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The Success of Ingvar Kamprad’s IKEA

Note: This article was written as an exam essay (referencing removed) for the MBA unit BMA779 Strategic Management with Dr Dallas Hanson. It’s an interesting study of IKEA penned in a single day from secondary research as a portion of my strategic management exam answer in the Summer of 2009-2010.

Born in 1926 and raised on his parent’s farm in Pjätteryd, a Småland province in southern Sweden, Ingvar Kamprad began his entrepreneurial career at the age of five selling matchboxes and pens to local villagers. At 11 he went into the garden seed business and as a teenager operated his business from a bicycle. In tumultuous political times, he also experienced a controversial nine year friendship with pro-Nazi leader Per Engdahl – who attended Ingvar Kamprad’s first wedding in 1950. Much of the groundwork behind IKEA can be identified in those formative years.

Kamprad founded IKEA, now one of the largest global retailers of furniture and household goods, in 1943 at the age of 17. The name IKEA stood for his own initials, E for the family farm called Elmtaryd and A for the village of Agunnaryd where he was raised. The business operated as a simple organisational structure out of a commandeered 2 metre square shed supplying locals with matches, lighters, wallets, watches and nylon stockings. IKEA pursued a cost leadership business level strategy and within two years was piggybacking mail order delivery parcels to the local train station on trucks carrying milk churns.

In 1948 IKEA expanded its product offering to include furniture sourced from local suppliers and the consumer market responded well. The product line was further expanded and in 1951 IKEA continued expansion through their IKEA catalogue strategy (still their major advertising strategy in 2010). The first IKEA furniture show-room was opened in Älmhult, Sweden in 1953.

In the next few years to 1956 IKEA embarked on vertical integration by designing its furniture. This was a direct strategic response (as part of an ongoing price war) in reply to the reaction they received from competitors who resented IKEA undercutting their prices. The competitors had called for a supplier boycott. Their response was driven by an awareness of IKEA, motivation from their market commonality and resource similarity (their similar size), and their ability to respond with appropriate and effective resources. However, IKEA’s tactical decision to allow customers to feel and experience their furniture proved decisive in the conflict. Kamprad then developed a secret network of suppliers to obtain his wood and fabric, with night time deliveries to hide the trucks. When supplies became harder to source – and Kamprad already knew the art of turning difficulties into advantages – he restructured his supply chain into Poland to capitalise on the competitive advantage of lower factors of production. This strategy saw IKEA prosper with a competitive advantage and much of the IKEA range is still manufactured in the Polish factories in 2010.

In 1956 Gillis Lundgren, a local draughtsman, realised that if he took the legs off a table he could fit it into a car boot – and the flat pack was invented. Ingvar Kamprad, being the entrepreneur, saw the implications of that insight and hired him as a designer. The flat pack gave another awesome competitive advantage to a cost leadership business model – it saved shipping air from the factory to retail outlets, it put the onus of assembly onto customers and it gave a competitive advantage to IKEA in the high volume low cost designer furniture market. And as IKEA expanded and internationalised it was effectively executing an integrated cost leadership / differentiation strategy – combining low cost economies with their clean Scandinavian branding.

A big part of the IKEA strategy, and core to IKEA’s success, is the part-truth / part-unsubstantiated / part-myth that has permeated the globe as the IKEA story and most of which has come directly from Ingvar Kamprad. Some of this is truth but other parts are debatable. Consider back to his roots among the pro-Nazis in Sweden – the Nazis understood the power of a good story to drive a cult following. Kamprad’s include the frugality stories of 30 year old IKEA furniture in his house; his writing of The Testament of a Furniture Dealer; the story of Kamprad’s childhood alarm clock being set permanently to 5.50am; the myth of clean green responsibility – when IKEA really buys its wood well below what could be legally purchased in China, and when IKEA has been caught red-handed exploiting child labour in Romania. Kamprad has also effectively used his apparent frugality to drive down supplier prices. All of this in spite of IKEA’s notoriously bad service, incomprehensible instructions, incomplete construction kits, out of stock notifications when customers reach their self-serve warehouses, and stores purposefully designed to force the shopper to spend an hour or more viewing everything IKEA wants to sell them. IKEA decides what you want and tells you, rather than using R&D to find out what you need. They place small items dubbed “hot dogs” (because of their ridiculously cheap price) around their stores and when you visit IKEA you find it difficult to not buy something you did not realise you even needed. A German social theorist named Theodor Adorno called it “retroactive need” and said this was a “key means by which capitalism perpetuated itself”. Another IKEA business level strategy is that when a competitor brings similar products into the market at a lower price IKEA rushes out a “stripped-down and even cheaper” version to squeeze “their rivals from above and below simultaneously”.

The IKEA international strategy uses a franchise corporate level strategy spreading risks and sharing resources. And as IKEA has moved into an ever expansionist mode, pursuing both multi-point competition and vertical integration to achieve market power, it found markets ready and willing to adopt the IKEA mindset of low cost, European designed furniture – “supplying Scandinavian design at Asian prices”. Britain, for example, was wallowing with a complacent Habitat (nicknamed “Shabitat”) which IKEA came to own. This was another key to the IKEA success story – timing. IKEA set up international distribution depots, automated warehousing full of flat pack products and licensed massive franchise stores globally that all paid three per cent straight off the top of sales back to IKEA. And profits had consistently, and still do, yield unprecedented industry margins of 17 – 18 per cent on all IKEA products.

However, it had stayed with Kamprad that IKEA had been treated badly in Sweden in the early years; Burkeman writes “[Kamprad was] obsessively aware of the risks his new company faced… [and] set about creating a business structure of arcane complexity and secrecy.” The ultimate business strategy, and one that maximised wealth for the Kamprads and provided an opaque protection for them, was the 1982 establishment of the IKEA Group and the Stitchtings where Kamprad passed over his shares to the so-called charity supporting “innovation in the field of architecture and interior design”. Most of which, like Kamprad living in Switzerland, had the express objective of tax avoidance in Sweden and locking up IKEA so that it couldn’t be ruined or sold by future Kamprads. He did not lock up the money. IKEA, with 135,000 employees in 290 stores in 36 countries and the Kamprad family-concentrated ownership hidden behind dubious financial wizardry, had income in 2008 of 22 billion euros. IKEA’s success has boiled down to good showmanship, luck and timing, strategic ruthlessness, obsession with mastering process efficiencies, financial skullduggery – great business, corporate and international strategy – and the ability to turn obstacles into competitive advantage. They produce 130 million copies of the IKEA catalogue to tell customers exactly what they do not yet realise they need in their homes. Their choice of a global strategy with corporate level franchise arrangements provides returns well in excess of competitors like Tesco. If only IKEA’s recipe for success came in a flat-pack box?

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Steven Clark Steven Clark - the stand up guy on this site

My name is Steven Clark and I live in the Derwent Valley in Southern Tasmania. I have an MBA (Specialisation) and a Bachelor of Computing from the University of Tasmania. I'm a mazer & a yeast farmer (making beer, fruit wine and mead as by-products of continuous improvement in my farming practices). I'm a photographer, although my film cameras are currently silent. I do not tolerate idiots. I do not tolerate bigotry. I do not tolerate excuses. Let's be clear, if you sit with my enemies you my are my enemy for life.

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