Introduction It becomes a foundation of creating long-term asset

Introduction

IKEA was founded in Sweden in 1943 by Ingvar Kamprad. He named the company with an acronym for his initials and the village he grew up, Elmtaryd, Agunnaryd. Today, IKEA is a multinational corporation, headquartered in the Netherlands that designs and sells ready-to-assemble furniture, kitchen appliances and several home accessories. IKEA is currently the world’s largest furniture retailer since January 2008. The company’s business concept is “To offer a wide range of well-designed, functional home furnishing products at price so low that as many people as possible will be able to afford them”. IKEA is known for its contemporary designs for furniture, appliances and also its interior design work, which frequently related with the eco-friendly concept. In addition, the corporation is well-known for its devotion to operation details, cost control and constant product development. In this day and age, IKEA owns and operate 373 stores in 47 countries.

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By 2014, IKEA Group was the largest home furnishing company, with EUR28.5 billion of sales, and planned to reach EUR50 billion by 2020, mainly from emerging markets. At the same time, IKEA Group had adopted in 2012 a new sustainability strategy that focused the company’s efforts on its entire value chain from its raw materials sourcing to the lifestyle of its end consumers. The plan especially centered on wood, which represented 60% of IKEA Group’s total procurement in volume and constituted a key lever for the company to increase its positive impact on sustainability. IKEA Group Management therefore had to decide how to manage its portfolio of wood sustainability initiatives, especially in the context of the company’s aggressive growth plan.
Moreover, IKEA is a value-driven firm with the desire for life at home. IKEA’s vision is to build a better everyday life for its customers. The paramount important financial principle of the IKEA Group is to breed by using their own resources. Consequently, IKEA can earn their money first before they spend. It becomes a foundation of creating long-term asset for the future so they can re-invest a bulk of their profits in existing and new IKEA stores, as well as in product development, sustainable solutions and also by continuously lowering prices to their customers.

Case Overview
In 2014, the IKEA group was after an aggressive growth strategy by expanding its number of stores over-the-world and range of customer targets to double sales to 50 Billion euros as well as it also launched a comprehensive sustainability strategy called “People & Planet Positive” which starts from the material base to lifestyle of customers in order to help achieve their strong determination? growth in a balanced and sustainable way. 

Below is the major sustainable strategy carried out by IKEA:

Obtaining Sustainable Wood 

 

Ø  Set up IWAY standard on working conditions and environmental protection for wood suppliers to keep an eye on (if vendors not to follow, they can no longer supply IKEA group)

Ø  Increase the area of FSC certified forest land ( Forest Stewardship Council (FSC) carried out 10 principles for timber management practice to fight against deforestation ) 

 

 

From the diagram, we can see the certified forest land has been increasing year from year. 

 

It is believed that IKEA will keep proposing new and strengthening the existing sustainable strategies. Owning more forests, driving higher procurement targets and standards, using more particleboard, using more recycled wood etc., may be one of their next considerations in terms of risks, profit and growth. Let’s wait and see.  

 

Case Questions

A. How would you assess IKEA Group’s People and Planet Positive sustainability plan? Is the plan likely to help the company transform its business? Are the plan’s targets too limited, appropriate, or too ambitious?

It is IKEA’s strategy that targets to transform all the features of the value chain. Through this strategy, environmental carbon footprints could be reduced and help advance labor conditions within IKEA’s supply chains. This IKEA’s strategy can also increase efficiency in production and logistics by developing programs to guarantee the products can be reclaimed or recycled.

 

IKEA’s strategy is premeditated to be a cohesive part of the IKEA Group long-term growth direction and builds on the Company’s long history of functioning with sustainability by drawing a new set of objectives and actions for delivery up to 2020.

