Blue Ocean Strategy: Example IKEA


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How to create uncontested 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.
Read how furniture giant IKEA applied the value curve concept by finding value in raising the price or decreasing quantity, not the other way around.

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Blue Ocean Strategy: Example IKEA

  1. 1. 2012Sabrina FruehaufThe Solutions GroupMKT 534Kellstadt Graduate School ofBusiness[VALUE CURVE– BLUE OCEANSTRATEGY] Client: IKEA
  2. 2. Table of Contents 1. Situation 2. Procedure: Value Curve (Blue Ocean Strategy) a. Definition of Value Curve i. Think like an entrepreneur ii. Assume industry conditions are shapeable iii. Do not focus on competition in mature industries iv. Focus on total solution sought by the bulk v. Focus on commonalities in what customers value b. Procedure of developing a value curve i. Select markets to combine ii. Identify factors of competition iii. Map the performance of existing solution providers iv. Create the curve
  3. 3. 1. Situation:Facing one of the biggest recessions after the Great Depression in the late 1920s, many furniture giantslike Crate & Barrel, Bed, Bath & Beyond, Target and IKEA had to incur huge losses due to reducedspending by consumers. The industry has been declining slowly but surely and it is time to revitalize thisindustry and make furniture shopping a new experience.After the latest executive board meeting with the client IKEA, an agreement was reached in terms ofreframing the industry and hires consulting firm “The Solutions Group” toreintroduce IKEA to theconsumer with a new, unprecedented look. IKEA is the world’s largest furniture retailer withheadquarters in Leiden, Netherlands. In October 2011, IKEA had a portfolio of 332 stores in 38countries.1 2. 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 tosucceed 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 andtrying to outdo competitors. This business model (widely taught and found in today’s world) results inpure commoditization and is not sustainable.Let’s back up a little and begin with recalling the conventional business strategy as it is being appliedacross all borders in order for you, IKEA to see the fallacy in the old and realize and embrace the value inthe new model. Michael Porter, a very wise yet criticized economist once laid the foundation for everymarketing strategy applied in today’s business world. He coined the so-called SCP, the segment conductparadigm. 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 ofperformance. According to Michael Porter, SCP works best in the second stage of the technologyadoption lifecycle, namely the growth stage. Porter would advise to conduct a SWOT analysis to get abetter picture of the industry, benchmark competitors and then decide between two different strategies togo for: cost-based or differentiation-based. The strategy will help your company steal market share, refineyour segments, find greater profit in niche segments and seek the spot where Marginal Revenue exceedsMarginal Cost by leveraging capabilities to their maximum.Having explained SCP in detail, there are some great downsides to this concept. Basically, it willeventually lead to head-to-head competition. When companies aim to steal market share from1 See IKEA’s corporate website,
  4. 4. competitors, what usually ends up happening is that strategies converge (as you can see in the Japanesemarket right now), or products begin to look similar (like cheaper Chinese imitations), or things willresult 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 consumerhappiness; however it tends to forget that as of a certain point, adding features will not prove beneficialbut instead cause a headache to the user. The tagline “less is more” gets completely neglected in MichaelPorter’s conventional theory. As the industry matures, companies run the risk of racing to the bottom evenfaster by trying to increase features and functionality and simultaneously decrease prices. The result is avicious 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 matureindustry and seemingly reduced profits. In order to step away from the crowd and gain competitiveadvantage without having to start a price war, the Solutions Group would like to introduce our client to anew 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 afew basic dynamics that need to be explained as to why the Value Curve will bring the promisedturnaround and help IKEA create new market space. a. Definition of Value CurveIn simple words, how the value curve counteracts all the conventional marketing theories is by findingvalue in raising the price or decreasing quantity, not the other way around. Doing so helps facilitate thevisualization of space that is genuinely new and which holds potential to be profitable. IKEA will not bethe first one to have tried this as there have been numerous exemplifications of successfulimplementations of a value curve, such as Home Depot, Target and Southwest Airlines. The value curveis based on five main assumptions which will be described in detail as follows: i. Think like an entrepreneurEssentially, what the client IKEA is advised to do is ask themselves what if they were entering a newmarket today. What if assets were not the main constraints holding them from a market entry? Thesequestions really help reframing basic business assumptions that other companies just take for granted.
