Case Study #6—IKEA Read the IKEA case study located in the section titled Case Studies in your textbook concerning the following situation: The IKEA case provides an excellent opportunity to apply str

Case Study #6—IKEA Read the IKEA case study located in the section titled Case Studies in your textbook concerning the following situation: The IKEA case provides an excellent opportunity to apply str
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”, http://www.ikea.com/ms/en_CA/pdf/yearly_summary/ys_welcome_inside_2012_final.pdf 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 www.ikea.com 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”, http://www.ikea.com/ms/en_CN/about_ikea/press/press_releases/Welcome_inside_2010.pdf 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