a). Brief Summary of IKEA’s History and Development
The history and development of the world-leading furniture manufacturer, IKEA, can be divided into four stages including Establishment, Expansion, Scope Extension, and Being the leader.
In 1943, Ingvar Kamprad founded IKEA in Sweden when he was 17 years old. He named the company with an acronym of his initials and the village where he grew up, Elmtaryd, Agunnaryd. IKEA was initially selling trivial items and then furniture by a mail-order catalog. The aim of IKEA is to sell affordable, quality furniture to worldwide customers.
The furniture-making company had grown from one showroom to more than 12 stores across Europe by 1974. In 2000, IKEA entered the Chinese and Russian market, with 16 and 14 stores respectively. Five years later, it entered the Japanese market. In 2013, the furniture-selling company entered the Indian market.
- Scope Extension
To better cater to the taste and needs of global customers, IKEA had redesigned its products and started providing assembly services in some of its branches. For instance, furniture are designed to suit smaller living spaces in China and assembly services are provided in India.
IKEA had started focusing on sustainability. The company had launched “People and Planet Strategy” and integrated it into all aspects of the company’s value chain. The strategy focused on 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 touched by IKEA. The group established the role of Chief Sustainability Officer who is responsible for the company’s sustainability strategy.
- Being the Leader
There were 345 IKEA stores in 42 countries by the end of 2013, most were located at the fringe of metropolises. IKEA has been the world leader in the home furnishing industry. It captured 4.9% of the global home furnishings market in 2011.
b). What is sustainability?
Sustainability can be described as 3Ps: Planet, Prosperity, and People.
Planet refers to how IKEA cares about the environmental issues and adopt measures to protect the environment. For example, the company devotes itself in sourcing more sustainable wood to protect the forest. People refers to the social issues. As the world’s largest furniture company, IKEA has to deal with various stakeholders and the company has to strive a balance of interest between all the parties. Prosperity refers to the economic issues. On the one hand, IKEA has to maintain its competitiveness in the industry and keep on earning profits. On the other hand, it has to be done in a moral way, which means that IKEA has to comply with the corporate governance to earn money. For instance, it is IKEA’s ethical practice not to hire child labor in those developing countries for the sake of cutting cost. To conclude, the 3Ps serve as a framework to help IKEA achieve sustainability.
c). What is “People & Planet Positive”?
The “People & Planet Positive” project aims at transforming the company’s value chain to:
- 1. A More Sustainable Life at Home for consumers
– Enhancing customers’ green lifestyle
2. Resource and Energy Independence for the company
– Setting stricter procurement standards and striving towards using renewable energy sources and becoming more efficient
3. A Better Life for People and Communities
– Converting entire range of lighting products to LEDs, promoting IWAY to the community, and implementing transparent and reliable system for recruitment of migrant workers
d). Why did IKEA launch the sustainability project?
There are three main reasons for IKEA to launch the sustainability project:
1.Customers’ awareness of sustainability
Due to technological advancement and better education level, customers start to pay more attention to sustainability. As the industry leader, IKEA has to focus on sustainability in order to maintain its competitiveness in the market and prevent the potential loss of customers.
2.Corporate Social Responsibility (CSR)
As the world-renowned company, IKEA can enhance its reputation by working on CSR. IKEA can also promote the CSR within the whole industry as a role model. And all the other companies follow the example of IKEA. In particular, IKEA has assisted developing countries in children’s right and education (UNICEF’s Child Rights & IKEA Retail Spain launched “The Power of Children”).
There is no exception for IKEA not to produce pollutants during the production process, especially for a world-leading company with such an enormous production scale. Therefore, IKEA implemented various measures to minimize the emission of pollutants and enhance the standard of forestry (the compulsory compliance to the IWAY). These can reflect IKEA’s determination in protecting the environment.
a). How does IKEA’s sustainability strategy align with its business model?
