Case Study 2: IKEA

Background
IKEA was founded in 1943 by Ingvar Kamprad. It is a group of companies
that designs and sells ready-to-assemble furniture, appliances and home
accessories. The IKEA group is having operations in 43 countries with total
155,000 co-workers. They worked with 978 home furnishing suppliers
from 50 countries in 2015. IKEA is keep opening new stores to expand its
business. In 2015, the IKEA Group opened 13 new stores in 9 countries. As
of August 31, 2015, the IKEA Group had 328 stores in 28 countries.

The IKEA concept

The vision of IKEA is to create a better everyday life for the many people.
Based on this concept, IKEA creates well designed furnishing products that
are attractive, functional, sustainable and affordable and sell them in
unassembled flat packaging to keep costs and prices low. The main
financial principle of the IKEA Group is to grow by using their own
resources. Therefore, IKEA is making long-term investments for the future
to support their future business growth by re-investing a majority of their
profits in product development, sustainable solutions and price lowering.

Sustainability at IKEA Group

The IKEA Group believes that company have to build resources before
expansion. Therefore, sustainability is important to IKEA. The IKEA
Group have done a lots in taking care of people and the planet, including
turning waste into resources, sourcing food and materials in a responsible
way and protecting natural resources.

Wood Sustainability

Sourcing wood posed several sustainability concerns as it may disrupt a

numerous of people’s live, affect biodiversity and ecological processes, lead
to deforestation and followed by global climate change and long-term
wood availability reduction. As IKEA Group was one of the largest lumber
consumers in the global retail and consumer goods industry, they worked
hard in improving the sustainability of its wood procurement practices.
IKEA Group developed its code of conduct – the IKEA Way on Purchasing
Products, Materials and Services (IWAY) to regulate its manufacturing
suppliers. The introduction of the IWAY Forestry Standard meant IKEA is
having a higher standard in sourcing sustainable wood. Nevertheless,
IKEA is still working on perfecting its sustainable wood supply chain.
There are four options suggested to use to achieve the goals stated in
company’s sustainability.

Option 1: Owning More Forests

This option is suggesting IKEA to lease more forest land and have direct
control and manage the forest.

Option 2: Driving Higher Procurement Targets and Standards

This option is suggesting IKEA to set a target of using more FSC-certified

and recycled wood.

Option 3: Using More Particleboard

This option is suggesting IKEA to redesign its products to increasingly shift

from relying on solid wood to particleboard.
Option 4: Using More Recycled Wood

This option is suggesting IKEA to focus on increasing the share of recycled

wood among all wood sourced.

Case Questions
Q1a. Brief Summary of IKEA History and Development

Q1b. What is sustainability?

Sustainability is a practice and concern on striving for the balance of

interests between all stakeholders. Using IKEA case as an example,
stakeholders of IKEA include wood suppliers, consumers, environmental
NGOs, Government, Public and indigenous people. To attain
sustainability, three dimensions, social, economic and environmental, have
to be focused and considered. The three dimensions are interconnected
and would affect each other when changes occurred in any one of the
dimension. The formation of government of a nation forms a social
contract binds the social and economic systems of groups of individuals
together which increase the general welfare of people and society. People
are working under the government to maximize their economic system’s
output. Basically, the environmental aspect is at the highest priority among
three dimensions. The lower the carrying capacity of the environment, the
lower the common good delivered by the social system and the less output
the economic system can produce.

Q1c. What is ‘People & Planet Positive’?

People & Planet Positive Strategy strives to attain a more sustainable life at
home for consumers, resource and energy independence for the company
and a better life for people and the community touched by IKEA. By
changing the practices of supply chain management in IKEA, it tries to
integrate sustainability into its core business strategy. Besides, it tries to
maintain a balance between sustainability and growth of business. The
strategy seeks to transform all aspects of IKEA’s supply chain, including
minimizing the use of raw materials of producing a product, selecting right
raw materials to reduce the impact on environment and improving the
working condition for labor. In addition, it aims to improving the efficiency
of production and supply chain and ensuring its products can be reused or
recycled at their end of life.

At customers level, IKEA has planned to replace its entire range of lighting
products with LEDs which is more efficient and consume less electrics. On
the other hand, in the production, distribution and store operation level,
IKEA put huge investment to reduce the energy consumption and seek to
produce as much renewable energy as possible. Also, IKEA has started
investing in wind farms, using biomass to power its production facilities
and installing solar panels at its stores.

