IKEA: The Furniture Guru - An Exploratory Study 3, CS 17… · In 2000, IKEA introduced a code of conduct for its suppliers based on international conventions and declarations known

1. Student, Symbiosis Law School, Pune



4. Associate Professor, Symbiosis Law School, Pune

Proceedings of International Conference on Strategies inVolatile and Uncertain Environment for Emerging MarketsJuly 14-15, 2017Indian Institute of Technology Delhi, New Delhipp. 18-27

IKEA: The Furniture Guru - An Exploratory Study

Ashmita Vinay1, Isha Srivastava2, Sohail Vij3 and Surya Rashmi Rawat4

Abstract

IKEA is a Swedish furniture giant. The brainchild of Ingvar Kamprad, IKEA runs on theconcept of DIY (Do-It-Yourself) and flat-pack furniture and is widely known for its effortsin environment conservation and fulfilling its social responsibilities. The company hasbeen on the top of the ladder since January 2008 and is yet to start its operations in2017 in Hyderabad, India. The case study focuses on understanding the ideology andconcept of the company regarding its marketing and promotion strategies, the storybehind its success, while analyzing its failures and the methods it used to overcomethem along with their applicability in potential markets. It also concentrates on findingout the opinion people hold of the company and its modern products thereby assessingits scope and potential challenges in a traditional market like India.

Keywords: DIY, Environment Friendly, Flat-Pack Furniture, Promotion, Scope.

1. Introduction

IKEA is a multinational group of companies that designs and sells ready-to-assemble furniture,appliances and home accessories. As of January 2008, it is the world’s largest furniture retailer,making a name for itself in the furniture industry which is one of the most labor intensiveindustries in the world. The company’s name is an acronym that consists of the initials of IngvarKamprad, Elmtaryd (the farm where he grew up), and Agunnaryd (his hometown in Småland,Sweden). The company is known for its modern architectural designs, and its interior design workis often associated with eco-friendly simplicity. The firm is also known for its attention to costcontrol, operational details and continuous product development.

Background

Ingvar Feodor Kamprad was born in Älmhult, Sweden on 30th March 1926. Kamprad today hasa total net worth of $44.5 billion, and is known to be “boldly innovative and inherently simple”.IKEA was founded by Kamprad in 1943, when he was just 17. IKEA originally sold pens,wallets, picture frames, etc. until furniture was introduced in 1948.The first IKEA catalogue waspublished in 1951 after which IKEA’s first furniture showroom opened in Älmhult in 1953.Designingfurniture for flat packs and self-assembly began in 1956 after which IKEA opened its first storein 1958 and the first restaurant in 1960. The largest IKEA store opened in Stockholm, Swedenin 1965 and covers 31,000 square meters.

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The IKEA Effect

In recent times, a lot of emphasis has been put on firms to be innovative and flexible in orderto keep up with the dynamic business environment and society. As stated by Joseph Schumpeterin 1939,

“Like human beings, firms are constantly being born that cannot live, others may meet what isakin, in the case of man, to death from accident or illness. Still others die a ‘natural death, asmen die of old age. And the ‘natural’ cause, in the case of firms is precisely their inability tokeep up the pace in innovation which they themselves had been instrumental in setting thetime of their vigor”

IKEA on the other hand has been a guide for innovation to all furniture companies around theworld with constant change in its policies and innovative selling ideas. IKEA believes in flat-pack furniture and Do-It-Yourself (DIY) concept. Experiments show that the monetary valueassigned to the amateur creations of self-made goods is on a par with the value assigned toexpert creations. Both experienced and novice do-it-yourselfers are susceptible to the IKEAeffect.

2. Review of Literature

The review below presents an elaborate account of the studies related with the present study.Norton, M. et al (2012) in his study reported the analysis of “IKEA effect” and its impact on theconsumers. Purnomo, H et al (2011) gives an account of the role of small-scale workers andwomen in the furniture industry of Java, Indonesia hereby giving an idea about how big theglobal furniture industry is. Douglas S.P. et al (2011) report about how firms from all parts ofthe world trying to expand their markets and operations are facing economic and cultural diversity.The author examines the effects of such diversities on the business and gives an idea of whatmethodology can be adopted by these firms. Bullard and West (2002) present a detailed accountof the importance of adapting to the changes that are taking place in the ever-dynamic marketscenario in particular the furniture marketing and manufacturing industry and how it can bedone. Tyson, K., (1996) talks about how business competition will change radically in the comingcentury and how important it is to be far sighted in this Intelligence-Age in order to survive inthe cut-throat competition. Harari, O. (1999) is a blueprint of five giant steps that will make orbreak an organization into or from market leadership. Kelly, K., (1999) exhibits the businessstrategies in this day and age of the networked economy and how communication, and notcomputation is the key to success.

