{"id":813,"date":"2015-12-03T17:10:21","date_gmt":"2015-12-03T22:10:21","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/ikea-dibs\/"},"modified":"2015-12-09T23:25:07","modified_gmt":"2015-12-10T04:25:07","slug":"the-secret-ingredient-in-ikeas-meatballs","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/the-secret-ingredient-in-ikeas-meatballs\/","title":{"rendered":"The secret ingredient in IKEA\u2019s meatballs"},"content":{"rendered":"

Ask your parents and your grandparents, affordable, decent quality, and good looking furniture was not a reality before IKEA came along. IKEA’s forward-thinking strategy has made it the biggest furniture seller worldwide \u2013 IKEA has 373 stores in 47 countries and about \u20ac30billion in revenue last year.<\/p>\n

IKEA managed this by having a very clear business model and a consistent operating model that allowed it to execute it. We were told in TOM that key to a successful business is precisely that, but is there any data to back Rob Huckmans\u2019s bold claims? Well actually, there is. Bain did a global cross-sector analysis of companies with top-quartile operating model indicators and it showed that they have a five-year compound average revenue growth that is 20% faster and operating margins that are 160% higher than for those in the bottom quartile.<\/p>\n

So it seems to me that the correlation between results stemming from consistent strategy and operating model is just as likely to be true as the Patriots having purposefully deflated those footballs.<\/p>\n

But I digress. Back to IKEA.<\/p>\n

Their business concept is \u201cto provide a range of home furnishing products that are affordable to the many people, not just the few. It is achieved by combining function, quality, design and value – always with sustainability in mind.\u201d IKEA does so by seeking simple solutions, saving every expensive possible when it comes to cutting costs, but not ideas.<\/p>\n

IKEA\u2019s business idea is grounded on a partnership with the customer. IKEA creates some customer value by making its unique stores a destination in themselves (e.g. with their large elaborate showrooms and cafeterias). However the greatest value comes from having well designed, nice furniture at a low (but not cheap) price. The way IKEA manages to offer its diverse product range at a genuinely low price is twofold:<\/p>\n

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1) Design<\/i><\/em><\/p>\n

The product design process is standardized and repeated for each product: price setting, manufacturer selection, and lastly collaboration to design a high-quality product to meet the desired price.<\/p>\n

Designers work with producers to use existing production processes to make new furniture. In the design phase, great emphasis is given to cost-efficient design (e.g. designing more compact furniture). The \u201cmake it yourself\u201d furniture was a huge breakthrough, drastically reducing transportation costs by making bulky end furniture fit into neat boxes.<\/p>\n

\u00a0<\/i><\/em><\/p>\n

2) Economies of scale \/ Lower costs <\/i><\/em><\/p>\n

IKEA searches worldwide for suppliers with the most suitable raw materials and then buys in bulk, globally, to ensure lowest possible price. Like Toyota, they strive for low costs in all operations (IKEA\u2019s and of their suppliers) to ensure big volumes in sales and long-term profits (for IKEA and suppliers). It\u2019s the classic economies of scale cycle: lower costs –> lower prices –> higher volumes –> lower costs…<\/p>\n

To further reduce costs, IKEA develops partnerships with its suppliers. The suppliers must guarantee that over 95% of inventory will be in stock. To make this a reality, IKEA placed its procurement units closer to its most important suppliers, and also created forums for supplier evaluation and coordination.<\/p>\n

Mikael Ohlsson, former CEO, used to say \u201cwe hate waste\u201d. The truth is frugality is the core of IKEA\u2019s business and operating model. It can be backtracked to its origins in Smaland, a modest Swedish region, where, according to Mr. Ohlsson, people are \u201cstubborn, cost-conscious and ingenious at making a living with very little\u201d.<\/p>\n

Even IKEAs scandals\/criticism are aligned with this thrifty culture. Most prominently, critics of IKEA claim that its corporate set-up minimizes taxes payable and disclosure (IKEA Group is actually part of the non-profit INGKA Foundation making most of IKEA\u2019s profits tax-free). Of course the argument can be made that \u201ctax efficiency\u201d is a natural part of the company\u2019s low-cost culture.<\/p>\n

All in all IKEA\u2019s operating model is very much aligned with\u00a0its business model, and this has fueled IKEA\u2019s growth and success over the last decades.<\/p>\n

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I forgot to talk about the meatballs, but I don\u2019t think there actually is any secret there.<\/p>\n

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Sources<\/strong><\/p>\n