The Swedish home products retailer IKEA Group (IKEA) has grown from a one-man mail order company, established in 1934, into an operation with 461 IKEA stores in over 40 countries/ territories and 217,000 employees in 2021[i].
The development of the IKEA formula
The ‘IKEA formula’, critical to its international success, has developed gradually over time. Its main focus is the delivery of low-cost products to customers: “[A] low price is the result of a methodical, systematic approach from initial idea through product development, supply, distribution and retail all the way to the customer’s home”.[ii]
The importance of selling at a low price was ingrained in Ingvar Kamprad, the founder of IKEA, even before he established IKEA in 1934. He grew up on a farm in Sweden and, as a kid, purchased matches in bulk from Stockholm and rode his bicycle around, selling matches to his neighbours. His bulk purchasing helped him to sell at a very low price while still earning a profit. His small business grew to include Christmas tree decorations, fish and pencils.
In the early days of IKEA, the firm sold products as diverse as watches, jewellery and picture frames whenever it was possible to sell such products at a low price. While his business grew, Kamprad started to advertise via both local newspapers and mail-order catalogues. Only in 1947 did IKEA add furniture into its product line, and it quickly became IKEA’s main set of end products. Local manufacturers near Ingvar Kamprad’s home produced the furniture from trees in the nearby forests. This line of products continued to grow, and in 1951 Ingvar Kamprad decided to end all the other products and to focus solely on low-priced furniture. At that point, “the IKEA that we know today was born”.[iii]
Low-cost service and the showroom/ warehouse idea
The focus on low-price furniture in the early 1950s caused customers to be concerned about the quality of IKEA products, as traditionally customers could not see the furniture before they placed an order. To solve this information asymmetry problem, IKEA opened a furniture showroom in Älmhult in 1953, so as to allow customers to compare IKEA products with those from its competitors.
The showroom idea became a key part of the IKEA concept and was applied systematically in IKEA’s international expansion. In 1964, IKEA opened a 45,800 square metre store in an attractive circular building in Stockholm, so appealing that thousands of people lined up for its opening. The building had four floors, and customers could move easily from floor to floor. However, neither the storage capacity nor the number of employees was sufficient to provide proper service to customers. To fix this problem, IKEA opened its warehouse so that customers could help themselves to what they wanted to purchase. The circular store, open warehouse and self-service approach became important components of the IKEA concept.
Low-cost, in-house design
The intense competition within Sweden in the early 1950s led to another innovation at IKEA in 1955: it started to design its own furniture. Like the opening of its warehouse, in-house furniture design at IKEA was initiated as a response to a problem: in this case, furniture supplier boycotts instigated by IKEA’s competitors. Contrary to the expectation of its competitors, IKEA did not run into supply problems; rather, in-house furniture design proved very successful.
Flat packaging
The design of ‘flat packaging’ started to emerge, triggered by an IKEA employee who, afraid of damaging a table during transportation, removed its legs to fit it into a car. This act unintentionally initiated IKEA’s novel business approach whereby customers could easily transport the products in their own vehicles and assemble them later. The assemble-it-yourself furniture, together with the flat packages, reduced space requirements in logistics operations (trucks, warehouses, etc.), and also lowered costs. IKEA incorporated the requirement of easily transportable flat packaging first into the design of kitchen products in 1959, and later into a variety of other products for use throughout the home.
Low-cost supply
In the early 1950s and 1960s, a suppliers’ boycott in Sweden forced IKEA to seek help from Polish manufacturers, who could sell its furniture at a lower cost than the Swedish suppliers. In that period, IKEA started to search for international low-cost suppliers to sustain its low-cost strategy.
By 2008, IKEA’s network of international low-cost suppliers had grown to the point where it had 46 trading service offices in 54 countries that managed 1,300 suppliers. It sourced 18 per cent of its products and materials from China and 14 per cent from Poland.[iv]
To reduce logistics costs even further, IKEA attempts to build new stores around its central warehouses. By concentrating several stores in the same area, IKEA has been able to reduce both marketing costs and logistics costs, though potential competition among stores nearby might adversely affect performance. For example, in the US, IKEA started with four stores in the Philadelphia/Washington DC/New Jersey area to facilitate shipping products from the central warehouse to these stores.
Low-cost materials and designs
Maintaining low prices is so central to IKEA’s strategy that before engineering a given product, IKEA reverses engineers the product to fit a predetermined price.[v] In addition, IKEA systematically searches for new materials and new designs to “fit the IKEA concept of form, function and price”.[vi] For example, IKEA initially used wood for the so-called OGLA chair, but later switched to composite, and finally to hollow composite, to make the chair affordable to most people. In 2011, IKEA switched its wooden shipping pallets for single-use paper composite pallets. At that time, IKEA was ordering over 10 million shipping pallets a year for shipping merchandise to its retail stores. The change to lighter paper pallets reduced transport costs by 10 per cent, resulting in over 143 million euros in cost savings.[vii] Along with adapting its shipping pallets, IKEA often offers its furniture in black, white, or unfinished wood; offering limited finishes allows IKEA to continue taking advantage of economies of scale.[viii]
Further, IKEA has described itself “as a learning and problem-solving organization that trusts the intuition of its staff”.[ix] IKEA tries to achieve this through both maximum decentralization and extensive internal training.
