Fundamentals of Management 7th Edition by Ricky Griffin

Exercise 13

Cultivating Innovation at IKEA
According to BusinessWeek magazine, IKEA "is the quintessential cult brand," and its customers belong to "a like-minded cost/design/environmentally-sensitive global tribe." The founder of this global "cult" is a Swedish entrepreneur named Ingvar Kamprad, who started the company in his rural hometown in 1943, at the age of 17. Kamprad has always referred to his targeted customers as "the many," and at least from the late 1950s, his plan has been to bring affordable, well designed furniture to this target market. "The many," then, is hardly a "mass" market: In reality, it's a profitable niche consisting primarily of consumers who want stylish furniture at a low cost. Its goal, says the company, is to offer "affordable solutions for better living," with "better living" referring to a range of well-designed furniture and furnishings and "affordable" referring to the price range of consumers who are starting up their own homes and/or expanding their families.
IKEA's marketing strategy depends on constant innovation, and the company's ability to innovate successfully depends in part on an organizational structure that encourages creativity and communication. In order to understand how it's all designed to work, however, we first need to break down the elements of "the IKEA way"-the factors which, taken in combination, have made the IKEA approach so successful. The target market that we've just described is the first of these factors, and we can identify four others in terms that any marketer would recognize:
• Product. With nearly 12,000 items, the IKEA product line is quite large, and because smaller products complement larger products, customers can experiment with ensembles that satisfy their own needs and tastes while calculating total costs as they proceed through the store or catalog. The company didn't pay much attention to product design until the early 1990s, but today, admits one expert, "you will always find some pieces which are good designs and very reasonable in pricing." IKEA also wants consumers-especially Americans-to stop thinking of furniture as durable goods. Older Americans, says one company marketing manager, "keep a sofa longer than a car" because they believe that it's going to be the long-term "icon of the living room." IKEA wants to appeal to the willingness of younger consumers to experiment with changes, and its price structure makes it possible for them to do it.
• Price. "Designing beautiful-but-expensive products is easy," says one IKEA executive. "Designing beautiful products that are inexpensive and functional is a huge challenge." Nevertheless, IKEA prices are typically from 20 percent to 50 percent below those of stores selling fully assembled furniture. "When we decide about a product, we always start with the price," reports one product developer, and after starting with an original competitive price, IKEA then proceeds to drive it even lower. The company maintains price leadership not only by purchasing in large quantities but also by constantly looking for cheaper suppliers; nearly 50 percent of IKEA's outsourcing partners are located in developing economies.
• Distribution. In addition to a global network of thousands of manufacturers and nearly 1,400 suppliers in 54 countries, IKEA maintains a system of 27 distribution centers (which ship products to stores) and 11 customer-distribution centers (which ship goods to consumers) in 16 countries. Its stores, too, are an important facet of IKEA's distribution strategy. A key innovation is the way they're laid out. Unlike the traditional furniture outlet, which directs customers to separate sections to view multiple versions of one product (e.g., beds) or one room (e.g., bedrooms), IKEA stores are laid out around a wide one-way path- the "natural path," according to the company-that carries customers directly from one section to the next. The "natural path" not only exposes them to the whole range of IKEA offerings but also encourages them to extend their in-store visits.
• Promotion. Promotion at IKEA revolves around the near-legendary annual catalog, a 300-page compendium of color photos and blurbs for about 12,000 products. Boasting a circulation of 175 million copies worldwide, the catalog covers the whole range of the company's new products, focuses on ideas for innovations in the customer's home, and relies on word-of-mouth publicity among the faithful. Not surprisingly, IKEA stores are arranged to accomplish essentially the same goals. Like the IKEA catalog, for example, they're designed to encourage repeat visits by showcasing the company's regular turnover in new products (about one-third per year).
The IKEA store is also the company's most obvious and most important process innovation. Averaging around 300,000 square feet, most boxlike blueand- yellow stores feature both the series of showrooms arranged along the "natural path" and an in-store selfserve warehouse. After choosing items from the Showroom, customers collect trolleys for transporting their purchases and pass into the Market Hall, where they can pick up smaller items, such as linen, lighting, glassware, and rugs. Next along the path is the Self Serve Warehouse, where they collect their furniture purchases in flat-pack form and then proceed to the rows of cashier's stations to pay for everything. Once they've paid for their purchases, customers can arrange for delivery or roll them to the loading dock, pack them in or on their vehicles, and take them home.
As important as process innovation has been to the company's success, the IKEA engine is powered by the introduction of new products and a constant stream of product innovations. Finding new products from outside sources, however, isn't the same thing as innovating within the company. At IKEA, innovation from within signals the company's commitment not only to respond to changes in the needs of customers all around the world, but also to maintain a global brand identity and convey an ongoing sense of excitement among the brand-loyal faithful.
At any given time, about 50 designers at the company's Swedish workshop are busy creating five to ten new products, but designers aren't the only people in the organization who are responsible for innovative ideas. "[E]veryone contributes," says Bill Agee, head of marketing at IKEA U.S. "Whoever you are within the IKEA organization, you're expected to contribute your ideas-your new ideas, your old ideas or whatever it may be-and every idea is welcome." The concept works, explains Agee, because "we're a very process oriented company…. [W]e have three basic processes: creating, communicating, and selling the home furnishings offer. Each of these processes," he adds, "has a matrix structure": Working as members of what amounts to a companywide team, designers design products, marketers like Agee communicate the product message, and "coworkers" in the company's warehouses and stores deliver the product to the customer. "Our independence," Agee thinks, "has a lot to do with our innovation because we don't know any better…. We feel that we are, to a certain extent, operating outside of standard operating procedures."
There's an IKEA TV ad that features a discarded lamp, forsaken on a rainy night in some American city. A man looks at the camera and says in a sympathetic Swedish accent, "Many of you feel bad for this lamp," and then, after a well-timed pause, "That's because you're crazy." What's the message of the commercial?