Opening case study IKEA

Established in the 1940s in a small village in Sweden by Ingvar Kamprad, IKEA has
become one of the world's leading retailers of home furnishings. In 2012 it was ranked
28th out of the world's top 100 brands by Interbrand, topping other well-known brands
such as Sony and eBay. In 2012, IKEA had 338 stores and 154,000 co-workers in forty
countries, with annual sales of more than €27.5 billion. IKEA's strategy is based on
selling standardized, Swedish-designed, self-assembly furniture products at low price.
The IKEA business idea is: 'We shall offer a wide range of well-designed, functional
home furnishing products at prices so low that as many people as possible will be able to
afford them.' IKEA targets price-conscious young couples and families who are willing
and able to transport and assemble furniture kits.
By the early 1960s the Swedish market was saturated and IKEA decided to expand its
business formula outside Sweden. IKEA's CEO, Anders Dehlvin, noted: 'Sweden is a
very small country. It's pretty logical: in a country like this, if you have a very strong and
successful business, you're bound to go international at some point. The reason is simple-
you cannot grow any more!
IKEA opened its first store outside Sweden in 1963 in Norway. In 1969 it opened its
second international store, in Denmark. It moved outside the Scandinavian countries
when it opened its store in Switzerland in 1973, and then entered a new country every
couple of years. 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.
IKEA has over 2,500 suppliers scattered in over sixty countries. IKEA works closely with
its suppliers by helping them to reduce costs, and sharing technical advice and managerial
know-how with them. In return IKEA has exclusive contracts with its suppliers. These
suppliers produce highly standardized products intended for the global market.
IKEA's internationalization strategy in Scandinavian countries and the rest of Europe has
not paid significant attention to local tastes and preferences in the different European
countries. Only necessary changes were allowed, to keep costs under control. IKEA's
business formula is based on low cost and affordability. Adaptation to each country's
local requirements would lead to higher cost of production and subsequently put pressure
on the company to increase its prices. IKEA applied its initial vision-to sell a basic
product range that is 'typically Swedish' wherever it ventures. To emphasize its Swedish
roots, it often uses a Swedish theme in its advertising campaigns, and has a Swedish blue-
and-gold colour scheme for its stores. The firm reaps huge economies of scale from the
size of each store and from the big production runs made possible by selling the same
products all over the world. IKEA's strategy of low responsiveness to local needs seemed
to work. In 1997 its international sales represented around 89% of its total sales. IKEA
sales in Germany (42.5%) were much higher than its sales in Sweden (11%). IKEA's
strategy of not paying attention to local market peculiarities has worked well in Europe.
The company has been able to sell its standardized products across Europe, and as a
result was able to build considerable economies of scale into its operations and maintain a
price advantage over its competitors. The first challenge came when IKEA entered the
Japanese market in 1974 through a joint venture. IKEA faced several problems in the
Japanese market. The root of most of these problems was the company's lack of attention
to local needs and wants. For example, Swedish three-seater sofas were too big for small
Japanese apartments. The Japanese were used to higher levels of customer service and
they were not used to the idea of assembling their own furniture. Even IKEA's Japanese
joint-venture partners were not convinced that IKEA's business model could work in
Japan. Finally, IKEA decided to exit the Japanese market in 1986.
Another major challenge came when IKEA entered the US market in 1985. Although
between 1985 and 1996 IKEA opened twenty-six stores in North America, these stores
were not as successful as their counterparts in Europe. As in Japan, IKEA paid too little
attention to local needs and wants. US customers preferred large furniture kits and
household items. For example, Swedish beds were five inches narrower than those US
customers were used to, IKEA's kitchen cupboards were too narrow for the large dinner
plates typically used in the US, IKEA's glasses were too small for US customers who
typically add ice to their drink and hence require large glasses-it is said that US customers
bought flower vases thinking they were drinking glasses-and bedroom chests of drawers
were too shallow for US consumers, who tend to store sweaters in them. In addition,
IKEA Swedish-sized curtains did not fit American windows, a mistake about which a
senior IKEA manager joked, 'Americans just wouldn't lower their ceilings to fit our
curtains.
As a result of initial poor performance in the US market, IKEA's management realized
that a global strategy should be flexible enough to respond to local markets. The company
then adopted a more balanced strategic focus (giving weight to global and local
concerns). On the one hand, the IKEA subsidiaries are still extensions of the corporate
head office and must closely follow instructions provided from the centre. IKEA still puts
strong emphasis on global market coordination to limit duplication of activities and
capture synergies or economies of scale and scope. The corporate headquarters promote
the same corporate values, operating procedures, standardized marketing solutions
(including important parts of store format and design, and the IKEA catalogue) and the
core product range (e.g. BILLY bookcase range and KLIPPAN sofas) for all IKEA
subsidiaries around the world. The shopping experience for IKEA customers should be
the same at an IKEA store in Sweden, the United States, or Japan.
On the other hand, subsidiaries are given more autonomy to respond effectively to the
local business environment. IKEA is prepared to respond to local concerns in terms of
issues considered by the IKEA executives to be of lower-level strategic importance, such
as local promotional campaigns, pricing of IKEA products, and human resource
management. Hence, a specific IKEA subsidiary can choose to stock certain products for
the local market (e.g. IKEA stores in China have a special set of tea cups for Chinese
New Year), can introduce local promotional activities (eg. the IKEA Family Loyalty
scheme in China), can vary the location of stores (e.g. IKEA stores in China are located
close to public transport hubs, in contrast to out-of-town locations elsewhere in the
world), and can select specific human resource management practices (e.g. on job
rotation within stores or local recruitment).
In the early 1990s IKEA redesigned its strategy and adapted its products to the US
market. A greater customization in the US is made possible by the large size of the US
market, which enables IKEAS subsidiaries in the US to produce kits designed
specifically for the US market in large quantities and hence keep cost under control.
During the 1990-94 period, IKEA's sales in the US increased threefold to $480 million,
and US sales rose to $900 million in 1997.
IKEA has learned from its past mistakes in Japan and the United States, paying a lot more
attention to local tastes and needs-without sacrificing its basic business model. In 2006,
IKEA re-entered the Japanese market, opening five new stores within two years.
Meanwhile, the United States has become IKEA's second biggest market after Germany.
IKEA is expanding into very distant markets such as the Dominican Republic in 2010 and
Thailand in 2012. The company's CEO Sören Hansen is planning further international
investments.
Sources: IKEA's website: www.ikea.com; 'Furnishing the world', Economist (19
November 1994); 79-80; H. Carnegy, 'Struggle to save the soul of IKEA, Financial Times
(27 March 1995): 12; J. Flynn and L. Bongiorno, 'IKEA's new game plan', Businessweek
(6 October 1997): 99-102; 'Ikea has designs to furnish the world', European (19
November 1994): 32; B. Solomon, 'A Swedish company corners the business:
worldwide', Management Review (April 1991); K. Kling and I. Gofeman, 'IKEA CEO
Anders Dahlving on international growth and IKEA's unique corporate culture and brand
identity', Academy of Management Executive (February 2003); P. Indu, 'IKEA-The
Japanese Misadventure and Successful Re-entry', ICMR Centre for Management
Research Case No. 308-270-1 (2008); A. Jonsson and N. J. Foss, 'International expansion
through flexible replication: Learning from the internationalization experience of IKEA,
Journal of International Business Studies 42(9) (2011): 1079-1102.