The IKEA effect – introducing customers as ‘co-creators of value’

There are few retailers who can claim the phenomenal international success of Swedish furniture company IKEA, whose modern, simple designs are household features across the world.

Founded in 1943 by then 17-year-old Ingvar Kamprad, the company as of November 2017 had 411 stores in 49 countries and it sold £32.3 billion worth of goods in 2016. Over 2.1 billion visitors browsed the store’s websites in the year from September 2015 to August 2016. 

Kamprad started modestly, initially selling small household goods like picture frames, pens and wallets, before expanding into furniture in 1947, developing it into the flat-pack DIY low-cost designs that have become so popular today.

The company’s name is an acronym of the initials of Kamprad’s name, Elmtaryd, the farm where he grew up, and Agunnaryd, his hometown. Although now a multinational, it remains at heart a family business which, say experts, can offer valuable lessons to other small companies who wish to expand.

On January 28th 2018, Kamprad passed away at the age of 91. Despite amassing a great fortune, Kamprad had opted for the simple life, believing in recycling tea bags and travelling economy.  He explains his manifesto Testament of a Furniture Dealer: “It is not only for cost reasons that we avoid the luxury hotels. We don’t need flashy cars, impressive titles, uniforms or other status symbols. We rely on our strength and our will!”

The “blue ocean” strategy

While there are multiple reasons for IKEA’s successful expansion, Dr Omar Merlo, Director of the MSc Strategic Marketing at Imperial College Business School, pinpointed the adoption of a “blue ocean” strategy as one of the elements that helped the company to grow.

“Strategists like to talk about blue ocean strategies…the idea that you change the rules of the game about how you compete and you create your own markets,” he explained.

“You’re really creating demand for something that wasn’t there before which makes competition irrelevant, and in many ways that’s what Ikea did,” said Merlo.

“In marketing we’d probably talk of it more as a market driving strategy…What we have here is more radical innovation by giving customers something that they wouldn’t have dreamt about.

Nobody was going around thinking ‘I’d love to have some flat-pack furniture that I could spend the weekend putting together’. Nobody had expressed that need but once it was provided to them it was one of those things that people said they always needed.”

Efficiency

Being “obsessed with cost efficiency” also worked in IKEA’s favour, Merlo argued. “They are historically notorious for cutting costs every possible way. I think one of the lessons that can be derived from this is that obsession pays off.”

Flat-packaging was an example of this efficiency, Merlo pointed out, and also the widespread practice of competitive bidding internally and externally for the design and manufacture of new products.

Ultimately the company had managed to reinvent what a furniture supplier does and how consumers now choose to furnish their homes, he said.

The trade-off for more affordable and utilitarian products was less durability, self-service in the stores and the lack of delivery services.

“The same way that it reinvented what a furniture supplier does, it also shaped how customers think and how they behave,” he said. “I think Ikea fundamentally changed our view of furniture as something durable into something that is less durable but also that is less emotional,” Merlo added.

“It’s made it ok for people to replace old stuff more frequently. So that’s the behavioural and psychological outcome.”

The reinvention of the business model?

Small businesses looking to expand abroad could learn from IKEA’s caution in managing scale. “IKEA did not fall into the trap of scaling prematurely so it would always grow at a very sustained and conservative way,” he said.

“This obsession with getting things done right, like the cost-savings, the functionality in the product and to be able to scale and get into a market only when they got it perfectly right.”

Similar to modern start-ups like AirBnB and Uber, IKEA had also benefitted by reinventing a business model and by “refusing to be content with established ways of doing things and established ways in which customers think and behave,” Merlo continued.

“You don’t have to be a big global corporation to do that. You can be small and have the same ambition and ability, particularly now because of the internet.”

The global family

Dr Josip Kotlar, co-director of Lancaster University Management School’s Centre for Family Business, argued that although IKEA was now a multinational, that it still reflected the story of other family businesses.

“It is still owned and managed mostly by family so I would say that the most surprising thing about IKEA is that it’s a case of a family business that managed to grow globally but still remain under the control of the family,” he said.

“This is something to consider because many small businesses don’t grow and don’t internationalise mainly because they don’t want to do so,” Kotlar added.

“Often for founders, growing beyond the threshold means losing control and losing the ability to influence decision-making and having a very tight control over all the operations.”

IKEA’s success lay in part with the way that they had adapted to different markets while still remaining loyal to their core values, purpose and vision.

The low-cost, design furniture with its distinctive Swedish names remained familiar everywhere but “on the other hand, IKEA is willing to adapt lower level elements of its operation. For example, it adapts marketing strategies, pricing strategies to different countries,” he said.

IKEA school of thought

In terms of lessons to learn from IKEA, “in order to internationalise and to access different markets businesses definitely need first of all a value proposition. That sometimes needs to be changed and modified compared to the original founding vision,” said Kotlar.

“The biggest challenge is for those companies who are born local and then need to internationalise because in this position they definitely need the power to reframe their basic organisation values and its value propositions,” he added.

“At the same time these companies also need to develop governance structures which might include a holding company, or a number of governing bodies like a board of directors, the family counsel and other governance bodies that allow the company to preserve control over the company as it grows.”

Expanding your business

Meanwhile, Paul Tomkins, a senior advisor with the IBD Business Advice Group, offered some practical considerations for small companies considering how to expand their operations abroad.

“Really you’ve got to do as much research as you can. There’s a lot of advice out there. There are people like me with IBD…and there’s a lot of help from the government and from the Department of International Trade,” he said.

The Department for International Trades (DIT) not only offered specialist advice to hone in on specific markets, but also had funding available for country visits, Tomkins pointed out.

In addition, “local advice is extremely useful at an early stage because there’s lots of different regulations and cultural things that you can trip over in the early days. You can get very economically sound advice from somebody local,” he added.

It was important to get your products or services tariff-correct and to be aware of which countries require special export licences for certain products and services, he advised.

“The main thing is to find out from your target country any particular technical or legal regulations you’ve got to actually comply with,” Tomkins said.

“Really it’s just a case of not being scared. If you ask and look around there is a lot of very good advice and frankly there are a lot of opportunities available.”

Nicola Smith has spent a decade reporting for The Sunday Times on both the European Union and South Asia.

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