EIS Main Project
IKEA as an Innovator:
The Right Combination of Execution and Ecosystem Innovation
Section 1:
Yamini Jagannadhan
Nick Jameson
Suzanne Lieb
Rachel Moss
Kelsey Stratton
Uttara Sukumar
10 November 2012
IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
INTRODUCTION
When Ingvar Kamprad founded IKEA in Sweden in 1943, his vision was to “allow people with
1
limited means to furnish their homes like rich people.” The core of the IKEA strategy is in offering a wide
range of products that were simple, well-designed and priced to be accessible to the majority of people.
Over time, IKEA’s “democratic design” principles made it one of the world’s most prominent furniture
retailers, but in 1985, when IKEA opened its first store in the United States, replicating the model that had
successfully captured consumers’ attentions in Europe, IKEA was met with mixed reviews: Customers
found the products unappealing and out-of-touch with the interests of the typical American consumer, and
consumers did not immediately grasp the do-it-yourself mentality.
2
Despite these initial challenges, IKEA
has become a staple in many American households. With roughly $35.1 billion in revenues, IKEA offers
over 50,000 SKUs to over 40 countries and manages a global supply chain to rival Wal-Mart.
3
IKEA came to dominate the US mass-market furniture industry by successful execution and by
understanding and changing the broader ecosystem, By examining the successes and failures of IKEA’s
global expansion, focusing primarily on the US market as a lens through which to view the company, this
paper aims to understand how IKEA changed and came to dominate the mass-market furniture industry.
We first look at an overview of the furniture market in the United States to examine trends and how
IKEA’s value proposition addressed those consumer trends. We then outline the key players in the IKEA
ecosystem to assess the co-innovation and adoption chain risks that IKEA overcame to expand
successfully. Based on this ecosystem analysis, we expand on this discussion to examine how IKEA
transformed the furniture value chain to suit its strategy and better serve its customers, specifically
looking at the structure of the value chains as well as the levers of ecosystem configuration. Finally, we
look at IKEA’s future and assess how its recent innovations in sustainability and expansion plans into
hotel chains affect the ecosystem and fit into its overall portfolio strategy.
1
The Economist, “The secret of IKEA’s success,” The Economist (24 Feb 2011)
Leland, John, “How the disposable sofa conquered America,” The New York Times (1 Dec 2002)
3
IKEA, “IKEA facts and figures,” (viewed 10 Nov 2012)
www.ikea.com/ms/en_CN/about_ikea/facts_and_figures/facts_figures.html
2
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
CONTEXT: THE UNITED STATES FURNITURE MARKET
The furniture retail market in the US is largely fragmented based on both revenue and consumer
trends and segments. In 2011, the industry-wide sales were $67 billion, roughly the same level as ten
years ago, which was due largely to the hit retailers experienced during the recent recession. Sales are
rebounding and expected to grow by over 20% in the coming year.
4
In terms of competition, the top ten
retailers account for less than 15% of the sales, making it a highly competitive market where retailers
often seek low-cost strategies to maximize profit. There are more than 100 national, regional, and multiregional furniture retailers – not including big box or department stores such as Wal-Mart, Target, and
Macy’s – that serve the US market, a sample of which is included in the below table. According to a
recent consumer survey on the channel sales by Mintel, a market research firm, the most frequently
visited channels for furniture sales in the US are mass merchandizers (Target, Wal-mart), home
5
improvement stores (Home Depot, Lowes), and value or discount stores (IKEA). Customers do not
necessarily discriminate among channels.
6
Top 20 Furniture Retailers by Sales (US)
1. Ashley Furniture Home Stores (National)
11. Crate & Barrel (National)
2. IKEA (National)
12. Haverty’s (Multi-Regional)
3. Rooms to Go (South)
13. Ethan Allen (National)
4. Berkshire Hathaway Furniture Division (National) – 14. Bob’s Discount Furniture (Northeast)
includes brands such as Jordan’s Furniture and
Nebraska Furniture Mart
5. Williams-Sonoma (National) – includes brands such 15. Mattress Firm (National)
as Pottery Barn and West Elm
6. American Signature (Multi-Regional)
16. Art Van (Midwest)
7. Raymour & Flanigan (Multi-Regional)
17. Select Comfort (National)
8. Pier 1 Imports (National)
18. Badcock Home Furniture & More (South)
9. La-Z-Boy Furniture Galleries (National)
19. Slumberland (Multi-Regional)
10. Sleepy’s (Multi-Regional)
20. RoomStore (Multi-Regional)
This proliferation of retailers exists to address a diverse set of customer tastes and price-points.
Amongst these retailers, there is disparity between “upscale” retailers and “bargain” retailers in terms of
quality, target consumers, and pricing. The high-end stores aim to achieve an aspirational experience for
the consumer. The foundational pieces usually have a high sticker price, but consumers are treated to
one-on-one service from a highly skilled customer service oriented sales professionals who emphasize
4
Lipson, Alison, “Furniture Retailing – US,” Mintel Oxygen (Aug 2012)
Ibid.
