A Case Study Documenting IKEA’sSuccess and Challenges.
In 1943 the Swedish furniture company IKEA was formed by Ingvar Kamprad an individual with an entrepreneurial mind set from a young age. Initially IKEA sold a wide range of products at low prices from pens and wallets to picture frames and nylon stockings. It was only in 1948 that furniture was first introduced to IKEAs product range. Initially furniture was manufactured in the forests near Ingvar's home it was well received and slowly the product line expanded.
Soon after in 1950 IKEA created its first catalogue then faced with increasing low priced competition in 1953 the first showroom was opened to demonstrate the high quality that such a cheap product had to offer. With the success that IKEAs show rooms brought it they soon began to experiment with other furniture ideas and it was in 1956 that flat pack and self-assembly furniture was first created allowing IKEA to further reduce costs and become the massive furniture retailer that it is today.
The IKEA group achieved sales over 28.5 billion EURO in 2013 from its 349 stores in 43 countries. Currently IKEA has over 139,000 employees and supplies over 12,000 unique products. IKEAs massive size means that is uses an astonishing 1% of global wood supply making it perhaps the largest user of wood in the retail sector.
Why IKEA succeeded:
IKEA is associated with products that are simple, low cost and stylish. These associations gave IKEA a very broad appeal to different groups of consumers and ensured that IKEA products appealed in both the business and consumer markets. At the time of its introduction IKEAs flat pack furniture offered a great solution for both individuals and companies who were looking for stylish high quality furniture at an affordable price.
Due to the way IKEA produces and sells its furniture it also ensured that it was readily available and convenient. Custom or mail order furniture would often take weeks for delivery whereas IKEAs products were readily available in their stores and easy to transport home in the average family car.
Whilst many may have considered it a downside IKEA also made the wise decision to standardize their product line during their international expansion, this helped IKEA keep costs low during the earliest part of their expansion and then allowed them to expand into local product lines once they had established in a new market.
The model that IKEA developed for its business ensured it was able to keep costs low. Flat packed furniture saved on many costs such as labour due to lack of construction and transportation due to the considerable space saving during transportation of flat packed furniture. Ultimately customers were very happy with the cost savings and IKEA maintained high profits by outsourcing the highly costly assembly part of the value chain directly to the customer who was more than willing to do the extra work for a large saving.
Another of the strengths of IKEA was its procurement. To support its booming business IKEA has 31 trading service offices of procurement staff in 26 countries that source from over 1,400 worldwide suppliers. With the bulk purchasing power behind IKEA and the large procurement team it was able to negotiate prices between 20% and 40% lower than its competitors for similar goods that those of its competitors for comparable goods. Over time IKEA proved that it could successfully manage worldwide suppliers whilst also maintaining the quality and consistency of its products which is an important part of maintaining its brand reputation.
IKEAs procures goods on a global scale and has located its 31 offices across the world in a manner that allows it to work with the local suppliers. Having
a local base is just one of the ways in which IKEA works to build its relationship with its local suppliers, staff also visit all of the suppliers on a
regular basis not only to continue to build relationships with their suppliers but also to build on their quality control processes. As part of this IKEA
is a strong believer that it should only work with ethical suppliers and as such it inspects the working conditions and the social conditions surrounding
the factories ensuring it adds value to the local communities it works with.
Currently 66% of IKEAs products are sourced from Europe however to keep costs down IKEAs largest supplier is China which provides 18% of all IKEA products. Production of a single product is spread across multiple suppliers and optimised in order to reduce prices as part of this IKEA also purchases raw materials and hardware in bulk which is sold to its suppliers to help them keep the final cost down.
To ensure that IKEA stays the market leader it pays special attention to its supply chain management which is supported by the latest IT infrastructure. Due to the large number of suppliers and the complexity of the products IKEA developed its own system for ordering from suppliers to efficiency produce its final product. To do this IKEA makes use of its 14 warehouses to effectively store and distribute its inventory the IT system which it has built helps it to manage the demands of stores and ensure effective distribution of its stock between them. Ensuring that nothing stays in storage for long is key to keeping IKEAs inventory costs low as everything is built to shelf rather than built to order like some other furniture manufacturers.
Challenges and the future of IKEA:
IKEA has expanded into the US market and is growing at steady rate operating in 23 US states as of January 2012, this hasn't been an expansion without challenges though with many problems occurring due to Unions with several large manufacturers not content about their working conditions. Following a LA Times expose in 2011 there were increased problems with complaints of racial discrimination, lack of annual pay reviews and mandatory overtime. This caused high staff turnover and let to IKEA reducing the pace of its US expansion focussing on other ventures.
Currently one of IKEAs focusses is their expansion into the Australian market with news in May 2014 that IKEA is looking to open four more 25,000 square meter stores and expand its online presence with a new web store. This $400m AUD investment is being jointly funded by the local IKEA company and the parent company back in Sweden. During 2013 IKEA saw its Australian profits jump 50% despite tough economic conditions which likely prompted them to be more aggressive in their local expansion.
IKEA has always adopted an ethnocentric strategy for internationalization weighing up the effect of the local culture against IKEAs own to select relevant products. In the early days IKEA often ignored local tastes and preferences in favour of keeping costs low but learnt the hard way in the US that this wasn't appropriate and adapted to the way furniture is purchased in the US. To do this greater control was handed over to the US subsidiary allowing them to customize products for the local market. Costs increased as a result of these changes however this localization approach was essential in order to gain traction in the US. This strategy has been repeated in other markets to help IKEA adapt to local culture and purchasing behaviour.
Recently IKEA has been looking more towards emerging markets with a growing middle class such as China for further growth. In order to eremain successful IKEA needs to further adapt its product lines to local demand and ensure that pricing strategy is correct. Average income is still much lower in emerging markets meaning prices have to be lower and with many people still only using public transport central city locations are essential for sales which could cause problems due to increased costs and lower margins due to the lower pricing point.
In breaking emerging markets IKEA has a large potential for growth but there is also a high risk associated with this if the market proves not to be ready for the products and prices that IKEA are offering.