Design for the whole family
In 1997, IKEA launched the Children’s IKEA concept to cater to the needs of younger family members. To create child-friendly products, the company consulted with child psychologists who specialized in playing and kids. In this way, IKEA applied its design expertise to respond to children’s needs. Along with adapting its products to address children’s needs, IKEA has added family services to make the shopping experience more enjoyable for all. Some of these services include additional play areas where children can safely stay while their parents shop, free baby food and baby food warming stations in the restaurant, and special kids’ meals in its stores.[x]
Learning and adapting in the international markets
IKEA started to expand internationally in 1963, opening its first international store in Norway. In the 1960s and 1970s, it focused on the European market, entering Denmark in 1969, Switzerland in 1973, Germany in 1974, Austria in 1977 and the Netherlands in 1979. Outside of Europe, it opened stores in Australia (1975), Canada (1976), Japan (1974 only to withdraw in 1987 and later return in 2006), Saudi Arabia (2008) and others.
In its European expansion, IKEA used the same products and the same operational formulas. As suggested by Anders Moberg, IKEA’s president between 1986 and 1999: “(W)e don’t spend much money or time on studies. We use our eyes and go out and look, and say it will probably do quite well here. Then we may adapt, but quite often we stick to our opinions.”[xi]
However, this lack of adaptation to local circumstances caused serious problems when IKEA entered into the US. IKEA opened its first American store in 1985, followed by six more stores in the next six years. Many products sold in these stores were manufactured in Sweden – following Swedish designs – and then exported to the US. Some of these products did not appeal to American customers. For example, many Americans use bedroom chests to store sweaters, but the IKEA chests were too shallow. Many Americans add substantial quantities of ice to their drinks; IKEA’s glasses were too small to allow for this. Noticing the problems, IKEA redesigned a fifth of its products and introduced larger glasses and chests with deeper drawers.
Besides redesigning its products, IKEA also adapted its routines in the US. For example, by 1994 its American stores purchased 45 per cent of their furniture from local American manufacturers, thereby significantly reducing costs. IKEA also added cash registers to reduce waiting times, as Americans profoundly dislike waiting at a cash register. Between 1990 and 1994 IKEA’s sales tripled, and in early 1993 it finally started to make a profit in the US.
However, even when adapting to the specificities of the American market, IKEA stuck with its low-price focus.
Crafting IKEA’s future as of the early 1990s
In the early 1990s, IKEA faced two major challenges, partially as a result of its rapid expansion. First, its administrative costs increased. Second, it got harder to manage its international operations, especially in terms of fostering local learning and efficient problem solving. IKEA made three decisions. First, it gave more autonomy to the CEO of IKEA America. Second, it gave up on central, internal budgeting in 1992, as the internal planning system became too cumbersome. In later years, each region only had to meet a fixed ratio of costs to turnover. Third, IKEA introduced internal competition by giving its franchise rights to Inter IKEA Systems B.V., thereby separating the IKEA Group and Inter IKEA Systems B.V. From then on, Inter IKEA Systems B.V. became the owner of the IKEA trademark, and franchised its business to all IKEA stores in the world. The IKEA Group was still the largest franchisee, owning most of the IKEA stores. For example, of the 301 IKEA stores around the world by 2011, the IKEA Group owned 267. This franchising approach produced internal competition, as the IKEA Group had to compete with the other IKEA franchisees.[xii]
In the 1990s and the early twenty-first century, IKEA continued its expansion, forging into Hungary (1990), Poland (1990s), the Czech Republic (1991), the United Arab Emirates (1991), Spain (1996), China (1998), Russia (2000), Portugal (2004), Lithuania (2013), and Latvia (2018) amongst many others.[xiii] IKEA has also announced in 2018 its intention to open several stores in South America via a franchise agreement with the retailer Falabella in Chile, Colombia and Peru over a period of 10 years.[xiv] Along with the expansion of its geographic reach, IKEA has also expanded its product lines over time. For instance, it added a line of IKEA-branded kitchen appliances, such as refrigerators, dishwashers and microwave ovens;[xv] and a line of private label grocery specialties (2006).[xvi]
As it expands overseas, IKEA continues to adapt to local requirements while trying to retain its low-cost strategy. However, this objective has proven challenging for IKEA in a number of countries. For example, in Warsaw, Poland, IKEA discovered that a full replication of its success formula would make IKEA stores too costly for the Poles, so it decided to install fewer toilets and eliminate air conditioning, essentially making the new stores look like “what IKEA stores looked like 20 years ago”. Even with these adaptations, IKEA in 1993 reached only upper-class Poles.[xvii]
Similarly, IKEA has revised its recipe in China. It provides more fee-based assembly services, as assemble-it-yourself is not popular in China and labour is inexpensive; IKEA stores are located near transportation lines rather than in the suburbs, since most customers do not have cars; the store layouts reflect those of average Chinese apartments, with more focus on the living room and the dining room, and less on the kitchen. As in Poland, however, IKEA is having difficulty trying to be a ‘low-cost’ provider in the Chinese market: In spite of its endeavours to cut costs through local purchasing, IKEA’s prices as of 2004 were considered mid-range, rather than low.[xviii] Nonetheless, by 2012, IKEA had decided to accelerate further its expansion into China.
