Fundamentals of Management 6th Edition by Ricky Griffin

Exercise 26

Cultivating Innovation at IKEA
Have you ever really wanted a couch? Enough to camp outside a furniture store for a week? That's how badly some consumers in the southeastern United States wanted a couch (or some other manifestation of euromodern furniture) when IKEA opened its Atlanta store in June 2005. Thousands lined up at the door on opening day, although the record was set when 35,000 customers visited IKEA's first Tokyo store on opening day in April 2006. Back home in West Chester, Ohio, Jen Segrest doesn't need any furniture, but "I'd walk over molten glass for my pot rack," she admits during a two-day vigil waiting for the West Chester store to open in March 2008. Segrest also runs a website called OhIkea.com. Another member of the crowd who doesn't plan to buy anything says that he's just there "paying homage."
IKEA is a sort of cult. It's certainly a darling of a consulting firm called the Cult Branding Company, which certifies that the Swedish retailer more than amply exemplifies the "Seven Golden Rules of Cult Branding":
1. Cult brands understand that consumers want to be part of a group that's different.
2. Cult-brand inventors show daring and determination.
3. Cult brands sell lifestyles.
4. Cult brands listen to the choir and create cult-brand evangelists.
5. Cult brands always create customer communities.
6. Cult brands are inclusive.
7. Cult brands promote personal freedom and draw power from their enemies.
IKEA, confirms Business Week magazine, "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. ( IKEA stands for I ngvar K amprad plus E lmtaryd A gunnaryd, the names, respectively, of the farm and village where Kamprad grew up.) At first, Kamprad sold miscellaneous bargain goods (pens, wallets, picture frames, and so forth) through a catalog, delivering orders with the village milk wagon. He added furniture to his product line in 1951, started commissioning designs in 1955, and introduced the flat-pack design (for convenient storage and transport) in 1956, but he didn't open his first brick-and-mortar store until 1958. More stores followed throughout Scandinavia, and the first non-Scandinavian outlet opened in Switzerland in 1973. IKEA entered Canada in 1976 but didn't venture into the American market until 1985. As of mid-2008, IKEA operated 253 stores in 24 countries (another 32 outlets are run by franchisees). In 2008, the company added 21 stores in 11 countries; another 20 global outlets were added in 2009. There are 36 stores in the United States, and IKEA wants to increase the number to 50 by the end of 2010. Sales have risen from $8.6 billion to $28.9 billion in the decade between 1998 and 2008.
Kamprad retired in 1999, but to the faithful, he's still the spiritual father of the IKEA movement. His pronouncements on the company's mission and manner of doing business have a way of sounding like a sermon on the Seven Golden Rules of Cult Branding. He refers to his target audience-and targeted customers-as "the many," and from the outset, his plan was to bring affordable, well-designed furniture to this market composed of "the many." Bear in mind that "the many" is not really a "mass" market: In reality, it's a profitable niche consisting basically of consumers who want stylish furniture at a low cost. Today, the company says that it offers "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 starting up their own homes and/or expanding their families. Although IKEA sells furniture in more than 20 countries, its market share in each is fairly small-somewhere between 5 and 10 percent.
As we shall see, the IKEA concept depends on innovation, and the company's ability to innovate successfully depends in part on an organizational structure that encourages creativity and communication. 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 concept 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 10,000 items, the IKEA product line is quite large, and because smaller products compliment 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. As for product design, one German expert recalls that the first IKEA designs were "quite horrible." Fortunately, he adds, the company started paying more attention to design in the early 1990s. "Today if you go to IKEA," he admits, "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-butexpensive products is easy," says one Swedish executive. "Designing beautiful products that are inexpensive and functional is a huge challenge." Nevertheless, IKEA prices are typically 20 to 30 percent, and sometimes 30 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 by constantly looking for cheaper suppliers; nearly 50 percent of IKEA's outsourcing partners are located in developing economies.
• Distribution. Unlike manufacturing, which is outsourced, IKEA regards distribution as one of its own core competencies. So, 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. About 70 percent of inventory reaches stores through distribution centers, with the remaining 30 percent coming directly from manufacturers. 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 (for example, beds) or one room (for example, 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. "Because the store is designed as a circle," observes one customer in Ohio, "I can see everything as long as I keep walking in one direction." That's the way it's supposed to work: The "natural path" not only exposes her to the whole range of IKEA offerings but also encourages her to extend her in-store visit.
• Promotion. Promotion at IKEA revolves around the near-legendary annual catalog, a 300-page compendium of color photos and blurbs for such exotic-sounding products as Extorp armchairs and Mumsig ovens. Issued every summer in 55 different editions, 27 languages, and 35 countries, the IKEA catalog boasts a circulation of 175 million copies worldwide. It consumes about 70 percent of the company's annual marketing budget, but it's a logical medium for getting across the IKEA message: Featuring about 12,000 items, it 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. First of all, they are, like the IKEA catalog, designed to encourage repeat visits by showcasing the company's regular turnover in new products (about one-third per year). They're also more colorful and attractive than the typical retail-furniture outlet-the better to suggest the wealth of product ideas contained within their walls and the better to stir the imagination of the customer's inner home decorator.
The IKEA store is also the company's most obvious and most important process innovation. Averaging around 300,000 square feet, most boxlike blue-and-yellow stores feature both the series of showrooms ranged along the "natural path" and an in-store self-serve warehouse. After choosing items from the Showroom (where product and price information is provided on large easy-to-read tags), 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.
The procedure, in which customers perform many of the functions performed by employees at traditional furniture stores, is a model of process optimization in a retail operation, and it's been the key to effective cost and price cutting at IKEA since Ingvar Kamprad first introduced the concept in 1953. Another major process innovation is the concept of flat-packing products-breaking down the parts and packing them in separate containers for shipping, storage, and customer self-assembly. IKEA developed the process in the mid-1950s as a logical extension of yet another important process innovation-the concept of designing its own furniture.
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. We've already seen why new products are so important to the IKEA concept: The encounter with showrooms and display racks full of products that weren't there the last time around stirs the customer's impulse to make changes-"to create a better every-day life at home," as CEO Anders Dahlvig puts it on the IKEA Group website. 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 to maintain a global brand identity and to 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. "[W]ith our flat organization structure," says Bill Agee, head of marketing at IKEA U.S., "everyone contributes. 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."
Would you want to manage an IKEA store? Why or why not?