Ikea: Making Couches Look Good Since 1943

What do H&M, Zara, and Ikea have in common? #FastFashion. Ikea’s operations revolutionized the customer experience, paving the way for all those retail giants that we all know and love. #disruption #lowcost #highvalue

With 298 stores in 26 countries and 49 stores in North America alone, IKEA is the largest furniture retailer in the world and the second largest in the US. It generates $36 billion a year worldwide, and has successfully implemented its basic business model across a wide variety of economic and business contexts (Shoulberg, 2015) .

This company is a great example of operational effectiveness, evidenced by the fact key components of its operating model (including merchandising, pricing, distribution, warehousing, marketing, sourcing, etc.) have been replicated by other leading retailers worldwide.

Ikea’s Business Strategy centers around three key principles:

  • Provide a one-stop-shop to meet customers’ every home décor and furnishing need.
  • Employ a cost-leadership strategy to maximize customer value by providing consistently low prices.
  • Create a unique customer experience to emphasize the recreational aspect of the shopping experience.

Much of Ikea’s competitive advantage stems from the alignment between its business and operating models. I’ve outlined the three main components of Ikea’s Operating model below:

1. Sell visually attractive but inexpensive products for customers’ immediate use.
Ikea builds for fashion, not for durability. Its products are simple, trendy, and well-made, but use cheap materials and rarely last for longer than a year or two. Ikea makes many of its products using recyclable or sustainable materials, and the designs (which are all produced in-house) prioritize simplicity and conservation. “By using fewer materials, the company cuts down on transportation costs because it uses less fuel and manpower to receive materials and ship products” (Lu, 2014). Savings on materials and transportation are passed on to customers through lower prices.

Additionally, the self-service warehousing model helps Ikea save on labor and inventory costs, by maximizing space for storage and lowering the warehousenumber of hands that touch each product. Selling furniture in parts (as opposed to fully constructed) helps save on labor and construction, allowing for an everyday-low-pricing strategy to generate value for customers without the hassle of high-low pricing, coupons, one-day sales, and any other sales gimmicks.

Previously, furniture stores placed great emphasis on function and durability. Ikea’s low-cost/low-price operating model was a true innovation in the retail industry. Freed from the pressure of a high-value purchasing decision, customers are more creative and indulgent with their purchases, and can replace the products often to adapt to changing needs or tastes. This started the “fast-fashion” business that was emulated by H&M, Zara, and many other low-cost/trendy retailers (Shoulberg, 2015).

2. Situate stores closer to suppliers to reduce warehousing/real estate costs and ensure that inventory remains in stock.

In pursuit of its low-cost, high-value strategy, Ikea situates its stores closer to key suppliers to reduce transportation expenses and ensure an efficient flow of goods within Ikea stores (Blenko & Garton, 2015). This allows Ikea to maintain low inventory levels (and reduce warehousing costs), while also minimizing the risk of stock-outs. By creating strong forums for supplier evaluation and coordination, Ikea is able to ensure that 95% of inventory remains in stock (Blenko & Garton, 2015).

Through collaboration with suppliers, Ikea developed a proprietary inventory management system that allows logistics managers to know what is Screen Shot 2015-12-06 at 9.08.21 PMsold through point-of-sale (POS) data and keep track of inventory through warehouse management system data. This point-of-sale data and proximity to suppliers helps logistics managers make more accurate sales forecast, and reduce the costs of waste or lost sales (Lu, 2014)

Lower warehousing and real estate costs come at the expense of greater inconvenience for the customers, who often need to drive 1-2 hours to reach an Ikea destination. However, this too is part of Ikea’s strategy. By having a few stores that are geographically dispersed, Ikea ensures that visitors come with the intent to buy something, and can structure the experience accordingly.

(IKEA, 2014)

3. Foundation ownership and franchising model to maintain control over the customer experience.

From the Ikea site, we learn that “The founder of IKEA, Ingvar Kamprad, wanted to create an ownership structure and an organisation that stand for independence and a long-term approach. That is why, since 1982, the IKEA Group has been owned by a foundation” (IKEA, 2014). The foundation allows Ikea owners to maintain considerable influence over operations, free from shareholder pressures or controls.

The franchise model allows for local owners to tailor store aesthetics/product lines to meet local preferences and tastes, though significant vertical integration of Ikea franchises, designers, administrative functions allow for a seamless, inexpensive, and uniform customer experience.  The customer experience is central to Ikea’s strategy.

