IKEA’s history and development
IKEA was found in Sweden in 1943 by Ingvar Kamprad who grew up in Elmtaryd, Agunnaryd. It sold small items initially, then affordable and quality furniture to mass-market consumers through mail-order catalog. In 1953, it introduced the unassembled flat packaging to help minimize transportation costs and prices and transfer assembly costs to customers. After the introduction, most of the IKEA furniture was designed and sold in that unique method. By 1974, IKEA had grown from 1 showroom to more than a dozen stores in Europe. It continued to grow while entered Russia in 2000 and had built a network of 14 stores there. From 2005, the company started to enter Asia, beginning from Japan, and designed new products that suit local tastes. By 2013, there were already 16 stores in China which generated a total sales of €740 million while the Group also expanded their markets to India at the same period.
Currently, IKEA owns and operates 303 stores and franchised 42 stores from Inter IKEA Systems B.V. It has become the world leader of its main market of home furnishing and faced no comparable global competitor. The company has also been emphasizing sustainability through implementing the “People & Planet Positive” sustainability strategy from 2012.
What is sustainability?
Sustainability is the ability to continue a defined behaviors indefinitely and satisfy people needs without compromising the lives of future generation, including the following 3 aspects:
Environmental - Ability to maintain rates of renewable resources harvest, pollution creation and non-renewable resource depletion that can be continued indefinitely.
Economic - Ability to support a defined level of economic production indefinitely.
Social - Ability of a social system, such as a country, to function at a defined level of social well being indefinitely.
What is “People & Planet Positive”?
To enable IKEA to better anticipate and address sustainability issues, the “people & Planet Positive” strategy has been implemented so as to strike the balance between the consumer and the earth. It sought to transform the company’s entire value chain, from its raw material sourcing to the lifestyle of its consumers, that focused on 3 areas:
More sustainable life at home for consumer - for example,
to engage and involve people and communities around IKEA stores, suppliers and co-workers through impactful, relevant and unique communication, etc.
Resource and energy independence for company - for example,
strive for resource independence by using resources within the limits of the planet and by encouraging all waste to be turned into resources;
develop company business through investing in renewable energy sources, energy efficiency, store expansion and refurbishment, low carbon transportation and range development, etc.
Better life for people and communities touched by IKEA - for example,
continuously identify and develop setups for home based workers to improve working conditions, protect labour rights and prevent child labour;
maintain 100% IWAY** approval of all suppliers of home furnishing and other key products and services
**IKEA Way(IWAY): a code of conduct that IKEA set on purchasing products, materials and services to specify minimum acceptable standards for working conditions and environmental protection at its manufacturing suppliers.
Reasons of IKEA launching sustainability project:
Sustainability is a driver of growth and is a fundamental part of decision making. To continue growing and being the world leader of home furnishing market, IKEA strives to minimize negative impacts on the environment by considering the long global value chain such as sourcing of wood supply and forestry protection. Besides, caring sustainability is good for the reputation of IKEA because consumers would feel that the company is carrying out corporate social responsibility and hence increase sales volume indirectly.
How does IKEA’s sustainability strategy align with its business model?
For IKEA’s business models, it offers a wide range of home furnishing items of good design and function, excellent quality and durability, at prices so low that the majority of people can afford to buy them. IKEA’s products are catered to people with different needs, tastes, preferences etc. The way IKEA create a relevant offer at a genuinely low price is by shortening the distance between the need of our customers and the possibilities at our suppliers.
IKEA’s strategy:
Use more FSC-certified and recycled wood
To drive down the cost of raw material, IKEA uses recycled wood instead of virgin particle board. Moreover, IKEA group uses FSC-certified wood which tries to take into account of different stakeholders. It also cooperates with more reliable suppliers so as to ensure product quality.
Own more forests
By owning more forests in Russia, IKEA can have ability to trace wood from forest to customers and is able to secure more FSC-certified wood with high quality in the future. The bonds between customers and IKEA becomes closer while the reputation of the brand could be maintained.