3. Objectives of the Study

• Understand the ideology of the Swedish company named IKEA Group.

• Analyze the success of IKEA as it became the world’s largest furniture retailer.

• Investigate the initial failures and how were they overcome.

• Explore the social responsibility undertaken by IKEA.

• Look at its scope of success in India

Research Method

A qualitative evaluation was utilized for this research project leveraging subjective methodssuch as interviews and observations to collect substantive and relevant data. Upon collectingthe primary data derived from surveys conducted through handing out questionnaires, carefulanalysis was done with help of graphs and rank correlation method to prepare a SWOT (strengths,weaknesses, opportunities, and threats) to analyze how IKEA will establish itself in India. The

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Ashmita Vinay, Isha Srivastava, Sohail Vij and Surya Rashmi Rawat

research also gathered relevant data from the some documents and compiling databases i.e.,the secondary source to arrive at a more coherent understanding.

4. IKEA and Environment

In 1992, IKEA developed an Environment Action Plan for the company which focused on structuralchange, allowing IKEA to “maximize the impact of resources invested and reduce the energynecessary to address isolated issues.” The environmental measures so taken included minimizingthe usage of formaldehyde, using 100% post-consumer plastic waste for furniture productionand using only recyclable materials for flat packaging and non-mixed materials for packaging toassist in recycling among other things. As IKEA aims to contribute to better forestry in thelong-term it only accepts wood from high conservation value forest or intact natural forest ifthey are verified as responsibly managed. IKEA has its own forestry organisation which sourceswood from 48 different countries with special projects in China and Russia.

IWAY

In 2000, IKEA introduced a code of conduct for its suppliers based on international conventionsand declarations known as IWAY, acronym for the IKEA Way of Purchasing Products, Materialsand Services. IKEA suppliers are responsible for communicating the content of the IKEA codeof conduct to their employees and sub-suppliers.

5. Growth Rate

The GDP growth rate for euro area consisting of 19 countries has been on average 1.7% forthe financial year 2015, where it has the maximum number of stores and gets its maximumsales.

“Some 80 percent of the group’s total sales are generated in Europe and it’s aiming for 50billion Euros in revenue by 2020, an average growth rate of about 10 percent a year, partlythrough growing its online business.”

This shows that IKEA has been growing five-folds the size of economy it creates majority ofits earnings from. Therefore, the European economy has not slowed down IKEA’s growth. Apossible explanation is that IKEA is known for producing basic and cheap furniture, so in timesof economic slowdown IKEA’s furniture become inferior goods.

6. Marketing and Promotion

One of the major drawbacks of marketing in the furniture industry is tied up with the questionof how the consumer can be induced to spend a larger portion of his income for furniture. Withrelatively affordable furniture and effective marketing, IKEA has been able to address this issuerather effectively. The biggest contributing factor that has led to the rapid growth of IKEA isthat it weaves a story around itself and binds the customer in such a way that they feel a partof IKEA. This can be seen through the concept of “IKEA FAMILY” according to which IKEAfunctions not as a business earning profits through sales but as a family based on its corevalues and philosophy. The DIY concept also offers advantage i.e., when customers help specifyor create a product, they are much more likely to be satisfies with it.

The 4 P’s of Marketing

The 4 P’s of marketing are essential for any company to implement for the establishment of asuccessful business. IKEA is no exception to this and has implemented them as a part of theirmarketing strategy. IKEA produces modern contemporary designs to their products while givingample of options for the customer. Every year IKEA produces 9,500 home furnishing products

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designed to be functional and good looking but at a low price.. IKEA realized that in order toreach the masses of the global markets it was necessary to localize. It understood that themodern European style designs would not work in the South East Asian market and hencedecided to design home furnishings suitable for places like Japan. IKEA gets its main share ofprofit from USA, China, Australia, Poland, Sweden, Italy and Germany. It’s promotion strategiesvary with the market conditions and cultural aspects of each country. The IKEA catalogue isthe main way through which IKEA appeals to its customers. The catalogues are produced in 38editions, 17 languages and distributed in 28 countries. Every year 2 million copies of thecatalogues are distributed. The target markets of IKEA are middle class population all over theworld and small business firms that want affordable and cheap furniture. The total sales were of28.7 billion Euros. In the fiscal year 2015 IKEA Group’s total sales amounted to EUR 31.9Billion ($35.7 Billion US) .There was a 5.5% increase in the net profit from the year of 2014.The brand value of IKEA, as of 2016 is $11.9 Billion.

