Key Success Factors
There are at least four factors that contributed to the immense success of IKEA. These are listed as follows:
- the desire to be fiercely independent in order to create products that are low-cost, high-quality and non-conventional;
- the desire to serve others;
- always learning; and
- core values remained intact even after six decades of solid success.
It would be impossible to fully understand the success of IKEA without studying the humble beginnings of the company. It was started by Ingvar Kamprad in Smaland an insignificant region of Sweden. He was not born with a silver spoon on his mouth, in fact his family had to make a living by utilizing a small family farm called Elmtaryd. He started making money on the side by selling Christmas cards to people in his rural village of Agunnaryd. When Christmas is not yet in the horizon he would buy and sell matches. Using the initials of his name and the places that he valued the most he founded IKEA which stands for Ingvar, Kamprad, Elmtaryd, and Agunnaryd.
When Kamprad stubbornly held on to the belief that it should sell at rock bottom prices, his competitors combined forces to drive him out of business. Yet instead of capitulating to their demands Kamprad did something that was almost unheard of during the 1940s and it is to ask manufacturers from other countries to make furniture at competitive cost. Ingvar Kamprad may have started one of the first business outsourcing process before the time of the Internet and before airline industry made it possible to ship cargo quickly and cost-efficiently. In other words no one could have though of such ingenious solution because what Kamprad tried to achieve was never done before in the history of Swedish furniture retail business. But Kamprad was at his element when thinking about creative solutions to his business problems.
This brings the discussion to the first reason why the firm was so successful. Kamprad was committed to remain independent and not merely going with the flow and copying what others were doing. Along with his desire to succeed he wanted to be totally free in making business decisions because he was convinced that there is a better way of doing things, in fact Kamprad believed that his way of doing things will not only make him profitable but will ensure that they will be consistent in delivering affordable and yet high-quality products.
This commitment to provide cheap but quality furniture stems from a belief system that everyone should have a chance to enjoy IKEA-made furniture. It is therefore their desire to serve people that made them go the extra mile and to work real hard in developing solutions to rising manufacturing costs as well as shipping costs. In this regard, the company’s leadership as well their employees has the assurance that they can suggest creative solutions so that they can further enhance customer service. One can argue that the best way to serve their customers is to lower their prices. In an economy where manufacturing costs are escalating on a regular basis one of the best ways to reduce cost is through innovation.
This was clearly illustrated by an inventive solution created by an IKEA employee who proposed that in order to save shipping costs the company can create furniture that can be disassembled, shipped in a system that will be known later as “Flat Pack Furniture”, and then re-assembled again by the customer when they get home. The newly discovered method of delivering products lowered the cost of the furniture while at the same allowed the consumer to participate in the process of furnishing his or her home. It was an instant success but it would not have been made possible if Kamprad did not teach his employees to always look for innovative ways to improve their service. The leadership is also determined to foster an environment where employees are encouraged to follow their dreams.
Related to their desire to innovate is the passion to keep on learning. This can be seen in the regular weekly meetings where employees learn from one another. The company is always reassuring their employees that everyone makes mistakes and as Kamprad said in his Testament of a Furniture Dealer, “Only while sleeping one makes no mistakes.” This has clearly emboldened his employees to seek alternative paths. While they are open to new ideas and they are constantly seeking ways to innovate there are a few things at IKEA that will remain the same for a very long time to come. This is the adherence to company values:
- Togetherness
- Cost-Consciousness
- Respect
- Simplicity
The company is very flexible and thus able to face adversity. Yet internally, it remains the same because according to Steen Canter, a former IKEA executive, Kamprad, “…has a core group of people who are culture bearers for the brand, who will go out and fight World War II for him” (8). This is the reason why IKEA can open 276 stores in 36 countries and yet maintain the same level of commitment, passion and success.
This is also the reason why they can open at countries like Japan, Russia, and China and yet not allow the dominant culture to change them. Instead the company was able to maintain its core values and philosophy which are proudly Swedish even if an IKEA outlet is totally immersed in a different national culture. This means that customers can expect the same level of service in a newly opened store in Russia just like as if they were in Sweden.
