IKEA Billion Dollar Strategy

IKEA

The Seekers

21 days ago|8 min read

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In 2018 there was a massive traffic jam in the city of Hyderabad. Now traffic jam is not new to a city like Hyderabad, but the reason why this traffic jam happened is amusing. It was not because of an accident. It was not because a truck had broken down. It was merely because of the opening of a furniture store. You heard that right. A furniture store had opened up in Hyderabad, which resulted in such a massive traffic jam that a person who would usually take just 20 minutes to go from office to home took about more than 4 hours. Just because of this traffic jam.

And it almost appeared as if the entire city had taken a break just to visit this furniture store. The Hyderabad police were putting out traffic advisories radio jockeys were advising against venturing near the area and the entire city was in a frenzy. The furniture store itself had put out a billboard saying: that’‘ Hyderabad. We are here to stay’‘ The question is-. What kind of furniture store is this and what is so special about this furniture store that it could bring a mega city like Hyderabad to a standstill? This brand is none other than the world’s largest furniture seller, goes by the name IKEA.

1.     IKEA

For those of you who do not know about IKEA. IKEA is a Swedish furniture company and it is so huge that IKEA has about 445 stores worldwide not just that, IKEA has more than about 2.17 lakh workers and generates a revenue of more than $ 40 billion. And no matter which city an IKEA store opens up. No matter which country an IKEA store opens up, the entire population of that city falls head over heels just to visit this store. And if you look at the top 10 furniture brands all across the world, you will see that IKEA is at the top. With a revenue of $ 40 billion. And the second competitor to IKEA is not even close to $ 10B. The question is-. What is so special about IKEA, is that people are so crazy about it. What is so special about IKEA is that it has been able to build a $ 40B empire merely by selling furniture, which in the conventional world is not considered to be a scalable business.

2.     Case Study: American Cake Industry

The answer to this question lies in one of the most beautiful case studies that were done by Harvard Business Review, which dates back to the 1950s. In the 1950s in the American culture mothers used to bake cakes for their kids and they used to consider it to be their gesture of love and devotion to their family.

Now back then, cake making process in itself was very tedious, and sometimes it used to take more than a day for a woman to bake a cake. So there was a company called General Mills that came out with the idea of actually minimizing the effort that mothers were putting into baking a cake. So they came out with the idea called instant cake mix wherein they said that we are going to give you all the ingredients in a packet, and all you have to do is just add water to these ingredients. Put it in the oven and within a few hours, your cake will be ready. So this product minimized the efforts of the mothers to such a large extent that a process that would usually take more than a day sometimes would be done in less than half a day. Now, theoretically, if you see it on paper, this looks like one of the best products a mother could ask for. Why? Because it minimized the efforts, it minimized, the time to a large extent, and most importantly, the cakes almost always use to come out very delicious.

But you know what this product failed miserably in the market. The question is- What could be a more perfect product than a product that can save a ton of time that can reduce efforts, and can give out amazing results. Well, this is the same question that General Mills guys also asked. So they hired a few psychologists and got them to find out what exactly was wrong with the product. As it turns out, there was nothing bad with the product.

The only problem was that mothers considered the cake mix to be an insult to their efforts. And somehow they came to believe that merely by using the cake mix, they were kind of deceiving their husbands and their children. Now, if you see this principle is not very far from home. I mean if your mother is a specialist in making Chole Bhature and she puts in an entire day’s effort just to make delicious Chole Bhature for your family And you go and tell her that here’s an instant Chole, Bhature mix, wherein you just have to add water and you will be able to make delicious Chole Bhature. Will she accept that? The only reason why she wouldn’t accept it is that it is taking away the sanctity of her efforts that is associated with the entire process of making a signature dish that is Chole Bhature.

Just like this, the mothers of the United States often felt it to be. Like an insult to their efforts, an insult to the sanctity that they have associated with the efforts of making cakes. So you know what the General Mills guys did.

They came out with another product and in this product, instead of making it much easier for mothers to bake cakes, they came out with a few hurdles wherein mothers had to add eggs and a few more ingredients which made the process more tedious by which it could give the mothers a perception that they were putting in a lot of efforts to bake the cake. As it turns out, this product became a massive hit and sales skyrocketed. And that is when the psychologists of General Mills understood a very important lesson in human psychology that is No matter how inefficient the system is, no matter how tedious the work is, no matter how bad the product is. If a person has put in efforts to bring out that kind of output, that person will have an extraordinary sense of value towards that product.

