IKEA: History and Purpose

In 1943, IKEA was created in Sweden by Ingvar Kamprad at the age of 17, the word IKEA was an acronym of his name with his first and last name initials, the name of his family’s farm which was Elmtaryd and the nearby village named Agunnaryd (Pg. 572). Kamprad anticipated that there would be a rise in consumerism among the rebuilding boom that followed the war so he moved quickly to provide low-cost furniture for families through the convenience of catalog sales (Pg. 572). In 1947, IKEA issued its first original mail-order catalog, within which the newly invented ballpoint pen was added to the assortment of products Kamprad was offering. Then in 1950, Kamprad set the foundation for the future direction of IKEA by adding furniture and home furnishings to the mail-order line. A year later, an expanded version of the IKEA catalog became available. In 1952, the stability of home furnishings in the IKEA product line was strengthened when Kamprad took his items to the St. Eric’s Fair in Stockholm and won over customers with the high-quality, low-priced furniture items in his line (“Welcome Inside Our Company”). In 1953, IKEA had an opening of the company’s first showroom which demonstrated how Kamprad created a model of vertical integration, uniting a variety of suppliers under the IKEA umbrella, coordinating long-run production schedules, and controlling distribution. In 1955, an IKEA employee discovered the company’s “flat-box” approach which was to sell their furniture unassembled (Pg. 572). In 1964, the introduction of the first warehouse store allowed IKEA to eliminate an entire step in product distribution by allowing warehouse container pick-up by the customers (Pg. 572). Practical solutions and a low-cost promise created a new formula for IKEA of “knock-down” furniture, flat-box storage and shipping, and assembly by the consumers armed with IKEA-developed tools and visual instructions. This formula allowed families to save money and create a new furniture experience. IKEA revolutionized the home-furnishings industry.

Currently, IKEA is a private limited company that is owned by an organization controlled by the Kamprad family. It has grown to be one of the largest global furniture retailers by cooperating with more than 1,500 suppliers around the world, which is around 50 countries in designing their own furniture and by trading internationally, they have 341 stores in 38 countries including: Germany, United States, France, Italy, United Kingdom, Sweden, Spain, Canada, Russia, China and others. IKEA’s business idea is to “offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them” (“Welcome inside Our Company”).

Their vision is “to create a better everyday life for the many people. Our business idea supports this vision by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them” (“Welcome Inside Our Company”). The IKEA guides the company in every aspect of our business, from design idea and production, through to the stores, customers and beyond. They work hard as a team to offer quality products at affordable prices for our customers. This involves optimization of the entire value chain, building long-term supplier relations, investing in new technologies, creating efficient production techniques and producing large volumes “Our vision goes beyond home furnishings – we want to create a better every day for all people touched by our business” (Yearly Summary FY15, 2015).

For 30 years, Mikael Ohlsson was the president of the company who was replaced by Peter Agnefjall in 2013, he states that “One of the main reasons why I joined IKEA is that it is a truly values-based company that wants to have a positive impact on people and communities. This is why sustainability is an integrated part in everything we do. Sustainability should not be a luxury but affordable to the many people” (“Peter Agnefjäll…”, 2013). IKEA sells good quality design in low price furniture, bathroom, kitchen and accessories around the world. IKEA states that “by responding quickly to our customers’ dreams and needs for a better life at home, we will continue to grow our business. We still have a lot to learn about our customers, so we constantly challenge ourselves to be even more relevant by creating high quality, affordable home furnishings and make long-term investments in our business, people and planet” (Yearly Summary FY15, 2015). IKEA’s new store formats and services make it easier for customers to visit IKEA by public transport, collect products near their homes, or have them delivered so that they are accessible to people whenever and wherever they want. Because IKEA wants to make a positive impact on the planet they want to produce as much energy from renewable sources so they invested in wind farms and solar panels to generate energy that does not come from fossil fuels. Their entire lighting range is LED which is good news for the planet and for customers’ wallets, because LED light bulbs use up to 85% less energy than traditional incandescent bulbs, and last up to 20 years. All the cotton used for the products, from soft furnishings and bedding, to towels and rugs, now comes from more sustainable sources and they reached our goal to source 50% of wood from more sustainable sources two years ahead of schedule. They are constantly offering more products and services that enable customers to save energy, water and waste at home (Yearly Summary FY15, 2015)

