M621 - International Marketing " IKEA IN THE USA " Case Study

22 June 1999 Copyright by Gordon Skaljak. All rights reserved. Copyright Information

Question 1. - What has allowed IKEA to be successful with a relatively standardised product and product line in a business with strong cultural influence? Did adaptations to this strategy in the North American market constitute a defeat to their approach?

Background and the "Ikea concept" World's largest home furnishings retail chain. Achieved international expansion in 3 major phases. Summarised its mission as to offer a wide variety, good design, good value, for "young people of all ages". Determination to maintain a standardised product strategy. Does not own manufacturing facilities. Ikea owns distribution and designs furniture. Manufacturers are subcontracted. Cost leadership strategy through high volume production and standardised items. Ikea consumers expected to supply their time for assembling work after purchase, thus becoming "prosumers". What has allowed IKEA to be successful? They were customer focused. As they were not selling through dealers - could obtain feedback directly from customers. Also, Ikea sees itself not so much as a retailer but as a central star of services. What are these universally appealing values and why were these, together with the standardised assortment, successful in so many countries worldwide? It appears that the countries Ikea entered through international expansion had already had a growing number of potential customers who were not tied to a traditional furniture image. They preferred practicality, good value, simplicity, and liked the idea of contributing by giving their time in assembling stage. They also wanted: wide variety available at one place providing assurance that "something suitable can be found, will be nice and simple, practical and of good value". These factors combined with the perceived wide variety and "good" design were appealing in many countries to a similar customer market segment. This concept was also easy to promote world-wide - mainly through catalogues, uniform in layout, with minor regional differences. All that contributed to the making of "universally accepted" Ikea formula. Ikea in the USA Entered market in 1985. Limited success - led to more expansion in 1987. Planning for more outlets came from some compromises - namely Europe's standardised product strategy - had to be adapted for the US. (Ikea adapted 1/5 of the product range, 45% produced locally in the US). Some service adaptations were also made because American customers hate standing in lines, love next-day delivery, etc. Adaptations = defeat to the original IKEA approach?? Streamlined and contemporary "Scandinavian" style was still achieved. What is really the core of the IKEA approach was still maintained through predominantly (4/5) universally accepted product range with local minor adaptations. Many of the locally introduced adaptations were later introduced into other countries' Ikea outlets worldwide - therefore it can be concluded that they were "pilot-tested" in the USA but subsequently

widely accepted. Economies of scale were still being achieved. The main characteristics of the Ikea concept were therefore preserved. Furthermore, for the "typical Ikea customer" it seems that their perceptions can be matched world-wide, throughout Ikea outlets, and in their eyes be seen equal to their expectations (i.e. wide variety, streamlined and contemporary "good" design, for "young people of all ages"). Although the original formula is now a bit more flexible, the core of it is preserved and appears to be working for all Ikea outlets internationally. It can be argued that minor adaptations do not amount to a defeat to their original approach.

Question 2. - Which features of the "young people of all ages" are universal and can be exploited by a global/regional strategy?

