Fluent Essays

Hi Rachel,One page should be good enough. Here is the Case study for your reference. IKEA’s Global Strategy:Furnishing the WorldPaul KolesaIKEA is a furniture manufacturer and retailer, well known throughout the world for itsknockdown furniture. Its large retail stores in the blue-and-yellow colors of the Swedishflag are located on the outskirts of major cities, attracting shoppers who are looking formodern designs at good value. The low-cost operation relies on buyers with automobiles tocarry the disassembled furniture in packaged kits and assemble the pieces at home.The IKEA case is interesting because it shows how even retailers can go global once thekey competitive advantages of the offering are standardized. The case focuses on the Americanentry, which posed barriers IKEA had not encountered before and which forced adaptationof some features.IKEA, the Swedish furniture store chain virtually unknown outside of Scandinavia 25years ago, has drawn large opening crowds to its stores as it has pushed into Europe, Asia,and North America. Along the way it has built something of a cult following, especiallyamong young and price-conscious consumers. But the expansion was not always smoothand easy, for example, in Germany and Canada, and it was particularly difficult in theUnited States.Company BackgroundIKEA was founded in 1943 by Ingvar Kamprad to serve price-conscious neighbors in theprovince of Smaland in southern Sweden. Early on, the young entrepreneur hit upon aCaseCaseGroup Dwinning formula, contracting with independent furniture makers and suppliers to designfurniture that could be sold as a kit and assembled in the consumer’s home. In return forfavorable and guaranteed orders from IKEA, the suppliers were prohibited from sellingto other stores. Developing innovative modular designs whose components could be massproduced and venturing early into eastern Europe to build a dedicated supplier network,IKEA could offer quality furniture in modern Scandinavian designs at very low prices.By investing profits in new stores, the company expanded throughout Scandinavia inthe 1950s.Throughout the following years, the IKEA store design and layout remained the same;IKEA was basically a warehouse store. Because the ready-to-assemble “knockdown” kitscould be stacked conveniently on racks, inventory was always large, and instead of waitingfor the store to deliver the furniture, IKEA’s customers could pick it up themselves. Storeswere therefore located outside of the big cities, with ample parking space for automobiles.Inside, an assembled version of the furniture was displayed in settings along with otherIKEA furniture. The purchaser could decide on what to buy, obtain the inventory tag number,and then either find the kit on the rack, or, in the case of larger pieces, have the kitdelivered through the back door to the waiting car.This simple formula meant that there were relatively few sales clerks on the floor to helpcustomers sort through the more than 10,000 products stocked. The sales job consistedmainly of making sure that the assembled pieces were attractively displayed, that clear instructionswere given as to where the kits could be found, and that customers did not haveto wait too long at the checkout lines. IKEA’s was a classic “cash-and-carry” approach, exceptthat credit cards were accepted.This approach, which trims costs to a minimum, is dependent on IKEA’s global sourcingnetwork of more than 2,300 suppliers in 67 countries. Because IKEA’s designers workclosely with suppliers, savings are built into all its products from the outset. Also since thesame furniture is sold all around the world, IKEA reaps huge economies of scale from thesize of its stores and the big production runs necessary to stock them. Therefore, IKEA isable to match rivals on quality while undercutting them up to 30 percent on price.To draw the customers to the distant stores, the company relies on word-of-mouth,limited advertising, and its catalogues. These catalogues are delivered free of charge inthe mailboxes of potential customers living in the towns and cities within reach of a store.The catalogues depict the merchandise not only as independent pieces of furniture butalso together in actual settings of a living room, bedroom, children’s room, and so on.This enables the company to demonstrate its philosophy of creating a “living space,” notjust selling furniture. It also helps the potential buyer visualize a complete room and simplifiesthe planning of furnishing a home. It also shows how IKEA’s various componentsare stylistically integrated into a complete and beautiful whole. Even though furniture ishardly high-tech, the philosophy is reminiscent of