IKEA’s strategy is to provide a large range of home furnishing items of good design at excellent quality and durability, at prices so low that the majority of people can afford to purchase these items. The innovation strategy was to design furniture that was easy and inexpensive to build, receive it disassembled at stores, and display it on the showroom floor with detailed explanation tags, making a salesperson unnecessary. This is one of the main reason why customers tend to spend more time in the store than compared to the time they would in a competitor’s location. The company made sure to distinguish itself from competition by the way it organizes its stores. For example, shopping in IKEA is an experience because they are built for browsing. The furniture was laid out and showcased in the stores as it would be in a home but employees are always available for questions. IKEA identifies their customer as half producers and half consumers because most products have to be self-assembled and they also have the ability to choose, order, pickup, and transportation. Their operation has to cope with a high volume because their products can be substituted. The degree of customer contact is very low, which is why they focus on low cost, while their competition will focus on higher cost due to low volume, high variety but high in customer contact. IKEA has released a shopping app for iOS to complement their current catalog. The start screen shows a number of offers that will capture the attention of consumers using the application. It is very easy to operate, people can just touch items to view more details and lookup other products by area, which makes it very simple to navigate. When they touch an item they can see they item’s availability by location and it will tell you exactly where the item is located in store by aisle.

IKEA focuses on three objectives when trying to measure their performance, which are quality, speed, dependability, flexibility and cost. The company wants to achieve quality advantage over competition by doing everything they need to do the correct way. Products are made to fit their customer’s’ exact needs. The stores itself are designed in unique and clean layout, which is matched with their brand identity. The customers perceive the products and services with a very high value. They also achieve speed by doing things fast. Customers can locate the store fast from the bright yellow and blue identity. The store is designed with a warehouse and parking facilities, which allow customers to park their cars without spending extra time finding parking close by. They also have supporting facilities such as childcare and self-service restaurants, which allows customers to also leave their children to the play area so that they can concentrate on their purchase. The products have flat-packs with code numbers that help customers to easily pick up what they may need from the warehouse. IKEA also has a large ramped conveyor belt that transports items through the cashier, which allows customers to get through checkout as fast as possible. The company also strives to do things in time. An example would be the reordering system keeping up with goods out of stock and making sure they are kept to a minimum. IKEA tries their best to accelerate the arrival of new stock if stock-outs occur and reorder quantities in case the ales pattern does change. They also obtain reasonable queuing time and ensure that there is constant availability of items. The operation of IKEA allows products and service flexibility as they have ability to introduce new products and services. They are more responsive to the customers’ wants and needs through the global sourcing strategy. The company leaves much of the design up to their suppliers and it is beneficial to the fast introduction of new products. IKEA also allows mixed flexibility and is able to provide a wide mixture of products and services. The range of products are wide from home furniture to office furniture and accessories, from childcare to self-service restaurant. The idea of mix and match is successful in offering mix flexibility. The company is able to change its level of outputs. In the stores, it is up to individual store management teams to determine stock levels of each product, which means they are more responsive to the change of demand at that specific location. IKEA also follows a specific cost objective, which is to do things cheaply as possible. High quality reduces cost and time to re-do things. Fast operations reduces inventory and improve flow of customers, which helps to increase sales. The company being dependable increases predictability and efficiency. Also, the company being flexible allows them to adapt to change and can adjust operations to respond to customers’ needs and wants without the extra costs.

In this industry the threat of new entrants is very high. There are barely any entry barriers but competition is very intense for new entrants. In order to compete effectively, competitors must invest a great amount, develop long-standing relationships with clients, and select suitable locations for outlets. It is very difficult to establish in major cities and gain the reputation of IKEA, establishing a vast supply chain and creating a unique brand name. IKEA has succeeded in managing and maintaining long and well established relationships with current suppliers. They have been recorded to have at least 1300 suppliers in 54 countries and 21% of them are located in China. IKEA also possesses their own manufacturing company, which is called Swedwood Manufacturer and is used to develop their own designs. Suppliers in this situation have a very low bargaining power and can be compelled to be on the same terms with IKEA rather than against them for any reason. There are many direct competitors who are also importing from China, which is why consumers are faced with many alternatives and a very large bargaining power. IKEA needs to update their latest trends in order to avoid losing their name for style. They are able to follow any new style fairly well and rapidly due to their simplicity of design and innovative technology. The demand for basic furniture has remained relatively constant, which makes it very hard for substitutes to take over. The industry is very competitive, which is why IKEA has wisely attempted to compete by entering China and Japan markets and will allow them to obtain a competitive advantage (Perepu, 2008).