6
Coffey, Sarah, “Top 100 US Furniture Stores by Sales” (19 Jan 2011) www.apartmenttherapy.com/top-100-us-furniturestores-by-137079
5
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
the quality of the merchandise as well as the variety. These high-end stores carry an enormous range of
styles, colors and options to choose from, giving upscale retailers a large inventory cost to meet customer
expectations and demand. It is customary for retailers to offer free delivery service to all consumers, so
7
the furniture would arrive at their home already assembled within a few weeks. On the lower end of the
spectrum, mass channel stores like Wal-Mart and Target are increasingly popular choices for consumers
looking to spend less to furnish their living space. The quality is usually low, the design basic, and
customer service is minimal.
8
IKEA has the unique advantage of straddling the upscale-bargain divide with its reputation for
sleek design and consumer-friendly shopping experiences. However, while the US market satisfied an
extremely important growth strategy for the company, IKEA was almost unsuccessful in capturing this
critical market, because of a poor understanding of consumer demographics. As one IKEA executive
noted in a BusinessWeek article:
“We got our clocks cleaned in the early 1990’s, because we didn’t really listen to the
consumer...stores weren't big enough to offer the full IKEA experience, and many were in poor
locations. Prices were too high. Beds were measured in centimeters, not king, queen, twin. Sofas
weren’t deep enough, curtains weren’t long enough and appliances didn’t fit US kitchens.”
9
Finally, US furniture consumers tend to view furniture purchases as “long-term” investments, a
behavior and habit that IKEA would have to undo to promote its almost disposable model of furniture
consumption. According to Christian Mathieu, the external marketing manager at IKEA North America in
2002, “Americans change their spouse as often as their dining-room table, about 1.5 times in a lifetime.”
10
Furniture is a durable good that can last a lifetime, and American customers do not tend to change items
unless they have excess money to spend.
7
Moon, Youngme, “IKEA Invades America,” Harvard Business School Publishing (2004)
Above n 4.
9
BloombergBusinesswek Magazine, “IKEA,” BloombergBusinesswek (13 Nov 2005) www.businessweek.com/stories/200511-13/ikea
10
Above n 2.
8
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
THE IKEA STRATEGY AND VALUE PROPOSITION
IKEA pursued a strategy of providing low-cost, well-designed furniture to the masses through a
unique shopping experience. IKEA’s slogan, “Low price with meaning,” emphasized its commitment of
offering “tasteful, cleverly designed products that did not make customers feel cheap.”
11
IKEA’s own set of
operations objectives placed cost as the highest priority for the company. From their materials sourcing
strategy which focuses on finding low-cost materials from around the world, to their innovative “flat”
packaging system, to their combined “warehouse showroom” designs, IKEA implements this low cost
strategy effectively. In all ways, they make the classic operations trade off of cost versus quality, the
specifics of which we will explore further in subsequent sections of the paper. While some consumers
have been frustrated with certain low quality products, IKEA remains overwhelmingly popular.
To bring this value proposition to the United State, IKEA replicated the model that had been
extremely successful in Europe. IKEA retail warehouses showcased streamlined, modern product
designs in a way that forced consumers to walk a certain path through the store before reaching the selfservice warehouse, where they would pick up their chosen flat-packed furniture pieces. IKEA shifted the
onus of furniture assembly onto the consumer who assembled the furniture after they transported it
themselves. The retail stores had amenities like Swedish cafes and playrooms for children, so families
could enjoy a long day of shopping and entertainment. IKEA created a “one-stop-shop” and a “global
lifestyle brand for interior design.”
12
Furthermore, IKEA has taken a targeted strategy in terms of identifying customer-appropriate
geographic locations for its stores. In the Unites States, IKEA’s strategy has been to place stores in
suburban areas, with a highly concentrated population of upper-middle class liberals. IKEA describes
their core customer as someone “who traveled abroad, liked taking risks, liked fine food and wine, had a
frequent flier plan, and was an early adopter of consumer technologies like Walkmen, laptops, and cell
phones.”
13
However, recognizing that customer tastes vary across spending categories, part of IKEA’s
strategy has been to offer an extremely broad range of products to hedge against the risk of fluctuation in
11
Above n 7.
Architecture 411, “How IKEA has revolutionized Interior Design,” Architecture 411 (1 Aug 2007)
13
Ibid.
12
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
any particular consumer segment. Additionally, with the economic recession, IKEA has cast a wider net,
knowing that more and more people are looking to keep their costs down. For example, in response to
the recession and sovereign debt crisis in Europe, IKEA planned to triple its store openings and increase
its expansion and investment into China and Asia.
