IKEA states in their business idea: "We shall offer a wide range of home furnishing items of good design and function, at prices so low, that the majority of people can afford to buy them"(IKEA 2005). IKEA manage to keep costs low by their superior relationship with their suppliers were they buy low-cost components in huge quantities. Together with efficient warehousing and customer selling service it passes on to customers resulting in lower prices, anywhere from 25 - 50 % lower than its competitors. However, at the same time they manage to operate with 8 - 10 % profit margins, much higher than the industry average (Norman and Ramirez.1993).
We have made a short and simple SWOT analysis to get an overview their capabilities.
High variety offering right range of products
Higher margins than competitors
Economies of Scale
Logistics - inventory management
Long term relations with suppliers
The business culture
Organisational capabilities adapting change
Market leader - Category killer
High service level - few stock outs
Low lead time
Good product informationToo big may increase bureaucracy Franchising higher control cost
Mass marketing expensive
Charismatic leader hard to replace
Search cost for cheaper components
Market surveillance keep up with trends
Expanding Asian market
New technology may lower marketing cost
More focus on environmental issues New trends individualism Time is money people do not have the time to put products together Too dominate defence position man hamper innovation
The key elements to IKEA's winning formula are well known: simple, affordable, functional, high quality, Scandinavian design, an extensive product line, knock-down furniture kits that customers transport and assemble themselves, low cost, unique logistics, huge stores located in suburban areas with plenty of parking space, day-care facilities and restaurants. To focus only on low cost and low price is to miss the true significance of the companies' business innovation capabilities. IKEA has systematically redefined the roles, relationships and organizational practices of the furniture business, so they can offer lower prices and the right variety of products. IKEA has been able to grow globally in an industry that traditionally was a fragmented and dominated by local actors.
In Theodore Levitt's famous article Marketing Myopia (1960), he stresses that it is important to define and to know what need to fulfill. The founder of IKEA Ingvar Kamprad had interest in the home furniture industry primarily because of social reasons. He wanted to respond to increasing prices of home furniture. Prices grew 41 % faster than other household goods from 1935 to 1946. He commented that:" IKEA's aim is to change this situation. We shall offer a wide range of home furnishing items of good design and function at prices so low that the majority of people can afford to buy them ." IKEA's vision "To create a better everyday life for the majority of people" reflects which needs IKEA tries to fulfill. The main purpose is to make the customers life easier and better, and not to sell furniture as a main goal.
IKEA's revenue for 2003 was 11.300 million Euros and with an annual growth of more then 20 %, an achievement they managed every year since 1997. To understand how IKEA still manage to keep their annual growth over 20 % it is important to see what value they are creating for their customers. First, they maintain to involve the customers in their business concept. It offers a brand new division of labor; if customers agree to take on certain key tasks traditionally done by manufacturers and retailers -- the assembly of products and their delivery to customers' homes then IKEA promises to deliver well-designed products at substantially lower prices. This kind of distribution and logistics make the margins better and...