“intimes when many nations and people face economic hallenges our vision of erating a betr everyday it ‘the many people is more relevant than ever. To make posible furnish uncial, individually nd sustainably ~ even when the economy i gt.” “This was Mikael Onsson, IKEA's Chit Executive, speak. Ing in 2012 while reporting 2 sales increase of 6.9 per ‘cent (to €25.2 bilo), profits of €3 bilion and share ‘Bains in mast markets, At the same time average prices had fallen by 2.6 percent. IKEA had become the war's largest home furnishings. company with 287 stores. in 26 counties and employing 131,000 people. The home furnishings market By the late 2000s home furnishings was a huge market ‘waren with retail soles in excess of $USEOQ bn in items such as fumiture, household tertiles and tor ‘coverings. More than 50 percent of these sales were in ‘umitue stores. Table 1 compares the geographical spread of tha markt and IKEA sales by regio, IKEA's competitors “The!hame furnishings market was highly fragment with ‘campstition cccuring locally ater than lolly. In each repon that IKEA had stores it would typically face com etre of several pes: (© Multinational uriture retailers ike IKEA) al of whom ‘were considerably smaller than IKEA, These included ‘the Danish company yk (turnover ~€2.5 be). Table 1 The gongraphical spread of the market and (of IKEA sales by region Soin se y 38 EB ‘Sauce: The a Soy Companies specialising in jst part of the furniture ‘product range and operating in several counties '5uch as Al fom Germany in ktehens. “» Multtbeanch ret furitue outlets whose sales ware ‘one country such as DFS in the UK. The US ‘market was dominated by such players (eg. Bed, Bath {Beyond Inc with revenues of some $USS bn). © Nonespecialist cornpanis who carried furniture as part (ofa wider produc ange. Inthe UK the largest operatorwas the Home Retail Group whose subsidiary Argus offered seme 33,000 general merchandise products ‘through its network of 340 stores and online sales. Despite this more generalist offering Agus nas number ‘one in UK furniture retalling. General DIY eompanias ‘such as Kingfisher (through 84 in the UK and ‘Castorama in France) were attempting to capture mace ‘of the bottom end ofthe furntue market. ‘© Small andlor specistisedretalers andr manufacturers. “These accounted for some 90 per cant of the market in Europe. IKEA's approach IKEA had been founded by Ingvar Kamprad in 1943 in ‘the small Swedish town of Almmult. Gut aid nat open Fs frst major furniture store until 1958. The company’s ‘success had been achieved through the now legendary IKEA businass medel ~ revolutionary in the furnishing Industry ofits early years (see Table 2). The guiding business philsopty of Kampard was that of improving ‘the evenday tite of people by making products more ‘affordable. This was achieved by massive (20 per cent +) reductions in sales pees ve competitare which, in tur, required aggressive reductions in IKEA's costs Reasons for success Im his book The IKEA Edge published in 2011, Anders Dahlvig reflected on the reasons for IKEA's success Table 2 IKEA's ‘upside-down’ business model ‘before, during and after his period as CEO (1999-2002), He felt that the success of IKEA was built an a clear ‘and detailed understanding ofthe furnishing market and IKEA's success criteria, ‘wens success hs grown tom stability and consistency raring he bgp tat with eto ion an ino ion in the det (ovation rather than revolution. (OWENS fee success criteria were 1. Desig, function, snd quality at low ces; 2UsiqueSeandngvie) design, 2. inspiration, ideas and complet sobtins¢. Eventing ‘in on place; 5. “A day ou the shopping experience YOu may wel ay hath re sia othe of most ‘companies. Te difrene, in my epinon shat KEA is ‘much bate at liver usta needs than are ater retilers.. Most competitor focus an st moat tno ofthese cistomer needs High-steet shops focus on design and inspiration. Ou-attown low-cost retailers focus on price. Department stores facut on ‘chaie, The reat strength of MEA le inthe contination tal five. IKEA's competitive strategy DDahivig explained IKEA's approach to competition: “ou can choose to ‘adapt your company’s product range to the martts you are operating in or you can choose to shit the markers preference towards your own range and stye. IKEA has chosen the fatter By doing this, the ‘company can mains 3 unique and distinct proile. Design Modean (Swedish) Target households 7 Fis with enioren Sve of hap ‘Soll speialist stops A furnishing ems in bg tres Location Cty centre oucottone Product focus esi er "Rw at Marking averting catalague (ee) Price ‘gn Low Product sembly Ready sere Flat pack ~setassembly Suing Local Glonat Beard Macutscuers MEA Final tes ross margin Sales revenue Overheads ten high Frugal —no pees Tis cme ms presaed fran Ske, mets rofesr cfSategc Manages Seti Bune coos tended mabe ar‘his is, owever, a mare diticut path to follow: ©. .