IKEA CASE STUDY

Think that at the age of 7, you are selling matches on the street, selling pens and wallets at the age of 12, working hard every day hard work day and night, morning to evening hustle, which results in at the age of 17 you open your first business, a business which is spread all over the world from Japan to Singapore, from Germany to Australia and even India, if anyone wants to purchase affordable furniture so they remember you the first, IKEA World's largest furniture company, so one can't even imagine in a dream that a company which started from store room will destroy competition and dominate worldwide furniture market but interestingly, hardly anyone knows that this 60 billion dollar company doesn't make any furniture nor pays any taxes not all this, after knowing everything about business model there is no such furniture company who beat IKEA in the market, but how? After all how IKEA does all this and most importantly what are those most powerful business lessons which we learn from this case study and implement it in our business.

IKEA, THE UNDISPUTED KING OF FURNITURE

This story starts from 1943, Ingvar Kampard, 17 years old boy, prints catalogues for selling furniture, people watched the catalogue and they loved furniture too but no one buys it because the furniture prices were too low many people thought he is a fraud to fix this problem Ingvar quickly converts his store room to a furniture showroom, so that people before purchasing can come and see furniture physically experience it and after that buy it and guess what after this technique, in front of Ingvar showroom there is a line of thousand people and this is the place where IKEA was born, years went and one by one stores were opened and fast forward to today IKEA is undisputed king of furniture One such a billion dollar empire which contains many secrets inside it Now at first, IKEA is famous for selling furniture at low prices, that is just one side of the story because IKEA is not a furniture company, IKEA is a marketing company with a excellent logistics network But the question is how does IKEA do this? Well to understand this we have to go back in time, at the age of 6 when Ingvar used to sell matchboxes, one of his aunts lived in Stockholm whom he asked to bring cartons of matchboxes, which he then split into small boxes and sell it to customers and from now he knew the power of pricing, many few people know this that IKEA didn't start from selling furnitures, IKEA first started selling pens and wallets When World War 2 was over, Swedish government was building homes for people, which Ingvar saw an great opportunity to enter in the furniture market and because till now IKEA has mastered in control of both pricing and cost, so for them providing furniture at very cheap price was of no big deal but as i said from beginning IKEA was not a furniture company, it is a marketing and logistics company You see back then when World War 2 was over and IKEA entered in the furniture market at that time in Sweden many small scale furniture manufacturing factories were set up who became IKEA's sourcing hubs and to top it all initially IKEA used to only print catalogues and delivery it to people houses they used to place an order, and this order were made by small manufactures and IKEA then delivers it to people if you see now, worldwide out of 100 people who visits the IKEA store, 85% of them come out with a product in hand But the question is, how does IKEA do this on the worldwide level?