14
THE ECOSYSTEM: KEY PLAYERS
IKEA’s ecosystem encompasses a vast, global network of internal and external components,
some highly visible, others relatively invisible to the consumer who depends on IKEA for affordable,
trendy furniture and home decoration items. Internally, IKEA maintains a system of stores, distribution
centers, trading offices, and a corporate headquarters (“IKEA of Sweden”) that coordinates the broader
activities of the ecosystem. Externally, IKEA relies on complex network of suppliers and logistics partners
that enable IKEA to offer over 50,000 SKUs to customers across the globe. Understanding the roles each
player in the ecosystem assumes and how they interact with one another helps identify the challenges
and risks IKEA encountered as it developed into the leading furniture retailer it is today.
Exhibit 2: IKEA Ecosystem with Risks (Source: Team Analysis)
14
MarketLine, “IKEA: Ten Consecutive Years of Revenue Growth,” MarketLine Case Study (Jan 2012)
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
INTERNAL PLAYERS
“IKEA of Sweden” – Operations management specialist Enrico Baraldi identified a miniecosystem within IKEA’s greater ecosystem that plays a pivotal role in managing and orchestrating the
elements of IKEA’s ecosystem. “IKEA of Sweden” not only manages the vast product range that IKEA
offers but also supervises the development of long-term strategy, marketing, logistics, and purchasing,
essentially serving as the central coordinator of the entire IKEA universe. IKEA comprises over 550
business units spread across more than 50 countries.
15
Within the “IKEA Boundaries” there three entities
that play important roles in the ecosystem:
•
IKEA Trading Service Offices (TSO) - IKEA operates 41 TSOs worldwide, which serve as important
interfaces between suppliers and the IKEA network at the local level. They pursue purchasing options
and negotiate deals for their local geographic area.
16
They manage the supplier and purchasing
relationships at a local level as well as locate potential local suppliers that could serve the national
brand. For example, IKEA plans to enter India where they already have thousands of sub-suppliers,
but they are going to use this opportunity to build up the capabilities of some of these small-scale
suppliers so they can support the global brand more efficiently.
•
IKEA Distribution Centers – IKEA runs roughly 30 distribution centers around the world that are
responsible for daily logistic coordination with suppliers and logistics partners. As IKEA has expanded
geographically, it has adapted its distribution infrastructure. Recognizing the increase in direct
deliveries and online shopping, IKEA is examining ways to reorganize its distribution chain to ensure
timely delivery. For example, it stores “low-flow” items centrally for large regions and “high-flow” items
closer to relevant markets.
•
17
Inter IKEA Systems – IKEA runs a franchise system where IKEA stores pay a fee of 3% of sales to
Inter IKEA Systems B.V.,
18
the owner of the IKEA Concept and the worldwide IKEA franchisor.
19
15
Baraldi, Enrico, “Strategy in Industrial Networks: Experiences from IKEA”, California Management Review, pp. 99-126,
(2008)
16
IKEA, “IKEA Purchasing” (viewed 2 Nov 2012) www.ikea.com/ms/en_US/jobs/business_types/purchase/index.html#
17
IKEA, “IKEA Distribution” (2 Nov 2012) www.ikea.com/ms/en_US/jobs/business_types/distribution_logistics/index.html
18
The Economist. “Flat-pack accounting” The Economist (5 Nov 2006) http://www.economist.com/node/6919139
19
IKEA, “The IKEA franchising” (6 Nov 2012) http://franchisor.ikea.com/franchising.html
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
While in most companies a franchise system may create a challenge to ensure consistent consumer
experiences, the IKEA franchise system is designed as part of a complicated legal structure set up by
the founder, Kamprad.
20
For example, the largest franchisee is the INGKA Group managing almost
90% of IKEA stores. The INGKA Group is owned by the Kamprad foundation, which is run by a fiveperson executive committee where Kamprad is chair and his wife and lawyer are also committee
members.
•
21
Overall, the franchisor and the franchisee are completely aligned.
IKEA Franchisee Stores – IKEA runs over 300 IKEA stores that provide direct access point to
customers. Importantly, these stores serve as “showroom warehouses” that enabled IKEA to keep its
retail, inventory, and labor costs down, because these stores promote a “self-service” model.
22
IKEA
stores play an important role in how IKEA managed to address the adoption risk among customers
(see Adoption Risks below for further detail), particularly in the United States where furniture tastes
differ from those in IKEA’s initial markets of Europe.
EXTERNAL PLAYERS
Logistic Partners – IKEA maintains relationships with roughly 500 external logistics partners in
over 20,000 “transport corridors.”
23
These partners play critical roles in tying together IKEA’s vast
distribution network and keeping the costs low. Of these 500 partners, IKEA has developed close
relationships with 50 logistic partners, including Maersk, Willy Betz, and TNT, who account for roughly
80% of IKEA’s total transport volumes.
24
Just as it strives to develop long-term relationships with key
suppliers, IKEA tries to establish similar relationships with its logistics partners to reduce costs and
provide stability to the supply chain.