In 2011, the role of Chief Sustainability Officer (CSO) was created to formulate and implement IKEA’s sustainability strategy. Details of the strategy include minimising the use of raw materials through product designs, reducing environmental impacts through sustainable material sourcing, and ensuring products could be reused or recycled by program development. Below shows how these areas align with the business model.
1.Key activities – product design with less use of raw materials
IKEA’s business idea is to “to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them”. To achieve low prices, IKEA takes charge of one of the initial key activities: product design. These designs align with the sustainability concept by using fewer raw materials. The use of particleboards is one example. Particleboards are made of wood particles or fibres bound with glue and a thin layer of solid wood on top. This practice allows utilisation of wood. In other words, fewer trees are needed for producing each piece of furniture. As particleboards are a mix of cheap materials including wood chips, sawmill shavings and sawdust, these boards cost less than half-solid wood or plywood.
2.Key resources – sustainable material sourcing with less environmental impacts
With home furnishing market accounting for 60% of IKEA’s sales, wood has become one of the company’s key resources. IKEA adopts sustainable wood procurement practices through its IWAY development. IWAY stands for the IKEA way in Purchasing Products, Materials and Services. It is a code of conduct which specifies minimum acceptable standards for the environment protection at its manufacturing suppliers. These standards include the prohibition of sourcing wood from the illegally-harvested forests, forestry operations engaging in forest-related social conflicts, and so on. IKEA also develops one-to-five-year action plans with suppliers specifying production level and type of articles or products expected in the future. Not only do these plans meet sustainability standards, they also help the company perform a long-term cost management.
3.Key resources – program development to ensure products could be reused or recycled
A series of programs have been developed to make IKEA’s resources more cost efficient and sustainable. For example, IKEA has made efforts in making its particleboard manufacturing plants to accept recycled wood since it is ample in supply and cheaper than virgin particleboard in countries such as France and Germany. To make this program cost effective, the company only uses recycled wood collected by particleboard plants locating near to the urban area. This helps minimise the cost of collecting resources from individuals.
b). How do you feel about the progress of IKEA Group has made implementing this plan?
IKEA Group is committed to integrating sustainability concepts into its business model. As mentioned above, IKEA’s business idea is to provide functional and affordable products to as many people as possible. To achieve this, the company has to monitor costs closely. Nevertheless, it manages to keep costs down while implementing sustainability plans with concrete target details. For the product design area, IKEA Group evaluates the technical possibility of accelerating replacement of solid wood by particleboards to increase the share of particleboards to 80% by 2022, given current replacement rate is 5% per year. For the sustainable material sourcing area, IKEA Group has committed to reaching 50% of wood from more sustainable sources by 2017 and 100% by 2020. And for the program development area, the company has put its focus on increasing the share of recycled wood from 4% of all wood sourced in 2013 to 10% by 2020.
a) Give an analysis on each option to address IKEA’s Wood Supply Chain sustainability.
Four options to address IKEA’S wood supply chain sustainability
1.Owning more forest (backward vertical integration)
Internalising most of the supply chain through leasing and holding forests, IKEA would have most control (amongst the four options) over the implementation of sustainability plans. Regulatory standards would also be more congruent across different countries, given the IWAY amongst other industrial standards (such as the Forest Stewardship Control, FSC) are being more consistently enforced and monitored. In addition, as promised by IKEA, sustainability of all parties (such as the rights of indigenous people, labour conditions and the general ecosystem of selected forests) involved would be much guaranteed and be held directly attributable for the failure to deliver promises.
As forests become properties of IKEA, IKEA would have more reliable estimates concerning the general availability, quality and cost of raw materials. On top of that, IKEA can also leverage its procurement process across difficult selected sites across different countries. For instance, the cost of harvesting birch and pine woods in China is significantly higher than that of Russia; whereas the latter gives a higher yield (yet having greater impact on the environment). As a result, IKEA, after holding forests, could have better leverage between cost, yield and environmental-friendliness. In addition, after acquiring forests in Russia, IKEA would be able to halt clear-cutting (a common practice in Russia which constitutes harm to forestry) whilst reducing cost of materials, striding towards sustainability.
