It's IKEA's World. A Growth Strategy Based on Cost Leadership

Contents

1 Introduction

2 Models

3 Growth Drivers
3.1 Internal Growth Drivers
3.2 External Growth Drivers

4 Difficulties of Internationalization

5 Recommendations

6 Conclusion

Statutory Declaration

List of Figures

Figure 1: Ikea’s Waterfall Strategy

Abstract

This case study provides information about Ikea’s growth strategy which is based on a cost leadership with high degrees of standardization and only a few local adaptations. Applying growth drivers, marketing mix and internationalization strategy, the case gives profound insights into the company’s success and how it was achieved.

Key value of the case involves critical assessment of Ikea’s internationalization and recommendations to maintain growth.

Outcome of the study was that Ikea is dependent on certain growth drivers that include company values, prices, product range, places of distribution and advertisement on the internal side of the company and governmental actions, growth of the population, mergers and sustainability on the external side of the company. Ikea’s growth strategy seems to be very successful.

Nevertheless, the company has to face several challenges regarding its internationalization process. Through governmental regulations, too superficial market research and different tastes of customers that lead to a necessary adaptation to local circumstances, Ikea needs to avoid being outperformed by its competitors.

1 Introduction

The Ikea Group which is owned by Stichting INGKA Foundation since 1982 is the largest furniture and home article retailer worldwide (Ikea Group, 2015). The company from Småland in Sweden produces ready-to-assemble furniture and furnishings in a Scandinavian style (Kotler et. al., 2012, p. 3). With its 315 stores in 40 countries Ikea made a sales volume of EUR 28.7 billion in 2014, which was 5.9% higher than in the year before. Additionally to the stores with 700 million visits, the websites recorded a number of 1.5 billion visits in the same year (Ikea Group, 2015).

Ikea follows an extreme cost leadership strategy with certain adaptations to specific foreign markets like China or the USA. In 2014 Ikea opened 12 new stores in 10 countries which shows the dimension of the company’s growth (Ikea Group, 2015).

In this case study an analysis of Ikea’s growth strategy should be developed including possible threats through the company’s internationalization strategy to better understand Ikea’s success.

Therefore, in the first chapter certain methods are introduced that are used during the case study including growth drivers, 4 P’s and internationalization strategies.

Chapter two applies some of these methods as it describes and evaluates Ikea’s internal and external growth drivers.

In the next chapter a detailed analysis of Ikea’s internationalization strategy is given including certain threats and problems that occur due to the expansion.

Finally, recommendations are developed how Ikea can maintain its success and market power in a customer- and company-oriented way.

2 Models

In a first method a differentiation between certain growth drivers is made to explain Ikea’s growth strategy: internal and external growth drivers. Internal growth drivers refer to actions and plans that derive from inside of the company. In opposite external growth drivers describe takeovers or mergers and the company’s environment.

To illustrate the growth strategy of Ikea, the 4 P’s of the marketing mix are used. The 4 P’s describe generally the internal marketing mix of a company regarding product, price, place and promotion (Kotler et. al., 2012, p. 4). By analyzing these factors and comparing advantages and disadvantages, the growth strategy of Ikea is examined and evaluated.

The global adaptation of the company requires an explanation through the internationalization strategy. In this context Ikea will be assigned to either a standardization or an adaptation strategy. Standardization refers to economies of scale which are created through mass production and same production and management practices worldwide. In opposite adaptation to local circumstances gets important in physical further markets in comparison to the market of the home country. Sometimes a certain degree of adaptation leads a company to even higher successes, which can be seen in the following example of Ikea. A last method consists of the comparison between the market entry strategies waterfall and sprinkler strategy in association with internationalization. Whereas companies using the waterfall strategy prefer a sequential market entry from physically near to physically far markets, the sprinkler approach is used when entering several markets at the same time. The waterfall strategy contains less risk than the sprinkler strategy as expansion can be planned and initial costs of the entry are lower. Nevertheless, the sprinkler strategy is used especially in case of important firstmover advantages through quick market entries (Kotler et. al., 2012, p. 71).

3 Growth Drivers

Underlying its extreme growth, Ikea developed certain growth drivers that made this growth possible and increasing. These are either internally caused by the company or externally by the market environment. Even in the recession years after 2008, Ikea maintained to be successful by selling cheap furniture that the people could afford. Although the company’s competitors faced high declines in sales, Ikea was able to build 15 new stores (Kotler et. al., 2012, p. 3). The following chapter explains what the company did to achieve this stable growth.

