Reflection on ikea case study using management theory (500 words)

IKEAs international strategy

IKEA is one of the largest furniture makers and retailers in the world and is well known for its low-cost, stylish furniture and bold, sometimes controversial, advertising campaigns. Established by Swedish entrepreneur Ingvar Kamprad in 1943, by 2015 the company had an estimated turnover of 31.9 billion (A$46.5 billion), net profits of 3.5 billion (A$5.1 billion) and 328 stores in 28 countries.¹ While IKEA has undoubtedly succeeded in foreign markets, establishing stores in countries as far apart as Australia and Romania, around 70 per cent of its sales still come from Europe and its overseas expansion has not always progressed smoothly. Adapting the companys culture to national norms has proved challenging and there have been mistakes along the way.

A brief company history

Brought up in a small farming community in southern Sweden, Kamprad was an enterprising individual who even as a boy sold small items like matches and Christmas cards to his neighbours. He came up with the name IKEA by combining his initials (IK) with the first letters of the name of the farm and village in which he grew up (Elmtaryd, Agunnaryd). At first, IKEA was a vehicle for Kamprads trading and mail-order activities. He added furniture to his product lines in 1947, mainly by accident, but quickly recognised that there was a growing demand in post-war Sweden for inexpensive household goods. Owing to problems with Swedish manufacturers, the company started to procure furniture from Poland and found this to be a cost-effective strategy. By 1951, Kamprad had decided to focus exclusively on furniture and the first IKEA showroom was opened in Sweden in 1953 to allow mail-order customers to establish the quality of the items they were ordering by seeing and touching them. In 1955, the company started designing its own products and a few years later opened retail stores.

The company offered well-designed, stylish items that drew on Swedish design traditions at inexpensive prices. Costs were kept down by designing furniture with a target price in mind. Furniture was flat-packed to minimise transportation costs, assembled by the customer to keep operating costs low and production was sourced from low-cost locations. IKEA became known for its cost-minimising approach and its associated capabilities in cost-efficient design, sourcing and logistics. Kamprad, reflecting on his upbringing in a Southern Swedish farming community, placed a high value on thriftiness and morality and shaped IKEAs culture accordingly. The companys stated mission was to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them² and co-workers were recruited as much on the basis of their values and beliefs as on their experience and skills. In 1976, Kamprad published his manifesto, The Testament of a Furniture Dealer, which contained slogans like expensive solutions to any kind of problem are usually the work of mediocrity; in many respects this document represented the credo of the company.³

The pattern of IKEAs internationalisation

The companys forays into international markets began first by opening stores in other Scandinavian countries but the company quickly moved farther afield. In the early years, the formula for international expansion was a simple one. The company identified markets with the potential for high sales volumes and then purchased cheap land on the outskirts of a big city to establish a base. A tight-knit team of trusted and experienced Swedish managers relocated to the country in question and supervised the building of the new store, led the operational team and ran the business until it was deemed mature and could be handed over to local managers. Once a beachhead was established, IKEA tended to cluster further stores in the same geographical area.

In its first phase of internationalisation, IKEA entered new markets by keeping its product catalogue and its management processes the same. There were sometimes minor adjustments to items to reflect national differences, for example standard bed sizes tended to differ between countries, but the overwhelming majority of the products sold by IKEA were common across countries. The Swedish roots of the company were celebrated as a source of distinctiveness not only in the design of the firms products but also in its management style. Managers across the organisation were strongly encouraged to adopt a Swedish, open and non-hierarchical management style because Kamprad felt that this mode motivated employees and had universal appeal. A pragmatic problem-solving style and egalitarian approach to decision making became the cornerstone of IKEAs unique culture and was referred to by the founder and his team as the IKEA way.⁴

The challenges of internationalisation

As the company moved further from its Scandinavian base and became more dependent on overseas operations, the pressure for the company to be more nationally responsive grew. One of IKEAs first challenges came when it entered the US market. The company expected its standard range to sell as well as it did in Europe but instead faced some unexpected problems. IKEA executives were, for example, initially perplexed by the number of vases they were selling until they realised that Americans were buying vases to drink from rather than put flowers in because European style glasses were too small for American tastes. Conversely, IKEAs first forays into Japan were unsuccessful, partly because its furniture products were viewed as too large to fit into small, Japanese living spaces. While recognising the need to adapt some of its products to local demands, IKEAs low-cost business model depended on the high-volume sales that came from standardisation. The IKEA headquarters team recognised the need for some country-specific adaptations and made it possible for area managers to put forward suggestions, but to achieve economies of scale, the extent of adaptation was limited to 510 per cent of the product range.