Backward vertical integration is always a capital-intensive and risky approach, for it requires high fixed cost for leased holds (such as machineries and the land cost itself); and further associates company profitability with the yields of raw materials.
Apart from mounting fixed cost for IKEA, the idea of backward vertical integration would drift managerial attention to managing timberland, instead of providing quality products and services to customers as IKEA would also have to factor in the handlings of residual products, such as sawmills and wood dust (which not only are troublesome but also render little to no profit).
Not only is it costly and worrisome to step backward into cultivating forestry, it adds uncertainty to the profitability of IKEA because the rotation periods (sowing to harvesting) of trees vary greatly. If lease terms and periods are shorter than rotation periods, IKEA would potentially have to harvest logs prematurely or renew leases under unfavourable terms, menacing company profitability.
2. Driving higher procurement targets and standards
This option implies that IKEA would impose stricter regulatory standards regarding overall sustainability control of its upstream suppliers. With different supplier relationships (from transactional to partnership), corresponding advantages and disadvantages induced would be slightly different. In the following, pros and cons of different supplier relationships would be thoroughly discussed.
Alliances or partners suppliers of IKEA
By forming alliances and striving long-term partnership with upstream suppliers, IKEA’s requirements would be sophistically communicated and addressed. As often, forming alliances and partnering supplier relationships, companies of concerned parties would set up a separate department with inputs from both supplier and buyer. With the assistance from other parties, the goals are more likely to be met.
Moreover, driving higher procurement targets and standards with partnered suppliers can lead to potential supplier advancement. Due to the long-term relationship, suppliers can contract with IKEA and supply qualified wood on a continuous basis. If investment or technology is needed during the course of the partnership, IKEA and suppliers can discuss said possibilities and explore more investment potentials join-handily. In this way, financial and physical risks can be lowered due to better leveraging between different parties. Suppliers may have a higher commitment towards IKEA as they also involve in those projects. IKEA can influence their suppliers in using higher standards such that their technology may potentially improve.
Forming alliance with the suppliers can also be risky. Information sharing between parties may lead to information leakage, meaning suppliers will know more than procurement standards. IKEA may require to pay more attention when selecting suitable suppliers for alliances and come up with contingency plans for the handling of risks associated with information sharing.
Likewise, managing supplier relationship may also increase the cost of procurement. Being constrained by the contract, IKEA needs to source from their alliances. Meanwhile, suppliers can raise the price of wood under the alliance relationship as IKEA needs to accept it anyway. The price offered may not be of suboptimal when comparing to the industrial price. Therefore, it may increase the cost of purchasing for IKEA.
Transactional suppliers of IKEA
Using arm’s length relationship with the suppliers can initiate the enhancement of industrial standards. Since IKEA increases their targets and requires higher standards of wood, it will only procure from qualified suppliers and sources. Being one of the largest lumber consumers in the world, it may bring great influence to the industry.
For example, Starbucks complied with C.A.F.E (coffee and farmer equity) guidelines that evaluates company ethics by third parties. As Corporate Social Responsibilities have higher importance nowadays, it can encourage other companies to follow suit. IKEA has no partnership relationship with its suppliers, which can incentivise their potential suppliers to fulfill the requirements so that they can become the suppliers of IKEA. Eventually, it can initiate the enhancement of industrial standards.
Under transactional suppliers relationship, the higher standards from IKEA may limit the supply sources. Some suppliers may refuse to follow the stringent standards set by IKEA as it involves higher investment. Hence, the number of suppliers who are able to provide eligible wood will be limited. It will then decrease the bargaining power of IKEA.
Additionally, it will increase the cost of quality control. For setting a standard, IKEA needs to pay for drafting guidelines, screening and qualifying suppliers. To ensure the suppliers are providing suitable wood from sustainable sources, even the suppliers are FSC-certified, it still requires continuous inspections towards the wood. Gradually, it will decrease the efficiencies and increase the cost towards procurement and quality control.
