01 Nov IKEA – Strategy in a Nutshell
IKEA differed radically from other furniture businesses at the time of its conception. It makes for a good strategic case study today.
IKEA’s founder, Ingvar Kamprad, died in January 2018, aged 91.
After starting from the humble Swedish beginnings, his entrepreneurial flare led to a multibillion-dollar global empire.
The customer profile is the global middle-class. They are interested in items such as bookcases, side tables, storage units. They are aspirational. They are delighted by the value but also the philosophy of style and good design and frugality. Spending amounts are very similar around the world.
The target market is well-understood. IKEA appeals to the emotional needs of the group as well as the functional. The physical brand is consistent internationally. Cultural differences are taken into account. The core strategy and positioning of IKEA is the same around the world.
However, each country has cultural differences. For example, Americans fold their clothes and want deep sofas, quality textiles and large sizes. Italians hang clothes. Japanese expect high-quality materials and fabrics, more than they desire low prices.
IKEA strives to be positioned as a Lifestyle. The philosophy is stylish, frugal, sustainable, affordable. Shopping is an ‘experience’ which surprises and delights. Walking through an IKEA store is a journey of discovery. There are imaginative opportunities for lifestyle improvement at home within spaces that resemble closely the home itself. Glitter-spangled communist chic.
Strategy & Store Layout
The IKEA store layout typifies its strategy. The showroom levels depict both frugality and abundance from smart thinking. Bookshelves are not bare, but they are adorned minimally. You can see your own things sitting on the shelves. The kitchens, bedrooms, lounge areas and offices contain only as much peripheral styling as the shopper needs cues to project themselves into the scene. The rooms are sparse but not spartan, much the same approach that a real estate agent would take to the sale of a property.
IKEA’s strategy is to deliver value to the aspiring middle classes and cutting costs at every point. Product designers must build stylish simple furniture at a low cost. This means innovative materials are developed (such as resins and chipboard combinations).
Customers walk through the store in a retail experience designed to stimulate pleasure and prolong visits and thereby sales. With a well-stocked and fun kids play area, it is becoming known as the birthday party venue of choice, although unintentionally. A trip to IKEA is a family, fun day out when it comes to the Australian market.
Much of the customer service is outsourced back to the customers. Clear signage enables shopper/pedestrians to understand the route and the script they are to follow. While shopping, a number of checkpoints make available order sheets and pencils so that the shopper can record the item’s Aisle and Lot number and any other specifications. This is much-needed information when it comes to product collection.
Walking through the maze of fabricated rooms to the dining area – akin to a Scandinavian RSL in an airport setting – one is confronted by the vastness of the industry on the levels below. An enormous picture window reveals the expansiveness of the warehouse and the palettes upon palettes of boxed stock awaiting collection. And whilst down there, one feels like an ant on the moon. The bourgeois-aspirant sensibility recedes back to East Germanic industry and function. But DIY help is everywhere. There are three-metre long product trolleys and large yellow bags specially designed to tether loosely onto them to roll both small and large purchases back to one’s vehicle.
This all reduces the storage costs and enables these vast emporiums of lifestyle to be situated on one super-sized warehouse paddock.
Throughout the organisational chain, the culture is one of thrift. Staff travel economy class. Kamprad himself could have afforded an airline but he apparently always flew economy. Staff appear as the catalogue models.”Waste is a mortal sin”. Ongoing supply chain management includes restructuring suppliers in regional areas.
The result is an excellent integration of all Activity Systems to strengthen the strategy and block imitators.
IKEA aims to reduce prices by 2-3% per product each year. This may be sustainable with ongoing product innovation. It is anticipated they will need twice as much material next year and the supply is at a bottleneck. It is uncertain whether they can continue growing at this pace without restructuring materials supply chain.
Pretax profits are estimated at $1.7 billion.
The 10% operating margin is very low for the category. Revenues are growing at approximately 15% p.a. It is in growth, with large-scale rollouts into new markets, that brings the scale of revenue, not the margin.
Challenges – materials are the lynchpin for continued growth at this pace. Continued cultural modifications will need to be made to the global ‘template’.
There is also a challenge to keep the experience ‘fresh’. As it takes several hours to move through an IKEA store, the appeal for convenience could threaten the longevity of the model. I have noticed that the children’s play area is well attended and a larger dining/restaurant is in the IKEA store closest to my house. The restaurant offers unlimited drinks for the price of one, so the plan is clearly to have people fed and enjoy a lengthy stay where there is some perceived value.
It will be interesting to see how the business performs and adapts to these challenges, but I see no signs of things slowing.