Suppliers/Manufacturers – IKEA relies on a network of over 2,000 direct suppliers in 50
countries who do anything from manufacture furniture to manufacture accessories (e.g., rugs,
cushions).
25
Unlike other large corporations that similarly rely on networks of suppliers, such as Wal-Mart,
20
Ibid.
Above n 18.
22
Baraldi, Enrico, pp. 99-126
23
Ibid.
24
Ibid.
25
IKEA, “IKEA FAQ” (viewed 10 Nov 2012) www.ikea.com/ms/en_CA/customer_service/faq/faq.html
21
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
IKEA takes a “long-term” approach to cultivating supplier relationships, recognizing that it cannot afford to
jeopardize these relationships. IKEA often strives for co-innovation and co-development of products and
technologies to build mutual trust and to delegate key tasks down the supply chain. We will discuss this
further in the section on “Co-Innovation Risks.”
Sub-Suppliers – IKEA’s suppliers depend on over 10,000 sub-suppliers spread across over 60
countries to help provide finished goods and products. Sub-suppliers can provide anything from raw
materials to packaging or coatings.
26
Generally, sub-suppliers are small and thus more easily influenced
by IKEA due to their lack of positional power. However, some sub-suppliers have more “balanced”
relationships with IKEA and they tend to comply with IKEA’s requests only if they see a direct benefit. For
example, IKEA’s flat packaging partners have become powerful players in its ecosystem because IKEA
depends on this streamlined packaging system to maximize its distribution costs (see discussion below in
Value Chain).
Product Designers and Store Designers – Designers enter the ecosystem in two locations.
First, they provide hands-on design advice in terms of the product design, working with suppliers to
design core products once materials and price have been set. Second, interior designers are brought in at
the store level to design store layouts and promote complete packages of furniture and help customers
recognize the value proposition of IKEA. These designers play an important role in value capture,
because they help bring in customers and link them into the overall IKEA experience. Not only do IKEA
designers help with the store design, however, but they also support “design planner” programs that help
shoppers plan the perfect IKEA room.
27
Customers – As noted above in the strategy section, IKEA customers are independent, savvy,
and practical-minded. In the United States, the key challenge with customers was targeting the right
demographic while promoting the do-it-yourself assembly aspect of home design.
26
27
Ibid.
IKEA, “Design Planner” (viewed 10 Nov 2012) www.ikea.com/ms/en_US/rooms_ideas/splashplanners.html
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
RISKS IN THE IKEA ECOSYSTEM
As IKEA entered the US market, it faced co-innovation risk associated with its suppliers and
adoption chain risks associated with its customers, both of which it successfully mitigated (see Harvey
balls in the Ecosystem Map in Exhibit 2 for risk location).
CO-INNOVATION RISK
IKEA’s strategy enables it to offer thousands of SKUs at low price points but raises the question –
how can suppliers keep up? We assessed a medium-level co-innovation risk associated with the
suppliers, because without high-quality, low-cost suppliers on board within its ecosystem, IKEA would not
be able to offer its value proposition to customers. Ultimately, IKEA’s approach towards dealing with its
suppliers involved building deep, long-term relationships founded on trust and mutual dependency. Unlike
Wal-Mart, for example, who is known to bully its suppliers to hit rock bottom prices,
28
IKEA recognizes the
need not to alienate its partners and often invests in its suppliers to ensure they are good long-term
partners.
IKEA builds trust with its suppliers by forming long-term contracts and establishing joint initiatives
to address cost and quality issues, creating a shared goal and vision for the ecosystem. Doing so not only
ensures IKEA’s suppliers can fulfill their orders and commitments but also establishes enduring trust
between both parties. For example, with its recent foray into India and plans to increase its India sourcing
for its global stores, IKEA plans to invest in enhancing the capabilities of its suppliers.
29
As one editorialist
noted, IKEA “works closely with enterprising entrepreneurs to upgrade and upscale the stores to meet its
global quality and supply standards.”
30
Moreover, it is not uncommon for IKEA to work jointly with its
suppliers if it is concerned about costs or quality, particularly with those suppliers that wield high supplier
power. For example, in 2000 IKEA worked with one of its “printed veneer” suppliers to develop a new
technology for its “Lack” table, because they were concerned about the rising costs of printing on wood.
28
Fishman, Charles, “The Wal-Mart You Don’t Know,” Fast Company (1 Dec 2003) www.fastcompany.com/47593/wal-martyou-dont-know
29
Kinetz, Erika, “IKEA to invest $1.9B in India to open 25 stores,” BloombergBusinessweek (22 Jun 2012)
www.businessweek.com/ap/2012-06-22/ikea-to-invest-1-dot-2b-in-india-to-open-25-stores
30
Goyal, Malini, “Why you should look forward to IKEA’s entry into India,” The Economic Times (1 Jul 2012)
http://articles.economictimes.indiatimes.com/2012-07-01/news/32484858_1_ikea-s-dindia-furniture-giant-entry
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
Through discussions with Swedwood Poland (the manufacturer) and Akzo-Nobel (the printing company),
IKEA worked to develop a new “print-on-wood” technology that it was able to apply to future designs and
other products manufactured by Swedwood Poland.