3. Using more particleboards
Regarding the usage of particleboards, the first advantage will be driving more product
innovation. Despite the traditional way of wood furniture production, using particleboard is a relatively new way. In order to fit in this new material, IKEA needs to redesign its products. For instance, Bonaqua had invested in a lightweight bottle material and design to reduce the weight and disposal space. Gradually, it had become a gimmick for their product and built the eco-friendly image for Bonaqua.
Back to IKEA, using the new lightweight particleboard requires new design of products and encourages new product innovation. It also brings benefits of efficiency and cost down effects of 20% cheaper than solid wood. As a result, IKEA can capture more economic benefits through this product innovation.
Another advantage of this option will be reduction in the logistic cost. As the lightweight particleboard is denser than solid wood, it can fill up the truck 30% more than before. The transportation fee for trucks can be reduced due to economies of scale. The similar example applies to Bonaqua. Its lightweight bottle can save recycling space by a simple twist of the empty bottle, that can reduce its size by an average of 86% as compared to its conventional packaging. With the similar philosophy, IKEA can reduce the size of materials and load more particleboard with one ride, which save the order cost and logistic cost from it.
Finally, IKEA can reduce the global amount of wood used by replacing it with particleboard. With the replacement rate of 5% every year, IKEA is expected to increase the particleboard-to-wood ratio to 80% by 2022. Using this method can efficiently reduce the consumption of wood to a reasonable amount whilst keeping the “wood-looking” design.
Use of particleboard also brings demerits. Customers perceive particleboard as sub-quality and cheap, which may decrease their willingness to pay for the particleboard made goods. Due to consumer’s demand for solid wood product, only half of IKEA’s group procurement of solid wood can be realistically substituted by particleboard in the future. Some markets such as China and India may have a very low demand of particleboards, resulted in the limited production capacity. In order to change people’s perception towards solid wood and particleboard, the company may also need to do more advertising and marketing to change customer’s mind.
Furthermore, particleboard cannot completely substitute solid wood. Currently, particleboard is often used for components that are not visible structural framing elements, and some components such as round surface still require solid wood. As solid wood is sturdier and longer-lasting than particleboard, products made wholly from particleboard may have a shorter lifetime. The usage of particleboard cannot 100% replace solid wood and can only substitute part of it. In the long-run, it will reach its limit and reduce the effectiveness of using less solid wood. In addition, changing the materials from solid wood to particle board requires IKEA to redesign its products. More investment will be needed for research and development.
4. Using more recycled wood
To start with, using recycled or reclaimed wood will be cheaper than using virgin particleboard. In some countries such as France and Germany, their regulations on landfill and bioenergy can provide sufficient supply of those wood. It also gives an alternative for countries that cannot access particleboard easily such as Italy to use recycled wood and materials for production.
On the other hand, using recycled wood can help promote environmental-friendliness and increase IKEA reputation. In fact, IKEA has announced a production line of “no waste” products that are made of recycled materials. One of the products, the ODGER chair that will be released in 2017, contains 70% of recycled plastic and 30% of renewable wood to promote eco-friendliness.The below album shows some products made by recycled materials.
Though the use of recycled wood is ideal for the long run, there are obstacles in the execution. Different countries may have different handlings and use of disposed woods. Some of them may not have incentives on recycling. For example, used wood will be directly sent to landfill in Russia without separation, while used wood is mainly for combustion to produce energy in Sweden. In order to develop a wood-recycle-friendly environment, it involves heavy investment in developing the source and manufacturing plants. Moreover, only board plants located near urban areas can be used so that the transportation and collection cost can be reduced. In conclusion, the use of recycled wood may not be cost effective and globally applicable.
b) Which option(s) may have the highest leverage for IKEA?
