IKEA, however, had repeatedly bucked market trends and industry norms. Over three and a half decades it had built a highly profitable worldwide network of furniture stores. (See Exhibit 1. ) Company Origins IKEA is an acronym for the initials of the founder, Ingvar Kamprad, his farm Elmtaryd, and his county, Agunnaryd, in SmDland, South Sweden. In 1943, at the age of 17, Kamprad began his entrepreneurial career by selling fish, Christmas magazines, and seeds. Within a few years he had established a mail-order business featuring products as diverse as ballpoint pens and furniture.
It was in furniture, however, that he saw the greatest opportunity. Even as the pent-up wartime demand found expression in the post-war boom, the traditional Swedish practice of handing down custom-made furniture through generations was giving way to young householders looking for new, yet inexpensive, furniture. But while demand was growing, inter-association supply contracts and agreements between Swedish manufacturers and retailers kept prices high while foreclosing entry. As a result, between 1935 and 1946 furniture prices rose 41% faster than prices of other household goods.
Ikea Essay Example
Kamprad felt that this situation represented both a social problem and a business opportunity. He commented: Professor Christopher A. Bartlett and Research Associate Ashish Nanda prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1990 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163.
No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1 390-132 Ingvar Kamprad and IKEA A disproportionately large part of all resources is used to satisfy a small part of the population. . . . 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.
Finally, the retail cartel members pressured the manufacturers cartel not to sell to IKEA. Kamprad responded by buying from a few independent Swedish furniture makers and by establishing new sources in Poland. To his delight, he found that his costs actually fell and he could charge even lower prices. “[IKEA] resembles the monsters of old times,” fumed one retailer in a letter to the cartel. “If we cut one of its heads, it soon grows another. ” In 1953, Kamprad converted a disused factory in ? lmhult into a warehouse-showroom. Company sales grew from SKr 3 million in 1953 to SKr 6 million in 1955.
By 1961, IKEA’s turnover was over SKr 40 millionC80 times larger than the turnover of an average furniture store. (See Exhibit 2. ) Of a total SKr 16. 8 million furniture mail-order business in Sweden, IKEA had SKr 16 million. In 1965, Kamprad opened a second outlet in Stockholm. Sensitive to the impact of the automobile on shopping habits, he gave priority to creating ample parking space rather than the focus, as was traditional, on downtown location. His new store, built on the outskirts of the city, was the largest in Europe at the time.
Several of IKEA’s basic practices were developed in this period: the self-service concept facilitated by the wide distribution of informative catalogs and the use of explanatory tickets on display merchandise, the knock-down kits that allowed stocks of all displayed items to be kept in store warehouses in flat pack boxes, and the development of suburban stores with large parking lots that brought the cash-and-carry concept to furniture retailing. Each of these practices resulted in economies that reinforced IKEA’s position as the industry’s low-price leader.
Between 1965 and 1973, IKEA opened seven new stores in Scandinavia, capturing a 15% share of the Swedish market. Rather than appeal to the older, more affluent consumers who had been the prime target of those offering the traditional, more expensive lines of furniture, Kamprad focused on younger buyers, who were often looking to furnish their first apartments. (See Exhibit 3 for customer data. ) However, by the early 1970s, growth in the Swedish furniture market was stagnating. Kamprad felt it was time for IKEA to expand internationally.
Entry into Continental Europe “It is our duty to expand,” Kamprad said, dismissing those who insisted that furniture retailing was a strictly local business. “He ignored the economic downturn caused by the 1973 oil shock,” remarked an executive, “and oddly, it worked in our favor. Our overhead costs were low, and the customers really appreciated our value-for-money approach. ” Because the German-speaking countries constituted the largest market for furniture in Europe, they became his priority, with Switzerland being the first target.
As in other European countries, Swiss furniture retailing was highly fragmented, with 67% of all firms employing three people or less. Most were in expensive, downtown locations. IKEA opened a large store in the suburbs of Zurich, in a canton which had about 20% of the country’s consumer purchasing power. Ignoring the fact that furniture in Switzerland was of traditional design, very sturdy construction, and made from dark woods, the new store offered IKEA’s line of simple contemporary designs in knockdown kits.
Besides, rather than conform to the local service-intensive sales norms, the IKEA stores introduced self-service and cash-and-carry concepts. By distributing half 2 Ingvar Kamprad and IKEA 390-132 a million catalogs and backing them with humorous, off-beat advertising (see Exhibit 4), the new store attracted 650,000 visitors in its first year. In 1974, IKEA opened near Munich. Not only was West Germany Europe’s largest and best organized furniture market (estimated at DM 12 billion in 1973), but it was also the largest furniture producer and exporter.
German retailers were set up as elaborate furniture showrooms and they had adopted the role of order takers for manufacturers, holding little inventory of their own. As a result, consumers typically had to wait weeks for delivery, and manufacturers often faced sharp swings in demand as styles changed or the economy slowed. Again IKEA promoted itself as “those impossible Swedes with strange ideas. ” Promising inexpensive prices, immediate delivery, and the quality image of the Swedish Furniture Institute’s M`belfakta seal, the company attracted 37,000 people to the store during its first three days.
German retailers responded vigorously. Their trade association complained that the M`belfakta requirements of the Swedish Furniture Institute were “considerably below the minimum requirements for quality furniture in West Germany and neighboring countries. ” Following legal proceedings against IKEA for deceiving customers with the M`belfakta seals, the German court put constraints on how IKEA could use the seals. Other retailers initiated legal action challenging the truthfulness of IKEA’s aggressive advertising. Again, the courts supported the German retailers and curtailed IKEA’s activities.
Nonetheless, business boomed, with IKEA opening 10 new stores in West Germany over the next five years. By the late 1970s, it had built a 50% share in the cash-and-carry segment of the West German market. Retailers who had earlier fought IKEA’s entry began to acknowledge the potential of this new retailing concept, and imitators began to mushroom. IKEA continued opening stores in Europe and franchising others outside Europe into the 1980s. (Exhibit 5 details IKEA’s worldwide expansion. ) IKEA’s Culture, Strategy, and Organization