CASE STUDY ANALYSIS ON

IKEA INVADES AMERICA

SUBMITTED BY:
AAYUSH MAIRA
AVIK SENGUPTA
DATTARAJ BORKAR
DEVIREDDY SUSHMA
GIANNA BARETTO
HARIPRASAD J

INTRODUCTION:

IKEA is a Swedish company registered in the Netherlands that designs and
sells ready-to-assemble furniture, appliances, and home accessories. As on
2002, the company is the world's largest furniture retailer.

It was founded in Sweden in 1943 by a 17-year-old Ingvar Kamprad. The
company's name is an acronym that consists of the initials of Ingvar Kamprad,
Elmtaryd (the farm where he grew up), and Agunnaryd (his hometown in South
Sweden).

With sales approaching $12 billion, IKEA operated 154 stores in 22 countries
and serviced 286 million customers a year. In the United States, IKEA had 14
stores, with plans to open as many as nine more in 2003.

There were a number of factors that distinguished IKEA from other furniture
retailersits stores were strictly self-service and featured such amenities as
playrooms for children and Swedish cafs, and all of its furniture came
unassembled (customers were expected to put together the furniture on their
own)-yet it was a very successful company.

COMPANY BACKGROUND:

17-year-old Ingvar Kamprad decided to start a local catalogue company
using some money his father had given him. Initially, the company sold
basic household goods at discount prices; after which, Kamprad began
selling home furnishings. Six years later, Kamprad opened his first
furniture showroom, and two years after that, IKEA began designing its
own low-priced furniture. In 1958, IKEA opened its inaugural store, in
Almhult, Sweden; at 6,700 square meters, it was the largest furniture
display in Scandinavia at the time.

IKEA had now become the favoured furniture-shopping destination for
price-conscious Swedes. The flagship storebecame the prototype for
all of IKEAs retail outletsit featured a childcare centre, a restaurant, a
bank, and enough parking for 1,000 cars. The stores magnetic appeal
was apparent from the start; Thousands of Swedes showed up on the
first day. IKEA then opened similar low-priced furniture stores in
countries beyond Scandinavia, first in Europe, and then in both Asia and
North America.
HISTORY OF IKEA:

1926 The founder of IKEA, Ingvar Kamprad, is born.
As a young boy, he knew that he wanted to develop a business. He
started by selling matches to neighbours from his bicycle.

1943 IKEA is founded by Kamprad.
When Ingvar was 17, his father gave him a gift for succeeding in
his studies. The gift was used to establish his business.

1947 Furniture is introduced into the IKEA product range.
The furniture was produced by local manufacturers.

1951 The first IKEA furniture catalogue is published.
Kamprad soon made the decision to discontinue all of the other
products and focus directly on low-priced furniture, and IKEA was
born.

1953 The furniture showroom is opened in Almhult.
The customers could see and touch the furnishings before
ordering.

1955 IKEA begins designing its own furniture.
Pressure from competitors caused suppliers to boycott IKEA. This
required IKEA to start designing own furniture, and this became
the basis for the future growth. Ultimately, they conceived the
idea of flat packaging; this led to innovative design and improved
function at lower prices.

1958 The first IKEA store is inaugurated in Almhult.
6,700 square meters of home furnishings! At the time, it was the
largest furniture display in Scandinavia.

1965 The IKEA store in Stockholm is opened.
Thousands of people waited for the opening of the flagship store.
By opening the warehouse and letting people serve them by self,
an important part of the IKEA concept was born.



IKEAS PRODUCT STRATEGY:

At IKEA, the new-product development process was overseen by a
product-strategy council, which consisted of a group of senior managers
who established priorities for IKEAs product line-up. These priorities
were based on consumer trends. Once a product priority was
established, a product developer would set the products target retail
price using The Matrix. The matrix consisted of three basic price
ranges and four basic styles. Within each price range, the company
would survey the competition to establish a benchmark and then set its
own price point 30% to 50% lower than their rivals.

Once IKEA had established the target retail price for the proposed
product, the company would then begin selecting a manufacturer to
produce it. IKEA worked with 1,800 suppliers in more than 50 countries,
always seeking to balance cost-efficient labour with the companys
product quality standards. IKEA would circulate a description of the
proposed products specifications and target cost to its suppliers and
encourage them to compete for the production package. Sometimes
different components would be sourced from different suppliers; the
two pieces would only come together in the store, when a consumer
would select each piece individually.

