Case Study #6 IKEA

Assignment 2: Dropbox Assignment

Case Study #6—IKEA

Read the case study located in the section titled Case Studies in your textbook and prepare a 7- to 10-page report in a Microsoft Word document concerning the following situation:

The IKEA case provides an excellent opportunity to apply strategic management concepts to a large privately-held company that is expanding into India. IKEA is a Netherlands-based Swedish company with a presence in 44 countries around the world, including the US, the UK, Russia, the EU region, Japan, China, and Australia. It is the largest furniture retailer in the world but did not enter India until 2013, despite the fact that it has been sourcing from India since the 1980s.

The purpose of this case study is to examine the factors that are crucial to IKEA’s continued success and to propose strategic actions to sustain its competitive advantage. The case opens with a review of the company’s humble beginning. IKEA was founded by 17-year-old Ingvar Kamprad in Sweden in 1943. By the 2000s, IKEA has become the world’s largest furniture retailer. The corporate structure was constructed to prevent any takeover and to protect the family from taxes. Thus, the structure is a complicated arrangement of not-for-profit and for-profit organizations. The IKEA stores provide customers with a unique shopping experience with low prices, solid quality, modern designs, and most importantly, the concept of do-it-yourself (DIY) products.

The extensive discussion is followed by a description of the furniture industry in India and what IKEA had to overcome in order to enter the Indian market. IKEA first met with regulatory and political roadblocks, and then had to work with suppliers in order to meet the Indian government’s requirement for sourcing. Finally, there are several challenges that IKEA faces.

This case is ideal for demonstrating the importance of the general environment, international corporate-level strategy, and type of entry. The following points are to guide a review and discussion of these important concepts.

• Review IKEA’s general environment segments and elements in India and describe in detail all the elements associated with this segment. Include three to four perspectives of the general environment.

• What are the segments in the general environment that relate to IKEA’s situation? Be specific? Provide examples and details.

• Analyze IKEA’s intended international corporate-level strategy in India. How was it strategized and what led to this country of interest?

• Describe how, if in any way, India is different from other countries? In your opinion, what would be a close second country?

• What is IKEA’s choice of international entry mode? Provide research and examples.

• What are the advantages and disadvantages compared to other international entry modes?

• Identify IKEA’s current challenges in India. Based on your analysis, what additional recommendations would you make to help IKEA achieve its goals?

• Discuss the uncertainties and risks of doing business in different regions throughout the world.

• Discuss whether IKEA would be wise to pursue a cooperative strategy. Also identify the type of cooperative strategy that would be best, explained why would it be best, and suggested with whom IKEA should pursue this strategy? If a cooperative strategy was not a good idea for IKEA, explained why not.

• IKEA’s product demand is difficult to manage. Recently overseas competition has refocused their product lines from the low end of the market to the more median price range. As they did this, they also broadened their product lines. How should IKEA manage their products? Should IKEA have a product line to meet the needs of the entire market or should they focus on one area of the market? If they follow a market focus strategy, what should their new target market be?

Support your responses with examples.

Cite any sources in APA format.

Submission Details

Name your document SU_MGT4070_W3_A2_LastName_FirstInitial.doc.

Submit your document to the W3 Assignment 2 Dropbox by Tuesday, January 3, 2017.

