IKEA: Modularizing Design and Value
IKEA’s vision is to “create a better every day life for the many people”, aiming to bring good design to as many people as possible. As CEO Mikael Ohlsson once said, IKEA’s goal is to offer “people with limited means the ability to furnish their houses like rich people”. By catering to this target demographic with low prices, modular design aesthetics, and a focus on immediate functionality over durability – combined with its personable brand and strong sustainability focus – IKEA has become one of the leading retailers in the furniture industry.
IKEA was founded in Sweden in 1943 by a 17-year-old entrepreneur named Ingvar Kamprad, using money that his father gave him as a reward for doing well academically. The business began as a mail-order service for everything from pens to picture frames to nylon stockings, with furniture being introduced to the product offerings only in 1948 (five years later).
Today the company operates 315 stores in 27 countries, and logs over 700 million annual store visits. Its geographic footprint includes the U.S., Italy, France, the U.K., Russia and Japan. Sales totaled €28.7 billion in FY14, increasing 3.0% from the prior year; store visits increased ~5%. Today, the company has over 147,000 employees and relationships with over 1,000 suppliers.
IKEA’s business model is to sell modular design furniture for low-end prices. IKEA targets the younger demographic for whom a furniture purchase is yet not a 20-year commitment. Instead, IKEA met the specific needs of this demographic, who care primarily about low pricing, product functionality over durability, and a clean design aesthetic.
To this end, IKEA offers a diversity of products – in 2014, IKEA offered 9,500 products, and launches about 2,000 a year with a team of 15 in-house designers and 75 externally-contracted designers. Its products also reflect simple, modular design. Most importantly, its products compete against higher-end stores like “Design Within Reach” or “West Elm” with similar design aesthetics, but price points 5-10x higher.
Modularizing the steps of furniture purchase, transport and assembly is key to IKEA’s operating model, and allows IKEA to offer this low-price/high-quality value proposition to consumers. By separating the assembly and delivery from the furniture item, IKEA allows customers to buy the bare-bones of what they need, with a choice to opt in to the more service-oriented value propositions. In other words, customers are able to pay for exactly what they want, and not what they don’t.
Self-service is a defining part of the IKEA customer experience. Customers record their favorite items on a card catalogue, and then retrieve their own furniture from the stocked warehouse.
By limiting customer service and allowing customers to serve themselves from the basic warehouse, IKEA reduces the need for extra sales staff or warehouse labor. IKEA is able therefore to charge customers only for the furniture item – and lower its own costs, passing these on to consumers through low prices and employees through living wages.
Customers are also able to transport items (the majority of which are flat-packaged through IKEA’s famous modular design) easily in their own vehicles. IKEA products are famously designed for self-assembly as well, removing another cost that the consumer might have to bear with a traditional furniture retailer. Furthermore, by designing its own furniture, IKEA is able to vertically integrate. IKEA also collaborates closely with suppliers who can help influence the design and quality of its product offerings.
IKEA’s showrooms are a key component to the success of its operating model. With such a diversity of products, customers might be overwhelmed – but by arranging items in an innovative showroom design, IKEA solves the pain-point of consumers wondering, “when might I ever use that?” Rather, consumers are asking, “How can I use this in my own home?” Showrooms also gave customers the ability to vet quality firsthand, and was key to engendering trust in low-priced furniture purchases. IKEA opened its first furniture showroom in 1953, actually in response to a competitor during a price war.
Store locations are also “destinations”, located outside of city centers. Stores are designed to keep shoppers in-store longer, with a cafeteria (serving the famous IKEA Swedish meatballs) so shoppers don’t leave when they get hungry, and colorful play areas for children, so families can spend longer at the store.
Lastly, IKEA focuses on social responsibility as part of its brand – a competitive advantage for consumers at a time when more millennials see the primary purpose of business as “improving society” (36%) than “creating wealth” (15%) . IKEA pays workers a living wage, has donated €104 million from the IKEA Foundation, and most recently has teamed up with the UN refugee agency UNHCR to develop temporary refugee housing for Syrian refugees. Moreover, IKEA has folded sustainability into its basic operating ethos, setting ambitious water, energy, waste, and raw material sustainability goals for its business to hit by 2020. It owns and operates 224 wind turbines around the world, sells mostly LED/LED-compatible lighting products, and in 2014, sourced 76% of its cotton and 41% of wood from “sustainable” production facilities that used less water, chemical fertilizers, and pesticides. In its focus on building a vision for the world, IKEA builds brand ambassadorship among its most loyal consumers.
 IKEA Yearly Summary 2014: http://www.ikea.com/ms/en_US/pdf/yearly_summary/ikea-group-yearly-summary-fy14.pdf
 World Economic Forum Impact Investing Report: http://www3.weforum.org/docs/WEF_II_FromMarginsMainstream_Report_2013.pdf
Student comments on IKEA: Modularizing Design and Value
Great post, Sherri! I have been a fan of IKEA ever since I graduated college and realized how expensive it is to decorate an entire apartment. One thing I noticed when I moved from DC to Boston this year is that IKEA furniture is very difficult to disassemble. Even if you don’t lose the Allen wrench you get with the furniture, trying to remove the screws often strips the wood making it impossible to re-assemble. You mentioned that customer assembly is one of the key elements of the modularized operating model. Do you think it is also intentional that the furniture is difficult to disassemble? If so, it’s a very smart idea because it aligns well with their business model of providing furniture for functionality over durability. It forces people to invest in new furniture when they move, which is frequently for the young customer market that IKEA targets. I would expect that many customers do not even attempt to disassemble when they move. The hassle of disassembling coupled with the cost of moving services is probably more expensive than the original low price of the furniture, which encourages customers to simply repurchase, boosting IKEA’s sales.