Q1d. Why did IKEA launch the sustainability project?

There are mainly four reasons explaining why IKEA launched the
sustainability project.

First of all, IKEA created the role of Chief Sustainability Officer (CSO) and
the Sustainable Group. The Chief Sustainability Officer is responsible for
formulating and implementing the company’s strategy while the
Sustainable Group is responsible to implement the People & Planet
Positive Strategy. IKEA has shown its willingness to take the social
responsibility in protecting the society and environment.

Besides, IKEA Group’s Chief Sustainability Officer, Steve Howard, noted

that the ambitious growth plan of IKEA would bring great impact on the
resources and environment as there are increasing world trend of
consuming more resources in economic activity. It is important to manage
its operations and sourcing aspects to maintain sustainability and protect
the environment so as to balance between business growth and being
sustainable.

In addition, the sustainability of wood supply is one of the reason for IKEA
to launch the sustainability project. IKEA is one of the largest lumber
consumers in the global retail and consumer goods industry. Wood is the
main raw material for IKEA’s products which means that the sourcing
practice of wood by IKEA is an essential issue on sustainability and
business growth. However, logging can be destructive to people,
environment and biodiversity which would in turn disrupting people’s lives
by reducing availability of food, clothing and shelter, affecting biodiversity
and ecological processes and affecting the global climate. Besides, logging
in an unsustainable way would reduce long-term wood availability and
thus affecting IKEA’s future business regarding the material issue. Without
a proper sustainability strategy, IKEA may face the problem of increasing
souring costs, finding sufficient resource and harming the global
environment. It is important to structure a framework on maintaining the
availability and quality of wood.

Apart from managing the supply and quality of wood to fulfill future
customer needs, IKEA seeks to address the higher price of raw materials
and energy. Without proper management on the raw materials and energy
consumption, the availability of raw materials and energy would be
decreasing and the cost of obtaining it would increase in the future. Thus,
it increases the cost and price of its products and reduce the desire of
spending of customers. Therefore, IKEA strive to drive down the emissions
to protect the environment and maintain a low price of products to
customers.

Q2. How does IKEA’s sustainability strategy align with its

business model?

The key concept of IKEA business model is providing high quality and wide
range of home furnishing products to people at a low cost. The aim of IKEA
is to help more people live a better life at home.

Firstly, IKEA keeps using the low cost strategy to meet its target to provide
low price products. Its furniture is mostly sold in unassembled flat
packaging. More unassembled furniture can be transported in each
shipment when compared with the assembled. So, the transportation costs
are reduced. Moreover, customers have to transport and assembled the
furniture by themselves. Thus, IKEA can lower both transportation costs
and assembled costs by transferring them to the customers. Moreover, due
to the People & Planet Positive strategy launched in 2012, IKEA decided to
be more sustainable in sourcing. Thus, more particleboard will be used to
replace solid wood. While this strategy is maintaining the sustainability,
the cost of furniture can be reduced at the same time. The products made
of particleboard are 20% cheaper than the one made of solid wood. This
shows the strategy is consistent with the business model.

Secondly, in order to maintain quality of products in a sustainable way,

IKEA had developed IKEA Way on Purchasing Products, Materials and
Services (IWAY) and used Forest Stewardship Council (FSC) certified
wood. IWAY is the minimum standard for working condition and
environmental protection that IKEA set for its suppliers. The suppliers of
IKEA have to fulfill IWAY in order to continue cooperating with IKEA. So,
the illegally harvested wood is prohibited and the source of wood would be
more sustainable. Moreover, one of the FSC standards is maintaining the
forest ecosystem. Using FSC certified wood can help protecting the
foresting when sourcing the wood. In long term, the wood availability is
enhanced and the quality of wood can be maintained and thus the quality
of the wood product.

Thirdly, IKEA has used local customization to align with its aim. As the
needs in different region may not be the same, IKEA designed to customize
its furniture to suit the needs in different regions. For example, it has
designed furniture in smaller size to fit the small living space in China. So,
this can help more people live a better life at home.

Q3a. Which option(s) should IKEA Group pursue to address

IKEA’s Wood Supply Chain sustainability? Explain.

Among the four options, option 1 is the best option for IKEA to address its
wood supply chain sustainability. Option 1, which is to own the forests, is
the option that brings the largest benefit to IKEA.

