IKEA

IKEA International Marketing

Johannes Zeller  80 Upper Hannover Street Sheffield S3 7RQ [email protected]

International Marketing Dr. Nikos Dimitriadis Autumn semester 2002 Sheffield University

1. Introduction ............................................ ................................................................... .............................................. ............................................... .................................. .......... 2 2. Some Statistics .............................................. ..................................................................... ............................................... ............................................... .......................... ... 3 3. How IKEA works..................... works ............................................ .............................................. .............................................. ............................................. ......................... ... 4 4. SWOT Analysis: ............................................... ...................................................................... ............................................... .............................................. ...................... 6 4.1 General Constraints ............................................. ..................................................................... ................................................ ..................................... ............. 7 5. Market Examples and Expansions ................................................ ........................................................................ ......................................... ................. 7 5.1 Case Study 1: USA............................... USA...................................................... .............................................. .............................................. .............................. ....... 8 5.1.1 Opportunities ............................................ ................................................................... .............................................. .......................................... ................... 8 5.1.2 Threats: .............................................. ..................................................................... .............................................. .............................................. .......................... ... 8 5.1.3 Conclusion..................... Conclusion ............................................ .............................................. .............................................. .............................................. ....................... 8 5.2 Case Study 2: Russia .............................................. ..................................................................... .............................................. ................................... ............ 9 5.2.1 Possibilities: .............................................. ..................................................................... .............................................. ......................................... .................. 9 5.2.2 Constraints:......................................... Constraints:................................................................ .............................................. ............................................. ......................... ... 9 5.2.3 Suggestions: .............................................. ..................................................................... .............................................. ......................................... .................. 9 6.Conclusion..................... 6.Conclusion ............................................ .............................................. .............................................. .............................................. ................................... ............ 10

1. Introduction Ikea Svenska AB, founded in 1943 is the world's largest furniture retailer which specializes in stylish but inexpensive Scandinavian designed furniture. It has 128 fully-owned stores in 26 countries, visited by over 108 million people yearly, and worldwide sales of about $5.4 billion in 1994 (IKEA 1994). Ikea's success in the retail industry can be attributed to its vast experience in the retail market, product differentiation, and cost leadership. The company is,  perhaps, one of the World's most successful multinational retailing firms operating as a global organization based on its unique concept that the furniture is sold in kits that are assembled by the customer at home. Refer appendix 1B for corporate performance. Ikea's mission is to offer a wide range of home furnishing items of good design and function, excellent quality and durability, at prices so low that the majority of people can afford to buy them (IKEA 1994). The company targets the customer who is looking for value and is willing to do a little bit of work serving themselves, transporting the items home and assembling the furniture for a better price. The typical Ikea customer is young low to middle income family. (Olsson, 1996, p.1) Ikea does not have its own manufacturing facilities. Instead, it is using subcontracted manufacturers all over the world for supplies. All research and development activities are, however, centralized in Sweden. In order to maintain low cost, Ikea shoppers are Pro-sumers half producers, and half consumers (Normann, 1993, 70). In other words, they have to assemble the products themselves. To facilitate shopping, Ikea provides catalogs, tape measures, shopping lists and pencils for writing notes and measurements. Car roof racks are available for purchase at cost and Ikea pick-up vans/mini trucks are available for rental (Economist, 1994, 101). Ikea's success is based on the relatively simple idea of keeping the cost between manufacturers and customers down. According to Ingvar Kamprad, the founder  of Ikea; "To design a desk which may cost $1,000 is easy for a furniture designer, but to design a functional and good desk which shall cost $50 can only be done by the very best. Expensive solutions to all kinds of problems are often signs of mediocrity." (Chandler, 1993, 12) Costs are kept under control starting at the design level of the value-added chain. Ikea also keeps costs down by packing items compactly in flat standardized embalages and stacking as much as possible to reduce storage space during and after distribution in the logistics process (Economist, 1994: 101).