3.1 Internal Growth Drivers

According to its vision “to create a better everyday life for the many people” by creating a wide range of products at low prices, so that every person can afford them, Ikea has a range of about 9,500 products that are sometimes even 50% cheaper than products of competitors (Grant, Jordan, 2012, p. 32; Dahlvig, 2012, p. 74). The company’s 12 inhouse designer and 60-70 external designer launch about 2,000 new products worldwide every year (Hiiemaa, 2015). But Ikea’s product range is not only wide in numbers, also in functions. Although the products are connected by the unique Scandinavian design, there are products that are suitable for every occasion and room in a house or apartment like kitchens, toys or even plants (Dahlvig, 2012, pp. 63-64). By creating this wide range, the company makes sure that every customer finds something to buy, even if it is just a candle. By clever solutions adapting to the problems of the customers with small rooms, Ikea manages to attract many people in cities where living space is limited. As the number of people who live in big cities will increase, e.g. by 5% in Tokyo (Statista, 2014), this represents a strong growth factor.

A second growth driver of Ikea’s product range regards the self-assembling of the furniture. Ikea has the assumption that a customer who wants to spend less on products is also willing to take part in the sales process. This includes the self-transportation, the selfassembly and even the introduction of self-checkout (Dahlvig, 2012, p. 93). By this method, Ikea keeps its own costs low at the same time as providing a purchase experience for the customer. For the customers who do not want to be integrated in that way, the company also offers transportation or installation and construction of the ordered furniture. Nevertheless more people complain about the difficult or often incomplete manuals of furniture, the so-called “husband-killers”, that take far too long to be put together. Although this is tested by new employees, the criticism still remains (Kowitt, 2015; Harrison, 2012).

Ikea is a standardized retailer which involves the same product range and strategies worldwide. With only little adaptations in physically further markets like Asia, the company is able to grow through economies of scale and mass production effects (Grant and Jordan, 2012, p. 393). Practically every store is standardized regarding layout and size of the sale areas, materials, equipment or even management techniques. The consequential improvement of productivity by learning effects and product availability is an important growth factor for Ikea and supported by the 5% productivity increase each year (Dahlvig, 2012, pp. 92-93). The disadvantage of the standardization strategy is that it cannot be adopted everywhere and leads to difficulties as depicted in the next chapter.

Ikea’s customers want more than purchasing the products of the company. They want an experience including the Swedish lifestyle and authenticity that Ingvar Kamprad, the founder of Ikea, implemented in the company. This lifestyle distinguishes itself from competitors with its simplicity, practicality and informality (Kotler et. al., 2012, p. 3). As Ikea provides next to its retail store also a children’s ballroom, a restaurant and different family activities, the company creates a unique shopping experience which makes the customers stay longer in a store. In Kungens Kurva for example a shop visit lasts on average one and a half hours (Dahlvig, 2012, p. 64). Due to these factors the growth of Ikea increases steadily.

The main growth factor of Ikea represents the pricing strategy. Before producing a product, a target price is set that needs to be achieved by the suppliers (Hiiemaa, 2015). Ikea’s product developers work closely with suppliers to ensure that the low prices are realized already at the production phase. The company’s main strength is the ability to create good quality at really low prices that should be at least 20% below the prices of competitors (Dahlvig, 2012, p. 63). Ikea uses global sourcing next to the invention of the flat-pack-system with the cheap material cardboard and the integration of the customer (Grant and Jordan, 2012, p. 378). These factors lower the costs of the company and increase its sales volume and thereby growth.

Also the placement of the stores contributes to Ikea’s growth strategy. As those are placed along highway or interstate routes in places outside the big cities, the visibility of the blue and yellow outside increases whereas location costs decrease (Grant and Jordan, 2012, p. 393). The network of 2,000 suppliers is mainly located in low-cost nations like Poland or Russia to keep production costs low and guarantee specific products with close availability of raw materials. However, the control of the processes and products of these many suppliers costs a lot of time, is difficult to optimize and gets even more complex with increasing globalization of the company (Kowitt, 2015).

3.2 External Growth Drivers

Next to the internal growth drivers, also external growth drivers affect Ikea. Due to governmental actions and retail-friendly policies in China, Ikea could become successful by even providing 70% lower prices than in the rest of the world. One reason is that raw materials like wood are purchased at lower than the average price. By 2009 about 20% of all purchases from Ikea came from China. In addition to the production in Poland, these two countries contributed 40% to the Ikea sourcing which guaranteed low costs for Ikea (Dahlvig, 2012, p. 81). Nevertheless this cheap work lead to unethical ways of labor. In the nineties the company was blamed for example to support child labor on the supplier’s production sites in Pakistan (Dahlvig, 2012, p. 37).