IKEA faces many political factors such as government attitude towards the brand and political stability. In 2012, IKEA had to admit that the company used prison labor in East Germany in 1970s and 1980s to produce its products. Although they offered formal public apology, the incident caused a huge controversy. There were allegations that the founder, Ingvar Kamprad was an active Nazi member, which brought about controversy with negative effects on the brand image. IKEA also received negative attentive related to their doll called Lufsig, which is Swedish for clumsy. But when translated in Cantonese dialect it sounds very similar to an insulting term. In 2013 there was an incident where a protester threw Lufsig toy at Hong Kong’s chief executive causing the toy to gain a symbolic role among Cantonese people dissatisfied with the government in Hong Kong.

Macroeconomic situation and consumer spending power are two main economic factors that affect the performance of IKEA and the performance of any business entity. The global economic and financial crisis that took place in 2007-2009 is a great example of the impact of external economic factors affecting the business. IKEA had to eliminate around 5,000 jobs, the volume of sales dropped by 1% by the second quarter of 2009. The company is also directly affected by exchange rate fluctuations between Europe and United States and other major currencies due to the global scale of business operations. Other factors include interest rates, tax rates, and the level of unemployment and fluctuations of costs of raw materials.

There are social factors that have direct and indirect effects on IKEA. The increase of concern toward environmental issues in the society threatens IKEA’s long-term growth prospects, which are people becoming increasingly concerned with deforestation issues, water depletion, and global warming. The company is one of the world’s largest consumers of wood and this may damage the brand image due to social change associated with concern towards environmental problems. Another issue would be the shift to online programs and applications to complete a wide range of personal and professional tasks. Less consumers may switch to electronic versions of books, which will then decrease the demand for bookshelves. Other social factors that can highly affect IKEA are demographic changes, changes in consumer attitudes and opinions towards furniture and home appliances, media perception of the brand and health and welfare of the target customer segment.

The competition of IKEA is mainly local retailers, who try to copy the idea or counterfeit the goods that IKEA can provide. In the United States, the company my face competition from Target, Ashley Furniture, Walmart, La-Z-Boy, JCPenney, and Ethan Allen. In the United Kingdom the competition would be from Tesco, Next. In Sri Lanka, the main competitor would be Damro. Globally, Walmart would be considered the main competitor because of styles and functions, even though prices are lower at IKEA. Walmart is classified as less stylish compared to the products sold at IKEA. Ethan Allen targets a more exclusive market compared to IKEA’s target market. IKEA has proved to be more successful in delivering high quality at a less price compared to their competitors (Jain, 2012).

SWOT Analysis

IKEA has many strengths since they are the largest furniture retailer in the world. Since IKEA is a global brand with a strong image, it is a major strength because everyone around the world is able to recognize them as a company. A very big strength that they have is that they are very sustainable with everything that they do as a company and with the products and services they offer to customers. They are different from their competitors which makes consumers want to purchase their products even more. They offer a wide product range that appeals to all target groups instead of targeting one target group, this is also an outstanding strength because not all companies are able to appeal to the mass market. Since they are able to offer a variety of products to a variety of people, they are able to produce many different products instead of having to limit themselves.

A major weakness they encounter is not being easily accessible. IKEA stores are scattered around the United States in only some states and when they are in the state a consumer lives in, they have to travel far to get to the IKEA. The stores aren’t offered everywhere because of how big the warehouse has to be and so it is easier for them to just have one location in a state. Another weakness is the consumer’s perception on cost vs. quality. Consumers might not think that the quality of the product they want to purchase is worth how much it is offered or vice versa. If they think vice versa then it is also bad for IKEA because customers could think if the product is priced low then maybe the quality is also low.