Use particleboard
The use of particleboard drives down the cost of production as it is less costly than the solid wood. By doing so, IKEA is able to offer wood products that are value for money.
How do you feel about the progress of IKEA group has made implementing this plan?
Generally speaking, what IKEA has been doing and planned to do in the later phases strikes us as a comprehensive, ground-breaking sustainable strategies, which embodies a wide range of non-mutually exclusive goals, ranging from escalating growth rate, brining an environmentally friendly life to a community and its customers, to revolutionise the existing value chain practice.
As for the four alternatives mainly based on the core strategy “People, Planet and Positive” that Horward, CSO of IKEA, referred to, our group can, to a certain extend, sees why they come up with these four distinct plans and what the rationale behind each of them is, given our limited knowledge on, and degree of familiarity with, IKEA.
The code of conduct set up for suppliers, namely IWAY, exemplifies how assertive and ambitious IKEA is to uphold its sustainability goal, requiring that IKEA are bound to only cooperate with parties over the supply chain which are approved in light of the framework of IWAY. This kind of selection, put in another way, “discrimination” may violate some fundamental principles in an economic sense though, such as profit maximization; on the other side, it sets a role model or benchmark in the industry, or in a broader scope, in the world-scale enterprises, which encourages others with similar aspiration in pursuing sustainability follow suit.
Another point we appreciate under this regard is that IKEA actually did a great job in independence in energy, rolling out a brand new bulb which spares 85% of electricity when compared with the old one. What is more, action on generating renewable energy is also taken. For instance, IKEA has installed solar panels on its buildings and invented a huge amount of fund in wind turbines, as well as integrating the idea of renewable energy generation by customers themselves into IKEA product, such as a solar panel of economic price, to make sustainable solutions more accessible to not only the company itself but also its customers.
Which option(s) should IKEA Group pursue to address IKEA’s Wood Supply Chain sustainability? Explain.
IKEA’s managers raised four potential options to address IKEA’s wood supply chain sustainability. To select the suitable option(s), the following three selection criteria have been set based on IKEA’s goals laid out in their sustainability plan, (i) meeting future needs of cusomers, (ii) being cost efficient, and (iii) creating less damage to the environment. Let’s first summarise each of their advantages and disadvantages so as to make a comparison.
Option 1: Owning more forests
Option 2: Driving higher procurement targets and standards
Option 3: Using more particleboard
Option 4: Using more recycled wood
To sum up the above, it is believed that Option 1 - Owning more forests and Option 3 - using more particleboard could help address wood supply chain sustainability for IKEA. These two options complement each others well.
For option 1 - owning more forests, it can yield numerous benefits. For example, it is able to secure access to more FSC-certified wood in the future. It allowed the company to diversify procurements away from China’s costly wood market for the logging of birch and pine. Moreover, it allowed IKEA group to closely monitor every step of the supply of wood from Russia to China. It also has high efficiency of wood usage and is able to meet the growth of the huge market demand.
Yet, the cons are that it has a very high costs and the risk is high as IKEA is accountable for the forests management. Hence, Option 3 could be adopted to cut down the cost of production. It is 20% cheaper than using the solid wood. Moreover, it is lighter to transport as well as more efficient as the yield from log to lumber is a lot higher for particleboard.
What has the highest leverage for IKEA?
It is believed that Option 3 has the highest leverage for IKEA, it is the most cost efficient. As mentioned before, the cost is 20% cheaper than using solid wood. In the long run, it is cost saving to IKEA. Its transportation is a lot ligher and can fill up the truck up to 30% or more.
For option 4 - using recycled wood, although it is cheaper than virgin particleboard in countries like France and Germany, it would require heavy investments. After assessing the 4 options, Option 3 - using particle board has the highest leverage for IKEA.
