Case Study: IKEA
Company Background
IKEA was founded in Sweden in 1943 by Ingvar Kamprad when he was 17 years old. He named the company with an acronym for his initials and the farm on which he was born, Elmtaryd, Agunnaryd. Ingvar Kamprad, began his business career as a young boy by selling matches purchased in bulk individually for a profit to his neighbors. Initially selling small items and then furniture through a mail-order catalog, by 1974 the company had grown from one showroom in Älmhult to more than a dozen stores throughout Europe. Kamprad sought to sell affordable, quality furniture to mass-market consumers around the world. By 2013, the company had grown to earn €3.3 billion in net income on €28.5 billion in sales.
Ingvar Kamprad
Company History
1920s’ Ingvar Kamprad started off selling matches, flower seed,
greeting cards, decorations and stationary to his neighbours
1940s’- 1950s’ Ingvar developed IKEA into a furniture retailer
1960s’-1970s’ First IKEA store opened outside Sweden in Norway and Denmark.
IKEA undergoes rapid expansion and started to become the IKEA
we know today.
1980s’ IKEA expanded into the US, Italy, France and the UK.
IKEA won the excellent Swedish Design prize
1990s’ IKEA opened the stores in Hungary, Poland , Spain and China.
Children’s IKEA is launched along with the IKEA group
1993 The Forest Stewardship Council (FSC) was created. IKEA Group. IKEA was one of the founding members
2000s’ IKEA expanded into even more markets such as Japan and
Russia. This period also sees the successes of several partnerships regarding social and environmental projects.
2011 IKEA became the world leader of home furnishing market
IKEA announced its People & Planet Positive strategy, which
focused in three areas: (1) a more sustainable life at home for consumers; (2) resource and energy independence for
the company; and (3) a better life for people and the communities
Late 2012 IKEA Group launched a comprehensive sustainability
strategy called “People & Planet Positive”
2013 IKEA owned 345 stores in 42 countries of which 303 were owned and operated and franchised the remaining 42 stores.
The company had grown to earn €3.3 billion in net income
on €28.5 billion in sales
In late 2012, IKEA Group launched sustainability strategy - “People & Planet Positive” that focused on the company’s, from its raw materials sourcing to the lifestyle of its consumers.
People & Planet Positive focused on three areas: a more sustainable life at home for consumers; resource and energy independence for the company; and a better life for people and the communities touched by IKEA. The strategy sought to transform all aspects of the company’s value chain, including designing products to minimize the use of raw materials, selecting sustainably sourced materials to reduce the environmental impacts and improve labor conditions, improving efficiency in production as well as logistics, and developing programs to ensure that its products could be reused or recycled at their end of life.
What is sustainability?
To meet future customer needs and address the higher price of raw materials and energy, while driving down emissions and maintaining our low prices, we need to transform our business. Simply working towards being less bad will not get us where we need to be—we need transformational change—which means changing old ways and embracing the new, being bold, innovative, and committed to taking action.
— IKEA Group 2012 Sustainability Report
Sustainability is a complex concept for us to understand comprehensively, but in general, sustainability can be defined as a requirement of our generation to manage the resource base such that the average quality of life that we ensure ourselves can potentially be shared by all future generations Development is sustainable if it involves a non-decreasing average quality of life. (Geir B. Asheim, 1994)
In the case of IKEA, they were pursuing an aggressive growth strategy, initiated in late 2012 to double sales to €50 billion by 2020. The major concern of this plan is how the company can maintain the environmental sustainability while the growth strategy can also be operated on track. IKEA mainly focus on selling furniture, which is made from wood. The wood procurement is a challenging sustainability issues in the IKEA Group wood supply chain because the company sought to procure wood and wood products close to its consumer markets to minimize transportation costs. Therefore, IKEA had launched “People & Planet Positive” that trying to solve the wood procurement. Also, they had made four options which were, owning more forests, driving higher procurement targets and Standards, using more particleboard and using more recycled wood, to help the IKEA sourcing wood material efficiently while the sustainability can also be on truck.
What is “People & Planet Positive”?
People & Planet Positive – a long term sustainability strategy released by IKEA in late 2012. This strategy allows IKEA to be more innovative and transforms its entire value chain in a sustainable way in the upcoming ten years, from selecting sustainably sourced raw materials to promote consumer’s lifestyle.
It mainly focus on 3 areas:
1. More sustainable life at home
2. Energy and resources independent
3. Better life for the people and communities
Here are the highlights of these 3 areas subtracted from the report:
More sustainable life at home
IKEA facilitates and inspires customers to live in a more sustainable life at home by offering products and solutions that help them to save energy and water and reduce waste. For examples, increases at least 50% of the efficiency of energy consuming products by 2015; all lighting will be converted to LED, which are nearly 10 times efficient than incandescent lighting and offered in a lower price; and creates functional and easy to use solutions for sorting and minimizing waste which offered in low price.