2. Some Statistics The most important markets for IKEA are Germany and the USA.

Global Sales as Percentage of  Turnover (2001/2002)

Germany USA Great Britain France Rest

Picture 1: Picture 3: Data from Internationale Pressemitteilungen, http://www.ikea.at/about_ikea/press_room/press_release_int.asp?pr_id=665, 07.11.2002 and IKEA is presented in most of the developed countries:

Picture 2: Representation of IKEA in the World, data from www.ikea.com, 06.11.2002

3. How IKEA works Above all else, one factor accounts for Ikea's success: good quality at a low price. Ikea sells furniture that's cheap but not cheapo, at prices that typically run 30 to 50 percent below the competition's. While the price of other companies' products tends to rise over time, Ikea says it has reduced its retail prices by a total of about 20 percent during the past four years. Ikea's corporate mantra is "Low price with meaning." The goal is to make things less expensive without ever making customers feel cheap. Striking that balance demands a special kind of design, manufacturing, and distribution expertise. But Ikea pulls it off in its own distinctive way: tastefully, methodically, even cheerfully, and yet somehow differently than any other company anywhere. Lisa Magonelly therefore presents guide to how Ikea designs,  builds, and distributes the furniture that the entire world wants to buy, separated in 5 steps:

1. Product and Price: Ikea's product managers use a price matrix to identify holes in the company's product lineup -- and how much to charge for a new product. Ikea has three   basic price ranges -- high, medium, and low -- and four basic styles: Scandinavian (sleek wood), modern (minimalist), country (neo-traditional), and young Swede (bare  bones). To identify market opportunities, they take a product council directive, plot his existing product lineup on a grid, and look for empty spaces (Lisa Magonelly, 2002,  p.2). Product range and development is primarily carried out by IKEA of Sweden AB.  New product development and product improvement is organised by separate product groups within IKEA, such as living room furniture, kitchen and bathroom furniture, carpets and textiles, lighting and glassware and ceramics (Jeffreys, 1992; quoted from Gary Warnaby, 1999, p.7). Most manufacturers design a product, and then try to figure out how to make it for a target price. At Ikea, the price comes first (Lisa Magonelly, 2002, p.2). To find the price the search for competing product and target their prices 30-50% below it. 2. Finding Producers: Ikea now buys from about 1,800 suppliers in 55 countries (Lisa Magonelly, 2002, p.2). the trading offices vie to offer the most attractive production  package, including materials (cheap hardwood or Indonesian rubber, for example) and

a factory where craftspeople have the necessary skills to produce unique items in sufficient volume. They are situated close to the raw materials to minimize transport cost (Bernachaut, 2002, P.12). Yet even as Ikea fosters competition among suppliers, it also treats them as long-term business partners. As Ikea offers nearly the same   products in its stores all over the world, they can order very high Volumes and therefore

get

cheap

prices.

The

firm

emphasizes

centralized

control

and

standardization of the product mix (Magrath, 1990, p.38). As Ikea offers nearly the same products in its stores all over the world, they can order very high Volumes and therefore get cheap prices. 3. Design the Product: With a price point and a manufacturer in place, Ikea uses internal competition to find a designer and select a design for production. So the management writes a brief that explains the product's price, its function, the materials to be used, and the fabricator's capabilities and sends the brief to Ikea's pool of nine staff  designers and 80 freelancers, and refines promising designs until he settles on the one he wants to produce (Lisa Magonelly, 2002, p.4). 4. Transport: Probably one of the most important inventions of IKEA are the flat boxes to transport the furniture easily. That make not only Transport from the factories to the stores cheaper, it also allos costumers to transport most of their shopping with their  own cars. As Amount to ship became more and more, coordination became more difficult. The company has responded by creating a global network of distribution centres, most of which are near container ports and major truck and rail routes. There are 18 Ikea distribution centres worldwide -- which handle about 70 percent of Ikea's total product line and four more are under construction. The other 30 percent of Ikea's  products travel directly from supplier to store (Lisa Magonelly, 2002, p.5) 5. Selling: The selling takes place in often huge furniture stores with very few service,   but a lot of information to read and furniture to see in their proposed use. Integrated   places for children make the shopping for families easier and restaurants selling typical Swedish food convince the costumer to stay longer.

4. SWOT Analysis:

In the case of Ikea, a standardized product strategy does not mean complete cultural insensitivity. The company is rather responding to globally emerging consumer tastes and   preferences. Retail outlets all over the world carry the basic product range which is universally accepted, but also places great emphasis on the product lines that appeal to local customer preferences (Retail Business, 1994, p.78; quoted from Olsson, 1996, p.2).