Assignment 2 Grading Criteria / Maximum Points
Described IKEA’s general environment and elements in India, including how those items impact IKEA’s situation and some examples. / 20
Analyzed IKEA’s intended international corporate-level strategy in India, including how it was strategized and what led to this country of interest. / 20
Described how India is different from other countries, including a detailed opinion for a close second (similar) country. / 10
Evaluated IKEA’s choice of international entry mode, including research and examples as well as the advantages and disadvantages compared to other international entry modes. / 20
Assessed the uncertainties and risks of doing business in different regions throughout the world, including IKEA’s current challenges in India and recommendations to help IKEA achieve its goals. / 20
Proposed the type of cooperative strategy that it would be best for IKEA to pursue, including with whom IKEA should pursue the strategy. / 30
Defended whether IKEA should have a product line to meet the needs of the entire market or focus on one area of the market, including why IKEA’s product is difficult to manage, the impact of competitors on IKEA’s product line, and how they might broaden the product line and focus on a new target market. / 40
Wrote in a clear, concise, and organized manner using appropriate format (i.e., APA). Utilized the appropriate type and number of scholarly sources. Demonstrated ethical scholarship in accurate representation and attribution of sources (i.e., APA). Displayed accurate spelling, grammar, and punctuation. / 40
Total: / 200

CASE 6: Business Model and Competitive Strategy of IKEA in India

Syed Abdul Samad

IBS Center for Management Research (ICMR)

“We are very determined but very patient at the same time. We started this journey six years ago. Things are finally moving and we are satisfied with the progress so far…

“I truly believe that the IKEA format is going to work. What is an IKEA store? An IKEA store has more than 9000 different articles for the entire family. We offer an experience for the whole family. Also remember, at IKEA we don’t sell products, we sell inspiration.”1

– Juvencio Maeztu, IKEA’s Country Manager for India, in 2013

After a year of lobbying and negotiating with and convincing the Indian politicos and bureaucrats, IKEA’s €1.5 billion investment proposal to set up its stores in India was finally accepted by the local government on May 2, 2013. However, as of July 2013, Juvencio Maeztu (Maeztu), IKEA’s Country Manager for India, found he still had a colossal task ahead of him.

IKEA, the Netherlands-based Swedish company, was the largest furniture retailer in the world with a presence in 44 countries around the globe—in countries like the US, the UK, Russia, the EU region, Japan, China, Australia, etc. However, it did not enter into the Indian market till 2013, though the company had had a presence in the country since the 1980s as a sourcing destination for its global stores. It had even opened its regional procurement office in Gurgaon, India, in 2007. In 2009, IKEA tried to enter the country to establish its stores, but its attempts were thwarted by India’s stringent Foreign Direct Investment (FDI) regulations. It again applied for permission for entry in June 2012, after India had made some changes in its FDI rules. However, IKEA had to wait another year, hitting many roadblocks on the way, before it was able to obtain the Indian government’s approval to establish its stores. The company also had to tweak its global store model to fit the Indian FDI and sourcing outlines and Indian consumer preferences.

While Maeztu was tasked with tapping the Rs.* 925 billion Indian furniture and furnishings market, analysts were keenly waiting to see what strategies the furniture giant would come up with to win the highly-fragmented, price-sensitive Indian market—as many Indian middle-class families preferred to have their furniture custom-made from small retailers or local carpenters. No two Indian homes had the same kind of furniture as Indians in general showed more of an affinity for unique woodwork and designs rather than flat geometric furniture. “Living room in India is different from any other country—a place for socializing and every activity is around the food. In some countries it is the kitchen and in some countries living room is used for sleeping,”2 said Maeztu. More important was the fact the Indian customer did not prefer the concept of do-it-yourself (where buyers had to assemble different pieces of the product themselves), a key part of IKEA’s globally successful business model. Analysts opined that though the company had managed to impress the Indian Government, getting into the homes of Indian consumers would be an entirely different ball game.

About IKEA

IKEA was a privately held company. It designed and sold ready-to-assemble furniture, home appliances, and accessories. From humble beginnings in 1943, the company went on to become the world’s largest furniture retailer by the 2000s.3 In the financial year 2001, the company earned revenue of €10.4 billion (Refer to Exhibit 1 for IKEA’s Growth in Revenue). By 2012, the company’s revenues increased to €27.6 billion with a net income of €3.202 billion (Refer to Exhibit 2 for IKEA’s Income Statement). By August 31, 2012, the IKEA Group had operations in 44 countries, including 30 service trading offices in 25 countries, 33 distribution centers, and 11 customer distribution centers. By August 31, 2012, the IKEA Group had a total of 298 stores in 26 countries and employed 139,000 people.4 Globally, the company had doubled its sales to €27.6 billion in the past decade and further planned to double them again by 2020 and to open 20-25 stores a year from 2015.