After consideration, the option with the highest leverage will be the combination of option 2 (driving higher procurement targets and standards) and option 3 (using more particleboard). As the use of wood cannot be completely eliminated at this stage, procuring qualified wood from FSC-certified forests can ensure the usage of wood that is less harmful to the environment. It can also provide a better description of the wood source so that customers can have a better idea on where the product materials are from. For the part that can be substituted, using particleboard is a good option to replace wood as it can utilise the transportation process and reduce cost on sourcing. Besides, it can effectively decrease the consumption of wood with less inapplicable situation worldwide. As a result, combining option 2 and 3 can leverage and achieve a more sustainable wood supply chain for IKEA.
How would you assess IKEA Group’s People and Planet Positive Sustainability Plan? Is it too ambitious?
Sustainability is about striking a balance between the environmental, social, and economical aspects in doing business. IKEA has paid enormous effort on keeping their business sustainable to the environment, which makes its plan feasible.
Here comes the evaluation on the three aspects: Environmental, Social, and Economical.
Energy-efficient LED lighting
The company has seen the potential of LED lighting as it is much more efficient than the traditional lighting products. Therefore, it would like to sell only LED lighting products by 2016.
The proposed action could greatly reduce the waste as the LEDs have a much longer
lifespan, which means the burden to the nature would be greatly reduced. There is a common phenomenon that for earning more profits, light bulbs are usually made to have a fixed and short lifespan. In view of this, the action that IKEA has taken is highly appreciated.
IKEA has been the largest sourcing company of wood in the world. It sources wood from certificated suppliers, and produces wood broad to fully utilize the wood during production.
To protect the environment, the company has started to invest in renewable energies, for instance, wind, solar and biomass power.
As stated in their People & Planet Positive strategy, IKEA focuses on the reusable resources and energies. For instance, it plans to minimize all the wastes from any of its products and recycle them until the end of the cycle.
In view of all these, the company has caught the trend of the future development. From the production process, material use, to the disposable materials, it has full supervision over them. It is said to be very comprehensive if regular tracking of all these process and evaluation of the recycling rate are done.
According to IKEA, the investment on energy saving has helped save over €40 million. By 2020, it plans to yield €50 billion from sales and also open 3 times more stores.
By the growth steps taken by the company and its plan, coordinating with its sustainable resources usage, the goal of gaining €50 billion profit could be achieved.
As stated by IKEA, the company also aim at improving labor conditions in its supply chain. This shows that the company is aware of the labor issue and not just focus on making profits.
However, the wood consumption of IKEA might still have affected the communities that rely heavily on wood. For example, due to negligence, protected forests wood is cut by IKEA in Russia.
There could have been a more sustainable plan for this. It should not rely on cutting enormous trees in different countries without planting some.
4 teams have been formed to carry out the plan, which are the Communication, Innovation, Policy and Retail teams.
There are as much as 500 workers who are responsible for the direct supervision of the plan and IKEA hopes to raise its company movements up to 95% relating to sustainability.
This is a great step taken by IKEA. In order to transform the company, there should always be a leading department and has the progression embedded in the company. Finally, its plan will be executed according to the timeline.
All in all, the company is going good in achieving sustainability. They have taken reasonable steps and would make it even better.
About IKEA. IKEA.com. Retrieved 12 February 2017, from http://www.ikea.com/ms/en_HK/this-is-ikea/about-the-ikea-group/index.html
IKEA Group,. (2012). IKEA Group Sustainability Report FY12 (p. 11). Retrieved from http://www.ikea.com/ms/en_US/pdf/sustainability_report/sustainability_report_2012.pdf
Sklyarova, M. & Kobets, T. (2011). Eco-efficiency for sustainability: IKEA’s environmental policy in Russia. Retrieved from http://www.diva-portal.org/smash/get/diva2:420853/FULLTEXT01.pdfEco-efficiency
Starbucks,. (2015). Global Responsibility Report 2015. Retrieved from https://globalassets.starbucks.com/assets/ee8121c1a6554399b554d126228d52ed.pdf