Case Study

Company Overview
IKEA is a privately held, ready-to-assemble furniture and home accessories company that was
founded in 1943 by a 17-year-old Swede called Ingvar Kamprad. He began trading ballpoint pens,
wallets and nylon stockings.

The first IKEA store opened in Sweden in 1953, followed by expansion into Europe in the 1960s and
Hong Kong, Japan, Singapore, Australia and North-America in the 1970s. The company now has
nearly 300 stores in 25 countries. Seventy-nine per-cent of sales are in Europe and fifteen percent
are in North America. Germany is the biggest single market. The company is now the world's largest
furniture retailer. Sales in 2015 were 32 billion, up from 29 billion in 2014.

Vision
Kampard believes the first cornerstone of a successful business is a strong vision. IKEAs is to create
a better everyday life for many people". Kampard was frustrated that well-designed, good quality
products were only available to rich. He wanted to change this and enable people with limited
financial means to have access to similar products. This social objective provides mission and
purpose to its employees and results in a value system that combines cost consciousness with a
constant desire to improve. Staff are motivated and loyal, which in turn delivers business results.

Strategy
IKEA has achieved its dominant market position through aggressive target costing and a relentless
focus on cost management. IKEAs prices typically run 30%50% below its competitors prices.
Moreover, while the prices of other companies products rise over time, IKEA says it has reduced its
retail prices by about 20% over the last four years.

IKEAs strategy is to sell high-quality, well designed, self-assembly furniture products at low prices.
Its designs are not to everybodys taste but IKEA has been successful in targeting price-conscious
young couples and families who are willing and able to transport and assemble the products. The
company has managed to cultivate a fashionable and trendy image.

IKEA does not pay significant attention to local preferences in the different countries it operates in.
This enables large economies of scale to be achieved from the big production runs made possible
by selling the same products all over the world.

Ikea reengineered the industry value chain by introducing flat-pack furniture. This brought
customers into the value chain by having them perform the transport and assembly processes. The
company foresaw that customers would be willing to integrate themselves into the assembly
process for the sake of saving money.

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Store Layout
Stores are usually designed in a one-way layout to encourage customers to see the store in its
entirety, as opposed to a traditional retail store, which allows a consumer to go directly to the
section where the goods and services needed are displayed.

The sequence usually involves going through furniture showrooms. These modelled rooms provide
a creative way introduce products and show customers how to piece together an entire room from
furniture and products available in store.

Customers proceed to a Market Hall for smaller items before visiting the self-service furniture
warehouse to collect previously noted showroom products in flat pack form. Most stores follow the
same layout of having the showroom upstairs with the marketplace and warehouse downstairs.

Most IKEA stores offer an "as-is" area just before the cash registers. Returned, damaged and
formerly showcased products are displayed here and sold with a significant discount and a "no-
returns" policy.

Store Location
The vast majority of IKEA stores are strategically located in high-density areas to guarantee store
traffic. They are often located along main roads to maximize visibility and outside city centres,
primarily because of land cost and traffic access.

Opening Hours
IKEA stores have long opening hours. Many stores are in operation 24 hours a day with restocking
and maintenance being carried out throughout the night. Public opening hours tend to be much
longer than most other retailers, with stores open well into the evening in many countries. In the
UK, almost all stores are open past 8pm.

Restaurants and food markets

Many stores include restaurants serving traditional Swedish food. Besides these Swedish staples,
hot dogs and drinks are also sold, along with a few varieties of the local cuisine. In many locations,
the IKEA restaurants open daily before the rest of the store and serve an inexpensive breakfast.
Refills of coffee, tea, and soft drinks are, as is traditional in Sweden, free of charge, even in countries
where this is uncommon in other restaurants.

Play Areas
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Many stores have a play area. Parents can drop off their children at a gate and collect them later. In
some stores, parents are given free pagers, which the staff can use to summon parents whose
children need them earlier than expected. In others, staff summon parents through announcements
over the in-store public address system.

Manufacturing
IKEA outsources approximately 90% of its manufacturing. Products are designed in Sweden but
largely manufactured in developing countries to keep costs down. With suppliers in 50 countries,
roughly two thirds of purchasing is from Europe and about one third is from Asia.

IKEA code of conduct for suppliers, IWAY, covers social, safety and environmental issues with its
global suppliers. IKEA has around 60 IWAY auditors who perform supplier audits to ensure they
follow the law in each country where they are based.

Cost Saving Strategies

Kampard wrote in his biography that wasting resources at Ikea is a mortal sin.

Despite rising costs and a global recession in recent years, Ikea has managed to continually offer
lower prices to consumers, while positioning itself for long-term growth. It accomplishes this by
focusing relentlessly on separating good costs (productive investments) from bad costs
(unnecessary expenses).

All of the cost savings not passed on to customers is reinvested in the business. At other companies
25 % reinvestment is considered high. The company owns all of its land and buildings. The stores
are custom built and designed for efficiency and sales potential. Restaurants and child-care facilities
are provided to make people feel at home.