Likewise, IKEA’s expansion to India created the need to make unique adaptations to the local market. In 2018, IKEA opened its first store in India and soon thereafter, opened its second Indian location in 2020, keeping in mind aspects of culture to be successful. One such example is the lack of a ‘do it yourself’ culture in India; as such, IKEA offers on-site assembly services in its Indian locations, similar to the assembly services offered in China.[xix]
Diversification
Not only has IKEA diversified geographically, but it has also greatly diversified its product and service offerings. One radical example is IKEA’s announcement to begin selling renewable energy to Swedish households in September 2021. Starting in Sweden, customers are now able to purchase energy sourced from solar and wind parks and track their consumption via an app. Jonas Carlehed, head of IKEA Sweden’s sustainability branch, stated that he sees selling renewable energy as an opportunity to become “‘climate positive’ – reducing greenhouse gas emissions by more than the amount from the entire IKEA value chain, from raw material production to customers’ disposal of their furniture – by 2030,” while also generating a new revenue stream for the furniture giant.[xx]
Another shift is exhibited by IKEA’s newly announced American Multi-Tier store strategy, which will be implemented in five central U.S. cities by 2024. IKEA stated that in select U.S. locations, it will begin moving from a “one-size-fits-all strategy” to a more diverse, “multi-tiered network of stores that include in-store urban locations and even neighborhood shops specializing in design services or as places to pick up orders placed online.”[xxi] This new multi-tiered approach will consist of IKEA’s traditional large warehouse stores, new stores for smaller urban locations consisting of approximately 100,000 square feet that resemble the traditional warehouse stores, and significantly smaller stores ranging from 5,000-10,000 square feet located within inner-city neighbourhoods to focus on bath, kitchen and home-design merchandise.
QUESTIONS
- What are the core competencies and end products of IKEA? How are they linked with each other?
- How did IKEA diversify?
- How did IKEA expand internationally? How has the firm maintained a focus on core competencies while simultaneously adapting to local needs in host countries?
- Would implementing IKEA’s ‘multi-tier structure’ (which will be introduced in the U.S. by 2024) be feasible within a country like China? Use information from the case to justify your rationale.
- Can you provide an update on IKEA’s core competencies, using materials available on the Web?
Notes
[i] IKEA, ‘FY20: a year of homecoming’, https://about.ikea.com/en/about-us/year-in-review accessed on October 2, 2021
[ii] IKEA company information.
[iii] Ibid.
[iv] Peter Wilke, with André Sobzcak and Isabelle Schömann, ‘Codes of conduct and international framework agreements: New forms of governance at company; IKEA: a case study’ European Foundation for the Improvement of Living and Working Conditions (2008).
[v] Catherine Clifford, ‘Meatballs and DIY bookcases: The psychology behind IKEA’s iconic success,’ CNBC (5 October, 2019).
[vi] IKEA company information.
[vii] Ola Kinnander, ‘IKEA’s paper pallet challenges wood dominance’, Bloomberg (3 November 2011).
[viii] IBID., 4
[ix] The Economist, ‘Furnishing the world’, The Economist 333 (1994), 80.
[x] IKEA company information.
[xi] Ibid., 79
[xii] IKEA company information.
[xiii] Milda Seputyte, ‘Ikea plans to open first shop in Lithuania’s capital in 2013’, Bloomberg (14 December 2011); Nerijus Adomaitis, ‘Icelandic investors to bring first IKEA to Baltics’, Reuters (15 December 2011).
[xiv] ‘IKEA pushes into South America with partner Falabella,’ Reuters (17 May 2018).
[xv] Debbie Howell, ‘Latest IKEAs debut self-checkout, branded appliances’, DSN Retailing Today 44 (2005), 2–3.
[xvi] David Wellman, ‘Ikea adds more stores, more food’, Retail Merchandiser 45 (2005), 7.
[xvii] Stephen D. Moore, ‘Sweden’s IKEA forges into Eastern Europe – Retailer tests new markets via “lab” in Warsaw’, Wall Street Journal (Eastern Edition) (1993), A.9.
[xviii] Paula M. Miller, ‘IKEA with Chinese characteristics’, China Business Review 31 (2004), 36–8.
[xix] Warren Shoulberg, ‘Why IKEA Succeeds Around The World While Other Retailers Falter,’ Forbes, (30 July 2018)
[xx] Anna Ringstorm, ‘IKEA to begin selling renewable energy to households in Sweden this September,’ The Globe and Mail (17 August 2021).
[xxi] Warren Shoulberg, ‘IKEA Moving Fast To Multi-Tier Store Strategy in U.S.,’ Forbes (26 January 2021).