Introduction

IKEA Group, a Swedish company founded in 1943 by Ingvar Kampard, is a

multinational operator of a chain of stores for home furnishing and furniture. It is the

world's largest furniture retailer, 75 IKEA stores owned and run by franchisees, in 19

countries, which specializes, in stylish but inexpensive Scandinavian designed furniture.

IKEA focused on younger buyer and provided Unique designed functional, high quality

yet low priced furniture. Initially Swedish furniture retailer created hurdles and left no

stone un-turn to seize their business. IKEA took these problem as opportunities and

created new way of sales for example taking down customer details contacting after

world ,finding new raw material produced from Poland which actually benefited IKEA

as it reduce their cost. Ingvar Kamprad’s vision was very well carried by its

management, through creating a unique culture which actually strengthens its way to

success. IKEA developed many new concepts and practices like Self-service,

Informative catalogs, large parking lots, Cash and carry concept etc. IKEA hoped to

reach a turnover of SKr 19 billion by 1990 and three times that amount by 2000 through

rapid expansion. The future concerns for IKEA are middle age and low and middle

income level would be shrinking; now they have to cater to old age people too. The

biggest concern was whether the rapid growth and increasing geographic spread would

make it difficult to retain company core culture. There was a difference in the attitudes

of the American and European markets which was a big constraint in their core design

furniture.. The concern was how far and rapidly could IKEA push its common sense and

simplicity concept of culture across all stores as global expansions.

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CSR and IKEA

“To create a better everyday life for majority of people”

It prescribed standard in-store facilities including baby changing rooms, a supervised play

area for children, information centers and café, family outing destination that can compete

with the entertainment park and the zoo for the family time. 1

IKEA’S PHILOSOPHY

The philosophy of IKEA was to have distinct organizational culture, reduce cost; finding

lowered priced material, innovative employees and differentiated product range.

Distinct organizational culture

The IKEA operated very informally and it was reflected in casual dressing, relaxed

office atmosphere, and the way of addressing each other. The IKEA management

process stressed simplicity and attention to detail.

Cost consciousness/ Cost leadership

It was strong part of management culture. IKEA was the low cost leader. IKEA followed

many practices to reduce its cost like

travel expenditure (Travelling for IKEA)

continuous search of low cost raw material (inexpensive pinewood

furniture)

search for creative and inexpensive solutions (simple and common-sense

style of management)

long-term relation with supplier (Designers working 2-3 hours ahead of

current products)

Employment

The average age of IKEA managers was 34 year .Highly educated, status conscious and

rigid person are not suitable for IKEA .The characteristics of IKEA employees were Simple,

hardworking, straightforward and young who absorb in culture of the company.

1 Source: Ingvar Kamprad and IKEA 9-390-132 HBS page no 3 and 7

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Product range /product differentiation

It had a range over 20000 products. Standardization of all design ,quality ,assortment

across the globe .44 % of customer prefer IKEA for their low price and 78 % customers

make their purchasing decision after viewing IKEA catalog.

DELTA MODEL

Level of Dissatisfaction *Vision*Credible Process =Cost of Change

LOW *High *High = LOW

Level of Dissatisfaction

IKEA employee’s level of dissatisfaction was low because the vision, way to achieve the

target and result properly communicated .IKEA Ambassador were selected to convey

the vision down to each worker. Due to informal management style the employees were

more committed and devoted to their work.

Vision:

o To create a better everyday life for the majority of the people.

The remarkable personality of Ingvar Kampard could be described as ‘walk a talk’

reflected from his actions like: travelling for IKEA, working late nights and coming

early to the office, dinners with the staff etc.

Competency: The ability of Ingvar Kampard could be determined through his

successful achievements in this industry; his thesis Testament of a Furniture Dealer

became an important mean for spreading the IKEA philosophy throughout its expansion.

His statement reflects the best of what he was and wanted the IKEA to be:

“The true IKEA spirit is founded on our enthusiasm, on our constant will to

renew, on our consciousness, on our willingness to assume responsibility and to

help, on our humbleness before the task and on the simplicity in our behavior.”

Credible Process:

The IKEA management was so participative that every employee knows what is

happening in the firm, making every process transparent. So they have trust on Changes

made by the leader.

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Cost of Change:

This cost was low because employee knew what is expected out of them how to achieve

the target.

THREE Essential Tests

1. Attractiveness: Before starting operation in any country, management considered

Ingvar thesis and general objective whether that can be achieved in respective

country or not. Make an informal test about market size, consumption pattern,

customer trends and competitors.

