The Business Strategy of IKEA

The Business Strategy of IKEA: A Discussion

Before becoming the largest furniture retailer in the world, then 17-year old Ingvar Kamprad started IKEA as a mail-order sales business in 1943. The Swedish company began selling furniture in 1948 and it opened its first physical store in 1958.

The first stores outside Sweden opened in Norway in 1963 and Denmark in 1969. More stores opened across Europe from the 1970s to the 1980s. The succeeding years saw the opening of multiple stores in each country and a further expansion in North America, the Middle East and the Near East, South East Asia, and the Far East.

IKEA is now a conglomerate or a multi-industry and multi-sector business organization. The success of this organization can be attributed to specific business strategies and tactics that revolve around offering well-designed and functional products at affordable prices.

Key Elements in the Business Strategy of IKEA

The Marketing Strategy of IKEA

Marketing can make or break a business organization. A look into the business strategy of IKAE reveals that the company has put emphasis on specific marketing considerations, tactics, and activities that have allowed it to realize its organizational mission, vision, and values.

Product Strategy: Capitalizing on Affordability and Mass Consumer Culture

Fundamental to the marketing strategy of IKEA is a selling proposition centered on offering a range of well-designed and functional home furnishing products, as well as appliances and accessories, that are affordable to the mass market.

The company expounds on this proposition through specific tactics within its product strategy. For starters, note that its flagship products are ready-to-assemble furniture. The decision to develop and sell ready-to-assemble home furnishing items provides the company and its customers key advantages to include easier storage and shipment and lowered cost.

Furthermore, acknowledging the need to expand customer options while recognizing the diversity of customer preferences, IKEA builds on the modular nature of furniture options to promote flexibility, customization, and mixing and matching of furniture modules.

The ready-to-assemble characteristic of its products has also allowed the company to capitalize on mass consumer culture while remaining sustainable. Prime examples include the extensive use of medium-density fiberboard, as well as the elimination or reduction of raw materials and substances that are potentially harmful to the environment.

Product diversification is also part of its modern product strategy. The company has ventured into smart home business since 2016 and flat-pack or modular house construction business. IKEA also sells residential photovoltaic or solar panels.

Pricing Strategy: Mass Appeal through Affordable Pricing Considerations

Remember that affordability is part of the selling proposition of the company. It is also important to highlight the fact that it targets the mass market to capitalize on mass consumer culture. Based on the prices of its products, it utilizes a mix of penetration pricing strategy, price leadership, value-based pricing, and cost-plus pricing strategy.

IKEA is not the only furniture manufacturer in a particular geographic market. The top competitors of IKEA include Groupe SEB, Ashley Furniture Industries, Walmart, Bed Bath & Beyond, Amazon, Target, Pier 1 Imports, and Wayfair. Furthermore, the Swedish conglomerate also competes with local furniture makers and smaller ones.

To maintain a competitive advantage and remain true to its unique selling proposition, the company has to make its products as affordable as possible. The company initially built on a penetration pricing strategy to allow it to enter a market and gain market share.

However, unlike a traditional penetration pricing strategy, the company did not raise the prices of its products substantially. Instead, it developed capabilities needed to lower costs associated with manufacturing, operations, and customer acquisition.

The company integrated other pricing considerations that revolve around value-based pricing and cost-plus pricing strategy to support further its unique selling proposition. Because the company is now the largest furniture retailer in the world, it now has a price leadership advantage that allows it to determine prices in the market.

Placement Strategy: Maintaining Global Distribution Through Retail Operations

Reaching the mass market also means determining and utilizing the most effective and efficient distribution channels. Nevertheless, the placement or distribution strategy of IKEA fundamentally centers on global retail operations.

There are more than 440 IKEA retail stores across the globe. Note that in Sweden alone, there are 52 retail stores while more than 270 stores operate in entire Europe. There are 52 stores in the United States and 35 in China. The largest store is located in the Philippines. The company also plans to expand further in South America and Southeast Asia.

Global retail operations have enabled the company to reach global customers. It is interesting to note that its retail stores typically occupy large floor areas to showcase the entirety of its product offerings. Furthermore, in addition, these stores are either located in outside cities or within city centers to make them relatively accessible to the public.

Retail operations require proper warehousing. Full-size stores have integrated warehouses. However, in cities with limited land areas such as Hong Kong, the company operated several stores while maintaining a central warehouse in another location.

IKEA implements a variety of store designs and considerations depending on the geography of a particular location. For example, in some countries with limited land area and planning restrictions, retail stores serve as display galleries and provide pick-up services in which customers would have to make in-store or online reservations.

The ready-to-assemble nature of its home furnishing products also forms part of its distribution strategy. This specific product design strategy not only minimizes shipping costs but also allows easier storage in warehouses and maximizes inventory capacity.

Promotion Strategy: Traditional and Contemporary Marketing and Sales Promotion

IKEA tackles marketing promotion using established marketing practices. The company has invested heavily in advertising to promote its product and its entire brand. Some of its advertisements have earned commendations. For example, in 1994, it ran a television commercial in the United States that featured a homosexual couple.