the way high-tech producers, such asmobile phone makers, attempt to develop add-on features that fit their particular brandand not others.As the company has grown, the catalogue has increased in volume and in circulation.By 2003, the worldwide circulation of the 360-page catalogue reached over 130 million,making it the world’s largest printed publication distributed for free. In 2003 the cataloguewas distributed in 36 countries and 28 languages, showing more than 3,000 itemsfrom storage solutions and kitchen renovation ideas to office furniture and bedroomfurnishings.Sales totaled about 12.2 billion U.S. dollars in 2003, with a net profit margin around 6–7percent. Of this, Europe accounted for over 80 percent of revenues, with Asia accountingfor 3 percent, and North America 15 percent. The huge stores are relatively few innumber—only 175 worldwide but growing rapidly—and the company employs aboutCase 15 IKEA’s Global Strategy: Furnishing the World 40576,000 people around the world (see Exhibits 1 and 2). Many of the stores have only oneexpatriate Swedish manager at the top, sufficient to instill the lean Ingvar Kamprad andIKEA ethos in the local organization.Although the firm remains private, it continues to innovate and reorganize itself. For instance,fast decision making is aided by a management structure that is as flat as the firm’sknockdown furniture kits, with only four layers separating IKEA’s chief executive from itscheckout workers. In 1992 IKEA abolished internal budgets and now each region mustmerely keep below a fixed ratio of costs to turnover.European ExpansionIn the 1960s and 70s, as modern Scandinavian design became increasingly popular, expansioninto Europe became a logical next step. The company first entered the Germanspeakingregions of Switzerland, thereby testing itself in a small region similar toScandinavia. Yet expansion so far away from Sweden made it necessary to develop new suppliers,which meant that Kamprad traveled extensively, visiting potential suppliers and convincingthem to become exclusive IKEA suppliers. Once the supply chain was established,the formula of consumer-assembled furniture could be used. After some resistance from independentfurniture retailers who claimed that the furniture was not really “Swedish,” sincemuch of it came from other countries, IKEA’s quality/price advantage proved irresistibleeven to fastidious Swiss consumers.The next logical target was Germany, much bigger than Switzerland, but also culturallyclose to IKEA’s roots. In Germany, well-established and large furniture chains wereformidable foes opposed to the competitive entry and there were several regulatory obstacles.The opening birthday celebration of the first store in 1974 outside Cologne wascriticized because in German culture birthdays should be celebrated only every 25years. The use of the Swedish flag and the blue-yellow colors was challenged becausethe IKEA subsidiary was an incorporated German company (IKEA GmbH). The celebratorybreakfast was mistitled because no eggs were served. Despite these rearguardactions from the established German retailers, IKEA GmbH became very successful,406 Section V Marketing Management CasesEXHIBIT 1IKEA Sales DataTurnover for the IKEA Group:Sales for the IKEA Group for the financialyear 2003 (1 September 2002 – 31 August 2003)totaled 11.3 billion euro (12.2 billion USD).3.60246810127.79.510.411.0 11.31993 1999 2000 2001 2002 2003and was thus accepted, being voted German marketer of the year in 1979. The acceptanceof IKEA’s way of doing business was helped by the fact that IKEA had enlargedthe entire market by its low prices, and some of the established retailers adopted thesame formula in their own operations.To get the stores abroad started, Kamprad usually sent a team of three or four managerswho could speak the local language and had experience in an existing IKEA store. Thisteam hired and trained the sales employees, organized the store layout, and established thesales and ordering routines. Although the tasks were relatively simple and straightforward,IKEA’s lean organizational strategies meant that individual employees were assignedgreater responsibilities and more freedom than usual in more traditional retail stores. Althoughthis was not a problem in Europe and Japan (where its Japanese-sounding name alsowas an advantage), it was a problem in the United States.Case 15 IKEA’s Global Strategy: Furnishing the World 407Top Four Purchasing CountriesChina 18\%Poland 12\%Sweden 9\%Italy 7\%Top Five Sales CountriesGermany 20\%United Kingdom 12\%USA 11\%France 9\%Sweden 7\%Sales by RegionAsia 3\%North America 15\%Europe 82\%Purchasing by RegionNorth America 3\%Asia 31\%Europe 66\%Co-workers