Production and Distribution

IKEA designs its own furniture and they are produced by their 1,220 suppliers located in 55countries. The company also has 31 trading service offices spread in 26 countries to monitorproduction, for testing of new innovations and checking price and quality of products. IKEAfocuses on the production capacity rather than the production quantity. The produced goods aretransported to the stores through the company’s distribution centers and warehouses. Thedistribution network plays a significant role in this since it operates 31 distribution centers in 16countries. IKEA transports goods in flat packs, hence making the transportation and shippingvery organized and efficient.

Figure 1: Distribution of Good through Various Means

7. Legal and Ethical Criticisms of IKEA

In September, 2004, IKEA offered free vouchers during a store opening in Jeddah, Saudi Arabia.There was a stampede at the opening of the store which killed 3 people and injured several.IKEA has also been accused of practicing child laboring its production units in the underdevelopedcountries. There have also been accusations of indulging in excessive logging of trees resultingin deforestation. There have been a number of callbacks of products due to quality issues.IKEA has also been criticized by Former Norwegian Prime Minister for stereotyping genderroles. The IKEA formaldehyde scandal is the biggest legal issue faced so far. The Company

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faced lot of backlash for exceeding the regulated amount of formaldehyde to be used in productionof goods.

Failure of IKEA in Japan

After attaining immense success in European countries, IKEA as a plan to expand in thecontinent of Asia, opened its first store in Japan. In 1974, IKEA entered Japan with a localpartner. However, due to the cultural, behavioral and lifestyle differences, IKEA failed to win thehearts of the Japanese markets and withdrew in 1986, just a year after commencement ofsales. It was noted that the major reasons for failure were the designs which seemed impracticalfor the comparatively small houses of Japan and, secondly, the assembly of the goods was ahassle for the Japanese people. Twenty years later, IKEA came back and made its way intothe hearts with a successful business model for Japan that was based on their living conditions.

8. Survey

Since, IKEA is about to start its operations in India in 2017, it is important to understand thescope of the company in India. A questionnaire was given out which carried a range of questions,of which some were subjective and some were evaluated on a Likert Scale. The scale evaluateson the five criteria viz. Strongly Agree, Agree, Not Sure, Disagree and Strongly Disagree. Findingsof the survey were arranged in the accordance with the objectives set forth in the study.

General Background Information

The respondents were asked to provide general information regarding their background.

The graph 2 depicts the gender of the respondents, 41% respondents were male while 59%respondents were female.

Figure 2: Distribution of Respondentswith respect to Gender

Figure 3: Distribution of RespondentsAccording to their Age-Groups

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Figure 3 depicts the age of the respondents. It was categories as 16 to 25, 26-35 years and soon. It can be concluded from the above data that majority of the respondents were young andin expanding family stage.

Figure 4: Distribution of RespondentsAccording to Their Age-Groups

Figure 6: Distribution of respondentsas per Salary P.A.

With reference to occupation figure 4, it was found that majority of the respondents i.e. 28.20per cent belonged to service sector, whereas 25.64% respondents were from business class.Out of total sample 10.25% respondents were home maker, and 20.51% were students, 12.82%respondents were government employee, and only 2.56% were from labor sector.

Figure 5 shows that 38.46% of the respondents were getting below 1 lac salary per month,23.07% had a salary of 6 to15 lac per month while only, 10.25% respondents belonged to thehigh income group.

9. Opinion of the Respondents Regarding IKEA

With the help of the survey, following things could be noted:

• A total of 46% people agreed to having seen the logo of IKEA before

• 61.5% people agreed to having heard the name of the company

• 41% of the respondents agreed that they would prefer buying furniture made of naturalwood over one made using manmade board such as plywood, while 30.8% respondentsstrongly agreed, 20.5% were not sure, 0.5% disagreed and only 0.2% respondents stronglydisagreed about the said statement.