31
Finally, IKEA relies on its suppliers to solve problems that are critical to the success of the entire
ecosystem. For example, in 1991 IKEA worked with a group of suppliers who manufactured the “Billy” line
of furniture to identify the cause of a string of poisonings associated with the furniture line. IKEA mobilized
Becker-Acroma, one of its major coating suppliers, to assess the situation and identify the causes,
ultimately identifying a short- and long-term solution to the problem. IKEA eventually identified a new
supplier – GIAB – that could help solve the problem but did not have the scale to meet the demand from
the old supplier. Thus, IKEA required all of its suppliers involved with this new technology to take shares
in GIAB, forming a joint venture among IKEA and these coating suppliers.
32
Although the project was
ultimately a failure because the larger suppliers did not like the “forced cooperation,” the example speaks
to IKEA’s willingness to work with and invest in its suppliers rather than kick them to the curb.
Through these examples, we see that IKEA addressed the co-innovation risk associated with its
suppliers by building long-term, trust-based relationships to ensure both sides were committed to each
other’s success. Like the movie studios that invested in new digital cinema technology, IKEA invests in
the appropriate new manufacturing technologies to keep its long-term costs down. IKEA realizes that
without the co-innovation and involvement of its suppliers in the ecosystem, it could not offer its products
at affordable prices.
ADOPTION CHAIN RISK
Another source of risk that threatened to prevent IKEA’s expansion and success in the United
States was the adoption risk associated with attracting the right customers. When IKEA “invaded
America” in the mid-1980s, it did not have the same success as it did in Europe, because IKEA failed to
fully understand the American customer: (1) Americans did not like IKEA products and viewed them “ugly”
and “inferior;” (2) although IKEA had a good sense of which customers would buy – liberals, urban-
31
32
Baraldi, Enrico, pp. 99-126
Ibid.
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
dwellers, and foreign travelers – the do-it-yourself furniture model targeted a lower class and set of
values; and (3) IKEA initially had not taken basic efforts to facilitate adoption amongst Americans, such as
switching from the metric system or creating “big gulp” size glasses and dishware.
33
To address this disconnect between the target customer segment and their consumer behavior,
IKEA focused heavily on understanding the customer and influencing their behavior through focused
advertising and marketing campaigns. In the mid-1990s, IKEA invested in a substantial market research
program to assess household values and behaviors. They ultimately found that much of the US was
“frozen by décor fear.”
34
One analyst noted that the reason many Americans “keep a sofa longer than a
car” is that they feel it will become “icon of the living room” and shame if the piece is a failure.
35
IKEA
found that younger Americans, by contrast, were more “entrepreneurial” and willing to take risks and thus
refocused its attention to this demographic by promoting a “commitment-free approach” to furniture. In the
early 2000s, IKEA’s shifted gears to reflect this approach to risk and change. In a 2003 ad campaign
dubbed “Unböring,” a Swedish stranger reprimands the viewer for feeling sympathy for a discarded lamp:
“Many of you feel bad for this lamp. That is because you're crazy.”
36
This multi-faceted campaign used
print, online, and television channels to access the younger demographic from all angles. By better
assessing what customers wanted, IKEA was able to create a niche in the value furniture segment.
IKEA’S SUSTAINABILITY MISSION’S EFFECT ON THE ECOSYSTEM
Before diving into how IKEA shifted the furniture value chain, it is worth noting the impact of
IKEA’s sustainability efforts on the overall ecosystem. IKEA is a leader in terms of bringing sustainable
materials into its products and expecting a focus on sustainability from its suppliers. In 1990, IKEA
adopted The Natural Step (TNS) Framework as a structure to implement its environmental policy and
plan. IKEA has proven that the environment and profitability can go hand-in-hand, and the initiative has
reduced the risk of its ecosystem.
33
Above n 2. Reports emerged of customers using vases as glasses because the IKEA glasses did not meet their daily
needs. Likewise, customers complained about the use of the metric system versus standard US measurements, voicing
frustration that they did not know what the measurements meant to them.
34
Ibid.
35
Ibid.
36
IKEAFANS, “Unboring” (viewed 10 Nov 2012) www.ikeafans.com/ikea/ikea-history/unboering-ikeas-unboringcampaign.html
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
Suppliers - IKEA applies the strictest market standards as a minimum requirement for the
products sold in all markets. TNS requires that products and packing convey a commitment to the
environment and require suppliers to adopt environmentally responsible production methods. Thus, IKEA
designers work closely with their suppliers to understand and adapt to key environmental product
specifications. IKEA does not assume suppliers get this training elsewhere, but instead runs 2.5 day
workshops to educate suppliers so they are able to establish and implement their own environmental
program to meet the standards.
