A CASE STUDY ON IKEA : FURNITURE RETAILER TO THE WORLD

Abstract : The case study will look into the development of IKEA from a small Swedish
furniture company to global home furnishing giant that it is today.

Keywords : IKEA, case study

1.

By the early 1970s, IKEA had established itself as the largest furniture retailer
in Sweden. What was the source of its competitive advantage at that time?

The term competitive advantage, despite its widespread use and popularity, has no
uniformly acceptable definition (Peteraf 2005, pg 178). Most oftenly, it is decribed (as
opposed to defined) in term of superior financial performance (Winter, 1995 cited in
Peteraf 2005,p. 179). In Peteraf and Barney (2003, p.314 cited in Peteraf 2005,p.
179), competitive advantage has been described as follows :

An enterprise has a competitive advantage if it is able to create more economic

value than the marginal (breakeven) competitor in its product market.

Michael Porter (1985, p.3 cited in Bredrup 1995,p. 43), the strategic management
guru who popularised the term described competitive advantage as :

Competitive advantage grows out of value a firm is able to create for its buyers that
exceeds the firm's cost of creating it. Value is what buyers are willing to pay, and
superior value stems from offering lower prices than competitors for equivalent
benefits or providing unique benefits that more than offset a higher price. There are
two basic types of competitive advantage: cost leadership and differentiation.

Case studies on IKEAs competitive advantages area abound. According to Grol and
Schoch (1998, p.89), IKEA strength comes from its mastery of three key aspects of
value chain, namely, unique design capabilities, unique sourcing and tightly
controlled logistics.According to Grol and Schoch further, this mean that the company
is able to produce products that are distinctive enough to provide market recognition,
secure sourcing for the long runs at profitable levels and reduce inventory costs
through regional warehouses which works very closely with stores.

Though Grol and Schoch directed their comments on IKEAs strength nowadays, this
paper submits that it is the same strength that gave IKEA competitive advantage in
the 1970s.The distinctiveness (i.e. its stylish functional and minimalistic designs) of
IKEA products was the factor that attracts customers to IKEA in the pre 1970 period.
Secure sourcing, meanwhile, was guaranteed by long term contracts with their Polish
suppliers who charged 50% less than Swedish suppliers.

This paper proposes to analyze IKEA source of its competitive advantage by the
early 1970s by looking at ways in which IKEA of the early 1970s fits into the Porters
classical Diamond Model developed by Michael Porter. Although the model was
developed by Porter to explain factors contributing toward a particular nations
competitive advantages as against other nations, this paper submits that with
contextual modification, the model is also applicable to explain factors contributing
toward a particular business competitive advantage as against other business.

Porters Diamond Model (Figure 1) (McKinnon 2009,p.209) comprises four integers

which are related to each other and which together, promote or impede the creation
of competitive advantage for a particular business. The four integers are factor
conditions, demand conditions, related and supporting industries and firm strategy,
structure and rivalry. According to Diamond Models theory these four integers shape
2

the nature of pressures on a particular company to invest and be innovative to attain

the hallmark of competitive advantage i.e. cost leadership and differentiation.In other
words, these four integers are the source of competitive advantages.

Firm
strategy,structure
and rivalry
Factors condition

Demand conditions

Related and
supporting industries

Figure 1 : Porters Diamond Model

1.

The factors conditions

According to McKinnon (2009,p.209) factors conditions consist of human resources

(quantity, quality, accessibility and cost of land and other natural resources including
climatic conditions and location), knowledge resources (scientific technical and
market knowledge), capital resources (amount and cost of capital to finance industry)
and infrastructure. Most of these factors were favaourable to IKEA in the years
leading to the 1970s. For example, the article mentioned about the innovative Gillis
Lundgren (quality human resource factor).

Other example of factors conditions favourable to IKEA was the Polish suppliers
(knowledge resources Kamprad knew where to source quality expertise at the
fraction of the price in Sweden) and the location of their third stores in Sweden (at the
outskirts of Stockholm with ample space for parking and good access roads which is
infrastructure factors in Porters Diamond Model).
3

2.

Demand conditions

Consumers demand for IKEAs products in the years leading to the 1970s were
strong as IKEAs products were not only competitively priced but were also of high
quality as proven by comparison done by the Swedish magazine Allt i Hemmet. As
stated by the article under review this publicity made IKEA products acceptable to
public and sales began to take off.

3.

Related and supporting industries

Porter identified two mechanisms through which a competitive advantage in one

industry could benefit other related industries. First, a supplier industry may provide a
downstream industry with regular supplies of low costs resources and possibly
privileged access to these resources. Second, close working relationships between
suppliers and an industry will result in more sharing of information and may result in
more rapid innovation.

In IKEAs case, the first mechanism is being represented by IKEAs relationship with
their Polish suppliers who could supply IKEA with resources at a fraction of the price
had IKEA sourced the same from Sweden. The second mechanism is represented by
the statement of one of the Polish managers quoted in the article under review that :
A third advantage (of working with IKEA) was that IKEA introduced new
technologies. One revolution for instance, was a way of treating the surface of wood.
These two mechanisms translate to IKEA being able to lead in term of price and
differentiation (i.e. new innovative products always on the shelves).