2. Cost of entry: IKEA start with single showroom in a country when market response

was positive they establish another showroom and so on. It helped them in saving

their finance so that it doesn’t stick in any country and have favorable return.

3. Better Off: IKEA had not diversified in any unrelated business, since they were

established as a furniture maker; they entered in kitchen, bathroom and office

furniture.

DIAMOND MODEL

Factors of Production

Labor: In IKEA is not suitable for highly educated and status oriented persons. So,

labor was available to IKEA, who can carry the core values of Ingvar’s Vision.

Land: All IKEA showrooms were located on outskirt of the city which was

beneficial for two main reasons low cost of land and large area. This strategy they

maintain both at local and international level.

Capital: IKEA rely on their own resources and to have large resources for

investment they emphasis on low cost wherever possible for example low cost of

raw material and land, labor ,traveling even they have maintained Head Quarter in

Denmark and Ingvar and Kampard himself lives in Switzerland to avoid the heavy

taxes of Sweden. IKEA franchises pays franchises fee and its show room pays

royalties which are transferred in IKEA charitable Foundation.

Entrepreneur: Ingvar Kampard is opportunist, creative, flexible and have a vision,

due to all these characteristic he achieved global success.

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Firm Strategy and Rivalry

IKEA strategy was to make high quality furniture for low and middle income class.

As this class is shrinking they have also diversified in other product lines such as

office, kitchen, bath etc.When IKEA became a recognizable brand in world it started

targeting elite class and locate its showroom in urban areas where possible.

IKEA introduced a unique concept in furniture industry like cash and carry, self

selection, catalog, knock-down kits ,large parking lots and off city showrooms,

showrooms a sort of a place for family outing etc.

Self service and no home delivery are sources of cost saving

IKEA after gaining competitive advantage in furnishing, it diversified in related

market (office, kitchen, bath) to gain market share and economies of scale.

IKEA faced competition from the day one from its native furniture maker to foreign

establish brands. To keep itself distinct from other they have focused on their

product line and service. There imitation is not possible, one retailer did and was

faced a law suit.

Demand Conditions

Demand for high quality and less expensive furniture was high in Sweden after 1930 and

kept on rising as prices of traditional furniture were increasing. IKEA first met this demand

and then tap other potential markets which were statured by respective country traditional

furniture industry.

Related Industries

In start when IKEA have strong long term relationship with its supplier it help them in

establishment and designing of their industries, buying, machines and setting operation. So

they toghather save cost. For production of their products they select those suppliers who

want to meet its capacities so IKEA get its price lower.

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PORTER FIVE FORCES MODEL

I. POWERFUL SUPPLIERS AND BUYERS

a. Relationship with suppliers

i. Supported the suppliers with the technically and financially even to the point

of designing their factories, buying their machines and setting up their

operations.

ii. Maximum production achieved through capacity of unconventional

supplier’s i.e. individual contracts for single raw materials with different

suppliers like table manufacturers and cushions.

iii. Fixed high volumes orders, encouraged the suppliers to invest and drive

down manufacturing costs.

i. As the designers worked two or three years ahead of current products.

iv. Low cost and high inventories lead to low margins to the suppliers as the

maximum capacity of production of suppliers was held constant.

II. Relationship with buyers

i. Buyers do have an influence over the furniture price decisions, as they were

demanding for new and inexpensive furniture, which IKEA was successfully

meeting at every continent.

ii. Provided faster services, which attracted a large number of customers to the

warehouses to select their product independent of any sales-man.

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III. Substitute Products

i. The substitute products for IKEA’s were not easily available as they had over

20,000 product offerings, and many of these products received special

attention.

ii. Once the California-based retailer imitated the concepts of IKEA, but he had

to abandon it after legal proceedings.

iii. IKEA was increasingly improving their price-performance trade offs with the

industry’s product.

IV. Threat Of Entry

i. Economies of Scale: it was not easy for the new entrants to make their

position in the industry as there were already powerful giants running the

market share. IKEA had highly innovative workforce and research and

development, who were devoted towards bringing new products and ideas.

They had a keen eye on the demands, that’s why the cost was lowered and it

was not possible for the new emerging company to keep at this level. They

cost was kept fixed by reaching maximum capacity at manufacturing level.