37
IKEA also focuses on maximizing their efficiency with transportation by
designing products and using packaging that takes up minimum space, which saves them transportation
cost. These environmental and product requirements ensure that IKEA has a strong relationship with its
suppliers, working alongside them to modify production processes to meet environmental specifications.
The added benefit to suppliers is that these efforts often result in production efficiencies and reduced
product cost. These close ties make suppliers less risky in the ecosystem because they are jointly
invested in IKEA’s sustainability mission.
Customers - IKEA wants to help customers make smarter decisions for the environment, but
these decisions also help customers save money, so even the less environmentally focused customers
are motivated to make better decisions for the environment. The focus is to give customers sound
environmental information and provide environmentally-friendly alternatives for acquiring IKEA products.
Some key pieces of this include: marketing material make it clear so customers can incorporate
environmental considerations in to their purchase decisions; a catalogue of products on non-chlorine
bleached paper and use pulp from farmed wood; limiting its catalog production to one catalog per year
and accepting old catalogs back to the store for recycling; free shuttle buses from select cities locations to
several stores in Europe; allowing customers to deposit old furniture before purchasing new furniture at
some locations in Switzerland thereby saving the waste disposal cost of approximately $100 for a sofa;
only selling LED lighting in its stores so that all electrical products more efficient which ultimately saves
customers money.
38
IKEA’s TNS initiative benefits customers both by saving them money, by educating
them about sustainability, and by helping them to leave a smaller footprint on the environment all at the
37
38
Owens, Heidi, “The Natural Step Network” (viewed 10 Nov 2012) www.thenaturalstep.org/en/usa/ikea
Ibid.
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
same time. It removes the decision from being in the customers hands, and puts the control in IKEA’s
hands, while still being less costly.
RECONFIGURING THE VALUE CHAIN TO SHIFT COSTS AND RISKS
In addition to addressing the adoption chain and co-innovation risks as described above, IKEA
reconfigured the typical value chain for furniture purchasing through process innovation in the internal
design process and supply chain alignment, as well as at the customer’s point of purchase, delivery and
usage. They not only shifted costs but also shifted risks, by internalizing some aspects of the chain that
used to be borne by customers while also allocating new duties to them.
The proceeding sections outline the value chains for a traditional furniture retailer and IKEA and
highlight the key differences between the two systems. Exhibit 3 provides a visual comparison of how
IKEA repositioned elements of the value chain to shift risks and costs.
Exhibit 3: Traditional versus IKEA Value Chain (Source: Team Analysis)
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
THE TRADITIONAL FURNITURE VALUE CHAIN
A traditional furniture value chain began with a furniture company identifying customer trends or
needs and designing a product that could address them. Based on these designs, the company would
select materials and identify what suppliers would be able to deliver the selected materials in the quantity
and timing needed. They would also determine what manufacturer would be used to produce and
assemble the furniture. Based on the materials, suppliers and manufacturers, the furniture company
would then be able to determine the cost of goods sold and set a target price. The elements of material,
supplier and manufacturer selection may not have been sequential, but most importantly they happened
BEFORE a price was set. Once the company had set a price, they would begin production and assembly
of the furniture. Finished pieces would be sent either directly to showrooms or possible to warehouse
locations and stored as inventory.
The customer entered the value chain at this point. A customer would enter a showroom or shop
online and choose furniture to purchase – a decision driven by his/her own interior design choices and/or
a sales representative at the showroom.
Often the showroom would provide delivery services and
transport the completed piece of furniture to the customer.
IKEA’S FURNITURE VALUE CHAIN
IKEA changed the value chain at two key junctures. First, it changed the design/supply chain
process by introducing a Product/Price Matrix for each type of product sold before thinking about material,
suppliers or manufacturers (see Exhibit 4).
39
Similar to the traditional furniture value chain process, IKEA
started with overall customer trends to determine product priority, but they would then add a target retail
price for the products and create a matrix for sofas, beds, etc. By developing a matrix, IKEA was able to
identify white spaces in their portfolio and potential market opportunities. Using this target price as a
benchmark, IKEA would then determine the product design, materials, suppliers and manufactures that
could be used to achieve an appropriate profit margin. Cost efficiency was the key focus: different product
components could be sourced from different suppliers to help maintain costs; materials could use a
39
Above n 7.
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
combination of lower-quality items for low-stress/low-visible surfaces and higher-quality for highstress/high-visibility surfaces. IKEA would even redesign a product multiple times to squeeze out
additional costs. Manufacturers focused on individual parts to produce rather than having to worry about
a full piece – as long as the pieces fit in a flat pack it did not matter where pieces were assembled.
Exhibit 4: IKEA Product/Price Matrix (Source: Youngme Moon, “IKEA Invades America”)
The second juncture where IKEA innovated in the furniture value chain was at the consumer.