A huge opportunity for IKEA is online sales because now that consumers are able to purchase products online and have it delivered to them, it will generate more sales for them instead of relying on receiving sales from the actual stores. Since the stores are not easily accessible it is more convenient for customers to purchase online and have it delivered. The only problem is if the product does not look or appear to be the same as it was online. There is more demand in today’s economy for low priced products and for companies to be more environmentally aware which gives IKEA the opportunity to gain even more sales because consumers nowadays are sensitive about prices and sustainability.

Because of economic slowdown, IKEA’s store traffic has decreased. Even though they offer low prices, the prices could still be too much for some consumers especially in today’s economy. Furniture might not be everyone’s first priority right now unless someone has bought a new place to live. Even then, it has been very expensive to buy a place to live or to move so that could be another reason why store traffic has decreased. The biggest threat IKEA has is the barriers to enter certain profitable markets because they do not adjust to other country’s cultures, needs, or wants. This makes it hard for IKEA to gain sales globally if they do adapt quickly.

Marketing Strategy

IKEA differentiates themselves from their competitors by their cost leadership and the shopping experience. In order to be the leader within cost compared to their competitors, IKEA survey’s the competition to establish a benchmark and then sets its own price point 30-50% lower than the competitors. Cost is so important that first a price point is established, and then the manufacturer, materials and design are chosen. They save money for consumers and for themselves in the long run.

The shopping experience within IKEA is not like any other company. The products they sell are displayed in room-like settings so customers don’t need a decorator to help them imagine how to put the pieces together. Customers would move along a predetermined path where they are guided through a maze of rooms by arrows that are placed on the ground. Their in house Swedish restaurant is as popular as its furniture and allows consumers to use their products while eating at the restaurant. At the restaurant, IKEA uses their own plates, bowls, utensils, cups, etc. they also offer a special drink that only they offer in-stores that is made from Lingonberries.

IKEA focuses on a couple of different factors when segmenting their market. The basic market segmentation bases that they use are income level, age, family life cycle, lifestyles, and benefit seeking. Because IKEA offers high quality products at an affordable price, they want to be able to appeal all target markets. IKEA is bases their stores strategy around attracting young, lower income individuals. College students and young adults, who tend to be in the low-income category, are a big target market for IKEA because these are the individuals are looking to buy furniture for the first time. Since it’s their first time buying furniture, they do not want to spend too much money on it because they don’t know what will happen in the future. College students and young adults are looking for good, cheap furniture that will work for the time being.

The other big demographic that IKEA focuses on is family life cycle. New families need furniture to fill their new homes, but don’t have a lot of money to do so because they’ve already spent most of it on the new house. IKEA’s product really cater to these types of young families far beyond their product selection and cheap prices. IKEA’s stores are also very kid friendly, they have supervised play areas where parents can check their kids into so the parents can shop in peace while the kids play, clean changing rooms are provided, and they offer a cafeteria where parents can bring the kids for a bite to eat after the shopping. The restaurant also offers a special menu just for the kids.

The 4P’s of Marketing

IKEA’s products are focused on having a low price with high quality. Looking at their competition’s prices, “IKEA sets their own prices at a price 30-50% lower than competitors” (Sonwane, 2014). The product is what brings the customers in. They want customers to see the high-quality materials. Therefore, they put the furniture surfaces where it is visible. Customers see displays where they can touch, feel and sit on the furniture to observe it well. IKEA uses flat packaged boxes to make shopping easier, “Flat packages boxes to make it easier for consumers to transport the furniture home and save shipping cost” (Sonwane, 2014). They are able to transport these boxes into cars or trucks which saves money on shipping.

IKEA promotes their products in all of the countries they are located in. They change the language of the ads so that the consumers are able to understand them. They use different IMC (integrated marketing communication) tools including public relations, direct marketing, advertising, sales promotion, and digital marketing. Within public relations, they offer events within certain stores like buffets offered for families during the holidays and they also utilize the press. Within direct marketing, they offer catalogs annually online and printed. The catalogs are produced in different editions and languages and are printed on totally chlorine-free paper and contain at least 10-15% post-consumer waste. Within advertising, they create print ads that are shown online and in stores, they also create video advertisements that are used for the internet and TV. Within sales promotion, they offer discounts and coupons that can be used in-store and online. Within digital advertising, they use Facebook, Youtube, Twitter, Pinterest, Google+, Instagram, and they have an app for consumers to download and shop from.

