The world’s leader in furniture retailment is a great example of success. The company has included offshoring in its global strategy, step by step.
At the begining, the swedish firm chose to implement vertical offshoring.
From the 60’s to the 90’s, IKEA chose to get its supplies from Poland hence reducing purchase price by 50%. During the 90’s, it applied a new strategy firstly based on production offshoring towards low cost Asian countries. As a matter of fact, the firm developped purchasing departments in China, Inda, Pakistan, Bengladesh, Vietnam, Malaysia, Thailand et Indonesia. Thus, in 2000, 22% of IKEA’s global supplies came from Asia, among which 10% came from China.
Secondly, the firm decided to reduce the number of suppliers – 2,500 in 1990 to 1,120 in 2009. The advantages resulting in this decision were numerous: it became more efficient regarding logistics, transportation, productivity and control of quality. What we can also notice is that between 1990 and 2009, the firm’s revenue increased of about €18 billions.
Thirdly, Ikea reduced its prices and initiated more competition between pruchasing departments to rise emulation.
Since the end of the 20th century and the begining of the 21st century, the furniture company has established its horizontal offshoring strategy.
In 1999, there was just 4 shops in Australia and 2 in China, but it were huge potential markets. Thus, Ikea chose to create big concept stores in Asia. Although China was the first target for those kind of stores, the purchasing power level was too low to generate enough profit. That is why, while offshoring in China, the firm also did it in Japan. With this country’s high density of population combined with a considerable purchasing power, Ikea could settle in China – forecasting a rise in purchasing power- while making profit in Asia.
However, in the long-run offshoring in Japan was very risky: Japanese are very demanding on service and quality, they are not used to self-service and the Japanese culture is very different from the European one. Plus, the government set very strict rules regarding the presence of formaldehyde in furnitures. In fact, the maximum level allowed in Japan was equal to half of the one decreed in other countries. This meant that hundreds of IKEA products should be made especially for the Japanese market, and at a higher cost. It seemed unbearable on the long-run. But IKEA decided to transform this issue into an opportunity. They made the bet that, sooner or later and for ecological reasons, all the other countries would adopt the same restrictions as Japan about formaldehyde in furnitures. So sooner or later IKEA would have to change their furnitures. Hence, they thought they might as well do it while entering the Japanese market ! And this revealed to be very profitable. Today almost all the other countries in the world lined up on the Japanese norms. IKEA opened its first japanese store in 2006, in 2009 the company planned to open five more (three in Tokyo, one in Kobe and one in Osaka) and sold for 400 million of euros.
Today, IKEA has 43 manufacturing units in 12 countries. China now represents 22% of its global purchases – about 300 suppliers. In this country, the firm decided to locate their first local production base at Nantong. As this city is near the Yangtze River – numerous resources – and near Shanghai – where IKEA has its biggest warehouses, it allowed to reduce logistic costs.
As a result, the furniture company lowered its prices in China by 50% between 2000 and 2012. Moreover, urbanization has grown rapidly in this country, which has increased the demand. Therefore, IKEA has not stop growing and making profit in China.
Since the begining, the furniture company has offshored in countries with either market potential or reduction cost potential. They took risks but enshured back up plans and certain limitations. At the begining of the 21st century, IKEA bet that Chinese people’s purchasing power would rise while making shure to settle in another country with actual and wide market (Japan). We can conclude that the firm’s offshoring strategy was profitable, and well planned.