The results have been impressive in recent years. Top-line growth has hovered around ten percent
a year whilst maintaining margins, despite the price reductions. The companys market share has
been growing in almost every country they do business.

Cost-consciousness is baked into the culture. Everything has a price-tag, not just the products. For
example, on the back of information brochures the cost of producing that information is shown. The
reason for this is that unnecessary costs almost inevitably lead to higher prices for IKEA customers.
IKEA continually looks at each part of the company and each process with a view to lowering costs.

Economies of scale naturally play an important role on keeping costs low. IKEA buys in bulk on
secure, long-term contracts with manufacturers to reduce its costs of raw materials. Virtually all of
IKEA's products are designed in-house and work from a set price-point. Designers & engineers strive
to reduce the amount of material used & wasted in production.

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After materials, one of the largest cost items is staff. IKEA is not aiming to minimize employee costs
across the board; instead, the company looks for ways to cut its staffing needs by making processes
more self-service-oriented. IKEA is mainly a warehouse store designed to maximise customer self-
sufficiency, reducing staff costs. Executives fly economy class, they do not have personal assistants
or extravagant offices.

Packaging is minimal. Plain brown cardboard is used because it is cheap, easy to recycle and can be
made to fit around almost any product. Wordless instructions avoid the need for translation. All
possible materials are recycled. Transportation is by cargo container rather than air to minimize
costs. Distribution centres are located for optimum travel efficiency with stores.

Supplier Chain
When IKEA sources suppliers to manufacture IKEA products, the aim is to find those who can
produce good quality products at the lowest possible price (although not at any price). IKEA is
committed to long-term cooperation and aims to develop close and cordial relationships with its
suppliers. The company buys production capacity rather than product quantities. In other words,
they order 10,000 hours of production from their suppliers rather than 10,000 bookcases.

Large volumes are essential to achieving low prices. The fact that the IKEA range is the same all over
the world enables large volumes to be ordered. Long-term contracts provide the necessary security
for suppliers to make the investment in plant and equipment. In certain instances IKEA provides
financial assistance to suppliers. IKEA has developed a variety of tools to help its purchasers to find
the best suppliers. IKEA also purchases raw materials and hardware in bulk, which it then sells to
IKEA suppliers.

Support staff make frequent visits to suppliers and follow the production process closely, enabling
new ideas to be tested and regular quality controls to be made. They also monitoring working
conditions, social conditions and the external environment around the factories.

Flat packed furniture can be transported with greater efficiency. Minimising wasted space enables
more products to be shipped for the same cost, reducing the cost of transporting each item goes
down. Today 60 percent of all IKEA freight is transported by road, 20 percent by rail and 20 percent
by sea. Less than one percent is air freighted. The aim is to constantly increase the proportion of
goods transported by rail.

Catalogue
IKEA publishes an annual catalogue. In 2010 197 million catalogues were produced in twenty
languages. The catalogue is considered to be the main marketing tool of the retail giant, consuming
70% of the company's annual marketing budget. The catalogue is distributed both in stores and by
mail. IKEA owns the largest photo studio in northern Europe.

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Environmental Performance
IKEA is intent on becoming a leading example in developing an environmentally friendly business.
The companys products, processes and systems all demonstrate its environmental stance. For
example, innovative design and packaging means more items can fit into a crate, resulting in fewer
delivery journeys. The company has a target of using 100% renewable energy.

In 2008 IKEA created GreenTech, a 50 million venture capital fund. It will invest in 810 companies
in the coming five years with focus on solar panels, alternative light sources, product materials,
energy efficiency and water saving and purification. The aim is to sell these green products in IKEA
stores.

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Appendix 1: SWOT Analysis of Ikea
Strengths

o Strong global brand (iconic stature - remarkable level of customer loyalty)

o Modern designs at low prices
o Economies of scale
o Wide product range
o Store locations
o Flat-pack technology
o In-store perks: restaurants, childcare etc.
o Strong, long-term partnerships with numerous global suppliers
o Environmental & sustainability activities
o Customer insight (listens to hundreds of millions of people who visit stores. Founder walks
around the stores and talks to customers)
o Design prowess

Weaknesses

o Over reliant on Europe

o Customer service e.g. large queues at tills
o Ethical standards of suppliers adverse report could affect consumer view
o Low ratio of sales staff to consumers
o Market research - failed in USA not used to self service

Opportunities

o Growing demand for low priced products in current financial climate

o Growing demand for green products
o International expansion - penetration into BRIC countries
o Fully fledged e-commerce site (Many people do not enjoy the IKEA store experience)
o Establishing supplier relationships in developing countries
o Improvement into mid & higher price points (different demographic)
o Appeal to a broader customer base - design style is not to everyones taste

Threats

o Saturated market in developed countries

o Home furnishings sector shrinking in some countries
o Competition from those copying model of low cost flat packed furniture (e.g. Argos)
o Slowing housing market - fewer first time buyers (a core market segment)
o Risk of recession - less disposable income