There are several reasons for IKEA to choose option 1. Firstly, IKEA can
secure its wood availability and price by owing its forest. If IKEA owns its
forest, it can directly manage the forest, which means that IKEA can secure
the access to more FSC-certified wood. Most of the products are made of
wood, if IKEA can secure its supply of FSC-certified wood, IKEA can have
better management of it production plan, which can save some of the
production cost in certain extent.

Secondly, IKEA can improve the ability to trace the origins of wood by
owing its forest. IKEA can invite expert to manage its forest, then, IKEA
can ensure the quality of woods are at the standard level. Furthermore, this
can increase the customers’ satisfaction, retain the existing customers and
let them to become the long-term customers of IKEA, which is a important
element to obtain customer loyalty. Moreover, owing its forest can gain the
confidence from the potential consumer and attract them to become
customers of IKEA.
Last but not least, option 1 has some benefits that cannot be obtain from
other options. Compare with option 2, option 1 is a long-term investment
for IKEA while option 2 seems to be a short-term plan for IKEA only.
Moreover, option 3 is to use more particleboard. This option will diminish
consumers’ willingness to purchase the product, which is a worse option
than option 1, because option 1 is using solid wood instead of
particleboard. Furthermore, option 4 is to using more recycle wood.
However, it is difficult to collect used wood and it may incur large cost.
Therefore, this option is also worse than option 1.

Q3b. What has the highest leverage for IKEA?

Comparing to other options, option 1 has the highest leverage for IKEA. If
IKEA has to own its forest, it must incur a huge amount of IKEA and the
amount has a large difference with other options. On the other hand, for
the benefits, option 1 can bring lots of benefits to IKEA as mentioned in
part (a). Option 1 highest efficiency of wood usage and production capacity
than other options. Because IKEA can manage the quality of woods and
secure the supply of FSC-certified wood by owing its forest. Although
option 1 has the largest benefits, the risk of this option is also the highest.
This is because if there is any damage in the IKEA’s forest, e.g. fire, it may
be a total loss for IKEA, this implies that the risk of option 1 is much higher
than others.

To conclude, option 1, which is to own its forest, incur the highest cost for
IKEA. On one hand, this option generate the largest benefits. On the other
hand, this option has the highest risk. As a result, option 1 has the highest
leverage for IKEA.

Q4. How do you feel the progress of IKEA group has made
implementing this plan?

We think that IKEA has a good progress in implementing this plan. There
are three main areas in the People & Planet Positive strategy, including a
more sustainable life at home, resource and energy independence and a
better life for people and communities.
IKEA is making good progress on the resources and energy dependence
aspect. It had an increasing trend of forests certified to FSC Standards. In
2011, the forest certified to FSC standards is 149 million hectares and it has
increased 25% to 187 million hectares in 2013. Moreover, it had kept a
trend of increasing the percentage of using FSC-certified wood and recycle
wood. It had a target of reaching 50% of wood sourced from more
sustainable sources by 2017 and reached 100% by 2020. In 2013, it had
reached 32.4% already, which showed a good progress. Besides FSC wood
and forest, IKEA had invested€21 million in developing renewable energy,
such as wind farm, biomass and solar panels. All these actions showed that
IKEA has making progress on the resources and energy dependence
aspect.

IKEA has also making good progress on a better life for people and
communities aspect. It had approved 100% suppliers of home furnishing
achieved IWAY on 2013, which aligned with the content in this aspect.

On the other hand, IKEA was making unsatisfactory progress on boosting

its sales. It aimed to double sales to €50 billion by 2020. However, its
revenue only increased around €5 billion during 2010 to 2013. In 2013, its
sales was around €28.5 billion, which was still far from the targets it set.

In conclusion, IKEA is making good progress on most of the aspects of the

plan.

Reflection
After this case study, we found that IKEA has adopted a lot of policies to
maintain the wood sustainability since wood is the important to its
company. Also, IKEA has considered taking corporate social responsibility
when carries out its policies. Although paying more attention to the
environment may reduce the short-term benefits of a firm, the advantages
it brings in long-term can be huge.
References

Thwink, (2014). The Three Pillars of Sustainability. [online] Available at:

http://www.thwink.org/sustain/glossary/ThreePillarsOfSustainability.h
tm [Accessed: 9th February 2016]

Quick MBA, (2010). Global Strategic Management. [online] Available at:

http://www.quickmba.com/strategy/global/ [Accessed: 10th February
2016]

ikea.com, (n.d.). Home – IKEA. [online] Available

at: http://www.ikea.com/hk/en/ [Accessed: 20th March 2016]

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