IKEA: High End Design for All
This blog post may require assembly.
Business Model
IKEA is the world’s largest furniture retailer, it had revenues of 29.3 billion Euros in 2014. The company sells a variety of partially and fully assembled furniture. IKEA’s strategy is to provide value through the price, sustainability, form, function, and quality of its products. [1]
Price is the most important component of IKEA’s plans to create value. Putting price first ensures the products that the company designs are affordable for all. [2] Sustainability is also a key consideration in the company’s approach. IKEA’s famed flat-packs, slim rectangular boxes, allow the company to reduce shipping costs and the carbon footprint associated with transportation. [5] In addition, IKEA operates 224 wind turbines and plans to derive all of its power from renewable sources by 2020. [2]
Form, function, and quality are each interrelated from the perspective of IKEA. [2] IKEA captures the value associated with form, function, and quality by focusing its promotion strategy on telling stories relevant to the consumers in each market. This process is possible because of the exhaustive data collection IKEA conducts on each market. [3]
Operating Model
IKEA’s operating model is focused on the design and production of the products sold in its retail stores. IKEA’s approach to design is called democratic design, which starts with an anthropological method of understanding customers and ends with an open internal dialogue. Each quarter IKEA researchers visit thousands of homes around the world to interview potential users about their everyday lives, photograph user homes, and conduct quantitative research. In-home observation allows the company to gain special insight into how people interact with furniture and other housewares. Insights gained from this research are compiled into a quarterly “Life at Home” report which along with information gained from other studies serves as the foundation of IKEA’s Data Mining Board.
Researchers and designers use this data to determine what adjustments will be made to the company’s basic range (products which rarely change) and its specialty ranges (products that change frequently). In addition, the design team consults product engineers and suppliers to ensure the new products meet IKEA’s goal of being low cost. [1]
Production is handled at one of 42 factories around the world. The vast majority of the capacity, by production value, is in Europe and Asia which together account for 94% of the goods produced. [1] The remaining plants manufacture products for local markets to save on shipping or labor costs. [3]
Performance and Sustainable Competitive Advantage
IKEA’s effectiveness is evidenced by its impressive performance to date. It is the largest furniture retailer and its revenues grew to 29.3 billion Euros in 2014 from 12.9 billion Euros in 2004. The company has maintained a relatively consistent gross margin over this time period.
Source: IKEA Group FY14 Annual Summary
The company’s impressive financial results were driven by an alignment between its business model and operating model. The low cost production and research insights gained from IKEA’s operations can be combined to produce products that are low cost, sustainable, functional, well designed, and high quality. This alignment between business and operating strategy creates desirable furniture that is typically cheaper than that offered by competitors. [1]
The sustainable competitive advantage created by this alignment is centered on scale and access. IKEA operates 42 plants around the world and has more than 300 stores globally. It would be difficult for any competitor to match their scale in production and distribution. In terms of access, IKEA has developed a complex research process that provides a detailed understanding of how consumers interact with furniture. Even, if a competitor could match the scale of its current research operation they would not be able to match its reserves of historic data. [1] [4] IKEA is winning the discount furniture market, one flat-pack at a time.
[1] “IKEA Group FY14 Yearly Summary.” IKEA Group FY14 Yearly Summary. IKEA Group, 31 Dec. 2014. Web. 8 Dec. 2015. <http://www.ikea.com/ms/en_CN/pdf/yearly_summary/ikea-group-yearly-summary-fy14.pdf>.
[2] Yohn, Denise Lee. “How IKEA Designs Its Brand Success.” Forbes. Forbes Magazine, 10 June 2015. Web. 9 Dec. 2015. <http://www.forbes.com/sites/deniselyohn/2015/06/10/how-ikea-designs-its-brand-success/>.
[3] Yohn, Denise Lee. “How IKEA Designs Its Brand Success.” Forbes. Forbes Magazine, 10 June 2015. Web. 8 Dec. 2015. <http://www.forbes.com/sites/deniselyohn/2015/06/10/how-ikea-designs-its-brand-success/>.
[4] Ghemawat, Pankaj. “Sustainable Advantage.” Harvard Business Review. Harvard Business Review, 1 Sept. 1986. Web. 8 Dec. 2015. <https://hbr.org/1986/09/sustainable-advantage>.
[5] “The Secret of IKEA’s Success.” The Economist. The Economist Newspaper, 26 Feb. 2011. Web. 8 Dec. 2015. <http://www.economist.com/node/18229400>.
Very interesting post! I am wondering whether IKEA also has some secret sauce regarding manufacturing to improve their margin while keeping their price competitive. Also, it is also very interesting that how IKEA can remain competitive with such poor customer service….is this a strategic choice to de-prioritize investment in customer service?
Haochen it looks like some people in the press have had similar experiences:
http://www.forbes.com/2007/04/12/walmart-ikea-depot-ent-sales-cx_lh_0412customerservice.html
Based on my review of the annual report it doesn’t look like the company has made any attempts to specifically resolve this issue. However, IKEA has committed to giving 17% raises to about half of its US employees. Hopefully, that will allow IKEA to hire better customer service and delivery employees.
Nice post, Damon. Obviously this is a very unique company–interesting to read some of the detail about how it works.
One of the other neat operational choices IKEA seems to make — based on first-hand observation, at least — is with their real estate. Not only is the shopping experience super unique — particularly in that shoppers pull their selections directly off the warehouse shelves after browsing the showrooms — but the very selection of the site seems directly related to the supply chain. I’m thinking in particular of stores in Red Hook, Brooklyn — where a boat could travel directly from Sweden, if needed — and in New Haven, which is both on the water and on a major interstate.
Thanks for the write up Damon. Ikea has fascinated me for a while. Interesting how they have used their data insights as a competitive advantage. I’ve heard that they are also able to save a ton on logistical costs due to the shapes/sizes of their boxes – they are optimized for low-cost shipping and compatibility in truckloads. I also think that they’re presentation in stores is very important to increase demand. The approach to show how things would be used in a certain part of the house is a really unique and interesting set up that likely contributes to overall demand. Every time I go there, I am interested in all the people who are touching and experimenting with the displays. These seems like a vital part of their model too.