Understanding IKEA

Kamprad, though officially retired, is still the cheerleader for the practices that define Ikea culture. One is egalitarianism. Ikea regularly stages Antibureaucracy Weeks, during which executives work on the shop floor or tend the registers. "In February," says CEO Dahlvig, "I was unloading trucks and selling beds and mattresses."

Another is a steely competitiveness. You get a sense of that at one of Ikea's main offices, in Helsingborg, Sweden. At the doorway, a massive bulletin board tracks weekly sales growth, names the best-performing country markets, and identifies the best-selling furniture. The other message that comes across loud and clear: Cut prices. At the far end of the Helsingborg foyer is a row of best-selling Klippan sofas, displaying models from 1999 to 2006 with their euro price tags. In 1999 the Klippan was $354. In 2006 it will be $202.

The montage vividly illustrates Ikea's relentless cost-cutting. The retailer aims to lower prices across its entire offering by an average of 2 percent to 3 percent each year. It goes deeper when it wants to hit rivals in certain segments. "We look at the competition, take their price, and then slash it in half," says Mark McCaslin, manager of Ikea Long Island, in Hicksville, N.Y.

It helps that frugality is as deeply ingrained in the corporate DNA as the obsession with design. Managers fly economy, even top brass. Steen Kanter, who left Ikea in 1994 and now heads his own retail consultancy in Philadelphia, Kanter International, recalls that while flying with Kamprad once, the boss handed him a coupon for a car rental he had ripped out from an in-flight magazine.

This cost obsession fuses with the design culture. "Designing beautiful-but-expensive products is easy," says Josephine Rydberg-Dumont, president of Ikea of Sweden. "Designing beautiful products that are inexpensive and functional is a huge challenge."

No design — no matter how inspired — finds its way into the showroom if it cannot be made affordable. To achieve that goal, the company's 12 full-time designers at Almhult, Sweden, along with 80 freelancers, work hand in hand with in-house production teams to identify the appropriate materials and least costly suppliers, a trial-and-error process that can take as long as three years. Example: For the PS Ellan, a $39.99 dining chair that can rock back on its hind legs without tipping over, designer Chris Martin worked with production staff for a year and a half to adapt a wood-fiber composite, an inexpensive blend of wood chips and plastic resin used in highway noise barriers, for use in furnishings. Martin also had to design the chair to break down into six pieces, so it could be flat-packed and snapped together without screws.

With a network of 1,300 suppliers in 53 countries, Ikea works overtime to find the right manufacturer for the right product. It once contracted with ski makers — experts in bent wood — to manufacture its Poang armchairs, and it has tapped makers of supermarket carts to turn out durable sofas. Simplicity, a tenet of Swedish design, helps keep costs down. The 50 cents Trofé mug comes only in blue and white, the least expensive pigments. Ikea's conservation drive extends naturally from this cost-cutting. For its new PS line, it challenged 28 designers to find innovative uses for discarded and unusual materials. The results: a table fashioned from reddish-brown birch heartwood (furniture makers prefer the pale exterior wood) and a storage system made from recycled milk cartons.

If sales keep growing at their historical average, by 2010 Ikea will need to source twice as much material as today. "We can't increase by more than 20 stores a year because supply is the bottleneck," says Lennart Dahlgren, country manager for Russia. Since Russia is a source of timber, Ikea aims to turn it into a major supplier of finished products.

Adding to the challenge, the suppliers and designers have to customize some Ikea products to make them sell better in local markets. In China, the 250,000 plastic placemats Ikea produced to commemorate the year of the rooster sold out in just three weeks. Julie Desrosiers, the bedroom-line manager at Ikea of Sweden, visited people's houses in the U.S. and Europe to peek into their closets, learning that "Americans prefer to store most of their clothes folded, and Italians like to hang." The result was a wardrobe that features deeper drawers for U.S. customers.

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