The secret ingredient in IKEA’s meatballs
IKEA's business model revolutionized retail as we know it, and their sound and aligned operating model allowed them to execute on it. This has lead IKEA to become the biggest furniture seller worldwide.
Ask your parents and your grandparents, affordable, decent quality, and good looking furniture was not a reality before IKEA came along. IKEA’s forward-thinking strategy has made it the biggest furniture seller worldwide – IKEA has 373 stores in 47 countries and about €30billion in revenue last year.
IKEA managed this by having a very clear business model and a consistent operating model that allowed it to execute it. We were told in TOM that key to a successful business is precisely that, but is there any data to back Rob Huckmans’s bold claims? Well actually, there is. Bain did a global cross-sector analysis of companies with top-quartile operating model indicators and it showed that they have a five-year compound average revenue growth that is 20% faster and operating margins that are 160% higher than for those in the bottom quartile.
So it seems to me that the correlation between results stemming from consistent strategy and operating model is just as likely to be true as the Patriots having purposefully deflated those footballs.
But I digress. Back to IKEA.
Their business concept is “to provide a range of home furnishing products that are affordable to the many people, not just the few. It is achieved by combining function, quality, design and value – always with sustainability in mind.” IKEA does so by seeking simple solutions, saving every expensive possible when it comes to cutting costs, but not ideas.
IKEA’s business idea is grounded on a partnership with the customer. IKEA creates some customer value by making its unique stores a destination in themselves (e.g. with their large elaborate showrooms and cafeterias). However the greatest value comes from having well designed, nice furniture at a low (but not cheap) price. The way IKEA manages to offer its diverse product range at a genuinely low price is twofold:
1) Design
The product design process is standardized and repeated for each product: price setting, manufacturer selection, and lastly collaboration to design a high-quality product to meet the desired price.
Designers work with producers to use existing production processes to make new furniture. In the design phase, great emphasis is given to cost-efficient design (e.g. designing more compact furniture). The “make it yourself” furniture was a huge breakthrough, drastically reducing transportation costs by making bulky end furniture fit into neat boxes.
2) Economies of scale / Lower costs
IKEA searches worldwide for suppliers with the most suitable raw materials and then buys in bulk, globally, to ensure lowest possible price. Like Toyota, they strive for low costs in all operations (IKEA’s and of their suppliers) to ensure big volumes in sales and long-term profits (for IKEA and suppliers). It’s the classic economies of scale cycle: lower costs –> lower prices –> higher volumes –> lower costs…
To further reduce costs, IKEA develops partnerships with its suppliers. The suppliers must guarantee that over 95% of inventory will be in stock. To make this a reality, IKEA placed its procurement units closer to its most important suppliers, and also created forums for supplier evaluation and coordination.
Mikael Ohlsson, former CEO, used to say “we hate waste”. The truth is frugality is the core of IKEA’s business and operating model. It can be backtracked to its origins in Smaland, a modest Swedish region, where, according to Mr. Ohlsson, people are “stubborn, cost-conscious and ingenious at making a living with very little”.
Even IKEAs scandals/criticism are aligned with this thrifty culture. Most prominently, critics of IKEA claim that its corporate set-up minimizes taxes payable and disclosure (IKEA Group is actually part of the non-profit INGKA Foundation making most of IKEA’s profits tax-free). Of course the argument can be made that “tax efficiency” is a natural part of the company’s low-cost culture.
All in all IKEA’s operating model is very much aligned with its business model, and this has fueled IKEA’s growth and success over the last decades.
I forgot to talk about the meatballs, but I don’t think there actually is any secret there.
Sources
- Blenko, Marcia et al. Winning operating models that convert strategy to results. Bain Brief, Dec. 10 2014. http://www.bain.com/publications/articles/winning-operating-models-that-convert-strategy-to-results.aspx
- IKEA Concept. http://www.ikea.com/ms/en_US/this-is-ikea/the-ikea-concept/
- IKEA’s Business Model. http://supplierportal.ikea.com/doingbusinesswithIKEA/Documents/The%20IKEA%20Business%20Model.pdf
- Lutz, Ashely. Ikea’s Strategy For Becoming The World’s Most Successful Retailer. Business Insider, Jan. 15 2015. http://www.businessinsider.com/ikeas-strategy-for-success-2015-1
- The secret of IKEA’s success. The Economist, Feb. 24 2011. http://www.economist.com/node/18229400
Xav, great post. Watching IKEA grow, I’ve wondered when a major competitor would arise on the scene, but there seems to be no direct and significant competitor that I’m aware of. The design strength and economies of scale advantages that you talk about definitely contribute to IKEA’s success. It’s interesting that you note that IKEA makes compact furniture that can ship in a box; this must save them significantly both on shipping to the IKEA stores and then on shipping to the end customer. They don’t have to deal with an in-house delivery team bringing huge couches/tables/beds to a house or apartment; they can rely on the consumer to build it themselves.
The other difference I’ve noticed about IKEA as compared to other furniture-makers is that there is no custom option on any design, whereas most other companies will allow you to specify the material, size, pieces, and have them custom made and shipped. Given there’s a trade-off of low-cost vs. high flexibility, IKEA has solidly landed in the low-cost camp.
Great article Xavi! I think like you mentioned IKEA’s business model focuses on reducing variability in terms of their designs and keeping a limited amount of styles, colors and features that make things easy to assemble for the customer but also allows them to better control their inventory. As you mentioned and Marissa noted above, because they are able to carry a limited amount of options and all their items are able to be deconstructed and held in a box, IKEA can stack items in their warehouses efficiently and hold a large volume of furniture items at each store location. This better ensures that items will be instock for their customers and ties into their operating model of being a one stop shop for all household furniture needs and ties to the supplier model you mentioned in the post.
I have been really surprised that there has not been a competitor in this low cost and decent quality space. A big complaint about IKEA furniture has been its lengthy and difficult home assembly process and its lack of high quality materials. There is a new startup that might soon disrupt the IKEA business model. Greycork is a new company that focuses on making higher quality and more long term furniture at even lower costs than IKEA. The new company identified that the younger generation tends to move at least a few times to different apartments throughout their 20s and 30s and want furniture that will last them through this process but that is easier to build and store. Their furniture is made out of higher quality materials like solid ash wood and fiberboard and the biggest competitive advantage is that the furniture is meant to be built in under 5 minutes! Additionally, the furniture is designed to have a few connectors and also ships directly to you in a lightweight box. This allows greycork to lower inventory holding costs and extracts similar operational efficiencies as IKEA but has more customer value in terms of cost and time savings. It will be interesting to see if new companies can optimize this business model and finally create a better alternative to IKEA in the near future. Please check the Business Insider link to Greycork if you are interested! http://www.businessinsider.com/theres-a-new-cheaper-alternative-to-ikea-2015-8
Cool, looks interesting, and I hope they make it! I honestly found IKEA to be “shadier” than I liked when reading about them (mostly because they are registered as a non-profit and I think they should pay taxes), so I’d love a competitor to make it 🙂