• When enquired about the pricing of furniture it was noted that 35.9% strongly agreed, 4%respondents agreed, 10.2% disagreed, 7.7% were not sure and rest i.e. 0.5% respondentsstrongly disagreed that the pricing of furniture was very important for them.

• Concerning the quality of furniture over the price showed that 53.8% respondents stronglyagreed that they consider the quality of the furniture over the price, whereas 28.2% agreed,10.2% were not sure, 0.5% disagreed and only 0.2% respondents strongly disagreed aboutthe said statement.

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Figure 7: Distribution of Respondents as Per Opinionof the Respondents Regarding IKEA

• 35.9% respondents agreed, 33.3% were not sure, 12.8% disagreed 10.2% strongly disagreedand only 7.7% strongly agreed that they were excited to assemble their furniture themselvesif it meant a lower price.

• 35.9% respondents strongly agreed that the life span of furniture had great significance forthem, while 33.3% agreed, 15.4% were not sure, 12.8% disagreed and only 0.2% respondentsstrongly agreed about the same.

• When asked about the preference regarding traditionally designed furniture over modernones, it was revealed that 28.2% respondents disagreed, 25.6% agreed, 20.5% stronglyagreed, 18% were not sure and only 7.7% respondents strongly disagreed about the abovestatement.

• 38.4% respondents agreed that they select likeable furniture from a variety of choices quickly,while 25.6% respondents disagreed, 23% were not sure, 7.7% strongly agreed and only0.5% respondents strongly disagreed respectively that they select likeable furniture from avariety of choices quickly.

Rank correlation was calculated to assess the rank among the seven statements and it wasfound that statement number 3 i.e. “Do you consider the quality of the furniture over the price?”is preferred by the people and they give first rank to the quality of the furniture over the price.Whereas, II rank was given to the statement no. 1 and 2 i.e. they buy furniture made of woodover one and the important of pricing. Similarly, III rank was given to the life span of thefurniture (statement no. 5) and in the similar fashion ranks were assigned to other statements.

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Table 1: Distribution of Respondents as per Opinion of the Respondents Regarding IKEA

S. No. Criteria Rank

1. Preference of furniture material between natural wood and man-made IIboard (plywood)

2. Importance of price of the furniture II

3. Importance of quality of furniture I

4. Eagerness to assemble furniture yourself if it meant a lower price V

5. Significance of life span III

6. Preference of design- Traditional or Modern IV

7. Ease of selection in a short span of time VI

10. SWOT Analysis

11. Present Status

IKEA as of today, it has 384 stores in 48 countries spread all over the globe. IKEA is theworld’s largest home furnishings retailer, it is also known as “The Furniture Giant”. IKEA receivedthree Red Dot Awards for product design in 2016.IKEA’s proposal to invest €1.5 billion ($1.9billion) to set up 25 stores in India by 2025 has been accepted by India. The first store in Indiawill be set up in Hyderabad by 2017.The value of the brand as of today is $18,082 millionannual donation by IKEA Foundation Worldwide of

€

104m.

The Scope of IKEA in India

Although IKEA’s step to move to penetrate the Asian market has been appreciated, it has bighurdles to overcome in order to gain success in the Indian market. India has been known toprefer traditional high quality natural timber product, much opposite IKEA’s product portfolio. In

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addition, India is touching 8% GDP growth rate every year which means they would opt forhigher quality good. On the other side, the increase in the growth of India’s middle-class populationmeans a larger target customer population for IKEA. IKEA primarily advertises using catalogues,which is not a famous method in India. Also, the DIY concept might be a challenging situationfor Indians. The advantage IKEA would be proving the country is that it believes in eco-friendlyprocedures which are required since pollution is one of the biggest challenges as of now.

12. Conclusion

Where direct selling of furniture was only a bleak possibilities in the 1930s, IKEA turned thetables around, quite literally so, by making it a trend for all upcoming furniture retailers. IKEAstrongly adheres to its moral ideologies understanding the responsibility it has towards itscustomers and the business world. Powerful management and marketing strategies have helpedIKEA in climbing up and staying on top of the ladder. The major failures in Japan helped themanalyze their problem areas and establish again as a successful retailer in the South-EastAsian markets. IKEA appreciates the movement towards environmental preservation and henceactively takes preventative measures to contribute towards the sustainable growth of theenvironment. As IKEA grows its operations over a considerably more geo-realistic base, theyare confronting an inexorably complex scope of situations. Given the market conditions in India,IKEA will face a lot of challenges especially when people are still tradition-driven and preferfurniture made by natural wood. Another challenge which will be faced by them could be relatedto assembling of furniture since it would be something new for the consumers. However,successful, innovative firms must have what one writer has called “bifocal vision”- a focus onshort and long term trends and strategies for success and with that vision, IKEA would definitelybe able to conquer the Indian furniture market.