IKEA distributes products nationally and internationally by digital distribution and in stores. Mattel is all over the world including North America, South America, Europe, Russia, Australia and Asia. At IKEA, distribution is all about making the route from the manufacturer to the customer as short as possible. They distribute their products in large volumes and in flat packages which saves money for them and the consumers. As of 2015, 328 IKEA group stores are located in 28 countries and there are 978 suppliers in 50 countries (Yearly Summary FY15, 2015).

Organization

The company’s management strategy can be described as flat box, “organization structure resembles the IKEA flat box, with only four layer separating the CEO and the cashier on the sales floor” (Griffin, 2016). A flat box organizational structure can also be described as a horizontal structure, “flatter structures are flexible and better able to adapt to changes” (Griffin, 2016). “Flat structures have fewer management levels, with each level controlling a broad area or group” (Griffin, 2016). IKEA separates its team based on who has similar knowledge and expertise to a particular skill. Figure 1 shows the four levels of IKEA. Advantages to this style of management is the communication and coordination. The higher ups are able to help and make decisions. A disadvantage with the flat box is the workload, “faster communication makes for quicker decisions, but managers may end up with a heavier workload” (Griffin, 2016).

Their supply chain starts with they build with their suppliers. IKEA is able to negotiate prices with suppliers like no other company. Since they are able to make agreements that are going to affect the company positively, it becomes a long-term business relationship. With long-term business relationship comes long-term contracts. “Having customer select the furniture and retrieve the packages themselves is an inventory management tactic called ‘cost-per-touch’” (“What Is Logistics?”).

Sourcing materials close to the supply chain reduces transport costs. By directly delivering products from the supplier to the IKEA stores, the company is able to reduce prices for both them and the consumers because it slashes handling costs, reduces road miles, and lowers the carbon footprint they create. They also save money by attaching the warehouse to the retail stores. They reduce one step within the supply chain process by doing this because the consumers are able to retrieve the product themselves in the warehouse.

Looking more into the material IKEA uses, their resources are also being saved based on hollow furniture, “IKEA saves on resources by using hollow leg furniture” (Roy, 2015). Their supply chain strategy is to benefit their sustainability, “by using high strength steel in its products, IKEA has realized that it can improve the ergonomic and safety aspects of its design, while reducing the weight of the products decreases the cost and helps the environment” (Roy, 2015).

Managers inside IKEA have responsibilities for inventory. This begins with the ordering process and logistics. “Logistics is defined as a business planning framework for the management of material, service, information and capital flows” (Lu, 2016). After all inventory is checked, delivery notices are sorted also. According to logistics world IKEA’s supply chain includes raw materials, manufacturing, distribution, retailer and consumer. The inventory flows from the supplier to the manufacturer which then flows to both the distribution center and the retail outlets and customers are able to retrieve the product from both locations.

IKEA has had problems with adapting to other country’s cultures. They tried implementing the same business model they were using when they expanded to China and the United States. They realized they made a mistake doing this because of how different consumers are around the world. For example, American customers demand bigger beds and bigger closets. IKEA had to change their business model in all the countries they expanded to so that they were able to appeal to all of the consumers.

When IKEA expanded into China, they didn’t research how different the country and the consumers were. The main problem were the prices because they were considered low in Europe and North America but in China they were considered higher than average. They also had to adjust its marketing strategy because of how they use catalogs as a major tool. Since they offered catalogs, other competitors within China were able to replicate IKEA’s designs and sell it at a cheaper price because they had access to cheaper labor and raw materials.

Recommendations

There’s not much IKEA should change about how they are as a company because what they’re doing currently makes them very successful. They should continue to differentiate themselves from the competitors by continuing to offer stylish and affordable products. One of the things they should change are increasing customer interactions between the employees and the consumers in the stores. Another thing they should consider doing is more research when expanding into new locations so that they’re able to appeal to as many people as possible. If they change some of the styles they provide according to demographics, they would be able to see an increase in sales.

Works Cited

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