Global Strategy of IKEA
Before Kamprad decided to go global he already had a winning formula. This winning formula was used in Sweden and IKEA was able to achieve unprecedented success as a furniture retailer. Upon closer examination the said winning formula contain elements that will cater to a universal need and it is the customer’s desire for cheap but quality products. This is the main reason why IKEA was able to expand globally. Moreover, IKEA was able to move fast and able to leave its competitors behind. In the 1940s when it was still a fledgling company IKEA was forced to innovate. Their decision to design their own products and then identify manufacturers outside the country to produce furniture at lower cost, gave them the competitive advantage to sell at lower prices while enjoying significant profit margins.
It would be a Herculean task to challenge IKEA. Consider the following figures:
- revenues reached $27 billion in 2007
- European market constituted 82% of sales
- while the bulk of company revenues came from Germany, US, France and UK, most goods were manufactured in China, Poland, Italy, Sweden and Germany such that 9,500 items were manufactured by 1,350 suppliers in 50 nations
It would be difficult to compete with IKEA because it has already created a system where items can be manufactured cheaply in places like China and Poland while at the same time it can also offer high-quality products from manufacturers in Italy and Germany. This means that before globalization became a buzzword, it was already a pioneer in terms of creating a network of suppliers and international stores that in turn resulted in “economies of scale” that will allow IKEA to generate handsome profits.
Aside from creating high barriers of entry for other competitors, IKEA was able to solve the problem of the “bargaining power” of suppliers. Early in its history Kamprad was already able to solve the problem posed by suppliers that can unite and work against IKEA. There was an attempt to boycott the fledgling company but Kamprad was able to think of a creative solution that forever freed them from the effects of “supplier bargaining power”. Current suppliers will never be able to form an alliance against IKEA because these suppliers are scattered all over the world.
IKEA was also able to expand globally because its main strategy was to focus on urban centres. Kamprad decided to open stores only in places where there is high volume traffic. It also employed a very conservative business approach where they only invested heavily if assured of productive gains. But the most significant business strategy was to make sure that IKEA’s corporate culture will shine through in international markets. This means that IKEA stores will not adapt to prevailing conditions and trends. They will continue to exercise what they believe to be their core values.
IKEA was therefore not content to simply hire employees from the local workforce. Kamprad believed that it would be impossible to establish an IKEA store, say for instance in Japan, if no one knows the core values shared by top management of the company, down to the rank and file employees.
Therefore, Kamprad made it a point to send veteran employees to manage international stores. One should expect that every time there is a new IKEA store outside of Sweden, the company will spare no expense in sending their home-grown talent to supervise it until it is ready to be left on its own. Aside from sending their veteran employees, the company handpicked those who already had experience opening stores abroad. What they learned while working in foreign soil gave them the ability to anticipate what will happen in a new location. They have one goal and it is to ensure that Kamprad’s vision will remain the focal point of the business establishment, even if it is located thousands of miles away from headquarters.
Aside from sending in his best troops to establish the proper system and ensure that the same corporate culture exist within IKEA stores located as far as Russia, China, and America, Kamprad also believed that things can be improved if the flow of communication can be enhanced in order to increase knowledge. This can be done by using already established systems like sharing employee experiences using the corporate intranet, company manuals, a staff magazine, information-laden wallpaper etc. Information coming from expatriates was used to prepare them for future store openings.
It would be extremely difficult for new entrants to come in and compete with IKEA in a global scale. Yet even those who are already established in the retail furniture business will find it hard to take away IKEA’s share of the market. IKEA was one of the first companies in the furniture business that utilized a business outsourcing process. They were very successful in creating business partners in countries like China and Poland where they engage in a mutually beneficial enterprise of allowing furniture manufacturers from these countries to build their designs allowing them to reduce their expenses. If a new entrant or a competitor would try to copy this model they would have to spend a great deal of money in order to start from scratch and like IKEA build a network of furniture manufacturers in different countries.
