Case Study IKEA

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For the exclusive use of J. Yu, 2018.
9-504-094
REV: SEPTEMBER 14, 2004
YOUNGME MOON
IKEA Invades America
In 2002, the IKEA Group was the world’s top furniture retailer. With sales approaching $12
billion, IKEA operated 154 stores in 22 countries and serviced 286 million customers a year. (See
Exhibits 1 through 4.) In the United States, IKEA had 14 stores, with plans to open as many as nine
more in 2003. There were a number of factors that distinguished IKEA from other furniture
retailers—its stores were strictly self-service and featured such amenities as playrooms for children
and Swedish cafés, and all of its furniture came unassembled (customers were expected to put
together the furniture on their own)—yet there was no question about the company’s success; when a
new store opened, it was not unusual for thousands of shoppers to line up on the first day.
Company Background
IKEA was founded in 1943 when 17-year-old Ingvar Kamprad decided to start a local catalog
company using some money his father had given him.1 Initially, the company sold basic household
goods at discount prices; in 1947, however, Kamprad began selling home furnishings. Six years later,
Kamprad opened his first furniture showroom, and two years after that, IKEA began designing its
own low-priced furniture. In 1958, IKEA opened its inaugural store, in Almhult, Sweden; at 6,700
square meters, it was the largest furniture display in Scandinavia at the time.
By the time IKEA opened its flagship store in Stockholm in 1965, IKEA had become the favored
furniture-shopping destination for price-conscious Swedes. The 45,800-square-meter flagship—
which ultimately became the prototype for all of IKEA’s retail outlets—was inspired by New York’s
Guggenheim Museum and featured a childcare center, a restaurant, a bank, and enough parking for
1,000 cars. The store’s magnetic appeal was apparent from the start; literally thousands of Swedes
showed up on the first day. Before long, IKEA was opening similar low-priced furniture stores in
countries beyond Scandinavia, first in Europe, and then in both Asia and North America. (For a more
detailed history, see Figure A below.)
1 The name IKEA came from Kamprad’s initials combined with the first letters of the names of the family farm (Elmtaryd) and
village (Agunnaryd) where Kamprad was raised.
________________________________________________________________________________________________________________
Professor Youngme Moon prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for
class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management.
Copyright © 2004 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
This document is authorized for use only by Jialiang Yu in Strategic Marketing 2018_5500 taught by PETER BORTOLOTTI, Johnson & Wales University from March 2018 to September 2018.
For the exclusive use of J. Yu, 2018.
504-094
Figure A
IKEA Invades America
Significant Events in IKEA’s Early History (excerpted from the IKEA Web site)
Date
Event
1926
The founder of IKEA, Ingvar Kamprad, is born. He was raised on a farm called
Elmtaryd, near the small village of Agunnaryd. Even as a young boy, Ingvar knew that
he wanted to develop a business. He started by selling matches to neighbors from his
bicycle. He found that he could buy matches in bulk very cheaply from Stockholm and
sell them individually at a very low price but still make a good profit.
1943
IKEA is founded by Kamprad. In 1943, when Ingvar was 17, his father gave him a gift
for succeeding in his studies. The gift was used to establish his own business.
1947
Furniture is introduced into the IKEA product range. The furniture was produced by
local manufacturers in the forests close to Kamprad’s home.
1951
The first IKEA furniture catalog is published. Kamprad soon made the decision to
discontinue all of the other products and focus directly on low-priced furniture, and the
IKEA we know today was born.
1953
The furniture showroom is opened in Almhult. For the first time customers could see
and touch our furnishings before ordering.
1955
IKEA begins designing its own furniture. There were several reasons for IKEA to start
designing its own furniture. But what actually led to this—possibly our best move ever—
was quite ironic. Pressure from our competitors caused suppliers to boycott IKEA. This
reaction to our early success required us to begin designing our own furniture, and
became the basis for future growth. Ultimately, this would lead to innovative design and
improved function at lower prices. Then, by lucky inspiration, one early IKEA employee
decided to remove a table’s legs so it would fit into a car, and to avoid transport damage.
