A CASE STUDY ON IKEA : FURNITURE RETAILER TO THE WORLD

Abstract : The case study will look into the development of IKEA from a small Swedish
furniture company to global home furnishing giant that it is today.

Keywords : IKEA, case study

This paper also submits that another factor which contributes to the success of IKEA
is the management structure of the company. The organizational structure of IKEA is
unprecedented among the gigantic retailing businesses in the world. IKEA was
originally and in essence a private company controlled by Ingvar Kamprad and it was
only in 1982 that Kamprad decided to transfer his interest to Stichting Ingka
Foundation, a charitable and tax-free foundation. However nothing much changed in
term of control as Kamprad and his wife are among the committees of the foundation.
The foundation however does not own the IKEA trademeark.The IKEA trademark is
legally possessed by IKEA Systems, controlled by a company in Netherlands Antilles
in which the beneficial owners are again believed to be Kamprads family. Kamprad
never agreed to offer to bring IKEA and therefore IKEA remains as franchise-chain
with Kamprads interest shared with Inter-IKEA, a company that benefits franchise
fees from all IKEA stores worldwide.

In effect , IKEA is actually being run by its founder, Kamprad himself. All risks related
decision was made by Kamprad himself assisted by managers surrounding him.
Fundamentally speaking, IKEA centralized organizational structure gives its founder
an ultimate control over all IKEA business transactions and activities. Today,

Kamprad is in his 80s and though is not involved actively in day-to-day operation of
IKEA activity, but he is still the Boss of IKEA. Rosenhauer (2005,p.7) wrote that the
present organizational structure of IKEA can be described as highly functional in
relation to their global marketing strategy. IKEA in other words is structured in such
a way as to enable centralization of control over functional activities.

According to a July 1998 article in the South China Morning Post, "Kamprad has no
intention of releasing his grip on his empire, to the dismay of many investment banks,
salivating over the successful retail chain that attracts 140 million visitors each year."
As a private entity, IKEA was free to engage in expansion without the pressure of
having shareholders demanding quick profits. This meant that the company could
take things at its own pace, and potentially fare better in the long run.
To some quarters, there is no reason why IKEA should change to a different style of
corporate management when currently, it has a steadfast corporate conglomerate
and managing 280 stores in 26 countries from the US to Australia plus further
expansion is planned at a rate of about 15 new stores a year in existing markets such
as the US and Japan, as well as in three new ones: South Korea, Serbia and Croatia.
(Financial Times Online, 2011).

On top of that, based on financial report issued via IKEA website stated that the
gross income of entire IKEA stores is reported to grow by 7.7% to 23.1 billion for
year 2010. The IKEA Group net profit for fiscal year 2010 increased by 6.1 % to 2.7
billion Euro, compared to the previous fiscal year. Perhaps to IKEA management, if it
isnt broken, dont fix it.

However this paper submits that some of IKEA perceived strengths are, ironically,
also its potential weaknesses. For example, its unique product designs which are too
European-centric. This has proven nearly fatal for their ventures in the USA and
Japan. IKEA business model also trade services for costs i.e. low priced products are
possible because there are no other frills offered to customers which can drive the
price up.The customers even have to assemble most of the bulky furnitures
themselves. But self-service model may not appeal to everyone.

Some customers may not appreciate this do-it-yourself approach.IKEA targets young,
cost-conscious customers who wants stylish furniture. Those in the high income
bracket may not want to indulge in shopping and picking out their furniture from
warehouse-like settings. Some customers may actually enjoy having a conversation
with a salesperson and getting individual ideas and inputs from employees. These
same customers may not have the time to wrestle with assembly of their furniture
once they get it home. Customers who feels that this is an unnecessary steps may
continue to buy from traditional retailers (Ferrel and Hartline, 2008,p. 517).

IKEA appears to offer a pleasant working environment, job security and a caring
attitude to its employees. But this casual, relaxed organizational attitude is not
without flaws. Some misconducts were reported to occur at IKEA outlets such as in
Russia where bribery cases among the staff were identified resulting in drastic
change by its top management in the form of tighter procedural process (Financial
Times Online, 2011). Due to these circumstances, the management decided to be
more transparent in their business dealing. It also reported that the privately owned
company disclosed its annual profits for the first time last year in a push for greater
transparency. IKEA has long faced scrutiny of its opaque ownership structure through

a complex web of foundations and holding companies controlled by the Kamprad

family.