In order to maintain cost leadership in the market, internal production efficiencies must be greater than that of competitors. Under Ikea's global strategy, suppliers are usually located in low-cost nations, with close proximity to raw-materials and reliable access to distribution channels. These suppliers produce highly standardized products intended for the global market, which size provides the firm with the opportunity take the advantage of economies of  scale factors. Ikea's role is not only to globally integrate operations and centrally design   products, but also to find an effective combination of low cost, standardization, technology, and quality. When examining the case of Ikea, we might ask whether they are actually implementing the structure that their strategy is suggesting. Since the strategy is to sell furniture, or rather entire interiors of homes, to a reasonable price by exploiting economies of scale and high degree of  customer created value into the products, we would be expecting a strongly centralised firm in order to exploit economies of scale. Economies of scale would be especially evident in the procurement of furniture, since this is the main input in the Ikea business. In fact Ikea is using its size when dealing with subcontractors in two ways. The first is to put  pressure on the subcontractors to become more and more efficient. But as Porter points out in his Five Forces Model, if you become too important for a special supplier then she might fight very hard too get a good price from Ikea. Consequently, Ikea has set a limit for how large share of the suppliers’ output Ikea should be. Secondly, Ikea can use her size to get good discounts from the suppliers. This is done by placing itself as a large customer to the supplier, to get some power in price negotiations.

A high degree of centralisation is also noticeable in the marketing function. The strongest argument for this is the production of a catalogue that is essentially the same in many countries. The production of the catalogue is comparatively expensive if we add the distribution of it to a very large number of households.

4.1 General Constraints: -

The workforce: IKEA doesn’t have its own factories; they give orders to different factories in low cost countries. As it is always the cheapest companies that get the job, some even might employ children. As newspapers and magazines might find that out first, this makes very bad publicity for the company. For example as the Swedish television showed a documentary about children working for IKEA carpets, the company finished the contract directly, but the damage lasted (Die Welt, 04.11.2002)

-

IKEA is the biggest furnishing company world wide, so it needs al lot of wood. This implicates, that there are confrontations with nature protecting organisations. For  example, as “Robin Wood” started a campaign against IKEA, because they use Tigewood in their furnitures, they had to promise only to use new planted wood for their  furniture (Die Welt, 04.11.2002). Most competitors are small, so they don’t get this much pressure from the media and can continue to use cheaper wood, so the need to act more ecological than all the others is clearly a constraint for the company.

-

The concept of IKEA is easy to adopt. Companies like Bush Industries in the USA have taken over the concept of cheap furniture, but they adopted their products to the American habits (Terpstra, 2000, p.291). So for example, they don’t use pine, the use oak wood. As IKEA sells nearly the same products all over the world, they are more dependent on the image of their new Scandinavian design.

5. Market Examples and Expansions The great majority of this expansion was organic, allowing the company to retain full control. However, a number of business format franchises existed, for example, in Iceland, Hong Kong, Kuwait, Saudi Arabia, Singapore and Spain. These stores were operated by outside companies where capital investment and management were the responsibility of local entrepreneurs, with IKEA providing merchandise and trading services such as marketing, administrative systems and support, education and training etc. (Worrall and Littler, 1995 quoted from Gary Warnaby, 1999, p.6).

5.1 Case Study 1: USA From the global sales chart can see that in terms of potential customers North America   provides relatively low amount of sales.This market is made even more attractive when considering the comparably high disposable income levels of North American citizens. I advise continued investment within North America.However certain issues need to be considered and dealt with before this investment can successfully take place.

5.1.1 Opportunities 

As IKEA has already created fully owned subsidiaries within the U.S.A it is logical that further expansion should carry on using this method.



IKEA already has substantial knowledge of the U.S.A market thus one of the major   benefits of using franchising (franchisee’s local knowledge of the market) is no longer  applicable.

5.1.2 Threats: 

Customers tend to require more customisable options. We advise that IKEA incorporates this products sold in N.America.



A strong Swedish krona has meant that furniture made in Sweden and sold in U.S.A is relatively expensive (although the steady recovery of the U.S.A economy has meant that the krona per dollar has steadily fallen all year.)