Energy and resource independent
IKEA invests in energy efficiency in order to reduce the energy consumption which has already saved 40 million cost over the period. Also, to use resources within the planet limit. Renewable energy is one of the important highlights of this area. IKEA has allocated capital to wind and solar. Furthermore, it is using biomass to power its production facilities. Moreover, to make its product more sustainable, it ensures all main home furnishing materials, including packaging, are renewable, recyclable or recycled.
Better life for the people and communities
IKEA is dedicated to influence people and the communities in order to live a better life. It supports the improvement of a good working condition for co-workers and secures compliance to IWAY at all suppliers in processes. Also, helping to support human rights and prevent child labor in order to lead a more equal world.
Reference:
IKEA (2012). People & Planet Positive: IKEA Group Sustainability Strategy for 2020.
Retrieved from http://www.ikea.com/ms/en_HK/pdf/reports-downloads/sustain
ability-strategy-people-and-planet-positive.pdf
Why did IKEA launch the sustainability project?
There are few reasons that urge IKEA to launch the sustainability project.
First, meeting the future customer needs by transforming their business. According to the IKEA sustainability report announced in 2012, the transformation change means changing the old business ways and embracing the new – being bold, innovative and committed to taking action. (IKEA Sustainability Report, 2012)
Second, keeping their products in low price. IKEA is improving their efficiency in logistics and production in order to decrease the cost so that the low price of their products can be maintained.
Third, addressing the higher price and energy. To reduce the energy consumption, IKEA has invested in promoting the energy efficiency. Furthermore, producing renewable energy is also in their priority list.
Fourth, reducing the environmental impacts. The awareness of environment protection is rising in the society. Therefore, IKEA is developing a program to ensure their products could be reused or recycled at the end of their life. Also, they are going to minimize their use of materials and choosing sustainably sourced materials, for example, the wood supply and cotton.
Which option(s) should IKEA Group pursue to address IKEA’s Wood Supply Chain sustainability?
We suggest IKEA Group should adopt option 2 and 3. The pros and cons of each option is listed below.
Option 1 – Owning More Forests
Pros
Owning more forests is kind of strengthening backward integration. The major benefits of doing so helps identify the source of wood for each product, which increases customers’ confidence for IKEA’s product. The quality of the wood source would be lifted up resulting from direct management towards owned forests. It also helps accessing to FSC-certified wood supply. Besides, it stabilizes the supply of small-scale sawmills, which prevent price fluctuation and assure quality of wood. Owning more forests enables IKEA Group to diversify procurement away from costly wood supply market, especially for China.
Cons
High capital investment sets IKEA group back from acquiring more forests. The high fixed costs of lease holds shift management attention from major business to leasing and managing forest. The forestry planning is also costly and time-consuming. In addition, managing timber-land subjects to a degree of uncertainty because of forest rotation period, which means that the revenue gained from harvesting a forest might not necessarily cover those cost of managing a forest. Moreover, due to cultural and political difference, managing forest takes much more IKEA’s attention to monitor its forest in order to meet international sourcing standards as well as local souring standards.
Option 2 – Driving Higher Procurement Targets and Standards
Pros
Managing procurement targets and standards is an efficient way to improve forest governance. Ultimately, it helps heighten the quality of raw woods, leading to better quality of IKEA’s products. Moreover, it allows IKEA Group concentrates on their core business, which are designing and manufacturing high quality products. It delivers a clear message to its customers that IKEA Group has committed to sustainability, which helps building brand names and emphasize IKEA’s Corporate Social Responsibility. Besides, it improves the production efficiency by using more standardized raw materials, resulting in lowering the procurement and production costs.
Cons
Concentration to higher procurement targets and standards makes IKEA a passive role in the supply chain of wood. As it rely heavily on procuring raw woods from suppliers, pricing or supply might fluctuate a lot due to shortage of other circumstances.
Option 3 – Using More Particleboard
Pros
Using particleboard is a strategic strategy for lowering operation and transportation costs. For instance, particleboard it lighter to carry as it has less density. Nowadays, a newly developed lightweight particleboards filled up 30% more in a truck, which could significantly reduce transportation costs and enhance transportation efficiency. Particleboard is normally 20% cheaper than solid wood, which helps reducing products costs. Furthermore, the yield from log to lumber is a lot higher for particleboard when compared to solid woods. It means the supply of particleboard is much larger than those for solid wood. Therefore, when supply of particleboard is adequate, shifting usage from solid wood to particleboard helps IKEA turns into a more sustainable way of doing business.
Cons
For angle of product design and manufacturing, some solid wood component of a product are irreplaceable due to the inadequate toughness or density of particleboard. Besides, solid wood is perceived to be more valuable than particleboards in some country. It also lower customers’ willingness to pay. Developing countries like China and India have only limited demand on particleboards. Therefore, for marketing concern, it is not viable to fully replace solid wood by particleboard. Also, some emerging market lacks of particleboard production capacity which hinder the growth of using particleboards. While suppliers do not willing to develop particleboard production capacity as it requires huge amount of capital investment.
