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Closing Case Sweden's IKEA Established in the 1940s in Sweden by Ingvar Kamprad, IKEA has grown rapidly in recent years to become one of the world's largest retailers of home furnishings. In its initial push to expand globally, IKEA largely ignored the retailing rule that international success involves tailoring product lines closely to national tastes and preferences. Instead, IKEA stuck with the vision, articulated by founder Kamprad, that the company should sell a basic product range that is "typically Swedish" wherever it ventures in the world. The company also remained primarily production oriented; that is, the Swedish management and design group decided what it was going to sell and then presented it to the worldwide public--often with little research as to what the public wanted. The company also emphasized its Swedish roots in its international advertising, even insisting on a "Swedish" blue and gold color scheme for its stores. Despite breaking some key rules of international retailing, the formula of selling Swedish-designed products in the same manner everywhere seemed to work. Between 1974 and 1997, IKEA expanded from a company with 10 stores, only 1 of which was outside Scandinavia, and annual revenues of $210 million to a group with 138 stores in 28 countries and sales of close to $6 billion. Only 11 percent of its sales were generated in Sweden in 1997. Of the balance, 29.6 percent of sales came from Germany, 42.5 percent from the rest of Western Europe, and 14.4 percent from North America. IKEA is now expanding into Asia, with the opening of stores in mainland China. The foundation of IKEA's success has been to offer consumers good value for their money. IKEA's approach starts with a global network of suppliers, which now numbers 2,400 firms in 65 countries. An IKEA supplier gains long-term contracts, technical advice, and leased equipment from the company. In return, IKEA demands an exclusive contract and low prices. IKEA's designers work closely with suppliers to build savings into the products from the outset by designing products that can be produced at a low cost. IKEA displays its enormous range of more than 10,000 products in out-of-town stores. It sells most of its furniture as kits for customers to assemble themselves. The firm reaps huge economies of scale from the size of each store and the big production runs made possible by selling the same products all over the world. This strategy allows IKEA to match its rivals on quality, while undercutting them by up to 30 percent on price and still maintaining a healthy after-tax return on sales of about 7 percent. This strategy worked well until 1985 when IKEA decided to enter the North American market. Between 1985 and 1996 IKEA opened 26 stores in North America, but unlike the company's experience across Europe, the stores did not quickly become profitable. As early as 1990 it was clear that IKEA's North American operations were in trouble. Part of the problem was an adverse movement in exchange rates. In 1985, the exchange rate was $1=8.6 Swedish kronor; by 1990, it was $1=Skr5.8. At this exchange rate, many products imported from Sweden did not look inexpensive to American consumers. But there was more to IKEA's problems than adverse movements in exchange rates. IKEA's unapologetically Swedish products, which had sold so well across Europe, jarred American tastes and sometimes physiques. Swedish beds were narrow and measured in centimeters. IKEA did not sell the matching bedroom suites that Americans liked. Its kitchen cupboards were too narrow for the large dinner plates. Its glasses were too small for a nation that adds ice to everything. The drawers in IKEA's bedroom chests were too shallow for American consumers, who tend to store sweaters in them. And the company made the mistake of selling European-sized curtains that did not fit American windows. As one senior IKEA manager joked later, "Americans just wouldn't lower their ceilings to fit our curtains." By 1991, the company's top management realized that if it was going to succeed in North America, it would have to customize its product offering to North American tastes. The company set about redesigning its product range. The drawers in bedroom chests were made two inches deeper--and sales immediately increased by 30 to 40 percent. IKEA now sells American-style king and queen-sized beds, measured in inches, and it sells them as part of complete bedroom suites. It has redesigned its kitchen furniture and kitchenware to better appeal to American tastes. The company has also boosted the amount of products being sourced locally from 15 percent in 1990 to 45 percent in 1997, a move that makes the company far less vulnerable to adverse movements in exchange rates. By 1997, about one-third of IKEA's total product offerings were designed exclusively for the US market. This break with IKEA's traditional strategy seems to be paying off. Between 1990 and 1994, IKEA's North American sales tripled to $480 million, and they nearly doubled again to about $900 million in 1997. The company claims it has been making a profit in North America since early 1993, although it does not release precise figures and does admit that its profit rate is lower in America than in Europe. Still, the company is pushing ahead with plans for further expansions in America, including the 1998 opening of a $50 million IKEA superstore in Illinois, which the company claims is the first of a new generation of larger stores. Source: "Furnishing the World," The Economist, November 19, 1994, pp. 79 - 80; H. Carnegy, "Struggle to Save the soul of IKEA," Financial Times, March 27, 1995, p. 12; J. Flynn and L. Bongiorno, "IKEA's New Game Plan," Business Week, October 6, 1997, pp. 99 - 102; and IKEA's Web site at http://www.ikea.com. Case Discussion Questions
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