IKEA’s strategy is based on cost leadership. Across markets where it currently has a presence, products are sold at low prices. Prices are 30 to 50% lower than competing products. Price variations are only a result of fluctuations in exchange rates. This penetration pricing enables IKEA to gain significant market share. Low prices are a result of large-quantity purchasing, low-cost logistics, store location in suburban areas and a DIY approach to marketing.
IKEA also benefits from economies of scale and healthy supplier-firm relationships. IKEA enters into long-term contracts, provides leased equipment and technical support in exchange for exclusive, low-cost manufacturing from suppliers. For new markets, IKEA should retain its price-image to maintain the brand’s positioning.
IKEA’s value chain is unique in that customers are also suppliers and suppliers are also customers. The transactions between the supplier and IKEA and on to the customer have a value adding step in each stage.
Product differentiation exists in the value-added dimension. IKEA’s consumers are treated as ‘prosumers’ with most of its products requiring assembly after purchase. But although assistance in this aspect is limited, IKEA offers options for choosing, transporting and assembling furniture. While this is well accepted in areas where IKEA now operates, it may be a point of consideration when entering new markets. Should IKEA encounter a market where DIY is not favored, IKEA may include the cost of the service to the product’s price.
IKEA stores are located in suburban areas. This is a factor in the achievement of IKEA’s low pricing. While it may appear as a disadvantage, this fits IKEA’s target market of customers willing to transport their own purchases and requiring less assistance in assembly.
IKEA’s promotion is centered on the catalog. These catalogs are uniform in layout...