References

• Bertram, D. (2007) Likert Scales…are the Meaning of Life, CPSC 681, Topic Report.

• Bullard, S.H. (1989) Furniture Manufacturing and Marketing in the ‘American Economic Transition.

• Bullard, Steven H., and Cynthia D. West (2002) Furniture Manufacturing and Marketing: Eight StrategicIssues for the 21st Century, Forest and Wildlife Research Center, Bulletin FP 227, Mississippi StateUniversity, pp. 24.

• Dankert, C.E. (1931) Trends and Problems in the Marketing of Furniture, The Journal of Business ofthe University of Chicago, 4(2), 149-173.

• Douglas, S.P., and Craig, C.S. (2011) Convergence and Divergence: Developing a Semi GlobalMarketing Strategy, Journal of International Marketing, 19(1), 82-101.

• Harari, O. (1999) Leapfrogging the Competition, Rocklin, Prima Publishing: California.

• Harvard Business School (1996) Ingvar Kamprad and IKEA, Harvard Business School Publishing:Boston.

• Kelly, K. (1999) New Rules for the New Economy: 10 Radical Strategies for a Connected World,Penguin.

• Norton M. I., Mochon D., and Ariely D. (2012) The IKEA Effect: When Labor Leads to Love, Journal ofConsumer Psychology, 22, 453-460.

• Owens, Heidi (1998) IKEA: A Natural Step Case Study, Oregon Natural Step Network, Oregon.

• Purnomo, H., Irawati, R.H., Fauzan, A.U., and Melati, M. (2011) Scenario-Based Actions to UpgradeSmall-Scale Furniture Producers and their Impacts on Women in Central Java, Indonesia, InternationalForestry Review, 13(2), 152-162.

• Schumpeter, J.A. (1939) Business Cycles: A Theoretical, Historical and Statistical Analysis of theCapitalist Process, ISBN 978-1-68422-064-9.

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• Smith, P.M., and West, C.D. (1994) The Globalization of Furniture Industries/Markets, Journal of GlobalMarketing, 7(3), 103-132.

• Tyson, K. (1996) Competition in the 21st Century, CRC Press.

· Zuvela, Maja (2008) IKEA Mulls Joint Venture with Bosnia Furniture Maker, Reuters.

Websites

• Protect the Forest Sweden. (2016). IKEA cuts down old-growth Retrieved from forest!http://skyddaskogen.se/en/ikea.

• Official IKEA Website. (2016). About the IKEA Group. Retrieved from http://www.ikea.com/ms/en_GB/about-the-ikea-group/company-information/.

• The Richest. (2016). Ingvar Kamprad Net Worth, the Richest. Retrieved from http://www.therichest.com/celebnetworth/celebrity-business/men/ingvar-kamprad-net-worth/.

• Official IKEA Website. (2016).IWAY, Retrieved from Our Code of Conduct.http://www.ikea.com/ms/en_JP/about_ikea/our_responsibility/iway/index.html.

• Chatterly J. et al. (2016) IKEA CEO: Late to online bloom but growth ahead. Retrieved from http://www.cnbc.com/2015/10/14/ikea-ceo-late-to-online-boom-but-growth-ahead.html.

• Official IKEA Website. (2016). People and Planet. Retrieved from http://www.ikea.com/ms/en_GB/the_ikea_story/people_and_the_environment/.

• EuropaEurostat. (2016).Real GDP Growth Rate. Retrieved from http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tec00115&plugin=1

• Official IKEA Website. (2016) this is IKEA... Retrieved from http://www.ikea.com/ms/en_GB/about_ikea/the_ikea_way/history/1940_1950.html.

Documents

IKEA: The Furniture Guru - An Exploratory Study 3, CS 17… · In 2000, IKEA introduced a code of conduct for its suppliers based on international conventions and declarations known