From that point on, we began to think in terms of design for flat packaging. Which led to
even further price reductions for our customers.
1956
IKEA begins testing flat packages. Designing products so that they can be packed flat
and assembled by our customers greatly reduced their cost. This was obvious from the
very first day we took the legs off a table and put it in a car. We can ship more items in
one truck, less storage space is required, labor costs are reduced and transport
damages are avoided. For the customer, this means lower priced products and easy
transportation home.
1958
The first IKEA store is inaugurated in Almhult. 6,700 square meters of home
furnishings! At the time, it was the largest furniture display in Scandinavia.
1965
The IKEA store in Stockholm is opened. Thousands of people waited for the opening
of our flagship store. The 45,800 square meter store has a circular design, inspired by
New York’s Guggenheim Museum. The success created huge capacity problems in
serving the customers. By opening the warehouse and letting people serve themselves,
an important part of the IKEA concept was born.
Source: Used with the permission of Inter IKEA Systems B. V.
2
This document is authorized for use only by Jialiang Yu in Strategic Marketing 2018_5500 taught by PETER BORTOLOTTI, Johnson & Wales University from March 2018 to September 2018.
For the exclusive use of J. Yu, 2018.
IKEA Invades America
504-094
By 2002, IKEA was the world’s most prominent furniture retailer. Although the company was
privately held and did not release profit figures, its 2002 revenues approached $12 billion (see Exhibit
1) and its brand was considered to be one of the most valuable in the world.2 Yet despite its success,
IKEA’s corporate culture still retained its pragmatic, cost-cutting sensibility. Waste was considered a
deadly sin at IKEA; employees were constantly reminded to save on electricity by turning off lights
and computers that were not in use, and managers always traveled coach and took buses instead of
taxis if possible. In addition, all of the company’s 70,000 employees were on a first-name basis,
regardless of seniority or position. As one American who worked in IKEA’s Almhult offices put it,
“It’s a little religious or missionary in a sense, but it’s who we are.”3
IKEA’s Product Strategy
At IKEA, the new-product development process was overseen by a product-strategy council,
which consisted of a group of senior managers who established priorities for IKEA’s product lineup.
These priorities were based on consumer trends, as identified by the globe-trotting council members.
Once a product priority was established, a product developer would set the product’s target retail
price using what the company referred to as “the matrix.” The matrix consisted of three basic price
ranges and four basic styles (see Figure B below). Within each price range, the company would
survey the competition to establish a benchmark and then set its own price point 30% to 50% lower
than those of its rivals.
Figure B
IKEA’s Product/Price Matrix
STYLE
Scandinavian
(sleek wood)
Modern
(minimalist)
Country
(neo-traditional)
Young Swede
(bare bones)
high
PRICE
RANGE
medium
low
Source: Case author.
There was a separate matrix for each product type IKEA sold—that is, a price matrix for sofas, a
price matrix for kitchen tables, and so on. In addition to being used to set retail prices, the matrix was
used to identify gaps in the company’s product lineup. By plotting the company’s current product
offerings on the grid and looking for empty spaces, product managers could readily identify market
opportunities.
2 In 2002, InterBrand, a marketing research firm, ranked IKEA 44th on its list of the world’s most valuable brands, ahead of
Apple, Pepsi, MTV, Harley-Davidson, and Xerox. See “The 100 Best Global Brands by Value,” .
3 Quote from Lisa Margonelli, “How IKEA Designs Its Sexy Price Tags,” Business 2.0, October 2002.
3
This document is authorized for use only by Jialiang Yu in Strategic Marketing 2018_5500 taught by PETER BORTOLOTTI, Johnson & Wales University from March 2018 to September 2018.
For the exclusive use of J. Yu, 2018.