  5. 5. ii. Assume industry conditions are shapeableThis aspect is crucial and requires a bit of willingness to take on risks as in contrast to SCP, here we’rereshaping the industry whereas in SCP the industry is given. Think like Neo in the Matrix where hefollows the white rabbit. iii. Do not focus on competition in mature industriesThis is where most companies make the mistake. Instead of concentrating too much on competition,IKEA needs to focus on where the job is to be done.The last two assumptions refer to volume. iv. Focus on total solution sought by the bulkInstead of increasing functionality of your product, think outside the box and try to find complementaryservices or products that may make a good combination with yours. This tactic allows you to target morepeople and decrease the price, and eventually raise the quantity sold. v. Focus on commonalities in what customers valueInstead of separating the market, it is important to recombine it by focusing across segments and industry.This almost resembles a mass market approach with one key difference. b. Creating a Value Curve i. Select markets to combineThis step needs to be highly customer-oriented. The mass market can be defined by looking for the twolargest segments that make up the market based on a combination of USD volume and segment size. Abig part of the bottom of the industry life cycle are the laggards, namely those that are most sensitive toprice and highly dogmatic when it come to venturing out and trying new products. It is crucial for IKEAto spend quite some time and effort to convince this segment first and then move on to the more risk-friendly segments like early adopters. Generally speaking, when combining markets, companies could goacross - Tiers within industries - Functional or emotional appeals to buyers - Substitute industries
  6. 6. - ComplementsThe first two refer to reversing the industry while the last two imply combining industries. It becomesevident that the last two strategies entail more risk as you are looking to merge two perhaps completelydifferent industries.Specifically to the client IKEA, let’s look at the buyers of furniture in the US across strategic groupswithin the furnitureindustry in 2012. IKEA is currently targeting the rather thrifty shopper who seeksaffordable furniture for his/her student accommodation or first own apartment. During the recessionthough, even these shoppers saved money wherever possible and one of the first segments to cut spendingon was furniture. In order to stay in business, IKEA needs to think about new target customers within themarket. Essentially the objective is to offer the same products but try to target families as well. ii. Identify factors of competitionBased on thorough analysis of the furniture industry through 30 hours of in-depth qualitative researchthrough the use of five segment specific focus groups, and elaborate consultation with the client, the mapfactors of competition that cater to both of the aforementioned market segments were defined as follows:price,style, selection, ease of use, customer service, durability, inventory, delivery service, location,ambiance and amenities. These factors were pinned down after asking the question of what IKEA’s massmarket receives from existing providers currently. Together, they eventually make up the x axis by layingthe foundation of the value curve which in essence provides a visual separation of the features.2 iii. Map the performance of existing solution providersThis step involves creative wordsmithing when trying to create and map features of competition forIKEA’s mass market. Basically, besides the x axis we are now adding the y axis to generate a 2-dimensional graph which highlights relative performance of two of IKEA’s primary competitors. Aftercareful investigation of the industry, the competitors chosen were Crate & Barrel on the high end andTarget on the low end. It is utterly important to keep in mind that the x axis maps all the crucial factorswhereas the y axis gives the relative performance of the market players.3After grouping the types, the buckets need to be arranged on an x axis, one after the other.2 Scale is not taken into consideration here3 Every factor is relative except for price, as price is ought to be taken literally which means a low price should also be low on thescale to enhance the visual separation
  7. 7. Figure 1: Map of Competition within furniture industry, client specific map for IKEA, October 2012As illustrated in the graph, Crate & Barrel ranks high on every feature except for amenities. Target, on theother hand ranks low on price, medium on most of the factors and quite high on location and amenities. iv. Create the curveBefore diving into the actual creation of the curve, some clarifications need to be made up-front. Thefactors that were identified for IKEA can be grouped together in different buckets depending on the typeof feature they belong to. In order to maximize the significance of this assignment, it is necessary to askconsumers for their opinion. A sample of 1,000 people in the US between the ages of 24-55 was herebyasked to find points of commonalities across competitors and throw the descriptions of 11 features intofour different buckets. 1. Must havesAlso known as points of parity, these must haves are hygiene factors that affect dissatisfaction byabsence. While they don’t really have an impact on satisfaction, they must be present in every furniturestore in order for the store to even be considered part of the industry. The must haves in the furnituremarket are customer service, durability, enough inventory, delivery service and location. It makes sensethat furniture needs to be somewhat stable, that the stores shouldn’t run out of stock fast, and that theyshould offer an option on delivery service, etc.