IKEAs engineers would determine what materials would be used to
make the product. The focus was always on cost efficiency.

Once a price point was established, a manufacturer was in place, and the
materials decided upon, the actual design process would begin. IKEA
would once again use internal competition to select a designer. The
company would circulate a product brief to its designers; after designers
submitted their design proposals, the company would select the best
one.

Because the companys furniture was designed to ship disassembled, all
of its products were transported in flat-packaged boxes. This flat
packaging not only made it easier for consumers to transport the
furniture home, it also saved the company on shipping.



LOW PRICE WITH MEANING:

The companys focus was primarily on price. Initially the design was only cost
effective but now according to the customers likes they adopted a more
distinct design aesthetic. The companys corporate sloganLow price with
meaningcaptured this commitment to offering tasteful, cleverly designed
products that did not make customers feel cheap. Even the most basic
products were now fashioned to reflect the companys philosophy of
democratic design. The company never claimed for its products to show
longevity but it was still a great success because of the good designs with low
prices.

STORE LAYOUT:

The store layouts were carefully designed. Upon entry, shoppers were gently
coerced into a predetermined path through cheerfully decorated model
bedrooms, kitchens, living rooms, and bathrooms. The atmosphere was always
bright and inviting, and customers were free to lounge on the model furniture
as they made their way through the store. Huge price tags adorned the goods,
and colour-coordinated cards offering design tips were displayed in
information kiosks located throughout the store. It resembled modern theme
parks with its childcare area and restaurants serving the famous Swedish
meatballs. It was difficult for the competitors to recreate an atmosphere as
IKEAs in its totality.

IKEA INVADES AMERICA:

IKEA initially had a not so good start in America. Its first U.S. store in
Philadelphia in 1985, the company discovered that Americans did not
like its products: because its beds and kitchen cabinets did not fit
American sheets and appliances, its sofas were too hard for American
comfort, its product dimensions were in centimetres rather than inches,
and its kitchenware was too small for American serving-size preferences.

IKEA then considering the customers complaints and doing some market
research had been able to address these problems and adjust its product
line-up and merchandising.

By the mid-1990s, the companys fortunes in the United States had
begun to improve, and from 1997 the company was able to double
revenues in the US from $600 million to $1.27 billion. By 2002, the
United States was IKEAs third-largest market.

Its 14 U.S. stores were servicing close to 30 million American customers
a year. As another indication of IKEAs success, the companys in-house
restaurants were now the 15th-largest food chain in America.

SHOPPING AT IKEA:

For IKEA customers, shopping at IKEA required some preparation.

Everything else customers needs to shop at IKEA were available at the
store entrance: pencils, paper, tape measures, store guides, catalogues,
shopping carts, shopping bags, and strollers.

All of the stores were self-service, so if customers found smaller items
they wanted, they could place the item in their shopping carts. If
customers wished to purchase larger items, they could jot down the
item numbers; they then needed to pass through the IKEA warehouse to
pick up their flat-packed items before proceeding to checkout.

Customers were expected to transport their purchases and assemble
them by themselves.

CASE ANALYSIS
After analysing the case the following problems were identified.
Difference in core competency of IKEA and American tastes and
preferences. They had to find a balance between Scandinavian design
and traditional design accepted by people of The United States of
America.

Superior service provided by competitors Wal-Mart, Target, Office
depot, Ethan Allen, Jordans Furniture etc. Most furniture retailers
offered delivery services at free of cost or an additional fee.


They had a limited style selection to cater the United States America
market.

Longevity and durability of IKEA products was a concern to the
customers.

Consumers were reluctant to buy new furniture too often.

DEMOGRAPHIC ANALYSIS OF THE UNITED STATES OF AMERICA


Source: U.S. Census Bureau: National Population Estimates; Decennial Census.

From the analysis of the above data, we can clearly identify two major market
segments other than the Whites; Hispanics, Black or Afro-Americans.



