Business

IKEA Business Model

We will talk about IKEA which just recently launched in India. But a big furniture player in the world like Walmart comes through Flipkart. Walmart works in cost leadership and economics of sale strategy and IKEA also works in the same way. They will offer you the product at a very lower price than any retail shop. Many people said that IKEA ruins the domestic market.

Recently IKEA was launched in India opened first store in Hyderabad and going to open stores in Mumbai and Gurugram. IKEA had invested 800 crores to come to India. It has more than 9500 products and has more than 350 stores in 35 countries. And till yet the company is at Profit. In 2017 their profit is 912 Million dollars. You can convert into Indian rupees to find out how much they earn. It works in cost leadership and operates at a very less profit margin.

Now let’s come to the starting of the company to know how it started. Ingvar Kamprad born in 30 march in 1926 in a small village of Sweden and that time he was in a very poor place. He spent his entire childhood in poverty. At the age of 6, he started selling matchboxes and, by the age of 10, he used to travel to his nearby village on his cycle to sell Christmas product. At the age of 17 in 1943, he got good marks in his study and then his father gifted him some money. With that money, he started his company IKEA.

He basically mixed his name and village name to make IKEA. IK comes from his name and EA comes from his village name. After 2 years he started to supply products through trucks. It means the company was growing quickly. By 1947 he had tie-up with local manufacture and sell their products until in 1955 local retailers boycott him because he was selling their products at a very low price. Because their mindset is operating at a low-profit margin. In 1973 due to high taxes in Sweden, they moved to Denmark.

 If they pay tax then they have to increase their prices and then less market will be acquired. Their strategy is to work at cost leadership and operate at a very less profit margin by selling more units. Suppose the cost of the product is 8 and profit is 1 rupee and tax is 2 rupees. With tax, they will have to sell the product at 11 and without tax, they will able to sell at 9. That’s why they moved to Denmark.

Now let’s talk about what is special in their products? They normally buy from manufactures, but they add one revolutionary thing and that is you can separate the furniture and then attach them yourself, due to this their logistic cost decrease and sell products at lower prices and start making modular products. He named this thing flat back furniture. They directly sell from his warehouse and the logistic cost was less, so that’s why they were able to operate at a less margin. So, they had a good product and good pricing.

Then they started to expand globally, but it doesn’t mean product quality will be poor because the price is cheap. Their products are at a cheap price but the quality is good. They spent a lot of money on their research and development but they don’t manufacture themselves. They give a design to the manufacturer and take a patent on it, so that nobody can copy. And they usually buy products in bulk so that they will get products at lower cost. They usually find those people who can give their products at a low profit margin. They buy products in bulk from all the people and then start selling them globally.

And another thing is their company is NGO. He would be the richest person on this planet if we calculate his entire net-worth, but he is not because his company is NGO. But is it right to donate all the money to charity? Maybe he does this so that any poor man can afford their product. Basically, they made a design box and whatever profit they earned through that it all goes to charity. And rest of the profit used for re-investing in business like the product, warehouses, franchise and all. So after researching about him, I got to know that he has kept the trademark by his name or company name. So, the Trademark is on your name. Company is working in the form of NGO, so they don’t have to pay TAX and the company is earning through trademark.

I have also heard that IKEA doesn’t pay good to their labors and they don’t get a good atmosphere. Now let’s analyze the behavior of the person. His father used to tell him that you don’t wake up on time, so he took the alarm clock and set alarm for 6AM and destroyed the snooze button. According to him, we should divide our time into 10 minutes frame and then divide the work accordingly. We have to try to waste as less as we can of each 10-minute slot.

 Let’s assume you sleep for 8 hours. So, divide rest off the time into 10-minute slot and let’s see how much time you will waste from each slot. So, this was his strategy He always used to travel in economy class. He called his every employee as “co-worker”. Basically, he was trying to make a good atmosphere. But still, people say they don’t pay good wages to an employee. He used to stay at cheap hotels and drive an old car. He always focuses on his work rather than a showing-off. He could show off things like big houses, cars and all. But he earned and always gives on charity. Now you can research like how much he earns and how much he re-invested.

 Also, research on How much he gives on charity and pay liability and all. If we talk about margin then I researched a lot but didn’t find anything. Even I studied their balance sheet but didn’t find about the margin. Basically, after doing research I got to know that this company don’t believe in showing things. If I talk about Walmart then they talk openly about their profit margin. But they don’t show and they are growing exponentially from last few years. And now they are also trying to grow online in India. Because in India, Pepper fry and other companies have already captured the market.

 IKEA has a price advantage and people in India are educated enough to use Amazon or Flipkart. So, if IKEA offers products at good prices maybe he will win the game. They have also built TV in their showroom from where you can order the products. And then the product will be delivered to your house automatically.

Ideally, their products are portable so you can easily carry them in your car. But they will also deliver you if the product is not portable. So, this was all about IKEA and I hope you like this company. I personally like this company and always wanted them to come to India so, that we can buy furniture at a cheap price. I wanted the same thing from Walmart as well and now both these companies have come.

Many people believe that furniture business can be only run through offline mode because of the touch factor. After 5 years I will tell you what can be done. Many people say that the wholesale market will always be there. But according to me, the wholesale market will start to diminish. The manufacturer will directly sell his products online rather than giving margin to the distributors.

Now you can see One Plus is a great phone and Vivo is also making good devices Vivo has also made their sub-brands which are called Vivo V1 to destroy all the Mi fans So I am talking futuristic. After 5 years the online market will be so big, the wholesale market will start to diminish because more and more people are shifting to online platforms.

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