Environmental and Other Issues
IKEA made it clear that it is part of their duty to take care of the environment. They believe that taking responsibility for people and the environment is part of doing good business. In other words IKEA is well aware of the concept called Corporate Social Responsibility. This is a mindset that everything is not about money and that a successful company must also learn how to give back to the community and to help in reducing its negative impact to the environment. This is easier said than done and IKEA will always attract criticism from environmentalists and concerned citizens simply because it is a global brand.
It is interesting to hear criticism with regards to IKEA’s decision to open stores in the suburbs. The bone of contention is the traffic problem due to a significant number of vehicles going to and fro IKEA’s store. Critics are saying that they are causing traffic and therefore their “Carbon Footprint” is something that should be dealt with. There seems to be no logic to this argument because there are many supermarkets in the UK and the US that generates the same kind of traffic problems but no one is saying that these giant superstores are destroying the environment. Just because people had to use their cars in order to go shopping, does not mean that the business establishment must be punished for contributing to global warming. It is indeed a ludicrous argument. Thus, the only possible reason why IKEA attracts this kind of criticism may be due to the fact that some of its stores are located in the suburbs.
Even if IKEA chooses to have their showroom in the suburbs this does not mean that they are not mindful of the environment. Besides, even if IKEA will close down their stores in the suburbs, their customers will simply look for an alternative source of high quality furniture. So instead of shopping in the suburbs – near their homes – the customers will have to travel to the city. The longer travel going back and forth from home to the store located downtown would mean more fuel consumption and inefficient use of time and effort. Aside from wasting precious resources, these shoppers are contributing to the demise of the planet.
IKEA consistently demonstrated its desire to give back to the community and to help reduce their environmental impact. This can be seen in how they design, manufacture and deliver their products from factory, showroom, and then to the homes of their customers. The best example of how their ingenious design and creative solutions was able to indirectly reduce their Carbon Footprint, can be seen in the creation of the Flat Pack Furniture. By designing furniture that can be disassembled and shipped in flat boxes IKEA was not only able to reduce cost but it has created a system to deliver more furniture at half the time.
This means that instead of requiring two delivery trucks to deliver a certain number of furniture, the Flat Pack Furniture enabled them to deliver using only one delivery truck. Expanding this idea much further, if their suppliers will have to deliver goods to IKEA stores – for instance China to the United States – it will require less cargo space to deliver the same number of furniture built in the traditional manner. Since there is less cargo space needed then IKEA can move more products in a single trip and this means less fuel and less labour. In other words an efficient system does not only ensure that IKEA will have healthy profit margins but it also means that their Carbon Footprint can be also reduced significantly.
The same philosophy allowed them to make innovations and to continuously strive to find ways in reducing manufacturing and transportation costs. Another major innovation is the LAMPAN. In this design IKEA challenged its people to create a cheap lamp stand and of high quality and beautiful design. They were able to come up with a product where the lampshade was also used as the bucket for the lamp foot. So when packing the lamp stand it would be easy to reduce it into something much simpler and therefore requiring only minimal storage space. Again, this is a major reduction in transportation cost. With regards to the environment it will require less fuel and less material to pack and ship the said product.
According to IKEA one of their major philosophies is that they “design the tag price first”, this means that their main goal is to create furniture based on low prices. They had to review their whole production process and determine how they can build something cheaper than what their competitors are offering and yet design a product that will make customers feel that they got their money’s worth. It is therefore important to know if low wages, working long hours, and hiring underage workers are part of the cost-cutting process. According to IKEA the company is committed to take responsibility not only for the environment but also for its people.
The mere fact that IKEA would like their employees to contribute, and at the same time encouraging them to attempt greater things for the company could only mean that IKEA’s business leaders, value its employees. A company that treat their people with respect will find it easy to take responsibility for the environment. One good example of this corporate culture is the creation of a tabletop using materials that was supposed to be used for making wooden doors.