“With its elaborate showroom and cafeteria, Ikea has become a unique destination for shoppers” (Lutz, 2015). Designed like massive mazes, Ikea showroomstores have plenty of floor space to promote intricate displays. Upon entry into the store, customers are guided through a planned sequence of furniture display vignettes, with strategic product placement designed to spur purchases. The showroom provides both inspiration and entertainment, offering an optimal shopping experience. The iconic cafeteria ensures a recreational experience – many come for the meatballs alone!

Ikea’s success is rooted in its mission to provide high quality products at prices that most people can afford. The entire organization – including its design team, supply chain operations and inventory management systems – are designed to support this distinct goal (Lu, 2014). Ikea’s vertical integration and operational freedom allows for cost reduction and efficiencies in design, production, warehousing, merchandising and sales. Its massive warehouses and retail locations allow for economies of scale and operational efficiencies. Over the last 60 years, we’ve seen other retailers adopt these innovative practices to great success, but few have made as great an impact on the retail industry as Ikea.

 

 

Works Cited

Blenko, M., & Garton, E. (2015, February 19). Great Strategy, But Is Your Operating Model Up To The Task? (Bain) Retrieved December 6, 2015, from Bain Insights: http://www.bain.com/publications/articles/great-strategy-but-is-your-operating-model-up-to-the-task-forbes.aspx

IKEA. (2014). About IKEA. Retrieved December 6, 2015, from Ikea: http://www.ikea.com/ms/en_JP/customer_service/faq/help/about_ikea/ikea_group.html

Lu, C. (2014, April 23). IKEA’s Vision. Retrieved December 6, 2015, from Trade Gecko: https://www.tradegecko.com/blog/ikeas-inventory-management-strategy-ikea

Lutz, A. (2015, January 15). Ikea’s Strategy For Becoming The World’s Most Successful Retailer. Retrieved December 6, 2015, from Business Insider: http://www.businessinsider.com/ikeas-strategy-for-success-2015-1

Shoulberg, W. (2015, January 25). Is IKEA the Most Influential Retailer of the Past 25 Years? Retrieved December 6, 2015, from The Robin Report: http://www.therobinreport.com/is-ikea-the-most-influential-retailer-of-the-past-25-years/?utm_source=The+Robin+Report&utm_campaign=e9f0db9d5e-Is_IKEA_the_Most_Influential_Retailer_1_14_2015&utm_medium=email&utm_term=0_e90268c709-e9f0db9d5e-201770281

 

 

 

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4 thoughts on “Ikea: Making Couches Look Good Since 1943

  1. I very much enjoyed reading this article Yelena! I think it is worthwhile when companies invest heavily in understanding consumer needs and translating these insights into a set of guidelines. Specifically for IKEA, I inherently believe they have added value not only to their shareholders, but to the overall societal wellbeing, as these fashionable yet necessary items have become affordable to a greater percentage of the population. Thank you for sharing!

  2. You talked around this in a few ways, but one thing about Ikea’s build-it-yourself furniture that revolutionized the industry is the fact that it can be shipped long distances vastly cheaper than traditional furniture. Most Ikea furniture comes in boxes that have very little extra space inside. When you consider the alternative–shipping stacked, piled, etc night stands or some other bulky furniture–you can see how shipping utilization goes way down and the chance of damage becomes much higher. By creating easily shippable boxed furniture, Ikea was able to radically reduce shipping costs and expand farther from factories than most other chains.

  3. Great write up Yelena!
    I agree that IKEA has a great value proposition. However, I was wondering how sustainable this model will be within only few years. Usually going to Ikea requires a full day: you need a car, time, and usually someone to help you carry everything you buy. As more and more e-commerce companies grow, buying furnitures on-line becomes easier and cheaper. For example, companies like Wayfair, offers a huge variety of furniture and home decor, many of them with better quality, and usually with free shipping. In the long term, do you think Ikea will change its operating model in order to be able to stay relevant in the on-line world as well?

    1. Yael, thanks for the thoughtful question! You bring up a good point about the competitive threat arising from e-commerce. IKEA actually does have a website, where customers can order products online. However, most of its sales still come from in-person purchases and surprisingly, from its paper catalogue (what is this, 1950!?).

      I think despite the inconveniences, IKEA’s remote location, massive warehouses, and maze-like layouts actually attract customers. People go there because it’s fun! And furthermore, part of IKEA’s strategy is to inspire purchases through creative displays and bulk packaging… folks might use Wayfair for occasional one-off purchases, but for massive shopping sprees and redesigns, nothing comes close to IKEA’s selection, prices, and designs.

      Lastly, given the fact that most of IKEA’s real estate is privately owned by the company or contracted under a long term lease (50-100 years), I don’t think they have much to gain from moving into the online space exclusively. Perhaps we’ll see a move towards digital, but in my opinion, the stores are here to stay.

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