and beverages out-lets, which reduced locations to put their stores. Another issue, operations in Indian as a single-brand segment were only allowed to own 51% of operation, but in the past year the government has given IKEA permission to own 100%, which also affects their strategy. (Warc Staff, 2013) Now, IKEA strategic plan in expansion in India is to ask consumer their needs, understand the culture and location, as well CEO stated, to keep to their core concept; to offer a wide range of well-designed, functional home furnishing products at low and affordable cost. (IKEA Concept and History, 2014) IKEA had entered into China in 1998, with join ventures and already understood the consumers’ desires in regards to furniture; they made modification for their small apartments. IKEA adopted the strategy to sell there item at 70% discount in the Chinese stores. The strategy IKEA is the broad lower-cost strategy; by taking lower prices so low it make items more affordable to increase sales increase profits. So far from lowering the prices by 10% IKEA’s sales in China rose 35%, so by the results of this strategy IKEA will continue this approach in opening more stores in China. (Miller, 2009) IKEA likes to build their stores near sub-urban areas for convenience, but since there is not much driving done in China they adjusted strategy to build their stores near public transportation. IKEA SWOT AnalysisThrough global expansion we can determine IKEA’s possible strengths, weakness, opportunities and threats, as seen below.Strength:CHINAHas already established stores in China, so there is awareness of their nameSupposes strong brand imageStrong concept of offering low pricesINDIAIndian government has approved IKEA to hold 100% owner shipIndian furniture market is growing about 30% compound annuallyWeakness:CHINAHigh transportation costs, in relation to pricesDifficult to control expansion under standards of control and qualityCompetition; local furniture storesINDIAGlobal size makes it difficult to implement business strategyLess skilled manpowerOpportunities:CHINALow entry barrier, because it is a less developed marketINDIAAggressive young populationDemand in market is increasingThreats:CHINAOEM (original equipment manufacturer) factories & online shopping, e-commerceINDIASocial changes, trendsSources for SWOT analysis (Olivier, 2013), (Maneesh, 2012), & (PR Newswire 2014)Porter’s Five Forces AnalysisThreat of new entrants: is current requires high capital investments offer new companies, in addition the new entrants must be able to maintain distribution of variety and speed, establish brand, quality and design recognition. Therefore, entry barrier is fairly high and risky.Bargaining power of buyers: Buyers have heavy control and power because they have such a wide variety of alternative supplies. Maintaining customer satisfaction is important in this industry and satisfying customers’ needs and desires.Bargaining power of suppliers: IKEA has a wide range of suppliers since they sell their product internationally, with around 2,000 suppliers in over 50 countries they suppliers do not hold much power or control in price. IKEA holds more power in asking for suppliers to match their desired prices. This is despite the current issue or conflict with one of their suppliers as discussed in the case.Threats of substitutes: IKEA is the top ten-furniture retailer by sales as recorded in US. (Kelly-Detwiler, 2014) Therefore, their threats or rivals do not pose an equal amount of power in the industry to pose a threat to taking high numbers of customers from IKEA.Rivalry among existing competitors: Being an internationally serving industry, IKEA has to compete with local and large named companies in each country. These rivals have a better grasp of their business and business develop since it is harder for IKEA as a large spread company to oversee needed changes at each store location, country or region. Increase in annual growth in both China and India is an advantage to expanded business to those countries.References(2013). 2013 Facts and Figures. 42 Countries and counting! Retrieved from (2014). IKEA Concept and History. Retrieved from , Kim. (2012, June 6). Former IKEA CEO: This Is How We Successfully Invaded The U.S. Market. Retrieved from , Valerue, Girdhar, Alka, and Sood, Rajal. (2013, July 21). Couching tiger tames the dragon. Retrieved from HYPERLINK "" strategies-to-expand-in-china/1/196322.htmlFAQ - IKEA. (n.d.). . Retrieved October 15, 2014, from , Maneesh. (2012, August 25). IKEA Invades India. Retrieved from , C. W., Jones, G. R., & Schilling, M. A. (20152013). Case 18 IKEA in 2013: Furniture Retailer to the World. Strategic management: an integrated approach (11th ed., pp. C251 - C258). Stamford, CT: Cengage Learning.Kelly-Detwiler, Peter. (2014, February 7). IKEA’s Aggressive Approach To sustainability Creates Enormous Business Opportunities. Retrieved from , Paula. (2009, July 1). IKEA with Chinese Characteristics. Retrieved from Newswire. (2014, August 12). Outdoor Furniture, Global Industry Analysts. Retrieved from Staff. (2013, October 16). IKEA plots Indian expansion. Retrieved from ................
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