An IKEA product developer was touring a door factory and the use of board-on-frame construction wherein a layering of sheets of wood over a honeycomb core created a lightweight and sturdy design that at the same time has minimal wood content. Again IKEA demonstrated its ability to hit two birds with one stone – to increase profit and at the same time reduce its environmental impact.
Porter’s Diamond
Every organisation cannot be best at everything and therefore have to focus on their strengths and what they are good at. In the case of IKEA, Kamprad realised this truth very early in his career as a furniture maker. He realised that in order to be one of the best furniture retailers, IKEA must learn to make its own design and then manufacture their own products. In this way, IKEA can assert control in every phase of the production cycle including the marketing phase. Yet there is only one problem, Kamprad realised that the company could not maintain its low prices without having to reach out to manufacturers outside Sweden’s borders. In other words Kamprad had to find partners around the globe that will be able to deliver high-quality products at low prices.
It is therefore clear that in order to maintain its competitive advantage, IKEA had to outsource its manufacturing needs. This means that IKEA had to acknowledge that it will not be able to produce affordable and yet high-quality products if they will continue to control the manufacturing process. IKEA decided to focus on what it does best and it is in designing innovative products like the LAMPAN and the tabletop made from materials for making doors. In this manner IKEA was able to free itself up to focus on more important matters.
IKEA’s success could also be attributed to its ability to understand demand conditions. IKEA fully understood the demands of the customer and it is to buy furniture that are cheap and yet beautifully designed as well as made from high-quality materials. Aside from knowing what their customers are looking for, IKEA also made sure that they establish their presence in urban centres and countries where there is a health and large market. This is the reason why its revenues are driven by purchases made in the UK and other European countries where there is a great demand for innovative products.
While it is true that one must focus on his strength it is also wise to recognise the strength of others and then if their abilities can complement ones weaknesses then it is prudent to develop business partnerships. IKEA was one of the first companies who used business outsourcing tools to streamline their operations. It is indeed much better to recognise that there are related and supporting industries that can enhance the profitability of the company. In the case of IKEA, the manufacturers from other countries are helping them achieve their goals.
Before establishing business relationships with other companies, especially those located abroad, there is a need to fully understand factor conditions. In the furniture manufacturing and retail business the factor conditions that must be looked into are those that are linked to raw materials, workforce, infrastructure, technical expertise etc. So when IKEA partnered with firms located in Hong Kong they are well aware that these firms are located in an area where there is easy access to oil, gas, and coal. These raw materials are needed to run factories.
The same thing goes for Dubai, in this port city IKEA was able to access and fully utilise its well educated work force, its ports, railways and container ports. IKEA also has ties with German firms and this is the reason why the company has access to high-quality engineering. Italy is known for its highly artistic people and by partnering with companies located in Italy, IKEA can tap into a limitless source for design ideas.
It is hard to equate rivalry and competition with success and productivity. Most of the time competition is seen as a source of problems. The competitors cut into the profit margin, especially in the case of price wars. Competition drives the prices down while companies spend additional money to fund research and development. Those who will not innovate can be certain of defeat in the long run. So competition makes life tougher for CEOs and their firms but on the other hand, competition and rivalry keeps business leaders sharp and ensure that the employees as well as the leadership will continue to find ways to improve.
Strong competition can either weaken or strengthen a company. A strong competitor sets a high standard for many. For IKEA there is a need to recognise one significant competitor and then use their level of success to gauge the improvements made by IKEA. IKEA could not afford to compare itself to a mediocre furniture retailing company. By doing so IKEA may think that is already at its peak when it is not. But if IKEA will compare itself to other successful furniture retail companies then it will see areas that require improvement.
Still there is a downside if IKEA will adopt the principles gleaned from Porter’s Diamond. IKEA can be so successful that it can distance itself from the rest of the competition. IKEA can find itself at the top of its game and then the inevitable thing may happen. An organisation without a worthy opponent or rival can easily become complacent. There is therefore a need to identify successful companies in the furniture business so that IKEA can compare itself to other companies that are more successful. In this way IKEA’s business leaders will always strive to find ways to improve their company.