504-094
IKEA Invades America
Once IKEA had established the target retail price for the proposed product, the company would
then begin selecting a manufacturer to produce it. IKEA worked with 1,800 suppliers in more than 50
countries, always seeking to balance cost-efficient labor with the company’s product quality
standards. (To save money on labor and production, the company was constantly on the lookout for
opportunities to build supplier relationships in developing countries. See Exhibits 5 and 6 for
details.) IKEA would circulate a description of the proposed product’s specifications and target cost
to its suppliers and encourage them to compete for the production package.4 In some cases, different
product components would be sourced from different suppliers; for example, a supplier in Poland
might produce a chair’s cushion while a Chinese supplier might produce its frame. The two pieces
would only come together in the store, when a consumer would select each piece individually.
Meanwhile, IKEA’s engineers would determine what materials would be used to make the
product. Here too, the focus was always on cost efficiency: the company liked to use high-quality
materials (e.g., expensive wood) on furniture surfaces that were visible and most likely to undergo
stress, and lower-quality materials (e.g., lower-grade wood or particleboard) on surfaces that were
low stress and less visible to the consumer (e.g., inside the drawers). It was not uncommon for a
single wooden product to contain as many as five different parts of the tree.
Once a price point was established, a manufacturer was in place, and the materials decided upon,
the actual design process would begin. Although design was handled in-house, IKEA would once
again use internal competition to select a designer. The company would circulate a product brief to
its designers; this brief would include the product’s price, its function, the materials to be used, and
the manufacturer’s capabilities. (IKEA had a pool of about 10 staff designers, but it also used many
freelancers.) After designers submitted their design proposals, the company would select the best
one.
Because the company’s furniture was designed to ship disassembled, all of its products were
transported “flat”; that is, in flat-packaged boxes. This flat packaging not only made it easier for
consumers to transport the furniture home, it also saved the company on shipping (one of the
company’s mantras was, “We don’t want to pay to ship air”5). In fact, the company estimated that its
transport volume was six times less than if it shipped its products assembled.
Even after a new product ended up in IKEA’s stores, the design process was not necessarily
finished. It was not unusual for IKEA to redesign a product multiple times, with a single purpose in
mind: To maximize the number of products that could be squeezed onto a shipping pallet. Of
course, these redesigns would often increase the product assembly burden on the consumer.
However, the constant focus on shipping frugality also meant that, with each new redesign, a
product’s retail price could remain stable over time (or even go down) while its shipping costs went
down.
Low Price with Meaning
In IKEA’s early days, the company’s focus was primarily on price. Because of this, while IKEA
enjoyed much early success, its low-priced furniture was functional at best, ugly at worst. As one
design expert put it, “If you look at the history of IKEA, in the early years their design was quite
horrible.” In the last decade, however, this had changed as the company had gradually but
4 IKEA owned some of its suppliers, but even these company-owned suppliers had to compete against independent
contractors for IKEA’s business.
5 Quote from Lisa Margonelli, “How IKEA Designs Its Sexy Price Tags,” Business 2.0, October 2002.
4
This document is authorized for use only by Jialiang Yu in Strategic Marketing 2018_5500 taught by PETER BORTOLOTTI, Johnson & Wales University from March 2018 to September 2018.
For the exclusive use of J. Yu, 2018.
IKEA Invades America
504-094
deliberately adopted a more distinct design aesthetic. “They became more and more interested in
design,” the expert noted. “Today if you go to IKEA, you always will find some pieces which are
good designs and very reasonable in pricing.”6
The company’s corporate slogan—“Low price with meaning”—captured this commitment to
offering tasteful, cleverly designed products that did not make customers feel cheap. Even the most
basic products were now fashioned to reflect the company’s philosophy of “democratic design.” (See
Figure C below for IKEA’s vision statement.) And while no one in the company would claim that
IKEA furniture was built for longevity—indeed, customers often discovered that IKEA products fell
apart after a few years and had trouble withstanding anything as disruptive as a move to a new
apartment—most of IKEA’s customers were nonetheless delighted by their unique combination of
form, function, and affordability.
Figure C
IKEA’s Vision Statement: “Democratic Design: Low Price with Meaning”
A better everyday life.
The IKEA business idea is to offer a wide range of home furnishings with good design and function at
prices so low that as many people as possible will be able to afford them. And still have money left!