FURNITURE PURCHASING CRITERIA OF THE CONSUMERS OF
UNITED STATES OF AMERICA



Additional Information
51% of respondents reported searching for information on the internet.
38% didnt feel knowledgeable about the furniture.
33% said they wished it was easier to purchase furniture online.
Source: Mississippi State University Survey on Consumer Purchase Decisions of Furniture
44%
13%
20%
23%
43%
Customers' Perception About Furniture
Longevity
Strongly Agree
Dont Agree
Some what agree
Agree
53.20%
22.80%
24%
Spouse's Role in Purchase Decision
Spouce is consulted and is an
active purchaser
Spouce is consulted and is not an
active purchaser
Spouce not consulted
SWOT ANALYSIS

Strengths

IKEAs flat packaging reduces costs and storage space requirements and
makes it easier for customers to transport.
IKEA has numerous global suppliers. (According to website information
they have more than 1300 suppliers in more than 50 countries).Exhibit 5
suggests that they purchase mostly from China and Poland.
The company focused on the slogan low price with meaning (Value for
meaning).
Ikea had a unique store environment. They provided the customers with
in-store perks like the IKEA Swedish cafes, childrens play area, tape
measures, store guides, catalogues, shopping carts, pencils, etc. IKEAs
stores were strictly self-service, a predetermined path through
cheerfully decorated model bedrooms, kitchens, living rooms, and
bathrooms. Customers were free to lounge on the model furniture as
they made their way through the store. Huge price tags adorned the
goods, and colour-coordinated cards offering design tips were displayed
in information kiosks located throughout the store.
Brand reputation IKEA is the world's largest furniture retailer. In
America, people lined to get into newly opened stores.

Weaknesses

IKEA did not perform appropriate market research when branching into
a new culture's market-such as when IKEA came to America.
The Ratio of sales representatives to consumers was low at IKEA.
IKEA's self-service ethos wasnt accepted by many, Americans were not
used to this type of service.
The Product and style selection at IKEA was limited.


Opportunities

Saving money on labour by establishing supplier relationships with
developing countries.
Movement into other countries that do not have this type of retailer e.g.
India.
Capitalize on good design with reasonable pricing. IKEA has greatly
changed their designs to meet the aesthetic furniture needs of their
customers, doing so at a low price.
Capitalize on the growing e-commerce market. Offer more services on
the web.

Threats

Plenty of competition. The furniture retail segment is highly fragmented
and IKEA is flanked by competitors in high-end specialty retailers and
low-end discount retailers.
Discount retailers sell the furniture products with added services such as
free home delivery and installation and also help cart away the old
furniture if the customer wanted to discard it unlike IKEA.

PORTERS GENERIC MODEL ANALYSIS OF IKEA











DIFFERENTIATION COST LEADERSHIP
FOCUS
DIFFERENCIATION
FOCUS COST
LEADERSHIP
IKEA
PORTERS 5 FORCES ANALYSIS OF FURNITURE INDUSTRY

Bargaining power of suppliers: (Low) as the suppliers are large in
number and quite fragmented. Hence it is not easy for them to get
together and exercise control on the costs at which they supply to the
furniture industry.

Bargaining power of Buyers: (Moderate) as the consumers cant get a
substitute for furniture. But if the competition among the companies is
high then customers can bargain from the companies.

Threat of New entrants: (High) as the furniture industry is not tightly
regulated and there are not much entry costs and barriers to stop them
from entering.

Competitive rivalry: (Depends on the country) generally its high with
small retailers and big furniture giants competing in the same market
space.

Threat of substitutes: (Low) as furniture has very limited substitutes.
Steel can be one but due to the cost factor cant be used to produce
mass scale products

Solutions
Redesign stores to meet the demands of vast ethnic groups in America.
For example: the store displays were not in line with Hispanic consumer
preferences. They needed dining tables with more than two chairs, but
IKEA had ones with only two.

Focus on strengths: Focus on more designs and products which
Americans prefer buying, like kitchenware, sofa sets and try to offer
attractive discounts on them.
Improve the products according to American preferences. For example:
sofa sets were hard and needed to be changed.

Add new stores to compete with high end competitors and to market
themselves aggressively. (According to Exhibit 4 they have just 14 stores
in the United States of America)

Price: IKEA competes on cost and they shouldnt lose this advantage by
adding to unnecessary costs in an attempt to imitate their competitors
marketing strategy.

Americans like to shop on the net. This is clear from the survey. Hence
more services can be offered on the web like design selection and
purchases on the web.

Spouses role in the purchase decision is pretty evident from the survey
and hence advertisements should be directed at both the primary
stakeholders in the purchase.

They can start some loyalty programs to help the regular customers get
further discounts and thereby increase their sales. This will help IKEA
generate a quality customer base from which they can apply the 80-20
rule to generate the maximum business.

The store locations are of primary importance as the IKEA stores are
generally standalone with huge parking spaces. IKEA must scout for
places in US where they can get maximum visibility and customer
footfall.