Another factor is that China liberalized its private household market that lead to an increasing number of people needing furniture because new apartments were built around the big cities (Jungbluth, 2006, pp. 134). As China had a constantly growing middle class from 3.6% of the overall population in 2005 to 10.8% in 2010 (Statista, n.d.), more people from Ikea’s target group were attracted to the small prices, high quality and suitability of the furniture for smaller homes. The problem of the stores in China was that the customers rather came for the atmosphere or to copy ideas instead of buying something.

As the prices were too high for the Chinese people, they sketched the furniture they saw in the stores and manufactured it for a cheaper price (Jungbluth, 2006, p. 138).

After production problems with its suppliers in Poland and Russia which could not keep the low production prices, Ikea founded and bought several furniture factories to create a just-in-time production that increased the flexibility of the company (Jungbluth, 2006, p. 127). In 1991 Ikea finally bought the Swedish company Swedwood to create its own production facility, that manufactures and distributes furniture (Grant and Jordan, 2012, pp. 381-382; Jungbluth, 2006, p. 127). In 2009 the Swedwood Group was responsible for almost 15% of the total purchase volume of Ikea (Dahlvig, 2012, p. 82). Nevertheless Ikea faces serious competition from other Scandinavian producers and low-cost manufacturers from Asia, especially China (Grant and Jordan, 2012, p. 378). Sources of competition represent not only other retail companies but also technology innovators or holiday providers (Harrison, 2012). Therefore the company needs to reduce its prices even more than before.

Ikea is a company that is able to overcome entry barriers in foreign countries. In China a cooperation with a Chinese company including a Joint Venture helped the company to get faster approvals for the store in Shanghai. The franchise system reduced the risk of Ikea’s internationalization further as the franchisees opened the stores under own risk and paid for the use of the Ikea concept (Jungbluth, 2006, pp. 103-137). The problem of franchising is that lacks of performance in one store can have damaging effects on the whole brand Ikea (Grant and Jordan, 2012, p. 387).

As the importance of environmental topics increased steadily and the customers got more sensitive to sustainability of production and products, Ikea managed to adapt strict codes of conduct that regulated the management of forests in a responsible manner. Although Ikea is eager to achieve low costs, this should not be done at cost of the environment and the forests, where the company gets its wood from (Grant and Jordan, 2012, p. 377). Nevertheless Ikea had to face a scandal as in the eighties high amounts of formaldehyde were found in its products which had not been properly controlled during the production process (Dahlvig, 2012, p. 37).

4 Difficulties of Internationalization

Ikea’s internationalization strategy consists out of three steps. In a first attempt the company tries to identify markets that have the potential of high sales volumes conducting a detailed market research. After buying an area in the outskirts of a big city in respective market with a good connection to highways or interstates, an expert-team of trusted Swedish managers is sent to that country for supervising the new store and managing operational tasks. The third step involves clustering more stores around the newly opened Ikea store to create a small “city” (Grant and Jordan, 2012, p. 365).

In addition, Ikea’s internationalization is characterized by a typical waterfall strategy as depicted in the following graph.

Physically near Physically far

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Ikea’s Waterfall Strategy

Source: Own representation based on Inter Ikea Group, n.d.; Miller, 2004

The company started its expansion in physically near markets such as Norway in 1963 followed by Denmark in 1965 and Switzerland in 1973. Not until a lot of market research has been conducted the company expanded to physically further markets as China in 1998 through the franchisee of Inter Ikea Systems BV, the Ikea Group (Inter Ikea Group, n.d.; Miller, 2004).

While being successful in most of the countries, the standardization strategy of Ikea had to be changed in a few countries as problems occurred. In Japan living space is restricted that lead to Ikea’s beds being too big for the people’s small rooms. The company needed to create smaller beds for this specific market.

In 1985, when Ikea opened its first store in Philadelphia, the company faced high problems due to a lack of prior market research. Next to high competition in the retail industry of America, the beds in the US are typically bigger and higher than European standards. As the Americans prefer King- or Queensize beds, Ikea had to change its standardization strategy again and develop bigger beds for the American market. The problem was that Ikea needed to import a wide range of its products from Asia or Europe which caused exchange rate risks and high transportation costs. Next to the beds, the shelves were not deep enough, the glasses too small and the sofas too hard (Kowitt, 2015; Dahlvig, 2012, pp. 135-136). Problematically was that through the adaptation to these certain markets, economies of scale, the main concept of Ikea, could be no longer achieved.

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