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IKEA Value Chain Analysis

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IKEA is a leading global brand of home furnishing products. The company sells stylish home furnishing products that appeal to the taste of the modern people at affordable costs. The main factors behind the popularity of the IKEA brand are its low costs but good quality products. The company has managed its supply chain and production processes efficiently to keep product prices low while also remaining innovative in terms of style and design.  Over time, the company has built a strong competitive advantage through its cost-efficient operating model and sales and marketing best practices.

IKEA is the favorite of the millennial generation not just because of its affordable pricing strategy but also because the company offers superior quality products in a very large range. An optimized value chain has helped the company achieve higher cost efficiency as well as grow its international presence faster through a franchise system. Read more about IKEA’s value chain and the best practices it has adopted to make its value chain more efficient than its competitors.

What is the Value Chain model?

 Michael E Porter of the Harvard Business School introduced the value chain model. This model includes all the activities which add value to the final product starting from procurement to production, marketing, sales, and customer service. Optimization of the value chain helps companies achieve superior results like higher operational efficiency and minimization of wastage. It can also help companies build new sources of competitive advantage.

There are two types of activities that are included in the value chain model. They are the primary activities and support activities. The Primary activities are concerned directly with the creation of the products or services whereas the support activities are related to the primary activities and improve the effectiveness and efficiency of the primary processes. Understanding the value chain model of IKEA can help you learn how IKEA brings higher cost efficiency and operational effectiveness to its business model.

Value Chain of IKEA: Primary Activities

Inbound logistics:

Inbound logistics refers to the inward flow of goods into a business and includes transport and storage. This is an important area in the value chain, optimizing which helps businesses grow their operational efficiency and minimize costs related to inventory management and logistics. IKEA has set this area of its business carefully in a manner to reduce costs of transportation and storage.  Since IKEA wanted a highly efficient distribution system from the suppliers to production and finally to the stores and customers, it made logistics an integrated part of its business.

The company also tries to reduce transportation costs and therefore around 20% of IKEA products are shipped directly from the suppliers to the stores. The company sources from more than 1800 suppliers in more than 50 countries. Apart from distribution centers located strategically at key locations around the globe, the company has 42 trading offices located close to the suppliers for managing supplier relationships. In 2018, the company acquired a distribution center in Dubai and started the construction of another one in Kualalumpur, Malaysia.

Operations:

IKEA operates a franchise system that has helped the brand expand internationally faster. The Inter IKEA Group is the owner of the IKEA concept. The franchisees that operate the IKEA stores around the world include INGKA, Dairy farm, Sarton, Mapa, Al Sulaiman, Al Homaizi, Al Futtaim, House Market, Miklatorg, Ikano, and Northern Berc. The Ingka group alone operates 367 IKEA stores in 30 markets worldwide. The total number of IKEA stores worldwide reached 433 in 2019. Moreover, the company is reaching its customers through e-commerce in 50 markets.

The business model of Ikea includes three core businesses: Franchise, Range & Supply and Industry. The franchising business oversees the operations of the franchisees. The Range & Supply business of IKEA is responsible for developing and supplying products to the entire IKEA range and includes  IKEA of Sweden AB, IKEA Communications AB, IKEA Food Services AB, IKEA Supply AG, and related businesses. IKEA Industry is the core area of the Inter IKEA group and produces wood-based furniture. It makes furniture of two types which include solid wood-based furniture and light-weight or board based wooden furniture.

IKEA Industry includes 43 production units in 9 countries: China, Hungary, Lithuania, Poland, Portugal, Russia, Slovakia, Sweden, and the USA. The top five countries where most of the production takes place are Poland, Russia, Slovakia, Portugal, and Sweden.

Outbound logistics:

IKEA transports around 20% of the products to the stores directly from the suppliers. However, the rest are transported using IKEA’s distribution system and distribution centers located in key locations around the globe. IKEA customers can choose to pick up products from the stores. To keep expenses minimized the company does not offer free delivery. Self-assembly of products also helps IKEA minimize costs. However, customers can also hire someone from Taskrabbit to help with assembling the furniture.

Marketing and sales:

IKEA has adopted an innovative marketing and sales strategy that uses a mix of traditional and modern channels. The company has also established an excellent sales and distribution network which is managed and operated by its franchisees. The IKEA stores are mainly managed by the franchisees and the company has stores in strategic locations to grow reach and increase sales. Moreover, these stores have accompanying warehouses. IKEA also uses in-store promotions to grow sales and offer a distinct shopping experience to its customers. 

In terms of marketing, apart from using digital channels, the company also uses traditional promotional channels and some other innovative methods. The company uses its website and app in combination with digital advertising as well as social media for customer engagement and to drive sales. It also uses video marketing for consumer education and promotions heavily. Another important method of promotion for the brand is the catalog that the company publishes for its customers. It also uses AI and virtual reality for helping people try the products inside the stores before actually buying them.

Products and services:

IKEA sells a very large range of home furnishing products. The company stores have around 9500 products and each year, the design team at IKEA is adding 2000 new products to the range. Suppliers, franchisees as well as the internal engineering and design team at IKEA all are a part of the production process and cooperate to make design and production cost-efficient and effective. Apart from that IKEA uses flat packaging which has helped it improve operational effectiveness and also minimize transportation expenses. Unlike other retailers, IKEA does not provide transportation and assembly services. However, it keeps the costs minimum this way. IKEA has brought home furnishing products for every room and every corner of the house and the focus is on maximizing customer satisfaction by offering a large range of modern and stylish furniture.

Value Chain of IKEA: Support Activities

Technology:

Technology has also played an important role in maximizing cost-effectiveness and operational efficiency at IKEA. At IKEA, digital technology has played a central role in helping the company tackle its production, supply chain and sales, and marketing-related challenges. The company is investing in digitalization to improve its manufacturing capabilities which is necessary to meet the ever-changing needs of its customers. The company has also accelerated the efforts to automate production and to leverage the benefits of data-driven manufacturing. Apart from higher operational and cost efficiency as well as improved product quality, digitalization will also help the company workers with more ergonomic workplaces. Moreover, digitalization will allow IKEA to have a seamless end-to-end IKEA supply chain, improving traceability and circularity.

HRM:

IKEA’s focus on the efficiency and satisfaction of its employees has grown in recent years. Overall, the company employs around 211,000 people worldwide. IKEA is investing in strategically managing its people whom it calls co-workers since the growth of its business depends on the growth of IKEA employees. Apart from hiring and retaining the best employees, the company has also developed attractive programs to help the employees manage growth and find career advancement opportunities.

Infrastructure:

IKEA has divided its business into three main segments which include franchises, range & suppliers and IKEA industry. The CEO of Inter IKEA Group is Torbjörn Lööf. The management of the Inter IKEA group BV is overseen by a supervisory board. Apart from a functional basis, IKEA also manages its business on a regional basis. Each function at IKEA from finance to HR and communications has its own head. The CFO of Inter IKEA Group B.V. is Martin Van Dam.

Procurement:

IKEA sources from around 1800 suppliers in more than 50 countries. Its purchasing and logistics function is divided into eight business units which include IKEA Components, Regional Supply Teams, Purchasing Development, Logistics Development, Sales & Supply Planning, Transport & Logistics Services, Purchasing & Logistics Areas, and Quality Support Centres. The company has also established trading offices at strategic locations close to where its suppliers are located and focuses on developing long term strategic partnerships with key suppliers. Integrated logistics has also helped IKEA make its procurement process more cost-effective and efficient.