As well as adapting the companys product lines, there was also pressure to adapt the management style. The democratic approach to management characteristic of Swedish organisations was not perceived universally to be as favourable as the top team expected.

Grol and Schoch, for example, point out that in Germany Swedish management was considered peculiar.⁵ Older workers felt uncomfortable calling managers by their first names and employees, in general, disliked the lack of formality. Similarly, in France, rather than seeing IKEAs flat organisation structure as enabling, many employees saw it as stripping them of status and removing opportunities for promotion. The fact that the key decision-making and training centres were located in Sweden (and required managers to be fluent in Swedish) made it very difficult for non-Scandinavians to progress to the higher echelons of management.

IKEA faced a different set of challenges in Asia, particularly when it entered the Chinese market.⁶ The company had always positioned itself as a low-cost provider, but in China it was seen as an expensive brand by its target market of young professionals. Import duties and exchange rate fluctuations made it difficult for IKEA to compete with domestic furniture producers on cost and IKEAs designs were quickly copied and prices undercut by local producers. China had huge market potential for IKEA because its population was growing more affluent and home ownership was increasing rapidly, but it was very difficult to maintain a low-cost market position in this environment. Faced with this dilemma, IKEA chose to maintain its competitive positioning and cut its prices significantly, with some of its products selling at prices 70% lower in China than in other countries. The decision to sacrifice short-term profits in order to gain a foothold in the market and achieve long-term growth seemed to pay off: 12 years after its initial entry, IKEAs Chinese retail stores began to show a profit.

The move into Asia also highlighted for IKEA the fact that one size did not fit all in other aspects of its strategy. In Europe and the US, most customers used private transport to get to IKEA stores, but in China the majority of customers used public transport. As a result, IKEA had to alter its location strategy, situating its retail stores near rail and metro hubs on the outskirts of cities rather than opting for more out-of-town sites. Similarly, the company had to adapt its environmental strategy. Like many other European retailers, IKEA sought to improve its green credentials by charging for plastic bags and requiring its suppliers to provide environmentally friendly products. The majority of Chinese suppliers were unable to provide products that met IKEA environmental standards and, rather than welcoming IKEAs environment-friendly approach, price-sensitive Chinese customers were irritated by charges for plastic bags. Consumers in China were unfamiliar with the concept of flat-pack furniture, did not own the tools necessary for assembling flat packs and lacked the means of transporting furniture to their homes. IKEA, inadvertently, created a new industry comprised of enterprising individuals who set up a business delivering and making up IKEA furniture. Unfortunately for IKEA, this also created the impression that there were hidden charges associated with the purchase of their products.

Internationalisation has presented IKEA with challenges but it has also opened up opportunities for innovation and learning. While much of the information flow within IKEA is from the headquarters to the stores, knowledge also flows in the reverse direction. The centre issues retail stores with detailed instructions about operating practices that need to be copied exactly, including how stores should be laid out, how the IKEA catalogue should be presented, what the product range should contain and what colours bags and staff uniforms should be, but operatives are also encouraged to explore new work methods and new product ideas. For example, the layout of each IKEA store needs to include the presentation of five living rooms for customers to view but the specific content and design of those rooms can be tailored to local tastes. New ideas emanating from employees are passed first to the service office in the relevant store, then to the service office in the relevant market and finally to the global service office. At each stage, new ideas can be rejected or passed on but, in all cases, the rationale for acceptance or rejection is articulated via the companys intranet. A formal system of store audits monitors individual stores adherence to the IKEA concept but also identifies good practices and new ideas that are shared across the organisation. Expatriates play an important role as mentors and, when IKEA enters a new country, co-workers are sent to other countries to learn about IKEA.

IKEA, like most other multinationals, struggles to balance global and local pressures but, over time, has found ways of replicating its core business model and operating practices in flexible ways.