 

People & Planet Positive has 3 key focus areas:

Inspiring and enabling millions of people to live a more sustainable life at home, offering products and solutions that help customers to save money by using less energy and water and reducing waste. Examples include: converting all lighting to LED that last for 20 years and use up to 85% less electricity; offering the most energy efficient home appliances on the market at the lowest price; creating low price, functional and easy to use solutions for sorting and minimizing waste and using less water at home.Becoming energy and resource independent, which includes producing as much renewable energy as is consumed in Ikea Group stores and buildings, building on the €1.5 billion allocated to wind and solar projects. It also includes improving the energy efficiency in Ikea Group operations by at least 20% and encouraging suppliers to do the same. Continuously developing the Ikea range, making products more sustainable by ensuring all main home furnishing materials, including packaging, are renewable, recyclable or recycled.Taking the lead in creating a better life for the people and communities, which includes supporting the development of good places to work throughout the Ikea Group supply chain – encouraging suppliers to not only focus on compliance but also shared values. It also includes going beyond the immediate reach of the supply chain and helping to support human rights.

 

 

 

IKEA Group’s People and Planet Positive sustainability plan has 3 focus areas as follows:

1)      A more sustainable life at home for consumers

2)      Resource and energy independence for the company

3)      A better life for people and the communities touched by IKEA.

I have confidence in IKEA Group’s People and Planet Positive sustainability plan is not too ambitious as it is a long term goal for the establishment to grow. Based on the three focus areas, to reach the final goal numerous milestones have been shaped along the years to reach the goal. It will transform all aspects of the company’s value chain, including design, select sustainably sourced materials, and advance labor conditions and efficiency in production and supply chain.

For the resource and energy independence, IKEA Group obtained 100% of wood, paper and cardboard from additional sustainable sources, and it is capitalizing in renewable energy sources. It shows that IKEA Group is devising actions to safeguard the environment and maintain sustainability. For example, IKEA Group’s has actively increase the use and availability of wood from more sustainable source (e.g. FSC-certified forest). End of 2013, 32.4% of IKEA Group’s wood use was procured from sustainable source. IKEA also planned to reach 50% by 2017 and 100% by 2000, long term interest is expected in the future.  For energy independence, IKEA Group’s has invested 1.5 euro billion to sustainable energy like wind farm, solar panels and biomass infrastructure. This investment follows the company’s long term objective of saving energy and is able to lower its long term operating cost.

Finally, for the third focus area, that aims better life for people and communities. We think that some actions are concrete and some are not, for example, take a lead in contributing to a better life for people and communities impacted by our business is not concrete enough. But maintain and secure 100% IWAY approval of all suppliers, develop and implement a transparent and reliable system for the responsible recruitment of migrant workers are more of the concrete actions.

Sustainability is to create and maintain the conditions under which humans and nature can exist in productive harmony to support present and future generations. IKEA Group, a world-wide company which provide a wide range variety of products from ready-to-assemble furniture to home accessories, has developed a Planet, People and Positive sustainability plan to maintain business and protect environment at the same time. We think that the plan is not too ambitious because it is a long term goal for the company to grow, and we hope that IKEA Group can continue developing its plan to maintain sustainability.

 

a.            How do you feel about the progress IKEA Group has made implementing this plan?

First, they have increasing trend of forests certified to FSC standards. In 2011, it was only 149 million hectares, but in 2013, it has already increased to 187 million hectares.

Second, they kept a trend of increasing the percentage of using FSC-certified wood and recycled wood. Their target is using 50% of FSC-certified wood in 2017 and 100% in 2020. They reached 32.4% in 2013.

Third, they developed renewable energy like wind farms, biomass and solar panels using $21 million

How does IKEA’s sustainability strategy align with its business model? What are the overlaps? What are the conflicts?

IKEA’s Business model

-IKEA’s business is to provide better products at lower price. They aim to double their revenue by 2020. They had expanded to emerging markets like India and launched a new selling platform – e-commerce. They strike to improve and expand existing stores. They have general product with additional locally adapted products. The transportation and assembly costs are low as they sell unassembled flat packaging which helps reduce costs. They also maintain high quality products by using IWAY standards and FSC-certified wood.

 

Sustainability Strategy (PPP)

People & Planet Positive has three key focus areas:

Inspiring and enabling millions of people to live a more sustainable life at home, offering products and solutions that help customers to save money by using less energy and water and reducing waste. Examples include: converting all lighting to LED that last for 20 years and use up to 85% less electricity; offering the most energy efficient home appliances on the market at the lowest price; creating low price, functional and easy to use solutions for sorting and minimizing waste and using less water at home.

