Ikea Case Study

Introduction

IKEA states in their business idea: "We shall offer a wide range of home furnishing items of good design and function, at prices so low, that the majority of people can afford to buy them"(IKEA 2005). IKEA manage to keep costs low by their superior relationship with their suppliers were they buy low-cost components in huge quantities. Together with efficient warehousing and customer selling service it passes on to customers resulting in lower prices, anywhere from 25 - 50 % lower than its competitors. However, at the same time they manage to operate with 8 - 10 % profit margins, much higher than the industry average (Norman and Ramirez.1993).

We have made a short and simple SWOT analysis to get an overview their capabilities.

Strengths Weaknesses

High variety offering - right range of products

Higher margins than competitors

Economies of Scale

Logistics - inventory management

Long term relations with suppliers

The business culture

Organisational capabilities - adapting change

Market leader - Category killer

High service level - few stock outs

Low lead time

Good product information Too big - may increase bureaucracy

Franchising - higher control cost

Mass marketing -expensive

Charismatic leader - hard to replace

Search cost - for cheaper components

Market surveillance - keep up with trends

Opportunities Threats

Expanding Asian market

New technology - may lower marketing cost

More focus on environmental issues New trends -individualism

Time is money - people do not have the time to put products together

Too dominate - defence position man hamper innovation

The key elements to IKEA's winning formula are well known: simple, affordable, functional, high quality, Scandinavian design, an extensive product line, knock-down furniture kits that customers transport and assemble themselves, low cost, unique logistics, huge stores located in suburban areas with plenty of parking space, day-care facilities and restaurants. To focus only on low cost and low price is to miss the true significance of the companies' business innovation capabilities. IKEA has systematically redefined the roles, relationships and organizational practices of the furniture business, so they can offer lower prices and the right variety of products. IKEA has been able to grow globally in an industry that traditionally was a fragmented and dominated by local actors.

In Theodore Levitt's famous article Marketing Myopia (1960), he stresses that it is important to define and to know what need to fulfill. The founder of IKEA Ingvar Kamprad had interest in the home furniture industry primarily because of social reasons. He wanted to respond to increasing prices of home furniture. Prices grew 41 % faster than other household goods from 1935 to 1946. He commented that:" ...IKEA's aim is to change this situation. We shall offer a wide range of home furnishing items of good design and function at prices so low that the majority of people can afford to buy them...." IKEA's vision "To create a better everyday life for the majority of people" reflects which needs IKEA tries to fulfill. The main purpose is to make the customers life easier and better, and not to sell furniture as a main goal.

Customer value

IKEA's revenue for 2003 was 11.300 million Euros and with an annual growth of more then 20 %, an achievement they managed every year since 1997. To understand how IKEA still manage to keep their annual growth over 20 % it is important to see what value they are creating for their customers. First, they maintain to involve the customers in their business concept. It offers a brand new division of labor; if customers agree to take on certain key tasks traditionally done by manufacturers and retailers -- the assembly of products and their delivery to customers' homes then IKEA promises to deliver well-designed products at substantially lower prices. This kind of distribution and logistics make the margins better and a consequence is lower prices for the customers. Because most items are packed flat they do not have to store finish products, which enables them to store more of the same products. This leads to both fever stock-outs and that customers can leave with their products resulting in a high service level for the customers

A part of IKEA's strategy is to ease the life of the majority of people. The term "majority of people" are not a very homogeny segment. IKEA offer a wide range of products, approximately 20.000, which makes it a one stop shop. This is both time saving for the customers and makes them able to choose within a variety of the same products group. Barbara Kahn (1998) discusses that a high-variety strategy can frustrate the customer. IKEA may well run the risk of a negative perception of their high-variety strategy by its customer. However, over years they have managed to develop a concept of high variety and a system that makes it easy for customers to handle this extensive product range. Kahn notes when customers value the variety and are willing to pay for it this can lead to a significant competitive advantage. Alongside with other facilities such as free parking, childcare and an affordable restaurant makes the shopping experience more comfortable and shopping at IKEA should be a nice experience for all members of the family.

Peter Dickson's model (1992) "Dynamic Model of Competition", he suggests that if heterogeneity in demand is constantly changing the organization must meet buyers' preferences to survive. The trends within home furniture are constantly changing and a recent trend the last decades is that the concept of family is almost none existing. The shift has been that single households are becoming more prevalent. Fashion trends also influence