The "young people of all ages" described in the Ikea case share similar features universally. Probably the majority of these features can be seen as shared between the Ikea customers in different countries but not always all of them. Also the relative importance of these features would vary between various countries and different customers. Relative to their domestic markets the perceptions can be more or less easily matched with their expectations, hence there can be some minor regional differences in how these globally shared features can be exploited. We can assume, for example, that the majority of Ikea customers like to perceive themselves as either practical or modern or non-traditional or indeed all of these at the same time. By definition, they are not tied to the traditional furniture image and design (relative to their culture) but are more inclined to prefer what they perceive of Ikea's design as "good", modern and streamlined. On their scale of importance, simplicity and practicality are likely to be of much greater importance than "traditional". They like shopping for "good" value and would contribute their work to achieve this if necessary (i.e. selfdelivery of goods and after purchase assembling work). Most of them feel good about contributing their time/work and are likely to get some sense of satisfaction out of assembling the furniture and finishing work. Willingness to contribute time/work in order to gain in achieving a better value is therefore another feature shared universally for this type of customer. The perception of what can be described as "good" value for money can be different on a regional level where paying 240 for a simple bed in Sweden, the UK or USA can be very different from good value in Poland, Hungary or Czech Republic. This can be exploited on a local level simply by ensuring that the perceptions match expectations i.e. that the similar or same product can achieve acceptable price perceived as "good" value. This approach would inevitably mean different profit margins per unit in different countries but in the larger picture what is important is maintaining the overall profitability whilst preserving Ikea universally appealing "good value" formula. The whole experience of Ikea shopping includes viewing, evaluating, choosing, pick-up and self-delivery, self-assembly and finishing work which also encompasses the other associated choice of convenient facilities (i.e. kids playing area, Swedish restaurant etc). All that combined produces the experience perceived by this type of customers as more modern, creative and interesting than the "traditional" - what they probably perceive as "boring" and less practical, "small" and poorer in the variety of choice. This type of customer seeks more entertainment from shopping than just a simple transaction and expects the perceived wide variety of choice and other facilities to be available "all in one place". Again, the perception of what can be considered as "wide variety" and/or "satisfying shopping experience" can be different on a local level. The choice of 8 bedroom designs in the USA can be seen as "small". At the same time this can be perceived as a large choice in some other country. Similarly, waiting in the check-out

queue for 12 minutes in the UK can be perceived reasonable whilst not acceptable in the USA. This can again be modified on a regional level by ensuring that the perceptions match expectations and preserve the Ikea concept.

Question 3. - Is IKEA destined to succeed everywhere it cares to establish itself?

It will depend on how flexible this concept is in various different countries' conditions. It was mentioned that the Ikea concept could be slightly modified regionally without compromising their original formula. This was also explained in the example where modifications are undertaken with a view to preserving this concept whilst focusing on the overall profitability rather than the margins. It would be reasonable to expect that taking this concept further and further globally would have some limitations that could not be easily met everywhere. For example the perception of "good" value: If US$360 (240) for one bed in the USA or in the UK was considered good value, the same product would have to be sold at a lower price in some other countries in order to match the similar customer expectations. Lowering the margins per unit sold can be justified with the overall profitability of the regional shop or the sum of Ikea outlets in a particular country, but this cannot be applied everywhere, as the differences can sometimes be greater than acceptable. In addition to this, more furniture can be locally produced thus increasing the flexibility of this aspect but this might appear as stretching the universally standardised assortment element of the Ikea concept. With further introductions of the Ikea concept globally, in order to preserve the original formula whilst maintaining the overall profitability as a measurement of success, it will always be important to establish a critical mass of potential customers. It will not only be important for them to like the concept but also to be able to afford it and perceive it as good value. In most countries of the developed industrial world and free trading markets, the Ikea concept can succeed. However, it would be unreasonable to expect that this can also be the case if this concept was attempted in the countries with extreme fluctuations in currency exchange rates, hyper-inflation or with rigid importing quotas and restrictions. This can also be the case with the attempts to achieve expansion in the countries with extreme and highly valued traditional perceptions of furniture design if these were much different from Ikea's. All the above scenarios can have more chance of success if the Ikea concept is slightly modified at a regional level. However, the more they are adapted to be acceptable to the region and in order to increase the critical mass of the potential customers - the more they can be seen as departing further from the original Ikea formula. In conclusion, the original formula can be preserved successfully in many countries world-wide with or without minor modifications whilst balancing the regional differences and sometimes even utilising them to preserve the original Ikea concept. However, it would not be reasonable to expect that this approach would be successful everywhere. There is a limit to the number of possible ways of adapting this concept without compromising it in order to successfully establish Ikea in great many countries. Of course, crossing that limit would be another way to achieve a greater chance of success globally on the regional level but it would at the same time increase the possibility of departing from the original Ikea concept.