by FunctionRange, purchasing/trading, wholesaleand others: 8,000Industrial production: 11,000Retail: 57,000Co-workers by RegionAsia + Australia 3,000North America 11,000Europe 62,000The IKEA group employs a totalof 76,000 co-workers in 43 countriesCanadian EntryTo prepare for eventual entry into the United States, IKEA first expanded into Canada. TheCanadian market was close to the U.S. market, and creating the supply network for Canadawould lay the foundation for what was needed for the much larger U.S. market. Drawingupon a successful advertising campaign and positive word-of-mouth, and by combiningnewly recruited local suppliers with imports from existing European suppliers, the Canadianentry was soon a success. The advertising campaign was centered around the slogan,“IKEA: The impossible furniture store from Sweden,” which was supported by a cartoondrawing of a moose’s head, complete with antlers. The moose symbol had played very wellin Germany, creating natural associations “with the north,” and also creating an image offun and games that played well in the younger segments the company targeted. The Canadiansresponded equally well to the slogan and the moose, as well as to IKEA’s humorouscartoonlike ads poking fun at its Swedish heritage (“How many Swedes does it take to screwin a lightbulb? Two—one to screw in the lightbulb, and one to park the Volvo”), which becameoften-heard jokes.The United States presented a much different challenge, as it offered a much larger marketwith a dispersed population, great cultural diversity, and strong domestic competition.The initial problems centered around which part of the United States to attack first. Whilethe east coast seemed more natural, with its closer ties to Europe, the California market onthe west coast was demographically more attractive. But trafficking supplies to Californiawould be a headache, and competition seemed stronger there, with the presence of establishedretailers of Scandinavian designs.Then, there was the issue of managing the stores. In Canada, the European managementstyle had been severely tested. The unusually great independence and authority of each individualemployee in the IKEA system had been welcomed, but the individuals often askedfor more direction and specific guidance. For example, the Swedish start-up team wouldsay to an employee, “You are in charge of the layout of the office furniture section of thestore,” and consider this a perfectly actionable and complete job description. This seemedto go against the training and predisposition of some employees, who came back with questionssuch as, “How should this piece of furniture be displayed?” IKEA’s expansion teamsuspected that the situation would be possibly even more difficult in the United States. Theteam also wondered if the same slogan and the moose symbol would be as effective in theUnited States as it had been in Germany and Canada.Entry Hurdles in the United StatesFrom the outset IKEA had succeeded despite breaking many of the standard rules of internationalretailing: enter a market only after exhaustive study; cater to local tastes as muchas possible; and tap into local expertise through acquisitions, joint ventures, or franchising.Although breaking these rules had not hurt IKEA in Europe, the firm got into some troublein America with its initial seven stores; six on the east coast and one in California. Manypeople visited the stores, looked at the furniture, and left empty-handed, citing long queuesand nonavailable stock as chief complaints.IKEA managers believed that their most pressing problem in entering the U.S. marketwas the creation of a stable supply chain. By taking an incremental approach, starting witha few stores on the east coast including an initial one outside Philadelphia, IKEA managersbelieved that they had ensured a smooth transition from the eastern United States,with its relative proximity to European suppliers, and its Canadian beachhead. Althoughthe store in southern California was much farther away, its large market and customer408 Section V Marketing Management Casesdemographics—young and active—favored IKEA’s modern designs and assemble-it-yourselfstrategy. The California entry was also precipitated by the emergence of a local imitator,“Stør,” which had opened ahead of IKEA, capitalizing on the word-of-mouth generated byIKEA’S new concept.IKEA’s early effort had problems because of less adaptation to the American market thancustomers desired. For example, IKEA decided not to reconfigure its bedroom furniture tothe different dimensions used in the American market. As a result, the European-style bedssold by IKEA were slightly narrower and longer than standard American