Most obviously, IKEA transferred the assembly and transportation of furniture to customers. In order to
do so, all products needed to transport “flat” (in flat-packaged boxes) and IKEA focused on designing
products to maximize the number of boxes that could fit on a single pallet for shipment from a
manufacturer to an IKEA store. This served their cost-efficiency focus by decreasing labor, shipping, and
storage costs: “The company estimated that its transport volume was six times less than if it shipped its
products assembled.”
40
Moreover, shipping products pre-assembled reduce the risk of damage to the
products, which could result in costly returns and lost sales. Encouraging consumers to assemble their
own furniture shifted the risk from the logistics and distribution partners to the customers themselves.
Often counter-intuitive, consumers found additional value by assembling their furniture themselves.
While IKEA shifted costs to the customer, it also shifted some of the typical interior design risk of
furniture purchases from the customers. A typical customer needed to drive their own interior design
decisions or hire an external third party and then drive between multiple stores to find and choose the
appropriate furniture. IKEA intentionally limited its style selection so that a customer could realistically
40
Ibid.
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
outfit an entire room or home from IKEA mix-and-match styles. This shift away from customers actually
helps promote a mass IKEA culture and encourages “up-selling” of products, because now customers
could purchase entire rooms or collections in a low-cost, easy-to-imagine way.
RECONFIGURING THE ECOSYSTEM
Given the changes in the value chain and IKEA’s adoption of the TNS Framework for
sustainability, IKEA had to reconfigure their ecosystem in a number of key ways. Specifically, they
relocated, added, subtracted, and combined certain elements to tailor their strategy.
Exhibit 5: Levers of Ecosystem Reconfiguration Leveraged by IKEA (Source: Team Analysis)
Relocate – As discussed in the value chain, IKEA relocated the price decision to before materials,
manufacturer and supplier choices. Furniture design is dictated by the high-level product/price matrix and
must be flexible with material, manufacturer and supplier options in order to achieve the target price.
Additionally, IKEA relocated the shipping and assembly functions typically executed by a manufacturer to
the consumer.
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
Combine – IKEA combined elements of the traditional ecosystem in a number of ways. First, it combined
the process of product design with shipping design. By always striving towards cost consciousness and
flat-packing as an important means to achieve this, product design was linked intimately with flat-packing.
While traditionally a manufacturer may be responsible for shipping and the furniture designer responsible
for product design, IKEA combined these ecosystem functions. Secondly, IKEA combined the traditional
interior design that a consumer had to address on his/her own with showroom and overall product design
by a furniture company. By intentionally limiting style options of IKEA furniture and never offering extreme
differences, the company combined the typical services of a showroom that helps a consumer by a
specific piece of furniture with the services of an interior designer who advises on a holistic design.
Add – In order to execute the TNS Framework, IKEA could not realistically assume suppliers would be
able to execute the new environmental sustainability requirements. IKEA had to add additional supplier
training and offer its own resources to suppliers. By managing suppliers up front, IKEA reduced costs in
the long-run
Subtract – By relocating the assembly of furniture to consumers and focusing on flat-packing that makes
storage easier, IKEA subtracted the inventory and warehousing needs typical for a furniture manufacturer
as well as narrowed role of the manufacturer. In particular, IKEA reduced the need for having only
manufacturer for a piece of furniture and different pieces of the same furniture piece could be
manufactured by different vendors and then just combined in one package that the consumer was
responsible for sifting through.
THE FUTURE: IKEA HOTELS AND THE IKEA PORTFOLIO
Given its success in dominating the retail furniture market, IKEA is currently making strategic
moves to expand its business offerings into the hotel industry. We examined this new venture as a
breakthrough strategy beyond IKEA’s core portfolio. Through Inter IKEA, IKEA is looking to develop at
least 100 “budget design” hotels across Europe, which will be run by an established hotel operator (not
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
IKEA itself).
41
The hotels will not use the IKEA name and other than the plan to offer “good quality at
reasonable prices.” They plan to first enter the UK, Germany, Netherlands and Poland.
42
Entering the hotel business is a clear departure of IKEA’s current strategy, and is in an entirely
new ecosystem from IKEA’s core business. Exhibit 6 offers a simplified version of the “IKEA Hotel”
ecosystem. As depicted, IKEA hotels would require an entirely new set of parties and stakeholders as
well as a new set of considerations to be made when making this long-term investment. Unlike the initial
IKEA ecosystem, the hotel system would rely on hotel operators, travel agents, and new forms of online
distribution and advertising to reach the end consumer. IKEA is taking a long-term approach to entering
the hotel industry.
Exhibit 6: IKEA Hotel Ecosystem (Source: Team Analysis)
IKEA’S ENTRANCE INTO THE HOTEL M ARKET
IKEA’s plan to enter budget hotels is consistent with its core strategy of good quality at
reasonable prices. Furthermore, Inter IKEA has already started investing in property – it is currently
building a 27 acre affordable housing district outside of London.