If shipping from Europe delivery will take 1 to 2 months. This could lead to stock  outs – Combined with exchange rates unfavourable to importing into U.S.A we advise locating suppliers within North America.

5.1.3 Conclusion: Strength are that there are already established stores on Eastern/Western seaboards. A weakness is that US citizens prefer

oak furniture. The affluent market is clearly an

opportunity. But the US economy Economic is still slowing down and there are competitors like Stor, Bush Industries. and US dealers dislike RTA furniture.

5.2 Case Study 2: Russia IKEA has opened two stores near Moscow that now attract more costumers than any other of  the 150 IKEA stores worldwide. And they want to invest more than 600 Mio Dollar in Russia in the next years.

5.2.1 Possibilities: •

Russia is one of the markets with the biggest potential of the world

•

As the market is not open since long, there very few competition

•

Moscow is a fast growing metropol where more and more people can afford IKEA furniture

5.2.2 Constraints: •

Administration is very inflexible- to open a new shop takes very much time.

•

Prices for sites are very high

•

Duty for imports are about 25-80%

•

Inflation in Russia is over 15% a year.

•

The future development of Russia is very insecure

5.2.3 Suggestions: •

Because of the high duty, IKEA should produce more in Russia.

•

Russia is also a very good place for purchase, because wages are low and the country has all raw materials that are needed (Wood, oil, steel)

•

Because of the high inflation and the unpredictable economic future, IKEA should  better find franchise- partner to open new shops

6.Conclusion Together with innovative changes in the value chain, where consumers become Pro-sumers and suppliers are turned into consumers, the concept of marketing high quality products at low cost through a focused generic strategy, intended for the globally emerging middle-class has served Ikea well. Centralized control and product standardization are two necessary components of the firm's long-term strategy. In addition, the company has facilitated its international expansion through owned subsidiaries and franchises. Future localization   pressures will force Ikea to change its global strategy in order to become more sensitive to local demands. Greater emphasis on joint ventures and strategic alliances represent possible vehicles to further build on Ikea's focus strategy. A new transnational oriented organizational structure would further provide the necessary infrastructure needed to support such vehicles towards true internationalization. This in turn, would impact on the present homogenous Scandinavian culture and introduce new values, ideas and, perhaps, broaden Ikea's core competencies.

7. Bibliography

1. Bernachot, Christine; Ducasse Hélène; Piedallos Carole : CAS DE STRATEGIEIKEA ; Comment IKEA parvient-il à adapter sa stratégie horsde ses frontières ?; http://www.univ-pau.fr/~benavent/cas/distribution/Ikea_CAAE_2001T.PDF at 05.11.2002; I.A.E de PAU et des Pays de l’Adour 2002 2. Die Welt : 04.11.2002. Die Ethik der Arbeitsplatte; Ikea, Schwedens Antwort auf  McDonald's, vereint Hedonismus und Alternativkultur zu einer beispiellosen Erfolgsgeschichte; by Mariam Lau 3. Jefferys, J.B: The IKEA Group; in Hast, A. (Ed.), International Directory of Company Histories, Vol. 5, St James Press; Detroit and London 1992 4. Olsson, Johan : Ikea of Sweden ; http://www.geocities.com/TimesSquare/1848/ikea.html at 06.11.2002; 1996 5. IKEA. (IKEA Svenska AB): Retail Business; Retail Trade Reviews; March n33 p7882 ; 1995 6. Magonelly, Lisa: How Ikea Designs Its Sexy Price Tags; http://www.business2.com/articles/mag/0,1640,43529|2,FF.html at 06.11.2002; October 2002 7.

Magrath, A.J.: Do as the Romans,' but retain distinctiveness." Advertising Age, April 16, n16 p38; 1990

8.

Normann R. Ramirez R. (1993) "From Value Chain to Value Constellation: Designing Interactive Strategy." Harvard Business Review, July/August 65-77

9. Worrall, S.; Littler, D., ‘‘IKEA”, Management Case Quarterl y; Vol. 1 No. 4, pp 3-14.; 1995 10. Warnaby, Gary: Strategic consequences of retail acquisition: IKEA and Habitat; International Marketing Review, Vol 16 Issue 4/5; Manchaster 1999 11. The Economist: (1994) "Furnishing the world."; Nov. 19, p101-102.