Case study 1 | IKEA - The Global Retailer

IKEA may be the world's most successful global retailer. Established by Ingvar Kamprad in

Sweden in 1943 when he was just 17 years old, today the home-furnishing superstore has

grown into a global cult brand with 411 stores in 38 countries that host 780 million shoppers a year and generate sales of 35.7 billion ($42 Bn.). Kamprad himself, who still owns the

private company, is rumoured to be the world's richest man.

IKEA's target market is the global middle class who are looking for low-priced but

attractively designed furniture and household items. The company applies the same basic

formula worldwide: Open large warehouse stores festooned in the blue and yellow colors of the Swedish flag that offer over 10,000 items, from kitchen cabinets to candlesticks. Use

wacky promotions to drive traffic into the stores. Configure the interior of the stores so that

customers have to pass through each department to get to the checkout. Add restaurants

and child care facilities so that shoppers stay as long as possible. Price the items as low as

possible. Make sure that product design reflects the simple, clean Swedish lines that have

become IKEA's trademark. And then watch the resultscustomers who enter the store

planning to buy a $40 coffee table and end up spending $500 on everything from storage units to kitchenware.

IKEA aims to reduce the price of its offerings by 2 to 3 percent per year, which requires

relentless attention to cost cutting. With a network of 1,300 suppliers in 53 countries, IKEA

devotes considerable attention to finding the right manufacturer for each item. Consider the

company's best-selling Klippan love seat. Designed in 1980, the Klippan, with its clean lines,

bright colors, simple legs, and compact size, has sold some 1.5 million units since its

introduction. IKEA originally manufactured the product in Sweden but soon transferred

production to lower-cost suppliers in Poland. As demand for the Klippan grew, IKEA then

decided that it made more sense to work with suppliers in each of the company's big markets to avoid the costs associated with shipping the product all over the world. Today there are five suppliers of the frames in Europe, plus three in the United States and two in China.

To reduce the cost of the cotton slipcovers, IKEA has concentrated production in four core suppliers in China and Europe. The resulting efficiencies from these global sourcing decisions enabled IKEA to reduce the price of the Klippan by some 40 percent between 1999 and 2005.

Despite its standard formula, to achieve global success IKEA had to adapt its offerings to

the tastes and preferences of consumers in different nations. IKEA first discovered this in the early 1990s when it entered the United States. The company soon found that its European style offerings didn't always resonate with American consumers. Beds were measured in centimetres, not the king, queen, and twin sizes with which Americans are familiar. Sofas weren't big enough, wardrobe drawers were not deep enough, glasses were too small, curtains too short, and U.S. size appliances didn't fit in the kitchens. Since then, IKEA has redesigned its U.S. offerings to appeal to American consumers, which has resulted in stronger sales.

The same process was unfolding in China, where the company established 24 stores. The store layout in China reflects the layout of many Chinese apartments, and since many Chinese apartments have balconies, IKEA's Chinese stores include a balcony section. IKEA also has had to adapt its locations in China. In the West, IKEA stores are generally located in suburban areas and have lots of parking space.

In China, stores are located near public transportation, and IKEA offers delivery services so that Chinese customers. They can get their purchases home.

Case Discussion Questions

1. How has the globalization of markets benefited IKEA?

2. How has the globalization of production benefited IKEA?

3. What does the IKEA story teach you?