Few brands reach the iconic stature of Ikea, the Swedish furniture company founded in 1943 that sells ready-to-assemble furniture. Known for its simple product design; its massive, friendly retail stores; and its very low prices (which have dropped an average of 2 to 3 percent each year since 2000), the company has built a remarkable level of customer loyalty around the world.
From its beginnings, the company concentrated on continuous cost reduction in a way that elevated it almost to an art form. As founder Ingvar Kamprad wrote in his autobiography, The Testament of a Furniture Dealer: A Little Ikea Dictionary (Ikea, 1976), “Wasting resources is a mortal sin at Ikea.… Expensive solutions to any kind of problem are usually the work of mediocrity. We have no respect for a solution until we know what it costs.”
But starting in 2008, facing rising prices and a global recession that hit its core markets (new homeowners and middle-class consumers) especially hard, Ikea set out on a new strategic path: to offer even lower prices to consumers, while positioning itself for long-term growth. It accomplished this through the simplest of methods: focusing relentlessly on separating “good costs” (productive investments) from “bad costs” (unnecessary expenses). The company then invested 100 percent of its net savings on building up the essential qualities of its business or lowering the price of its products. (At other companies, even 25 percent reinvestment is considered remarkable.) The results to date have been impressive: about 10 percent annual top-line growth and stable margins, despite the ongoing price reductions and economic pressure of the past few years.
As part of our background research for an s+b article (“Is Your Company Fit for Growth?” by Deniz Caglar, Jaya Pandrangi, and John Plansky, Summer 2012), we spoke in March with Ian Worling, one of the executives at Ikea who was closely involved with this initiative. Worling is Ikea’s director of business navigation — which combines the job of controller with a primary role in steering the business and in strategy development.
S+B: How did Ikea’s strategy initiative start?
WORLING: As a company, we have always been extremely clear about our ambition: to create a better life for people. That means we offer home furnishings at such low prices that as many people as possible can afford to buy them. That colors everything we do. We are single-minded about cost reduction, and we are never satisfied with where we are on that journey.
During the 2000s, we had very good growth in most of our markets. We were profitable, and inevitably, we got a bit fat on the cost side. Then the recession came on. When times are rough, it can be good for Ikea, if we can offer affordable-enough home furnishings. So we asked ourselves what we could do during this period to lower our costs and, instead of reducing the bottom line, to turn every euro back to lower prices for our customers. This goal of price reduction was the real key for us, from a motivation point of view.
We didn’t focus on cutting costs, because that’s the easiest thing to do in retail. You just lay people off, and cut back some of your capital expenditure, and it reduces your variable costs. But it also weakens you. Instead, we decided to make structural changes — to rethink our practices.
We’ve done this now for the past three years. Therefore, even in years like 2011, when we had significant increases in raw material prices, we were able to offer lower prices to our customers than we did the year before. The outcome has been higher market share in almost every country where we do business.