There was an increasing revenue and geographical expansion, which caused

barriers to the new entrants. IKEA had an increasing market share in the

furniture industry.

ii. Product differentiation: the imitation and the new concept of catalogs,

department designs and warehouses helped IKEA to maintain a strong brand

image, which was not easy to be competed.

iii. Government policy: the government regulations had an important part in

this industry, like the legal proceedings against Stor Company and legal

proceedings against IKEA for using the seal that was proved to be illegal and

retailers initiated legal actions challenging the IKEA’s aggressive

advertising. There was a major thrust of entrance in the Eastern bloc

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countries, due to their low reliability and poor quality image, political and

economic reforms.

iv. Capital Requirements: the new entrant had to invest a large amount in the

research and development, buying suitable locations for stores and

warehouses and promotion activities. IKEA whereas, had cut down its prices

to maintain market share of huge markets and had a wide excess capacity by

having strong reinforcing activities.

V. Rivals

Intense competition in markets likes in Germany, America, and England with traditional

furniture retailers competing for the share.

Competitive analysis of IKEA:-

Ingvar Kamprad focused on the human aspect. His motivation was not the profit

but improving the life of people. He boosted the morale of employees by personally

meeting and appraising them. He consistently turned problems into opportunities.

IKEA was lucky enough for not having first mover disadvantage when all furniture

dealers were making traditional furniture, Ingvar took a step ahead and introduced

simple, inexpensive and low cost furniture.

IKEA had a strong innovative, empowered workforce that helped in switching

customers from traditional furniture to new introduced furniture such as, office,

kitchen, living room, bath room furniture, which increased its share in market.

To sustain its low cost competitive advantage, IKEA helped its supplier technically

and financially so that the maximum capacities could be utilized.

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OLI MODEL

1. HIGH----OWNERSHIP ADVANTAGE

I. Entrepreneurial skills

Kamprad had potential to turn problems into opportunities when it saw that people are in

troubled due to high price and traditional design of furniture he took it as opportunity, with

his creative mind made unique designs, low price and easy assortment furniture. Kamprad

conveyed his vision throughout the organization by making people “IKEA Ambassador”

and his thesis “Testament”.

II. Production technique

i. IKEA has long term relation with his supplier to maintain its low cost it helped its

supplier in establishing their firms ,do maximum production to meet supplier

production capacities and keep inventory in its own store.

ii. IKEA is in continuous search of low and quality raw material keep on experimenting

on this.

III. Trademark

IKEA logo, product design and show room are so unique that if anyone imitate, he has to

face penalty .e.g Stor Case. To overcome such problems IKEA had registered all its unique

elements.

VI. Economies of Scale & Scope

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Location Advantage

Strong Weak

Ownership

advantagesStrong

Export OUTWARD

FDI

Weak Inward FDI Imports

Due to large product range IKEA has achieved economies of scale and scope, as waste of

resources is a sin at IKEA. It provides a secure delivery system to its supplier this way it has

achieved economies of scope.

2. WEAK---Location Advantage

Access to Raw Material: IKEA sourced raw material from Poland, which

reduced their cost as compare to buying material from Sweden.

Taxes: Taxes were high in Sweden to avoid these Kamprad shifted to Switzerland

and IKEA head office was shifted to Denmark.

Labor: IKEA employees are not very educated but very hardworking, on status

conscious and Odmjukhet: which means humility, modesty and respect for one’s

fellow man.

3. Strategy

IKEA has high ownership advantage but low location advantage so they should do

Outward FDI.

CORPORATE STRATEGY

i. Portfolio Management: IKEA had never diversified in any other business.

ii. Restructuring: When Ander Mober became President ,IKEA was restructuring on

functional lines as Formation of Supervisory Board , ,executive were based in Head

Quarter in Denmark ,introduction of formal budgeting and planning process ,3 year

corporate plan, A class site of showrooms.

iii. Transferring Skill: the recruited employees were delegated responsibilities earlier,

they were rotated frequently and rapid promotions for high performers. The

discussions with the senior management and trained IKEA ambassadors helped in

transferring skills within the company.

iv. Sharing Activities: IKEA has achieved economies of scope and scale by sharing its

activities with supplier

GLOBAL CORPORATE STRATEGY

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1. Demand:

There was a sophisticated demand for furniture with low cost and high quality for young

generation. They targeted young professional who initially started their life and furnish

their first apartments as mention in Exhibit 3.

2. Access for Resources:

They have access to resources in Poland which helped them in reducing cost. Designers

also replace traditional teak with less costly oak material. They also implement Just In

Time (JIT) system in their stores which differentiate them from other traditional store

system prevailing in German and European market.

3. Opportunity:

The IKEA successfully met sophisticated in other countries by opening their stores with

standardized product and appearance where people can shop easily and by providing

facilities like baby centers and restaurants, people preferred shopping at IKEA.

