Ikea Statistics

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Table of Contents

1. Situation
2. Procedure: Value Curve (Blue Ocean Strategy)

1. Definition of Value Curve

1. Think like an entrepreneur
2. Assume industry conditions are shapeable
3. Do not focus on competition in mature industries
4. Focus on total solution sought by the bulk
5. Focus on commonalities in what customers value

1. Procedure of developing a value curve

1. Select markets to combine
2. Identify factors of competition
3. Map the performance of existing solution providers
4. Create the curve

1. Situation:

Facing one of the biggest recessions after the Great Depression in the late 1920s, many furniture giants like Crate & Barrel, Bed, Bath & Beyond, Target and IKEA had to incur huge losses due to reduced spending by consumers. The industry has been declining slowly but surely and it is time to revitalize this industry and make furniture shopping a new experience.

After the latest executive board meeting with the client IKEA, an agreement was reached in terms of reframing the industry and hires consulting firm “The Solutions Group” to reintroduce IKEA to the consumer with a new, unprecedented look. IKEA is the world’s largest furniture retailer with headquarters in Leiden, Netherlands. In October 2011, IKEA had a portfolio of 332 stores in 38 countries.^[1] 

1. Procedure: Value Curve (also known as Blue Ocean Strategy)

Essentially, the goal is to create new market space in an industry that is completely mature. In order to succeed in doing so, it is necessary to move away from any conventional marketing tool that you know. The long-term objective can not be to jump into head-to-head competition by starting price wars and trying to outdo competitors. This business model (widely taught and found in today’s world) results in pure commoditization and is not sustainable.

Let’s back up a little and begin with recalling the conventional business strategy as it is being applied across all borders in order for you, IKEA to see the fallacy in the old and realize and embrace the value in the new model. Michael Porter, a very wise yet criticized economist once laid the foundation for every marketing strategy applied in today’s business world. He coined the so-called SCP, the segment conduct paradigm. This acronym underlies some key factors: segment tells you how attractive an industry is, conduct refers to the strategy of how companies behave and the paradigm gives insight into the degree of performance. According to Michael Porter, SCP works best in the second stage of the technology adoption lifecycle, namely the growth stage. Porter would advise to conduct a SWOT analysis to get a better picture of the industry, benchmark competitors and then decide between two different strategies to go for: cost-based or differentiation-based. The strategy will help your company steal market share, refine your segments, find greater profit in niche segments and seek the spot where Marginal Revenue exceeds Marginal Cost by leveraging capabilities to their maximum.

Having explained SCP in detail, there are some great downsides to this concept. Basically, it will eventually lead to head-to-head competition. When companies aim to steal market share from competitors, what usually ends up happening is that strategies converge (as you can see in the Japanese market right now), or products begin to look similar (like cheaper Chinese imitations), or things will result in a price war and products commence to resemble commodities.

The conventional theory praises to add more features to the product in order to increase consumer happiness; however it tends to forget that as of a certain point, adding features will not prove beneficial but instead cause a headache to the user. The tagline “less is more” gets completely neglected in Michael Porter’s conventional theory. As the industry matures, companies run the risk of racing to the bottom even faster by trying to increase features and functionality and simultaneously decrease prices. The result is a vicious circle as by doing so, sales go down (decreasing prices), variable costs go up (adding features) and fix costs increase as well, hence the net profit declines.

IKEA has found itself in a similar situation while being confronted with a very saturated and mature industry and seemingly reduced profits. In order to step away from the crowd and gain competitive advantage without having to start a price war, the Solutions Group would like to introduce our client to a new and revolutionary concept: the Value Curve (or also known as the blue ocean strategy)

Before presenting both the general procedure and the results that were developed for IKEA, there are a few basic dynamics that need to be explained as to why the Value Curve will bring the promised turnaround and help IKEA create new market space.  

1. Definition of Value Curve

In simple words, how the value curve counteracts all the conventional marketing theories is by finding value in raising the price or decreasing quantity, not the other way around. Doing so helps facilitate the visualization of space that is genuinely new and which holds potential to be profitable. IKEA will not be the first one to have tried this as there have been numerous exemplifications of successful implementations of a value curve, such as Home Depot, Target and Southwest Airlines. The value curve is based on five main assumptions which will be described in detail as follows:

1. Think like an entrepreneur

Essentially, what the client IKEA is advised to do is ask themselves what if they were entering a new market today. What if assets were not the main constraints holding them from a market entry? These questions really help reframing basic business assumptions that other companies just take for granted.

1. Assume industry conditions are shapeable  

This aspect is crucial and requires a bit of willingness to take on risks as in contrast to SCP, here we’re reshaping the industry whereas in SCP the industry is given. Think like Neo in the Matrix where he follows the white rabbit.