Option 4 – Using More Recycled Wood
Pros
Recycled wood is generally cheaper than particleboards and solid wood. In countries like France, recycled wood is ample because of landfilling regulations and bioenergy subsidies, which favors in using more recycled wood. Some countries like Italy, where accessing virgin wood-based board is limited, using more recycled wood could significantly reduce costs.
Cons
Heavy investment is needed in order to adapt recycled woods into manufacturing process. Besides, broad plants needs to be near with urban areas for collecting recycled woods. However, Some country might not provide incentives for collecting recycled wood, which makes the supply of recycled wood might not be viable sometimes.
After the above analysis, our group think that option 2 and 3 are the most suitable strategy that IKEA group should adopt. Option 2 and 3 do not conflict in a way that stops IKEA from achieving sustainability target. On the other hand, having higher procurement standard and at the same time using more particleboards would have a better synergy in overall supply chain management. While the low return in owning forest and viability in using recycled wood lower the effectiveness in favouring option 1 and 2.
What has the highest leverage for IKEA?
Option 2 and 3 should has the highest leverage.
Option 2 (Driving higher procurement targets and standards) dominates the input of IKEA, which fundamentally affects the company efficiency starting from the process of procurement to output of product fulfilment. Therefore, heightening the standards could help IKEA not achieve sustainability goal, but also enhance the system efficiency for its whole wood supply chain. While IKEA could concentrate back to designs and productions, which strengthens IKEA’s core business.
Option 3 (Using More Particleboard) sticks with options 2 for the synergy effect. With the popularity of adopting particleboard in production line, people nowadays are much more willing to accept particleboard used in product. While higher standard of procurement helps sourcing a high quality particleboard, which enables a higher quality of output, leading to greater production efficiency and lower defectives rates.
In conclude, these two options have highest leverage as it utilizes the capital investment and provide synergy effect for IKEA Group, helping IKEA to obtain it sustainability target and at the same time align with the growth strategy.
How would you assess IKEA Group’s People and Planet Positive sustainability plan?
As mentioned, a more sustainable life at home for consumers; resources and energy independence for the company; and a better life for people and the communities touched by Ikea are the three main focused areas in “People & Planet Positive strategy”. Evaluating what IKEA has done is a good indicator for the plan implementation.
In view of the sustainable life for consumers, IKEA planned to use LEDs for the whole lighting products in or before 2016, and the efficiency of the LEDs is 10 times more than the incandescent lighting. The consumer can enjoy better lighting while reduce the enjoy consumption. Besides, investing and producing more renewable energy, like wind farms, biomass as well as solar panels in the company operations are the good examples of resources and energy independence. Considering the better life for people and the communities touched by Ikea, the company preferred the Forest Stewardship Council (FSC) practices since it underline the balances across different stakeholders, such as the indigenous people. The following table provides an analysis and summary of IKEA activities toward the “People & Planet Positive strategy”.
Functional consideration Activities
Overall Company Strategy Sustainability integrate with IKEA Group’s
core business strategy and become the fundamental part of decision making
Human Resources - Created the Chief Sustainability Officer
- Hired Howard, the founder of The Climate
Group and include him to Group Management
Operations - €21 million investments in energy efficiency
(Energy production and consumption) - Invested in wind farms, biomass and solar panels
Sales Designed to use LEDs for all lighting products
(Product consideration) by 2016
Business Communication Communicate to NGOs and hope to gain their support
Procurement and Sourcing - Established a Code of conduct. E.g. IKEA Way
on Purchasing Products, Materials and
Services (IWAY)
- Favoured Forest Stewardship Council (FSC) standard
- Contracts with suppliers which having a
good sustainability standards
- Committed to achieve 50% of wood from
More Sustainable Sources by 2017 and 100%
by 2010
Source: The case “Sustainability at IKEA Group” from Harvard Business School
From IKEA image
Considering the table from above, the “People & Planet Positive strategy” in IKEA enable the company to transform its business in various aspects, such as the overall company strategy, human resources, operation, sales, as well as procurement and sourcing. Although the targets of the plan are challenge but they are attainable. For example, IKEA had reached 32.4% sourcing from More Sustainable Sources. It is believed that the company can reach 50% of wood from More Sustainable Sources by 2017. Not only for those quantitative targets setting, there are also some qualitative improvements, like the communication with NGOs. Hence, the plan targets are appropriate.
References:
Rangan, V. Kasturi, Michael W. Toffel, Vincent Dessain, and Jerome Lenhardt.
"Sustainability at IKEA Group." Harvard Business School Case 515-033,
September 2014. (Revised December 2015.)
