The Value of a Value Chain

The first time you visit an IKEA is a bit of a magical experience. You walk in and go up the escalators to see display after display of beautifully decorated rooms in nearly any style you can imagine. You can walk through entire houses in their showroom, and when you’re done upstairs, there’s an entire warehouse full of the modern pieces you’ve just spent hours wandering through. There’s even a food court. 

Next time you go to IKEA, take a pause halfway down the staircase between the showroom and the warehouse. Look around you. From this point, you can see from wall to wall of the massive building – 300,000 square feet (five football fields) of space.[i] And the best part? Everything within those five football fields is priced affordably.

A close up of a sign

Description automatically generated
Photo by Alexander Isreb from Pexels

IKEA’s product line includes about 9,500 products, and each year they introduce about 200 new products to that line.[ii] So how do they do it? How do they provide quality home furnishings at an affordable price? The IKEA process has been a source of intrigue for business strategists for years. This is partially due to their transparency with their mission, vision, value chain, and democratic design. 

The IKEA vision is to create a better everyday life for the many people.[iii] Their business idea is to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.[iv] They use their value chain and their concept of Democratic Design to accomplish this.

The IKEA value chain begins with listening to their customers. What do customers want to see in the IKEA catalog? What needs are not being filled? How much are consumers willing to spend on their products? IKEA learns from these discussions and begins designing and creating products that meet those needs. 

Next comes manufacturing and improving upon designs and ideas, followed by packaging and distribution. This is one of the most important parts of the value chain at IKEA, because this is where they save the most money. IKEA utilizes “flat packaging,” which allows them to lower transport costs by easily stacking their items on their trucks.[v] Though this means customers will later have to assemble their own furniture, IKEA is able to offer those items for a much lower price.

A room filled with furniture and a large window

Description automatically generated
Photo by THAM YUAN YUAN from Pixabay

In short, IKEA is able to provide low-cost furnishings that stand the test of time through reverse engineering – they set their prices first, and then they create the process for building products at that price point. Additionally, they produce in bulk to keep production costs down. When a product becomes more popular, they can make more of them for a lower cost and maintain their profit margins. Thus, popular items become even more affordable over time.[vi]

The “final” step in the value chain is to inspire and sell – inspire customers to rethink their spaces and, of course, sell their products.[vii] We say “final” step in the value chain because in reality, there is no final step. The value chain is a cycle, and IKEA stresses that in their design process. Just because a product has been taken to market, that doesn’t mean IKEA stops listening to their customers. Their company policy is to continue that conversation with their customers so they can continually improve their products.

The value chain seems to explain much of IKEA’s design process and their pricing strategy – so what, then, is Democratic Design?

According to Sarah Fager, Senior Designer with IKEA of Sweden AB, Democratic Design “is basically our culture and values boiled down to five dimensions, together with simply using common sense in everything we do.” These five dimensions are function, form, quality, sustainability, and low price.[viii] Democratic Design is the thought process behind the design and creation step of the value chain. It is the IKEA values in motion.

Questions for Marketing Managers to Consider:

  • One of IKEA’s primary goals is to provide a lower price to their consumer.  What are potential challenges to the overall customer experience by focusing on lower prices?
  • How can a company develop supply chain strategy (value chain) that helps the company maintain a focus on the customer experience?