43
Moreover, IKEA’s strength in the
furniture business has given the company a strong cultural understanding of different markets in Europe,
the consumer behaviors, and customer trends. Given its existing position, IKEA can think strategically
about which markets to target.
41
CNN GO, “IKEA to build 100 budget hotels across Europe” (16 Aug 2012) http://www.cnngo.com/explorations/life/ikeabuild-100-budget-hotels-europe-122631
42
Ibid.
43
The Week, “Should IKEA get into the hotel business?” (viewed 10 Nov 2012)
http://theweek.com/article/index/232103/should-ikea-get-into-the-hotel-business
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
Budget design hotels are a very fast growing industry, particularly as global economies are
collectively struggling. Similar chains have already popped up across Europe to challenge incumbents
(Chic & Basic in Barcelona, Base2Stay in London, Motel 1 in Germany).
44
The stock of budget hotels in
Europe is limited, which presents a compelling market opportunity for the business. The questions
remains whether IKEA will be able to deliver this new product line to its customers.
POTENTIAL RESERVATIONS WITH IKEA HOTELS
Historically, IKEA has not focused on customer service. As noted above with their expansion into
the United States, IKEA ignored consumer tastes to push their operating model onto furniture consumers.
This raises the question as to whether IKEA could thrive in a customer-service focused industry – would
they ignore guest demands? Would they use these venues as additional sources of advertising? IKEA is
currently undecided as to whether they would be using IKEA furniture at all in the hotel as an added
‘advertisement’ and this looks to be a complete diversion from their core strengths in their product
innovation, branding and integrating their supply chain.
Given that IKEA is a private company, it is tricky to determine its cash reserves and relative level
of investment the company has to spare on other business ventures. However, knowing that they are
making strategic investments in their core furniture business, particularly a $1.2 billion dollar investment in
India – the company has decided to divert some resources to invest in hotels.
45
As IKEA has a relatively
small presence in hospitality and real estate, investing in IKEA hotels will be more of a breakthrough
strategy for the company. In the past, IKEA has focused primarily on derivative innovations – with
adaptions of existing models, changes to manufacturing processes and supplier agreements to operate
more effectively.
44
Ibid.
Associated Press, “IKEA to invest $1.2billion in India to open 25 stores,” CBSNews (22 Jun 2012)
http://www.cbsnews.com/8301-505123_162-57458697/ikea-to-invest-$1.2b-in-india-to-open-25-stores/
45
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
Exhibit 7: IKEA’s Core Competence applied to Hotel Industry (Source: Team Analysis)
Although IKEA has managed to find a large target market for furniture, knowing the design and
innovations that the customer wants – this strategy breaks down for the hotel business. There is much
more of a personal, customer service element, which is not IKEA’s core competency. There will also be a
combination of process and product innovation which needs to take place when entering this market.
IKEA will have to measure what percentage of their resources they have invested in their
Breakthrough projects (mostly Inter IKEA investments, particularly in Real Estate), platform projects
(entering new markets for furniture retail, starting a new line of furniture) and derivative projects
(modifications to current products and designs). With this investment in hotels, IKEA has made a
departure from its previous strategy of simply offering quality furniture that is affordable to the consumer.
They will have to think about ‘safety, reliability, personalized service for the price – a human element.’
IKEA will also have to measure its long term impact of resource allocation. If the business takes off, the
company will have to invest more into this business, which will impact its overall brand and resource
allocation. With increased competition in the furniture business, the question is whether IKEA has the
bandwidth to execute this strategy. Furthermore, if the hotel business shows promise, but requires more
investment, IKEA will have to look at the allocation of their other resources and decide what to cut or add
to maintain the strategy.
Inter IKEA, which has money to invest in different projects has the challenge of evaluating a
collection of good opportunities. Here, they have somewhat mitigated their ‘customer’ risk, by ensuring
that another company will operate the hotel. However, a failure to deliver this promise can severely
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IKEA as an Innovator: The Right Combination of Execution and Ecosystem Innovation
impact the Ikea brand overall. Hopefully, IKEA compared this breakthrough opportunity to other
breakthroughs and carefully determined that it would be the best future strategy. Moving forward, they will
have to carefully monitor this resource allocation to ensure the company is following a consistent strategy.
CONCLUSION
Taking an ecosystem view of IKEA’s innovation strategy reveals that IKEA has constantly
innovated and reconfigured within its ecosystem to overcome risks and challenges to its operations. What
started as a simple, low-cost (and low-quality) furniture manufacturer has ballooned into one of the
world’s leading furniture retailers with continued plans for expansion. IKEA reconfigured its value chain to
shift risks and costs onto third-party actors, from the suppliers to the customers. Doing so enabled it to
increase customization and keep costs down to meet enduring demand. Looking forward, as IKEA
explores the hotel and other breakthrough opportunities it should continue to examine its portfolio of
products and offerings to determine whether new offerings are consistent with its core strategy.
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