There was an initial backlash due to the sociopolitical status of the LGBT community during that time. However, the company has since continued to run advertisements that appeal to the wider members of the community including transgender women.

Furthermore, the “Lamp” television and cinema ad released in September 2002 won several awards to include the prestigious Grand Clio, Golds at the London International Award, the ANDY Awards, and the Grand Prix at the Cannes Lions International Advertising Festival. The 60-second commercial coincided with the opening of 60 new stores in the U.S.

The company has partnered with other organizations to promote its products further beyond advertisements. Examples include product placements in The Sims 2 video game, public event sponsorship, and guerilla marketing initiatives such as public exhibitions.

Other marketing and sales promotional initiatives include participation in advocacies as part of its corporate social responsibility, public relations, value-added services such as the IKEA Family loyalty card, and the utilization of digital media and related technologies such as the introduction of the IKEA Place augmented reality mobile application.

Nevertheless, considering its target market that comprises the mass market composed of middle-income individuals and families, the company utilizes different types of marketing promotion to ensure maximum exposure and reach.

The Manufacturing Strategy of IKEA

Another critical element of the business strategy of IKEA is a specific focus on mass production. Because its selling proposition centers on designing and producing affordable products for the mass market, its manufacturing strategy complements its manufacturing strategy.

Insourcing and Outsourcing: Achieving Economies of Scale and Reducing Production Cost

Similar to successful business organizations such as the technology company Apple and the fast fashion retail giant Zara, outsourcing and vertical integration through insourcing are critical to the overall business and specific manufacturing strategy of IKEA.

The company designs the products in Sweden and manufactures most of these in developing countries through its Swedwood Group subsidiary. With over 15,000 employees and locations across more than 50 sites in more than 11 countries, Swedwood handles all the production of wood-based products. The largest factory is in Southern Poland.

Insourcing provides several advantages. The first is that it allows the company to have a complete control over the production process while having a separate organizational structure to focus on specific business activities. Furthermore, the manufacturing facilities have been strategically located in areas and countries to lower costs associated with production and distribution.

However, aside from insourcing, IKEA also outsources the production and acquisition of several items within different product categories. This allows the company to expand its product portfolio without the need for building additional production capabilities.

Both insourcing and outsourcing collective represents a source of competitive advantage for the company. It fundamentally maximizes the advantages of each while providing a workaround against their respective disadvantages.

An insourcing-outsourcing manufacturing consideration has also enabled the company to achieve economies of scale that has continuously allowed it to produce in high volumes, lower the production cost, and lower the end-user price points of its productions.

Supply, Logistics, and Inventory Management: Promoting Operational Sustainability

The supply chain operations down to logistics and inventory management at IKEA support the selling proposition of selling affordable household products to the mass market. Remember that the company has intentionally applied the concept of mass production and mass consumption to furniture retail. It is fundamentally a high-volume retailer of furniture.

Raw materials are critical to its production. The company has an established relationship with suppliers made possible through a dedicated team of officers stations in 42 trading offices around the world while maintaining guidelines to align these suppliers with its promise of providing high-quality products without compromising the environment.

IKEA used engineered wood instead of hardwood. Furthermore, to remain aligned to its corporate social responsibility, most of its products are made from recycled and sustainable materials, thus adhering to concepts such as circular economy and upcycling.

Taking into consideration sustainability demonstrates an acknowledgment of the importance of promoting the welfare of the environment to ensure long-term growth by future-proofing the company from possible environmental backlashes.

It is also worth mentioning that part of the business strategy of IKEA is to align geographically material flow or supply with production and distribution. To lessen costs associated with shipments and storage, the company chooses suppliers based on geographical considerations relative to the locations of its manufacturing facilities, warehouses, and retail stores.

Remember that part of the distribution strategy of the company is the integration of its warehouses with its full-size retail stores. Adding to the ready-to-assemble nature of most of its products, IKEA has managed to lower cost-per-touch. Note that the more hands touch the product, the more costs are associated with it.

The company has also utilized proprietary information systems such as an inventory tracking system and order quantitate management to keep track of its inventory and align it with retail demand and production capacity. The warehouses are also divided into two portions: automated facilities for fast-selling items and manual facilities for slow-selling items.

In a Nutshell: Understanding the Business Strategy of IKEA

Central to the purpose of the business strategy of IKEA is the realization or fulfillment of its major selling proposition or the IKEA Concept of offering a range of well-designed and functional home furnishing products, as well as appliances and accessories, that are affordable to the mass market.

It is also important to highlight the fact that the company has built a business characterized by furniture retail that capitalized in mass production and mass consumption. Similar to industries and sectors such as the fast-fashion retail and the consumer electronics industries, the company has a pronounced purpose of being a high volume retailer of furniture.

Marketing and manufacturing represent the two major elements of the business strategy of the company. The overarching goals and objectives of its specific marketing and manufacturing strategies and tactics collectively represent the realization of the IKEA concept.