The Ikea Way : From Cost Leadership to Market Leadership

The founder of Ikea, Ingvar Kamprad has built a global market leader, a brand recognized across continents for style and quality, while growing the business from zero to 41 billion euros.

No venture capital

No public funding

One guy, furniture and 41bn.

How did he do it ?

He started by setting a bold and clear vision for Ikea – to make better furnishings and furniture for “ALL”. He wanted to democratize design and make it affordable for all in the Sweden where he started and then eventually in every country around the world.

This is the statement he wrote

At IKEA our vision is to create a better everyday life for the many people. Our business idea supports this vision by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.

Note prices so low as a goal in the mission statement.

From the moment he started he had one mission. Keep great quality and design but keep reducing the prices for all customers.

He kept his promise. Ikea is probably the only major retailer in the world where the same product today is cheaper in absolute $ than it was 10 years ago.

How does Ikea do the impossible. Here are the 5 steps that Ikea takes and any business can take to achieve total cost leadership

1.    Sell Direct – Control the front end of your brand. Ikea started opening it’s stores and noticed that it could control quality, collect customer data, check on new designs faster and ensure that the 30-50% that one normally has to be given away to the retailers can be retained and part of it saved and savings passed back to the consumers. What can we do ? sell some brands directly to consumers using e commerce ? start a B2B portal to service retailers directly ? cut out the multiple middle men by going as direct as possible ? there is 10-30% savings in selling more directly available to any FMCG company.

2.    Source Global – Ikea from the start created a separate global buying organisation tasked with sourcing the best products at the best costs globally. Initially they used eastern Europe as the iron curtain of the soviet union collapsed, then increasingly they used china to bring down labour and conversion costs. What can we do – benchmark globally internally and externally in all key categories to understand where are the best costs and how to leverage them. there is another 10-15% or more savings hidden here.

3.    Involve the customer – ikea is unlike any other retailer – to bring down costs they don’t give you furniture. They give you flat packs in cartons that you need to open up and construct. This way they save 50% on shipping costs and pass you the benefit. What can we do ? offer XXL sizes in each category as super saver packs that we use to pass the benefit to consumers ? offer XXS ultra concentrate packs to pass on the savings to customers ? how can we involve customers to change their behavior to generate more savings. Moving a consumer from powder to liquid to a POD ( XXS idea) can generate 20% more profit for us – part of which we can pass back to the consumer. How can we start putting dispensers for all categories and bring down the effective cost to the consumer

4.    Backward Integrate – when they became too big for suppliers to support their growth, Ikea had to backward integrate to create their own manufacturing organisation. They designed and built their own global sourcing factories that now make a large part of their global portfolio. How can we backward integrate into select key categories like bar soaps, detergents, personal care liquids ? How can we co locate make, pack, fill and bottle production in one site?

5.    Monitor Costs – ikea monitors costs the way stock brokers look at stock prices. Daily, weekly, monthly. Alerts go up on any negative trends or early signs on cost increases and actions are taken immediately to correct the trends.

Cost leadership enables ikea to offer wow designs, wide ranges at an unbelievable cost. Cost leadership is directly responsible for market leadership.

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