  8. 8. 2. Linear satisfiersThe linear satisfiers are positively correlated with satisfaction, meaning the more you increase thatfeature, the happier the consumer becomes. They affect satisfaction and dissatisfaction with presence andabsence and in the example of furniture, linear satisfiers would be price, style, selection and ease of use. Itis logical that by raising the style, by enlarging the selection, and by alleviating the furniture assemblyyou make consumers happier and more inclined to buy from IKEA. 3. Delighters (“I never knew you existed but now that I know you I love you”)The delighter is the opposite of a must-have. It exponentially drives satisfaction with presence and itdoesn’t have any effect if absent. The delighter for the furniture industry would be the amenities as theypose as a nice extra to have without really pertaining to the furniture service per se. 4. So-WhatsThe so-whats comprise the features that no consumer cares about, the ones which should be eliminated asthey represent unnecessary cost factors. According to the focus groups that were being consulted,ambiance was a so-what for the furniture industry.Figure 2: Revenue vs cost grid for IKEA, October 2012The grid consolidates the findings from the conversations with the focus groups. By eliminating theunnecessary ambiance and developing the “hook”, hence the amenities, by reducing the must-havesbelow industry standard and by raising the linear satisfiers above industry standard, IKEA will create newmarket space with a totally new net value proposition.
  9. 9. The Value Curve for IKEA looks like this:Figure 3: Value Curve for IKEA, October 2012As the curve demonstrates, the niche or the hook that IKEA needs to focus on is clearly the amenities. Byadding this hot button, IKEA will succeed in targeting both their old segment, the young thrifters and thefamilies. Amenities which would prove a delight to the furniture industry, are for example a playgroundfor children or a restaurant.Price should be kept low while style, selection and ease of use need to be elevated as they fall under linearsatisfiers. After raising these, the target audience needs to be informed through an intense guerillamarketing strategy.The concluding and probably most imperative part of this last step is the communicability of the valuecurve. A concise, catchy statement is to be formed for IKEA in order to appeal to the two target segments.The Solutions Group has coined the following:IKEA: The only furniture experience ________________________ GO WITH YOU. IKEA: THE ONLY FURNITURE STORE WHERE KIDS WILL WANT TO IKEA’S NEW PLAYGROUNDThe Value Curve depicts how to increase profitability and helps IKEA move towards a better future. Byreducing ambiance and the interior design of the stores, IKEA will save a high portion of the costs. Byraising the hook, hence the amenities (through the installation of a restaurant with a Swedish specialtylike meatballs or hot dogs), the company will increase performance and eventually revenues. This strategyis so unique as it encompasses a volume strategy that both targets the two largest segments in the industry
  10. 10. and simultaenously lowers the price. Essentially, IKEA will satisfy a higher volume with the samestandardized product (but an extra delightful feature, the restaurant or the playground).Appendix 1. Map of Competition within furniture industry, client specific map for IKEA, October 2012 2. Revenue vs cost grid for IKEA, October 2012
  11. 11. 3. Value Curve for IKEA, October 2012