THE $40 BILLION REVENUE FURNITURE COMPANY

In 2018 there was a massive traffic jam in the city of Hyderabad. Now, the traffic jam is not new to a city like Hyderabad, but the reason why this traffic jam happened is something that’s very amusing. It was not because of an accident, it was not because a truck had broken down, it was merely because of the opening of a furniture store.
You heard that right. A furniture store had opened up in Hyderabad which resulted into such a massive traffic jam that a person who would usually take just 20 minutes to go from office to home took about more than 4 hours just because of this traffic jam. And it almost appeared as if the entire city had taken a break just to visit this furniture store. The Hyderabad police was putting out traffic advisories, radio jockeys were advising against venturing near the area and the entire city was in a frenzy.

In fact, the furniture store itself had put out a billboard saying that “Hyderabad we are here to stay.”
The question is – What kind of furniture store is this, and what is so special about this furniture store that it could bring a megacity like Hyderabad to a standstill ? This brand is none other than the world’s largest furniture seller, who goes by the name IKEA.

For those of you who do not know about IKEA, IKEA is a Swedish furniture company and it is so huge that IKEA has about 445 stores worldwide, not just that IKEA has more than about 225,000 workers and generates a revenue of more than $40 billion. And no matter which city an IKEA store opens up in, no matter which country an IKEA store opens up in, the entire population of that city falls head over heels just to visit this store. And if you look at the top 10 furniture brands all across the world, you will see that IKEA is at the top with a revenue of $40 billion. The second competitor to IKEA is not even close to $10B.

The question is – What is so special about IKEA that people are so crazy about it ? What is so special about IKEA that it has been able to build a $40B empire merely by selling furniture, which in the conventional world is not considered to be a scalable business. The answer to this question lies in one of the most beautiful case studies that was done by Harvard Business Review, which dates back to the 1950s.

In the 1950s the American culture mothers used to bake cake for their kids, and they used to consider it to be their gesture of love and devotion for their family. Now back then cake making process in itself was very, very tedious and sometimes it used to take more than a day for a woman to actually bake a cake. There was a company called General Mills which came out with the idea of actually minimizing the effort that mothers were putting into baking a cake. So, they came out with the idea called instant cake mix wherein they said that we are going to give you all the ingredients in a packet and all you have to do is just add water to these ingredients, put it in the oven and within a few hours your cake will be ready.

So this product minimized the efforts of the mothers to such a large extent that a process which would usually take more than a day sometimes would be done in less than half a day. Now, theoretically if you see, on paper this looks like one of the best products a mother could ask for. Why ? Because it minimized the efforts, it minimized the time by a large extent and most importantly the cakes almost always used to come out very delicious. But you know what ? This product failed miserably in the market, what could be a more perfect product than a product that can save a ton of time that can reduce efforts and can give out amazing results.

Well, this is the exact same question that General Mills guys also asked. So they hired a few psychologists and they got them to actually find out what exactly was wrong with the product. As it turns out, there was nothing bad with the product. The only problem was that mothers considered the cake mix to be like an insult to their efforts. And somehow they came to believe that merely by using the cake mix they were kind of deceiving their husbands and their children.
Mothers of the United States often felt it to be like an insult to their efforts, an insult to the sanctity that they have associated with the efforts of making cakes.

After that General Mills came out with another product and in this product instead of making it much easier for mothers to bake cakes they came out with a few hurdles wherein mothers had to add egg and a few more ingredients which made the process more tedious by which it could give the mothers a perception that they were putting in a lot of efforts to bake the cake. As it turns out this product became a massive hit and sales skyrocketed. And that is when the psychologists of General Mills understood a very important lesson in human psychology and that is no matter how inefficient the system is, no matter how tedious the work is, no matter how bad the product is if a person has actually put in efforts to bring out that kind of output that person will have an extraordinary sense of value towards that product.
For the rest of us it might look like a stupid product, but for that person that product will be of extraordinary value and that is how they concluded that labour leads to love. And this is exactly the phenomenon that IKEA applied to its furniture because of which today IKEA is a $40B company.

Now conventionally if you look at the supply chain of any furniture company what they do is the furniture first gets manufactured then the furniture gets shipped to the retailer. Over there the retailer stores it in a warehouse and then when you go out to the showroom, and you like one of those furnitures the retailer then ships the furniture to your house. Now this furniture comes directly assembled from the manufacturing hub to the retailer’s warehouse and from the retailer’s warehouse to your house. As a result of which it comes in a large truck. But you know what, IKEA furnitures were packed in such a way that they could literally fit in your car. The question is – How the hell is that even possible ? Well, they come in pieces and you have to assemble the furniture in your own house. And here’s where the concept of DIY (Do It Yourself) comes into play. As it turns out, just like mothers developed an extraordinary sense of value towards their work of actually baking a cake, customers started to develop a very beautiful relationship, an extraordinary sense of value towards their IKEA furniture because they assembled furniture by themselves.

Now, this is just the tip of the iceberg what it did to the supply chain of IKEA was something that is absolutely revolutionary because when it comes to logistics one of the most important factors that results into cost-cutting and efficiency is the volume occupancy, as in, if you are fitting something into a truck you have to make sure that the entire volume of the truck’s storage is actually filled. So if you see, practically you can’t fit beyond one sofa in a mini truck, you can’t stack one sofa on top of the another because that would destroy the sofa at the bottom.

As a result of which the volume occupancy of the trucks becomes very less, and here’s where IKEA’s revolutionary idea comes into play. Because IKEA furnitures did not come assembled, they came in a box, and you could stack one box on top of the other as a result of which the volume occupancy of the truck was maximized. And in one mini truck wherein you could ship only one sofa when it’s an IKEA sofa, you could practically ship more than 3-4 sofas. That is how the entire supply chain of shipping sofas became super efficient and it doesn’t stop over here. If you look at the warehouse of the retailers if the sofas come assembled again, the retailer can not stack one sofa on top of the other. But when it comes to IKEA storage you’ve literally got multiple stories of storage one on top of the other. And to put a cherry on the cake, these boxes could also fit in a car. As a result of which customers could practically take their furniture home in their car.

And that is how the supply chain was turned so efficient and the cost reduced by such a large extent that IKEA was able to provide premium furniture at a very low cost. IKEA was able to find it’s golden recipe of providing low price, high value products as in products that could be extremely affordable by the customers and yet could create an extraordinary sense of value for their customers. This is the reason why IKEA today is a $40 billion company and is operating in more than 25 countries.

Now the question is what can ordinary people like you and me learn from this extraordinary case study ? And more importantly, how can you apply the IKEA effect for your startup so that your customers will develop an extraordinary sense of value for your products. As far as the application of IKEA effect is concerned there are 3 major things that you need to keep in mind.

1. The task that you are giving to your customers shouldn’t be too easy.
2. Your customers should have to put in a certain degree of effort to complete that task.
3. And most importantly, you have to make sure that the task is designed in such a way that it can be successfully completed by the customers.

And apart from this, there are also some extraordinary business lessons that you need to learn if you want to build an extraordinary brand. The first thing we all need to realize is that the perceived value of a product is always directly proportional to the engagement of the customers. And no matter what kind of a brand you are, if you are able to engage with your customers that will help you create an extraordinary sense of brand value in the mind of the customers. And this sense of brand value could literally be the deciding factor to decide whether your company is an ordinary company or an extraordinary company.

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