3.     IKEA applied the General Mills Idea

For the rest of us. It might look like a stupid product, but for that person, that product will be of extraordinary value, And that is how they concluded. That leads to love. And this is exactly the phenomenon that IKEA applied to its furniture, because of which, today IKEA is a $ 40B company. Now conventionally. If you look at the supply chain of any furniture company, what they do is the furniture first gets manufactured. Then the furniture gets shipped to the retailer.

Over there, the retailer stores it in a warehouse and then, when you go out to the showroom – and you like one of that furniture the retailer, then ships the furniture to your house. Now, this furniture comes directly assembled from the manufacturing hub to the retailer’s warehouse and from the retailer's warehouse to your house. As a result of which it comes in a large truck. But you know what guys IKEA furniture was packed in such a way that it could fit in your car. The question is-, How the hell is that even possible? Well, while a conventional sofa comes something like this IKEA furniture. Look something like this.

4.     DIY- Do It Yourself Concept Led to Inventory Solutions

That is IKEA! Furniture does not come assembled. They come in pieces and you have to assemble the furniture in your own house. And here’s where the concept of DIY- Do it yourself comes into play. As it turns out just like mothers developed an extraordinary sense of value towards their work Of actually baking a cake, customers started to develop a very beautiful relationship, an extraordinary sense of value towards their IKEA furniture, because they assembled furniture by themselves. Now, this is just the tip of the iceberg. What it did to the supply chain of IKEA was revolutionary because when it comes to logistics, one of the most important factors that result in cost-cutting and efficiency is volume occupancy. As in.

If you are fitting something into a truck, you have to make sure that the entire volume of the truck’s storage is filled. So if you see practically, you can’t fit beyond one sofa in a mini truck. You can’t stack one sofa on top of the other, because that would destroy the sofa at the bottom. As a result of which the volume occupancy of the trucks becomes very less. And here’s where IKEA’s revolutionary idea comes into play. Because IKEA furniture did not come assembled. They came in a box and you could stack one box on top of the other, as a result of which the volume occupancy of the truck was maximized. And in one mini truck, wherein you could ship only one sofa when it’s an IKEA sofa. You could practically ship more than 3-4 sofas. And that is how the entire supply chain of shipping sofas became super-efficient.

5.     Effective Supply Chains

And it doesn’t stop over here. If you look at the warehouse of the retailers, if the sofas come assembled again, the retailer cannot stack one sofa on top of the other. But when it comes to IKEA storage, IKEA storage looks something like this, wherein you’ve got multiple stories of storage, one on top of the other. And to put a cherry on the cake, these boxes could also fit  As a result of this customers could practically take their furniture home in their car. And that is how the supply chain was turned so so efficient and the Cost was reduced to such a large extent that IKEA was able to provide premium furniture at a very low cost. And that is how IKEA was able to find its golden recipe of providing low price high-value products, as products that could be extremely affordable to the Customers and yet could create an extraordinary sense of value for their customers.

6.     Engage with Customers to Create Brand Value

And this is the reason why IKEA today is a $ 40 billion company and is operating in more than 25 countries. Now the question is: what can ordinary people like you and me, learn from this extraordinary case study, more importantly, how can you apply the IKEA effect to your startup so that your customers will develop an extraordinary sense of value for your products. As far as the Application of the IKEA effect is concerned. There are 3 major things that you need to keep in mind Number one. The task that you are giving to your customers shouldn’t be too easy. Number two. Your customers should have to put, in a certain degree of effort to complete that task. And, most importantly, you got to make sure that the task is designed in such a way that it can be completed by the customers. And apart from this, there are also some extraordinary business lessons that you need to learn if you want to build an extraordinary brand. The first thing we all need to realize is that the perceived value of a product is always directly proportional to the engagement of the customers. And no matter what kind of a brand you are. If you can engage with your customers, that will help you create an extraordinary sense of brand value in the mind of the customers.

And this sense of brand value could be the deciding factor deciding whether your company is an ordinary company or an Extraordinary company. For further reading, I would highly recommend you to read this book called Hooked written by Nir Eyal, and you could also understand how people often associate their feelings with price and cost from this book called Misbehaving, which has been written by a noble laureate named Richard Thaler.

 

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