Exhibit 1: IKEA’s Revenue Growth (2001–2012)

Source: Adapted from: “Welcome Inside – IKEA Group Yearly Summary FY12”,

Exhibit 2: IKEA’s Consolidated Income Statement (2008–2012) In million € (for September 1–August 31 of)

2012

2011

2010

2009

2008

Revenue

27,628

25,173

23,539

21,846

21,534

Cost of sales

15,723

13,773

12,454

11,878

11,802

Gross profit

11,905

11,400

11,085

9,968

9,732

Operating cost

8,423

7,808

7,888

7,198

7,078

Operating income

3,482

3,592

3,197

2,770

2,654

Total financial income and expense

427

165

76

143

177

Income before minority interest and tax

3,909

3,757

3,273

2,913

2,831

Tax

695

781

577

384

546

Minority interests

12

10

8

–

–

Net income

3,202

2,966

2,688

2,538

2,280

Source: Adapted from

This case was written by Syed Abdul Samad, under the direction of Debapratim Purkayastha, IBS Hyderabad. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

IKEA was founded in Sweden in 1943 by 17-year-old Ingvar Kamprad (Kamprad). IKEA was an acronym of Ingvar Kamprad, Elmtaryd (the farm where he grew up) and Agunnaryd (his hometown in Småland, South Sweden). The company’s products were well known for their modern architecture and eco-friendly designs. In addition, the firm paid attention to cost control, operational details, and continuous product development, which allowed it to lower its prices. Instead of selling pre-assembled products, the company designed furniture that could be self assembled. This helped it cut down on costs and the use of packaging. The company’s website featured around 12,000 products which represented its entire range.

Corporate Structure

IKEA was structured in such a way as to prevent any kind of takeover of the company and to protect the Kamprad family from taxes. Though Kamprad was the founder, he did not technically own IKEA. He wanted an ownership structure that stood for independence, long-term approach, and continuity. Therefore in 1982, Kamprad created Stichting INGKA Foundation, a non-profit organization registered in Leiden in the Netherlands. In 1984, Kamprad transferred 100% of IKEA equity as an irrevocable gift to the Foundation. IKEA was privately held by this Foundation. Its purpose was to hold shares, reinvest in the IKEA Group, and to fund charity through it. It also protected IKEA from family squabbling and its inheritance in whole or part by the Kamprad family. Kamprad said, “My family will never have the chance to sell or destroy the company.”5 The Foundation was controlled by a five-member executive committee that was chaired by Kamprad and included his wife and attorney. The Foundation was only controlled (not owned) by the Kamprad family. The Foundation, however, owned INGKA Holding BV, a private, for-profit, Dutch company that controlled IKEA’s operations.

IKEA’s structure was a complicated array of not-for-profit and for-profit organizations. It had two main components—operations and franchising. Operations included the management of its stores, the design and manufacture of its furniture, and purchasing and supply functions which were overseen by INGKA Holding. As of August 31, 2012, only 30 of the 298 IKEA franchisees, while the remaining stores were run by the INGKA Holding.6

The franchising part (trademark and concept) was owned by a separate Dutch company called Inter IKEA Systems. All IKEA stores (franchised and those run by INGKA Holding) shared 3% of their revenue with Inter IKEA Systems as a franchise fee. Inter IKEA Systems was owned by Inter IKEA Holding of Luxembourg, which in turn belonged to Interogo Foundation in Liechtenstein. This foundation was also controlled by the Kamprad family. Apart from these holdings, the food joints that operated in IKEA stores were directly owned by the Kamprad family and represented a major part of the family income. This corporate structure allowed Kamprad to maintain tight control over the operations of INGKA Holding and IKEA stores (Refer to Exhibit 3 for IKEA’s Corporate Structure).

