IKEA's Business Model - Suits Us!

Who doesn't like IKEA. They’re affordable, their designs are contemporary and they’re Swedish. That last one means you can have köttbullar aka meatballs when done shopping. Why am I bringing up IKEA? One simple reason, their business model of vertical integration is genius. Hundred Dollar Suits is a company with similar ideas. In this article, I will outline why they are able to sell their furniture at such low prices.

Vertical Integration at IKEA

My colleague sums it up: “Vertical integrated companies eliminate price markups for every production step, achieving cost efficiency by controlling quality step by step.” Just cutting the middlemen means you can save money effectively. The way IKEA does it is keeping as much work in-house as possible. They focus on controlling as many processes, manufacturing and distribution steps as feasible. As a result, they benefit from overall lower production costs, which can be passed on to the consumer.

Careful planning and design

Making a cheap product is actually much more costly than producing an expensive one. This is due to the careful consideration that goes into increasing efficiency, eliminating unnecessary steps or wasting time and effort. Companies who focus on vertical integration therefore have a different way of reaching their margin. Their one-off investment into skilled employees, useful resources and product design is commonly higher. Good capacity utilization is another relevant factor. When filling their shelves, IKEA uses its metrics in a way that ensures furniture is distributed properly. This minimizes the amount of time stock sits around.

Reducing the number of suppliers can limit expenses. Using less different materials is of great help as well. Common piece parts are the solution. Consequently, IKEA is able to order in larger volume from their vendors while negotiating a better price for bulk buying. Many of us like to buy that 20-pound bag of burger patties, IKEA practices bulk buying par excellence. By no means does that affect the quality of the finished product, it is just a way of thorough planning.

Compromises

The last thing I want to focus on is the fact that you might have to accept compromises when buying from a vertical integrated company. IKEA's customers know they will have to spend a considerable amount of time on assembling their bargains. Many people who prefer other retailers over IKEA just don’t like ready-to-assemble furniture.

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