4. Expansion:

Kampard struggled in international expansion of IKEA because Swedish furniture

market was stagnating opening market for it.

a. Internal Expansion:

Initially they were providing furniture only for homes but they expanded it by

introducing new product line for office furniture.

b. External expansion

They moved globally opening stores in Europe and in West German, expanded their

business by sustaining the same culture worldwide.

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Level of FIT AND SUSTAINABILITY

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Creative Solutions

Customers

Management

Method

Warehouse

Product Range

Suppliers

Leadership Style

Attention to Retail

IKEA CULTURE

Awards, promotions

Testament of a furniture

dealer

Informal and common sense

style

Young buyers

Maximum production

Catalogs

Knock-down kits

Ant bureaucrat week

Strategic fit among activities is fundamental not only to competitive advantage but also to

the sustainability of that advantage. The culture of IKEA is to enthusiastically work for

constantly renewing the products, on cost consciousness, focusing on quality, to assume

responsibility and to help in tasks and brining simplicity in the behaviors. To achieve this

culture, IKEA has integrated all the activities to achieve the simple consistency between

them, the optimum efforts could be reached by reinforcing the activities.

There was an increasing demand for the inexpensive furniture, while the prices were high;

this was a social problem yet a rising opportunity for the business. To place itself in the

industry it focused on activities like layout of warehouses, relationships with suppliers,

meeting demands of young buyers, providing a wide product range, appreciating the

creative solutions, paying attention to retails, a smooth leadership style that will be passed to

the generations developing leaders in the company and moreover their management style

that is the key to every activity.

Keeping the information of the customer’s buyer behavior helped IKEA to change its

strategy accordingly to provide products and services that show care for them.

Exhibit 3 shows that customer’s primary determinant of purchase was through the Quality

which was 44% and their criteria for choosing store were Quality 90%. Their purchase

decisions were based on the information provided in the catalogs which was 78%. IKEA

was able to positions itself as the industry’s low-price leader. It developed attractive

warehouses where the new creative solutions like: buying products by self-selection from

knock-down kits increased cost saving and faster service. They recruited employees that

were highly creative and were easily absorbed into the IKEA culture resulting in low cost.

By providing informal environment it was able to bring the trust and loyalty among the

company and the employees. The wastage of resources was determined to be the sin so it

helped in reducing the cost and increasing efficiency of the company and the workforce.

They worked devotedly and bring inexpensive solutions to every problem, for which they

were awarded and promoted. They presentment information on the products through

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catalogs which increased the customer awareness about the products, their prices and the

space it would take in their homes. The management style as discussed was unique, informal

and most of all the leadership style required by the IKEA was discussed in the thesis

Testament of a Furniture which passed the philosophy of the company to the generations

so that the leaders know their role in formulating the strategies for the company after Ingvar

Kampard has left the company. Retail was given the special attention as it was reorganized

into four geographical regions; purchasing, distribution and design functions that were

headed by regional managers. It increased standardization and integration among retails

both locally and internationally. By recruiting the right people it enabled the company to

achieve its sustainable competitive advantage.

VALUE CHAIN ANALYSIS OF IKEA

Primary Activities

Inbound Logistics: IKEA designer are in continuous search of less expensive and

good quality raw material in result of which they could find oak material instead of

traditional teak wood.

Operations: They help their supplier financially and technically to maintain their

competitive advantage of low cost.

Outbound Logistic: IKEA store inventory in its own warehouses as per

commitment with supplier and to meet its 90% to 95 % service level objective on

catalog.

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VALUECost ReductionProduct

Differentiation

Marketing and sales: IKEA marketing mostly depend on its Catalog in 1988 its

annual distribution was of 44 million in 12 languages and 27 editions accounted for

half the company’s marketing budget.2

Service: IKEA customer has to use their own transport to carry the knock-down kits

and assemble themselves.

Secondary Activities

Infrastructure of Firm: Firm use central decision making and use informal

management style its culture focuses on human aspect and common sense and simple

style.

HR Management :Young employees adjust in firm culture very easily ,quickly

responsibilities given rotation among departments ,promotion to high performer and

they are also low cost .management is informal ,major decision are made with Ingvar

permission ,Anti bureaucrat week were celebrated every year ,IKEA ambassador

conveyed the vision to every employee by acting as role model.3

Technology Development: IKEA that technology which help to reduce its cost and

improve quality.

Procurement: IKEA purchased material from 1500 supplier from 40 countries.

Value

Cost Reduction & Product Differentiation: IKEA has achieved both cost reduction and

production differentiation through efficiently managing its supply chain.

2 Source :Ingvar Kamprad and IKEA 9-390-132 HBS Page No:063 Source :Ingvar Kamprad and IKEA 9-390-132 HBS Page No: 05

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