Though to some quarters, the centralization of decision making process in the hands
of its founder is one of the sources of IKEA strength, this paper submits that it may
also be its potential weakness. The way it is, IKEA is the extension of the self of
Ingvar Kamprad i.e. IKEA IS Ingvar Kamprad.

As such, despite of all enthusiastic stories about IKEA, anxiety arose on the future
sustainability of this gigantic furniture retailer after the demise of its founder,
Kamprad. With a restriction in allowing outside investment or shareholder to
participate actively in IKEA business, would IKEA survive through hard time?
Other than centralized control by Kamprad family over IKEA business, it appears that
IKEA is lacking in market-sensing competencies. The incompetency caused the
failure in early expansion process which had forked millions out from IKEA for its
business sustainability and the oft-quoted classic examples were their ventures in the
USA and Japan.

Knowledge about market condition in particular location is of utmost importance in

business. According to Gupta, Govindarajan & Wang (2008,p.105) : The greater a
businesss dependence on a particular location, the greater the need to have worldclass competencies in the relevant activities there. The important of particular
location is likely to be very high when it is the sole location or one of only a few
locations where particular activity is concentrated (as it often true in the case of
upstream activities, such as R&D and manufacturing).

Gupta, Govindarajan & Wang (2008,p.105) further stressed that, The worldwide
business team needs to foster this coordination along several dimensions:
operational coordination between units performing similar activities as well as those
performing complementary activities. It also needs to promote the transfer of
knowledge and skills across locations.

Perhaps IKEA weakness in this regards is the result of its founder eccentric approach
towards market survey. According to one of IKEAs Swedish executives: [Ingvar]
spoke to the street to learn what they are looking for (Grol and Schoch 1998,p.97).
According to Grol and Schoch further, such empirical experiential approach goes
against the orthodox rules of international retailing, which preach extensive market
studies before entering new market, catering to local tastes and gaining expertise
through acquisitions and joint ventures. In the USA initial ventures however, going
against the grains of orthodoxy of international retailing had proven to be costly for
IKEA.

Another weakness is that the heavy reliability on sub-manufacturers and outside

suppliers for products supply. IKEA relation with its suppliers is governed by a Code
of Conduct entitled The IKEA way of purchasing home furnishing products and
some of the codes side heavier with the suppliers instead of IKEA. For example, the
short-supply and non-compliance of furniture manufacturing regulations are the
common problems faced by IKEA through out its business activities. However the
code prevents harsh actions by IKEA with the result that supply contract would not be
revoked in occasion of non-compliance to certain products regulations.

IKEA code of conduct (Mares 2004,p.385) stated that, IKEA supports its suppliers to
improve their operations. Believing in long-term relationships, IKEA does not break
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off relations due to non-compliance only, as long as there is a willingness to improve

in the right direction with an agreed plan of action to comply with the IKEA
requirements within an acceptable time frame. Repeated violation of IKEAs
requirements will result in the termination of the co-operation.

This paper submits that a band-aid approach to correct IKEA each and every
weakness will not work in the long run. What IKEA needed, despite its success under
current

management structure, is a total revamp of the management and

organizational structure i.e. going public.

So, what are the advantages for IKEA if it is operating as a public listed company? By
offering the IKEA business affair to be in-charged by shareholders, the accessibility
towards huge capital and expertise such as advanced technology and latest
information can be acquired faster. As mentioned earlier IKEA has several mega
stores in the pipeline for year 2011 expansion planning. Note must also be taken that
IKEA had experienced several wrongdoings during its first year operation in USA,
Russia, Japan and China.

Gummesson (2002, p.244) opines that the reason for going public are usually a need
for cash flow, but often also, it is to reduce total family control. Family ownership has
its own hazards, especially when new generations take over. There are also cases
when the best strategy should be to go from public back to private, provided that this
were financially feasible, which it often is not. A viable strategy is actively to recruit
investors and establish long-term relationship to those who constructively help build
the future.