IKEA Case Study Essay
IKEA Case Study
The founder of IKEA, Ingmar Kamprad, felt furniture should be affordable by those of modest income with a minimalist style. To achieve his goals, Kamprad knew he had to source and adapt materials cheaply and find suppliers using production machines to keep manufacturing costs low (Hill, 2014). Kamprad took IKEA’s furniture direct to consumers bypassing the traditional middle-man, retail store in Sweden. The strategic goal was to set a target price at 50% below competition, then find a way to design furniture to meet the price goal.
Legal, Cultural, and Ethical Challenges
The biggest hurdle IKEA faced initially was a culture of fragmented, established furniture retailers in Sweden selling expensive furniture expecting it to be passed down as heirlooms. Established retail firms brought pressure against their suppliers to embargo sales to IKEA. Kamprad used this obstacle to find 50% cheaper manufacturing facilities in Poland driving IKEA’s pricing even lower while infuriating the competition. When competitors accused IKEA products of being shoddy, a Swedish magazine tested both traditional and IKEA furniture at an independent laboratory, and IKEA was of equal quality.
Unlike traditional conservative Swedish companies, Kamprad had little use for executive perks and MBAs in his organization. He preferred to hire young, inexperienced employees and grow them through the ranks of the organization. He replaced himself as Chief Executive with a college dropout who initially started in the IKEA mailroom. With this emphasis on youth, there may be countries where IKEA hiring practices may be deemed prejudicial to older workers.
Sweden maintained capital control so investing in other countries became problematic initially requiring a fast investment return to fund expansion outside of Sweden. The exchange rate for the Kronen was also a factor in deciding to source locally during international expansion – a particularly wise decision in China and the United States (U.S.). Kamprad chose not to take IKEA public and instead transferred ownership to a tax-exempt Dutch corporation with franchise fees payable to another company (believed to represent the Kamprad family). Kamprad moved to Switzerland to avoid paying Sweden’s very high personal income taxes. He was certainly an early adopter of the inversion theory of taxation (“Financial Times”, 2014).
With the collapse of Communism, the eastern European manufacturing companies tore up longstanding contracts with IKEA. Kamprad reacted by purchasing a Swedish production company to oversee purchasing and operating of factories across the former eastern bloc. The acquisition netted IKEA additional leverage in design and manufacturing expertise worldwide. IKEA also formed strong bonds with Vietnamese manufacturers forcing a lean profit for the suppliers, but also giving them advice and expertise in furniture manufacturing. The Klippan model love seat is another valuable lesson in local sourcing resulting in a 40% reduction in price with five frame suppliers in Europe, three in the U.S., and two in China.
Strategic and Operational Challenges
IKEA knew its primary demographic and still caters to that segment although it expanded beyond just the hip, risk-taking, young target market. The most interesting part of the IKEA case study was each operational obstacle faced turned into key strategic improvements to its processes over time. When shipping costs escalated along with damages, IKEA developed the knock-down, self-assembly concept resulting in lower overhead. As store locations increased and logjams began at the checkout stations, IKEA developed a method for the customer to pick their goods from the warehouse storage aisles. If a market segment did not own personal cars, IKEA located stores close to public transportation or arranged for furniture delivery. The picture below is in Wembley, England but could be of an IKEA store anywhere in the world because of their consistent branding. All of these operational issues resulted in concepts implemented nearly across the board in its stores.
Figure 1 – from Drew (2013)
IKEA found acceptance problems in the U.S. until it changed sizing from the European metric system to inches and feet. Once the measurement changes were made along with everything getting incrementally bigger (glasses, sofas, window coverings, etc.), the U.S. expansion took off. The local market adjustment lesson proved valuable in China also as the traditional IKEA room layouts included balcony furniture for Chinese apartments. Including restaurants, daycare for children, and tool sections have expanded the interest level to the entire family. IKEA is successful enough to claim its publication of 212 million catalogs in 29 languages makes it the second most read publication after the Bible (Scrutton, 2013).
IKEA is fascinating in its complexity of financial organization, supply chain, and executive management. From the beginning, Kamprad had specific goals in mind and set about achieving it by thinking globally and acting locally. He put the stamp of his entrepreneurial flair on the company and managers. Only time will tell whether his vision continues as successfully throughout the 21st century.
Drew, P. (2013). The Guardian. Retrieved from http://www.theguardian.com/sustainable-business/kingfisher-ikea-bt-net-positive-strategy Financial Times. (2014). Retrieved from http://lexicon.ft.com/Term?term=tax-inversion Hill, C.W.L. (2013). International business: Competing in the global marketplace (9th ed.). New York, NY: McGraw-Hill. Scrutton, A. (2013). Chicago Tribune. Retrieved from http://articles.chicagotribune.com/2013-06-05/business/sns-rt-us-sweden-ikeabre9541h6-20130605_1_ingvar-kamprad-mathias-furniture