beds, and customers’existing mattresses and sheets did not fit the beds. Even though IKEA stockedEuropean-sized sheets in the stores, bed sales remained very slow. IKEA ended up redesigningabout a fifth of its American product range and sales immediately increased byaround 30–40 percent.The American suppliers, whom IKEA gradually recruited to reduce the dependenceon imports, also proved in need of upgrading and instruction in IKEA’s way of producingfurniture. IKEA sent its people to the suppliers’ plants, providing technical tipsabout more efficient methods and helping the suppliers shop around for better-qualityor lower-price materials. Now IKEA produces about 45 percent of the furniture soldin its American stores locally, up from 15 percent just a few years earlier. In turn thishas helped the firm cut prices in its American stores for three years running. TheAmerican difficulties also highlighted how growth could lead to quality problems inmanaging its increasingly complex global supply chain, so IKEA began conductingrandom checks.Other adaptations to the American market proved just as successful. For instance, newcash registers were installed to speed throughput by 20 percent, with the goal of eliminatinglong checkout lines. Store layout was altered to conform more with American aestheticsand shopping styles. A more generous return policy than in Europe was instituted and anext-day delivery service was implemented.PromotionWhile some managers helped establish the supply side of the stores, IKEA’s marketing staffwas busy with the promotional side of the business. Store locations had generally disadvantagedIKEA relative to competitors. Because of the huge size of the stores (typicallyaround 200,000 square feet), the need to keep a large inventory so that customers could getthe purchased furniture immediately, and the amount of land needed for parking aroundeach store, most stores were located in out-of-the-way places—next to the airport in NewJersey in one case and in a shopping mall 20 miles south of Washington, DC, in another.Thus, advertising was needed to make potential customers aware of store locations. It wasthought that lower prices and selection would do the rest—positive word-of-mouth hadproven the best advertising in most other markets.But in the United States’ competitive retail climate IKEA found that more focused mediaadvertising was needed. As one manager stated: “In Europe you advertise to gain business;in the United States you advertise to stay in business.” The diversity of the consumersmade word-of-mouth less powerful than in ethnically more homogeneous countries. Managementdecided that a strong slogan and unique advertising message were going to be necessaryto really bring awareness close to the levels in other countries.The Moose symbol of IKEA (see Exhibit 3), although successful in Germany andCanada, was considered strange and too provincial for the U.S. market and would projectthe wrong image especially in California. Instead IKEA, in collaboration with its NewYork–based advertising agency Deutsch, developed a striking slogan that combined theCase 15 IKEA’s Global Strategy: Furnishing the World 409EXHIBIT 3down-home touch of the company philosophy with the humorous touch of the Moose: “It’sa big country. Someone’s got to furnish it” (see Exhibit 4).Following the success of this advertising strategy, the company ventured further to establishitself as a pioneering store and to attract new kinds of customers. IKEA andDeutsch developed a series of eight TV advertising spots that featured people at differenttransitional stages in their lives, when they were most likely to be in the market for furniture.One spot featured a young family who had just bought a new house, another a couplewhose children had just left home, and so on. IKEA even developed one spot thatfeatured a homosexual couple, two men talking about furnishing their home. It was a daringstep, applauded by most advertising experts and impartial observers. The campaignhad a positive impact on IKEA’s image—and on IKEA’s sales. The company has continuedthe trend. One 30-second TV spot showed a divorced woman buying furniture for thefirst time on her own.410 Section V Marketing Management CasesEXHIBIT 4The privately held company won’t reveal income figures, but it is successful in each ofthe market areas where it has located its U.S. stores. It is credited with being partly responsiblefor a shift in furniture buying behavior in the United States. Choosing furniture hasbecome a matter of personality, lifestyle, and emotions in addition to functionality. IKEA’smanagers like that—they want IKEA to be associated with the “warmest, most emotionalfurniture in the world.”