How would you assess IKEA Group’s People and Planet Positive sustainability plan?
According to the three major drivers which IKEA set up that outlines the way they transfer the business in operation and supply chain, i.e. a more sustainable life at home, resource and energy independence, and a better life for people and community, IKEA set a number of targets, let’s have a glance at the summary of the targets under this plan.
(Extracted from IKEA's People Planet and Positive report)
Our group considers this plan initiated by IKEA as ambitious but feasible. It is estimated that, firstly, visitors patronising IKEA Group stores will climb to some 1.5 billion per year, giving rise to greater need of new employees, i.e. around 200,000 and potentially yielding 45-50 billion euro in turnover. Given the above data indicating that IKEA stands in a financially robust position, our group holds a firm belief that IKEA is capable of realising what they state in its People and Planet Positive sustainability plan. Together with its aspiration and vision of creating a better everyday life for the many people, what it decided to do can exert an positive impact to the business, supply chain and the practice of global workplace, which makes itself a role model of successfully sustainable company and therefore revolutionise the business.
The definition of sustainability underlying the People and Planet Positive sustainability plan is well instituted and upheld by the management, then disseminated throughout the entire company, its partners in the value-chain from factories, farms to customers all over the world. Also, claiming that they will do their utmost to be the leader in sustainable, affordable life at home by inspiring and enabling customers to fulfil their needs and dreams at home, IKEA will boast how successful they can be to use sustainability as a driver of transformational changes in business, society, and the world.
IKEA, actually, has done something transformational in its operation, which serves as sound evidence suggesting IKEA’s sufficient ability to take further steps to transform the business.
Secondly, as well as having 700,000 solar panels installed on its stores, 224 wind turbines in a renewable portfolio that is worth $2.3 billion, generating 1.5 billion of sales from energy-efficient products and reducing energy consumption worth $99.5 million since 2010, IKEA at the same time made improvements in supply chain, such as sourcing 41 percent of wood from FSC-certiied sources. What’s more IKEA started selling economic, solar panels in stores, transforming customers experience in energy consumption and generation and taping into solar panel market.
IKEA, a proactive and long-sighted company with long-term thinking, would do their utmost in transformation of infrastructure, internal production process and products while pursuing sustainable goals - making the dream of sustainable or green business come true.
Reflection
In IKEA case, it is essential to mention the sustainable global sourcing strategy. The IKEA Sustainability Product Score Card is an internal tool introduced to help classify the IKEA home furnishing range and help us move towards more sustainable product development. It guides us to improve the product in relation to the criteria that have an impact on a product’s sustainability profile throughout its life-cycle. The Score Card is an internal tool and results will not be communicated to customers in the form of individual product labels. To maintain the sustainability, IKEA do as following:
Better energy efficiency, lower water consumption
Renewable, recyclable and recycled materials
Economizing on resources – making more from less
In addition, IKEA try to expose the tradeoffs between supportive versus policing approaches. Lastly, we learn from the case that to evaluate an ambitious sustainability initiative launched while seeking to expand dramatically in emerging markets.
References:
IKEA. (n.d.). People & Planet Positive IKEA Group Sustainability Strategy for 2020. Retrieved on 10 February, 2016, from http://www.ikea.com/ms/en_GB/pdf/people_planet_positive/People_planet_positive.pdf
Murray, J. (2015). IKEA sustainability chief on 'radical change' and the bottom line. GreenBiz. Retrieved on 10 February, 2016, from https://www.greenbiz.com/article/ikea-Steve-Howard-renewable-energy-business-incrementalism-sustainability
Rangan, V.K., Toffel, M.W., Dessain, V. & Lenhardt, J. (2015). Sustainability at IKEA Group. Harvard Business School. Retrieved on 10 February, 2016.
The World Bank Group. (2001). What is Sustainable Development. Retrieved on 10 February, 2016, from http://www.worldbank.org/depweb/english/sd.html