Photo by Alexander Isreb

This thing played a big part in making IKEA. So this full process is divided into 2 parts, No.1 Sourcing, now look at this very very carefully IKEA never makes furniture on their own, IKEA's design team takes input from different countries that how they people like there furniture After collecting all this data, it is received at IKEA's design team and after that design teams, according to the preference data of different countries some designs are created In that designs some iterations are made and finally a mass market fit design is made After that, this mass market designs which are made according to countries preference are sent to the country's head Country heads recheck this design and after that price is set for the furniture which is to be made out of the designs After setting price, this designs are sent to the supplier along with the pricing, so that suppliers while controlling cost can make a proper perfect furniture for them Now comes second step that is Warehousing, IKEA performs this 3 activities under its warehousing No. 1 Inbound Logistics, in very simple words inbound logistics means to source the goods IKEA, when sources all there goods from the supplier, so they keep in mind the IWAY Standards In IWAY Standards there are 14 major considerations which IKEA look before taking goods from any supplier If all those considerations are not fulfilled, so IKEA does not pick up goods from that supplier Once IKEA pick up this goods, after that here comes the next step and that is "Docking" Leaving Antartica, IKEA is serving people across all the continents, for that they have more that 35 distribution centres Work of this distribution centers is to receive all the goods, handle it, sort it out, and dispatch ahead, now see how this works IKEA's biggest distribution center is in Beijing, Shanghai, through which they capture all the Asian market and if you look very closely This distribution center of Beijing, Shanghai gives IKEA three major advantages, No.1 Low labour cost No.2 Big real estate & cheap real estate, Big space is available and it is available very cheaply and third and most importantly, Port availability, the place in Beijing, Shanghai were they have opened their distribution center, they have ports nearby through which all there goods is distributed to rest Asian countries easily, but the interesting thing is when IKEA enters in any new market, they don't open there distributions at the starting, In the very beginning they open retail stores when at there retail stores there is a demand, after that in the radius of 600 km of their retail store, a distribution centre is opened, so that their logistics cost can be further reduced, now lets go to 3rd process that is Outbound Logistics As soon as distribution centre receives goods, after that this goods is dispatched ahead to mini warehouses from where all this goods goes to different IKEA's retail stores, Inbound Logistics, Distribution centre and Outbound Logistics In this whole supply chain process, there are 2 such things which gives IKEA unbeatable cost advantage No.1 Optiledge packaging, almost everyone knows that IKEA doesn't sell assembled furniture, IKEA's furniture comes in different dissembled parts and you have it assemble it on your own Now the catch is in earlier times, to store all this furniture parts IKEA used wooden blocks which took a lot of space and it was costly too and to solve this, IKEA used optiledge racks to store their furniture Optiledge racks are made from poly-propylene which is a recyclable material with this it is too light and most importantly it is very cheap, and the interesting thing is as using optiledge packaging IKEA increased its storage capacity by 44% because Using optiledge packaging their cubic optimisation increased more, in very simple words A whole truck in which IKEA goods are transported, the space inside that truck is divided into cubes and after that it is seen that how much goods then can store in 1 cubic meters When they started using optiledge racks they were able to store 44% more goods in one truck Let's move to IKEA's second cost advantage, that is Location mapping, if you closely analyse so you won't get any IKEA stores in the main city, All IKEA stores are opened in outskirts, why? because this thing gives IKEA three powerful advantages, No.1 Large space, they get a lot of space All the IKEA stores you will get in 2 lakhs to 5 lakhs square foot, they don't open stores smaller than this No.2 Cheap land, whenever IKEA opens a store they buy out the land and outskirts lands get more 30-40% discount rates comparing main cities And third and most importantly, Engaged efforts, people need to put more efforts to visit IKEA store because they are located in the outskirts And when people put in more effort, so it is obvious that people spend more time in there stores And the more a person spends time in a store, the more he spends his money there and all this happens using data analytics and machine learning, inside IKEA even a small data is recorded and analysed for better location mapping, cubic optimization and design trends, many of us think that IKEA dominates furniture market because they sell cheap But you know what, there is a lot more to it, did you ever think that why people who are going to IKEA store, 85% of them buy something before coming out Well this answer is hidden in IKEA's store design, IKEA's store design looks something like this, once you enter the IKEA store so your exit will be directly on the 2nd floor Whole IKEA store is designed like a maze so that you end up spending more time and end up buying more things, with this if you will see at the ending of the IKEA store a very special thing is kept and that is cinnamon bun counter but why it is kept here? Well there is a very big psychological reason to it Studies show that whenever we spend a lot of money, we are subconsciously in a psychological stress that makes us feel uneasy and inside IKEA everything is sold cheap, so there are many high chances that people who go to IKEA stores overbuys because of which there subconscious stress increases more, this bun counters aren't kept at the end of the stores to increase sales rather it is kept because when this buns bakes, the sugar smell is soo soothing that it decreases your subconscious stress and whether you eat bun or not, from that smell you get a relaxed feeling because of which by overspending, the psychological stress that you have increased that will decrease You start to feel good and after that you tell people about the IKEA store because now you have a very nice memorable experience Remember I told you in the beginning, after having 60 billion dollar value and 40 billion dollar revenue, IKEA hardly pays any taxes this is a secret of IKEA which many few people know, and the interesting part is legally without paying any taxes kampard family takes billions of dollars without paying any taxes But how? Well now look at this very very carefully, All the IKEA stores are operated and controlled by INGKA foundation, INGKA foundation is a non-profit organisation but the catch is, that IGNKA foundation leverages the IKEA trademark to run IKEA stores and this trademark INGKA foundation takes from Inter IKEA systems Inter IKEA systems is also a non-profit organisation, the catch is the non-profit organisation already pays 33% less taxes than profit organisations and now the more interesting thing is that Inter IKEA systems is again owned by a small non-profit organisation and who are the owners of that non-profit organisation, hardly anyone knows but there are high chances that there owners belong to Kampard family now what happens is the IKEA trademark which is used to run IKEA stores for that trademark, a very huge portion of profit as expense is given to Inter IKEA systems by INGKA foundation and this same thing is done by Inter IKEA systems through the privately owned company and all the money is moved from INGKA foundation to Kampard family Honestly this is a very over simplified version of IKEA's tax breaking systems because in reality this system is created in such a complicated way that it is impossible for someone to tax IKEA and all this brings us to all that powerful business lessons that we will study from this case study and implement it in our business No.1 Get your customer emotionally attached to your product, if you look very closely all the IKEA products are DIY that means Do It Yourself you have to assemble the whole product yourself, at one side this things comes with a very large cost saving advantage for IKEA but at the customer side this thing attaches the customer to the product more, why? because when a customer gets involved in the making process, so they take care of it nicely and along with it they get more attached to that product Second lesson, One thing never accounts to all, we all think that retail stores like IKEA and DMART are more profitable because they buy in bulk and sell in cheap that's why there profit upscales But the reality is, this is not the only factor behind earning profits by selling cheap If you look very closely, there are many contributing factors behind any organisation's cost advantage and selling advantage Like in IKEAs case it is Sourcing, Warehouse Management, Logistics, Operational cost management all these things together keeps IKEA in a very profitable state even after selling cheap And 3rd and most important lesson Consumer psychology is the key to sales, from store layout to IKEA's deployed pricing, from cinnamon bun counter to IKEA's location All the decisions are taken according to the studies of consumers psychology and if you do the same in your business so your customer won't leave you ever.

Thank You

Credit : Aditya Saini