& ‘significant understanding of the customer's situation at ‘home fs the basis fer MEA's product development and the creation ofthe main media thraugh which the product ‘is preseated to the public’ *...For most compettars, hnavng the lowest price seems to mean being 5 t 10 per ‘cent cheaper than the competition on comparable prod- ucts. AL IKEA, tis means being 2 minimum 20 per cent ‘cheaper and often up to 50 per ceat cheaper than the ‘competition. Global expansion ‘By 1999 IKEA was operating 158 stores in 29 countries “with a turnover the equivalent of €7.6 bn, Despite IKEA's ‘strong lobel position Dahivig fet there wes much appor- “unity and need for improvement: “0 far growth has come trom going “wie but thin”. We ‘have stores in 29 counties but with limited market share ‘in mast markets. Now me enter anew phase where be focus wil be to go “Heep” and coocentrate on out ‘exisling markets. ..We shall focus on continued strong volume gromth, 10 percent pa for 10 years” He explained his resoning: ‘wny make the change? First of all, we ware impelled by the changing character of the competion. For many years, te competion had been very trapmented and Tea intra, Howave, may of the very bi atl! eam- (panes ware ahing eatagy. From bag esl thay ware ashing toa pla expansin, atleast in the emerging ‘markets lke China, Rusia and Eastern Europe. They were sto brusdoning tee product range, maving away ‘rau ood oe tradtoas DY peoduets towards ars Nome fumishing. Theus wore ig companies with meh mare ‘musele than KEX's Wadioaal competitors. They had both ‘iagnela resources and operations etling compatense ‘8 par with IKEA. Ons wy to asus hem frm extas- grt the om turnbbing arena wus 0 aggressively ‘reduce priest and Ineresse the company’s presenes with ‘more stores in ll local markets in the counties where ‘KER seas operating. Market laiderohip in axeh market wat We abeetve,Anatar reason far Be sit in sestagy ‘was cost elilency. Growing sales im exating stores Is the most cost-elicient way to gow the company” ‘Managing the value chain Dasvig explained that IKER'S strategy crucially requires ‘he ‘design anc contol of EA's wider vale Chai in etal: “The secret Is the coato! and coorinatin ofthe whole ‘value chain fom raw material, production, and range “development, te distribution int stores, Most er com- panies working in the retail sector have conto either of ‘the retail end (stores and distribution) ar the product ‘design and production end. IKER's vertical integration makes ita conpiex company compared to most, since it ‘owns toth production, range development, cstriation, and stores... This included backward lateration by _entending the activites of Swestwood (EA's manutactur- Ing arm) beyond furniture factories, ito control over the ‘am materia, sam mil, board suppliers, and component ‘actanies” ‘(The chatenge)... Isha to combine song specialist functions within “oae” company view aad approach ... diferetation through conalliag the whole value chain | Ney to success. Tere ae some very important actors ‘hat have helped keep the company together: 2. strong ‘vision, the business idea, company values, a common stave concept, a common product range, and a common distibution and buying organisation ‘cent. Bet than planned margins compensated fortis, and thes the profit level wat in line withthe plan. Neverteless, 2 low price company must be a low cost IKEA first opened ia China in 1936 and i had eight stores by 2012 The Chinese market was extremely challenging fo @ company that hed built globe! success ‘tveugh standardisation. The main problems were tat in ceveloping markets IKEA products were expensive ‘elotive to local competitors and the consumer stopping expectations were centred on small, local shops and personal service. So inevtehly there had 10 be some ‘Nexbility in approach by IKEA. For example, It presented ‘an image as exclusive Western European interior design specialists ~ popular with younger, atfluent, city dwellers. ‘The shops were small than usual for IKEA and typically ‘ares city centres. Because DIY was not well ceveloped ‘in China IKEA offered nome delvery and assembly services. Catalogues were nly available instore. Crucially ‘ores ware allowed to source alerast 50 per cant lastly (agninst the company average of about 25 per cent) in ‘order to keep prices competitive.‘Questions 1 Identity where and how IKEA has achieved cost leadership. 2 Identity how IKEA has achieved ditferentiation ‘rom its competitors. ‘3 Explain how IKEA tres to ensue thet its Hybrid! “strategy emoins sustainable and does nat become ‘stucin theme’ 4 Yinat ave the fessons trom China about IKEA's seproaeh?