Exhibit 3: IKEA’s Corporate Structure

Source: Adapted from “Welcome Inside – Yearly Summary FY09”,

Going Global

In 1943, after founding IKEA, Kamprad increased his product range to include pens, wallets, picture frames, table runners, watches, and jewelry and nylon stockings at reduced prices. He initially made individual sales calls to sell the merchandise. When his business grew, he advertised in local newspapers and operated via the mail-order service using the local milk van to deliver the products to his customers. In 1948, he introduced furniture into the IKEA range. The furniture was made by local manufacturers close to his home. The furniture met with good response and Kamprad decided to expand his range. However, the company’s sales were threatened by the price wars among the competitors. Therefore, in 1953, he opened a showroom in Älmhult, Sweden, so that his customers could have a look at the furniture before placing an order. This helped the company as customers chose the products with the best value for money. However, the pressure that competitors exerted on suppliers to boycott IKEA led to the company deciding to design its own furniture. When IKEA began exploring the packaging of its furniture, one of the workers disassembled a table to fit it into a car for transportation. This led to the invention of flat packs and the self assembly concept, which became a huge success.

In 1958, the company opened its first IKEA store ‘Möbel-IKÉA’ in Älmhult, Småland, Sweden, with 6,700 square meters of home furnishings—the largest furniture display in the Scandinavia region during those times. In 1960, it added a restaurant to the store, which over a period of time became an integral part of the store concept and layout. However, after this the company began looking at markets other than in its home country. In 1963, the first store outside Sweden was opened in Oslo, Norway. Later in 1969, it entered Denmark with its store at Copenhagen. The company then spread out to other parts of Europe in the 1970s. In 1973, it went outside the Scandinavian region and opened a store in Switzerland followed by a store in Germany in 1974. The global expansion of IKEA stores took place at a rapid pace during the 1970s and 1980s. Stores were soon opened in other parts of the world including Japan (1974), Australia and Hong Kong (1975), Canada (1976), and Singapore (1978). In the 1980s, IKEA further expanded its store network in France and Spain (1981), Belgium (1984), the US (1985), the UK (1987), and Italy (1989) among other areas. It further expanded into more countries in the 1990s and 2000s. In 1998, it entered China by setting up a store in Beijing. In 2010, the company also entered the Latin American region with a store in Santo Domingo, Dominican Republic. However, the company did not have much of a presence in the developing countries.

Germany, with 44 stores, was IKEA’s biggest market, followed by the US with 37 stores. The IKEA store at Stockholm Kungens Kurva, Sweden, with an area of 55,200 m2 was the largest in the world, followed by the stores in Shanghai, China (49,400 m2), Shenyang, China (47,000 m2), Tianjin, China (45,736 m2), and Berlin Lichtenberg, Germany (45,000 m2).7 The IKEA store located in Tempe, Sydney, was the biggest store in the southern hemisphere with an area of 39,000 m2.8 By the end of 2013, IKEA planned to open its first warehouse in Croatia and its first shopping center in Vilnius, Lithuania, which would be the biggest furniture-selling mall in the Baltic States.

Manufacturing and Other Initiatives

Unlike the traditional retail stores where the customer could directly go to the needed section, IKEA encouraged its customers to go through its store in its entirety. Therefore, its stores were designed in a one-way layout in the anti-clockwise direction. Most of the IKEA stores were very large buildings decorated in blue and yellow patterns. However, the newer stores used more of glass for functional and aesthetic purposes—to give a better impression of the product and a better look to the store, and to use more of natural light to reduce energy costs. The stores required customers to first go through the display making note of the required items, then proceed to the open shelves to make smaller purchases, and then go to the self serve warehouse to collect the previously noted products. They were then directed to the in-house warehouse or external warehouse to collect the products and make a payment.