IKEA is a global furniture company that started from humble beginnings and has grown to dominate the worldwide furniture market. Despite not manufacturing any furniture and paying no taxes, the company has managed to outperform its competitors. The company’s business model and strategies can be studied as a valuable case study for other businesses seeking to improve their success.
How was IKEA Founded?
The story of IKEA is one of humble beginnings and remarkable success. It all started in 1943, when a 17-year-old Ingvar Kamprad started printing catalogs to sell furniture. Despite initial skepticism from customers who saw the prices as too good to be true, Ingvar turned his storeroom into a furniture showroom, allowing customers to physically experience furniture before purchasing. And thus IKEA was born.
Fast-forward to today, and IKEA is a billion-dollar empire known for its affordable furniture. But there’s more to the story than low prices. IKEA is not just a furniture company, but a master of marketing and logistics.
You see, IKEA’s journey to the top started long before the company started selling furniture. Ingvar had a background in retail, selling matches and pens and purses as a child. And when World War II ended and the Swedish government began building homes for its citizens, Ingvar saw an opportunity to enter the furniture market.
The secret to IKEA’s success lies in its ability to control costs and pricing. The company initially sourced furniture from small-scale manufacturers in Sweden and delivered it directly to customers who placed orders through catalogues. Now, out of 100 people who visit IKEA stores around the world, 85% come with a product in hand.
But the question is, how does IKEA do this on the worldwide level? The answer is Technology This thing played a big part in making IKEA.
What is Manufacturing Process of IKEA’s Furniture
IKEA’s furniture manufacturing process is divided into two parts: sourcing and warehousing. The company’s design team takes inputs from different countries to gather information about the choice of furniture. This data is then used to create designs that are iteratively refined to fit the mass market. Once the design is finalised, it is sent to the head of the country to be priced, then sent to suppliers to be manufactured.
In terms of warehousing, IKEA follows three main activities: inbound logistics, docking and outbound logistics. For inbound logistics, IKEA uses IWAY standards to ensure that suppliers meet certain key requirements prior to sourcing goods. Once items are picked up, they are taken to one of IKEA’s 35 distribution centers around the world. These centers handle, sort, and ship goods to various retail stores. IKEA’s largest distribution centers are located in Beijing and Shanghai, which allows for low labor costs, ample real estate, and easy transportation to other Asian countries. When entering a new market, IKEA first opens retail stores and then, once demand is established, opens a distribution center within 600 kilometers of the retail store to further reduce logistics costs.
IKEA’s Supply Chain Process
IKEA’s supply chain process includes two key elements that provide the company with significant cost advantages: Optilage packaging and location mapping.
Optilage packaging, which is used to store furniture parts, is made from a recyclable material called poly-propylene. Not only is this material cheap, but it’s also lightweight, which allows IKEA to increase its storage capacity by up to 44%. This is achieved using cubic optimization, which maximizes the amount of goods that can be stored in a truck.
Location mapping is another cost-saving strategy used by IKEA. The company opens its stores on the outskirts of cities rather than in the city centre. It offers three main advantages: large space, cheap land and engaged effort. By locating stores on the outskirts, IKEA is able to secure larger spaces at an affordable cost, and customers are more likely to spend more time in the store, which can lead to increased sales. The company uses data analytics and machine learning to optimize location mapping, cubic optimization and design trends.
The design of IKEA’s stores also plays a role in increasing sales. The stores are designed like a maze with exits located on the second floor, encouraging customers to spend more time in the store. Additionally, a cinnamon bun counter is located at the end of the store, not only to increase sales but also to help reduce subconscious stress caused by overspending.
It is worth noting that IKEA’s success is not only due to its low prices, but also due to its shrewd and efficient business strategies, as mentioned above. The company has a net worth of $60 billion and revenue of $40 billion and yet, the Campard family legally pays hardly any taxes.
3 Lessons we Learned From this Case Study that We can Implement in Our Business
1. Connecting customers emotionally to the product:
IKEA’s approach of having customers assemble their own products not only saves the company cost, but also emotionally connects the customer to the product. When customers are involved in the making process, they take good care of the product and develop a deeper attachment to it.
It is not just about buying in bulk and selling cheaply, there are many contributing factors that contribute to the cost and sales advantage of any organization. For IKEA, these factors include sourcing, warehouse management, logistics, and operating cost management.
3. The importance of understanding consumer psychology:
Consumer psychology is the key to IKEA’s success, from store layout to IKEA’s positioned pricing. All decisions are made according to the study of consumer psychology and by understanding and catering to their customers’ needs and preferences, they ensure customer loyalty.