Most of the time, beautifully designed home furnishings are created for a small part of the population—the
few who can afford them. From the beginning, IKEA has taken a different path. We have decided to side
with the many.
That means responding to the home furnishings needs of people throughout the world. People with many
different needs, tastes, dreams, aspirations… and wallets. People who want to improve their homes and
create better everyday lives.
It’s not difficult to manufacture expensive fine furniture. Just spend the money and let the customers pay.
To manufacture beautiful, durable furniture at low prices is not so easy. It requires a different approach.
Finding simple solutions, scrimping and saving in every direction. Except on ideas.
But we can’t do it alone. Our business idea is based on a partnership with the customer. First we do our
part. Our designers work with manufacturers to find smart ways to make furniture using existing
production processes. Then our buyers look all over the world for good suppliers with the most suitable
raw materials. Next, we buy in bulk—on a global scale—so that we can get the best deals, and you can
get the lowest prices.
Then you do your part. Using the IKEA catalog and visiting the store, you choose the furniture yourself
and pick it up at the self-service warehouse. Because most items are packed flat, you can get them home
easily, and assemble them yourself. This means we don’t charge you for things you can easily do on your
own. So together we save money… for a better everyday life.
Source: Used with the permission of Inter IKEA Systems B. V.
In addition, most customers found the IKEA shopping experience to be immensely appealing.
Over the years IKEA had refined its retail approach, building off the success of its original flagship
store in Stockholm. Although its stores tended to be cavernous—a typical outlet consumed 15,000 to
35,000 square meters—the store layouts were carefully designed. Upon entry, shoppers were gently
coerced into a predetermined path through cheerfully decorated model bedrooms, kitchens, living
6 Alexander von Vegesack, director of the Vitra Design Museum in Germany, who in 1999 mounted an exhibit on the history of
IKEA, quoted in John Leland, “How the Disposable Sofa Conquered America,” The New York Times, December 1, 2002.
5
This document is authorized for use only by Jialiang Yu in Strategic Marketing 2018_5500 taught by PETER BORTOLOTTI, Johnson & Wales University from March 2018 to September 2018.
For the exclusive use of J. Yu, 2018.
504-094
IKEA Invades America
rooms, and bathrooms. The atmosphere was always bright and inviting, and customers were free to
lounge on the model furniture as they made their way through the store. Huge price tags adorned
the goods, and color-coordinated cards offering design tips were displayed in information kiosks
located throughout the store. In many ways, the stores resembled modern theme parks, with their
childcare centers featuring large climbing structures and flamboyant playthings and their restaurants
serving delicacies such as smoked salmon, Swedish meatballs, and lingonberry tarts. As Anders
Dahlvig, IKEA’s group president, put it:
Many competitors could try to copy one or two of these things. The difficulty is when you
try to create the totality of what we have. You might be able to copy our low prices, but you
need our volumes and global sourcing presence. You have to be able to copy our Scandinavian
design, which is not easy without a Scandinavian heritage. You have to be able to copy our
distribution concept with the flat-pack. And you have to be able to copy our interior
competence—the way we set out our stores and catalogues.7
Furniture Retailing in the United States
In the United States, furniture retailing accounted for $67 billion in sales in 2002.8 The furniture
market consisted of case goods (dressers, tables, dining room suites, bedroom furniture, etc.),
upholstered furniture, bedding, ready-to-assemble furniture, and casual furniture. The first two
categories (case goods and upholstered furniture) each accounted for roughly 45% of all furniture
shipments; the other categories together accounted for the remaining 10% of the furniture market.
The market itself was highly fragmented; in 2002, the top 10 furniture retailers were responsible
for just 14.2% of market share. (See Exhibit 8 for details.) Within this market, there was a wide
dichotomy between low-end and high-end retailers. The low end included general discount retailers
such as Wal-Mart, office supply stores such as Office Depot, and discount warehouses such as Costco.
(Wal-Mart was America’s number one furniture retailer, in large part due to its huge retail
footprint—it was the largest retailer in the world.) These general merchandise retailers tended to
aggressively promote their furniture products on the basis of price; this cut-rate pricing meant that

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