IKEA: Redefining the Market to Achieve Success
How did an offbeat Swedish retailer managed to conquer the market for furniture around the globe? Below that quirky surface lies an amazing success story of well-executed strategic alignment.
IKEA is a perfect example of a company that is highly effective at driving alignment between its operating and business models. Starting from a single Swedish store founded in 1943, IKEA has grown to 298 stores in 26 countries with annual sales of $36 billion. While this growth is stunning, it is more extraordinary that IKEA has achieved this growth by completely redefining the furniture market into one where its operating model held all of the advantages.
When IKEA was founded, furniture was seen as an expensive lifetime investment. It was an item that should last for decades after purchase. However, IKEA’s founders realized that this left a market opportunity for those younger generations that were just starting to move into their own homes and apartments, but did not have the financial resources or stable lifestyle that support an investment in high-end furniture. As a result, IKEA decided on a strategy of offering lower priced furniture to this demographic, while avoiding large compromises in quality that a customer might expect at this price point. This redefined furniture as something to be used and consumed at each stage in a person’s life. IKEA furniture would be expected to last for a few years, then be replaced as the consumer bought new furniture to go with a new household or to better fit the needs or an expanding family. By creating a repeat business for furniture, IKEA built the foundations of its future business empire.
IKEA marketed heavily to Generation Y’ers and Millennials, and built products that targeted their aesthetic needs. IKEA focused on minimalist design, with clean lines, and an uncomplicated look. The following commercial shows what IKEA believes to be their target customers and the created and innovative solutions that IKEA developed to serve their needs.
In order to fulfill this business model, IKEA had to create a supply chain that could undercut the competitor’s price, while still fulfilling their quality promise to their consumers. IKEA’s stores became massive warehouses, where customers selected furniture from showrooms and picked up the final product from the actual warehouse shelves, allowing IKEA to cut down on its handling and transportation costs. Combined warehousing and retail space also meant that the company did not have to maintain an excessive amount of real estate and bear the associated costs.
As a result of the minimalist design, the basis of all IKEA furniture became the all-purpose particle board. Through a massive vertical integration strategy, IKEA became one the largest consumers of wood in the world, and built a plants capable of pulverizing wood into dust and manufacturing many multipurpose boards at one time. The particle board also allowed IKEA to minimize the package dimensions of its furniture, reducing shipping costs, inventory space, and create a product that IKEA’s healthy and fit Millennial customers could bring home in their cars and assemble themselves.
IKEA also built a seamless inventory management system, where electronic tracking systems maintain a by-the-minute inventory picture from manufacture to retail. This and other inventory innovations, included automated loading, pallet-less transport, and a multitude of other small incremental improvements gave IKEA an edge in minimizing its inventory carrying costs. The following video demonstrates some of the innovations that IKEA made in its supply chain inventory management and exhibits that attitude that IKEA has taken towards innovation.
IKEA skillfully leveraged its business model to take advantage of the quirks of its operating model. The large IKEA warehouses became retail destinations for its target market, with large, spacious showrooms and even Swedish Food markets. An Everyday Low Pricing model suited the tastes of IKEA’s Millennials and avoided the costs associated with running promotions, while allowing IKEA to maintain a smooth flow of inventory through its stores. Minimal marketing focused on YouTube ads, print catalogs, and word-of-mouth was more tailored to its customer’s media interaction patterns, and helped IKEA keep its marketing costs down. The retail experience is exhibited below:
When IKEA became one of the largest purchasers of wood, it highlighted its ability to use its buyer power to promote more sustainable forestry management policies. In addition, its particle-board strategy allowed it to source fast-growing ecologically-friendly sources of wood. This allowed it to defend its brand to the more eco-conscious Millennial target market.
Thus, through skillful integration of its business and operating models, IKEA managed to position itself as an environmentally-friendly, quirky, low-cost quality furniture retailer and maintain this competitive edge over its rivals for the last three decades.
Gorman, Ryan. “IKEA uses a staggering 1% of the World’s Wood Each Year.” The Daily Mail. 5 July 2013. Retrieved 6 December 2015. http://www.dailymail.co.uk/news/article-2357216/IKEA-uses-staggering-1-worlds-wood-year.html
Lu, Clara. “IKEA’s Inventory Management Strategy: How Does IKEA Do It?” Trade Gecko. 23 April 2014. Retrieved 6 December 2015. https://www.tradegecko.com/blog/ikeas-inventory-management-strategy-ikea
Lutz, Ashley. “IKEA’s Strategy For Becoming the World’s Most Successful Retailer.” Business Insider. 15 January 2015. Retrieved 6 December 2015. http://www.businessinsider.com/ikeas-strategy-for-success-2015-1
Shoulberg, Warren. “Is IKEA the Most Influential Retailer in the Last 25 Years?” The Robin Report. 14 January 2015. Retrieved 6 December 2015. http://www.therobinreport.com/is-ikea-the-most-influential-retailer-of-the-past-25-years/
“Dining Room Makeover Ideas – IKEA Home Tour (Episode 201)” IKEA USA. 18 November 2015. Retrieved 6 December 2015. “https://www.youtube.com/watch?v=_JmB-_pRV3Y”
“How IKEA Drives Innovation in the Supply Chain.” National Retail Federation. 26 September 2015. Retrieved 6 December 2015. “https://www.youtube.com/watch?v=NOyBX0_GtNw”
“People Go to IKEA For the First Time.” Buzz Feed Video. 21 September 2015. Retrieved 6 December 2015. “https://www.youtube.com/watch?v=S0sVYUQkjtw”
Student comments on IKEA: Redefining the Market to Achieve Success
This is a fascinating example.
It got me thinking about a couple of other points that I think are interesting about IKEA’s operating model:
Building on your supply chain analysis, I wondered, is it correct to argue that IKEA’s commercialisation of flat pack furniture means that it has effectively “disintermediated” the assembly stage from its supply chain? Instead, it outsources this stage (and the associated costs) to the customer. This would lead me to believe that IKEA requires lower manufacturing capacity than other furniture providers, since it only needs to manufacture the component parts rather than the fully assembled product. In my view, IKEA has been so successful at pursuing this strategy since it has been careful to pass sufficient cost savings onto the customer through the considerably lower pricing that you reference.
Another point that I think is interesting is IKEA’s store layout. IKEA has designed its stores so that customers are encouraged to walk through its showrooms before moving through to the “market place” where they choose their purchases. This means that customers are exposed to lots of ideas around how they can use IKEA furniture for interior design. I would hypothesise that this promotes increased in-store purchases.
Awesome summary of the Ikea operating model. I hadn’t really thought about how disruptive Ikea really was to the furniture market, but you’re right; Ikea follows a completely new business model and operating model. You laid out the benefits of the combined warehouse/retail space quite clearly, and I can see how those strategies (along with the advanced inventory management system) are well-aligned with a low-price/relatively high-quality strategy.
Another interesting aspect of the Ikea model is the self-build nature of the furniture. Some people have suggested that this actually makes people like their furniture more. I wonder if Ikea intended this effect or if it is just a fortunate by-product of their strategy!