Becoming energy and resource independent, which includes producing as much renewable energy as is consumed in Ikea Group stores and buildings, building on the €1.5 billion allocated to wind and solar projects. It also includes improving the energy efficiency in Ikea Group operations by at least 20% and encouraging suppliers to do the same. Continuously developing the Ikea range, making products more sustainable by ensuring all main home furnishing materials, including packaging, are renewable, recyclable or recycled.

Taking the lead in creating a better life for the people and communities, which includes supporting the development of good places to work throughout the Ikea Group supply chain – encouraging suppliers to not only focus on compliance but also shared values. It also includes going beyond the immediate reach of the supply chain and helping to support human rights.

Alignment

We can see that IKEA’s sustainability strategy has aligned with their business models in several ways. First, they emphasize on sustainability and energy concerned. They invested in wind mills, solar panels and biomass which are renewable energy that could use less resources while saving cost. Second, they implemented FSC forest standards in order to become sustainable while maintaining a high standard product level.  Third, they set up IWAY minimum standards for working conditions and environmental protection.

b.      Which option(s) should IKEA Group pursue to address IKEA’s Wood Supply Chain sustainability? Which has the highest leverage for IKEA?

 

There are 4 options proposed. They are owning more forests, driving higher procurement target and standard, using more recycled wood, and using more particleboard. We suggest IKEA group to pursue using more particleboard to address IKEA’s wood supply chain sustainability.

Owning More ForestsThis option can directly manage the timberland and being responsible to ensure they are following more sustainable terms. But due to the limited supply and the concern of ownership duration, it is not a good option for IKEA group to address the wood supply chain sustainability. However, it involves high cost and a long legal process to own a forest.

Compared with using more particleboard, this option involved higher cost, a more complicated process, and less fit into the term ‘sustainability’.

Driving Higher Procurement Target and Standard

This option can create a good image to customers for committing to sustainability but there are bad side of this options. There is limited supply of FSC-certified materials and it takes a long time to make area to be FSC-certified.
Compared with using more particleboard, this option did not fit in ‘sustainability’ in action. It can send a message to customers that they are committed to sustainability. But, it did perform as much ‘sustainability’ as the third option, using more particleboard. So, it’s not the best one to address wood supply chain sustainability.

Using More Recycled WoodThe cost of this option is cheaper than particleboard in some countries, such as France and Germany. Although it fits into the term ‘sustainability’, it involved a heavy investment (i.e. infrastructure). It’s because there are only few regions have incentives to collect wood for recycling, for example Italy.
To conclude, it may be a good option to address wood supply chain sustainability. But due to the high cost involved, we do not suggest IKEA group to pursue this option to address sustainability.

Using More ParticleboardThere are two main reasons why we suggest IKEA group pursue this option to address wood supply chain sustainability, the cost and the effectiveness.
This option can save material cost. Compared with products made of solid wood, the material cost of products made of particleboard is approximately 20% cheaper. For IKEA group, this can help minimize the cost. Hence, due to the lower cost, the price will become lower, which customers may find the products more attractive due to the lower price.
Although this option needs time to reinvent new product line, this can reduce the amount of wood used. The production of particleboard from one log of wood has higher yield than the production of solid wood from one log of wood. This fit into the term ‘sustainability’ the most. Apart from this, we believe this can help maximizing the profits in the future. So, this option should be the best one among these four options.

b)  Which has the highest leverage for IKEA?

For all four options namely owning more forests, driving higher procurement target and standard, using more recycled wood and using more particleboard, there are a set of common factors like risk and management, cost and efficiency, supply capacity and independence, customer perception, market growth alignment and IKEA’s plan alignment and sustainability. 

 The reason for having factors in “A & B” format is to demonstrate the positive or negative relationship in between concepts. 

Cost & efficiency is tightly related. Using the wood collected to produce maximum number of products is considered as efficiency. Most of the solid wood collected can be used to make furniture while only small amount of processed and recycled wood can be used in existing products. Only using particleboard can achieve additional 30% efficiency owing to the light weight in transport with the use of least wood and resin, that costs the lowest.

Risk & management is somehow contradicting. Internal sourcing can definitely manage the quality and policy but also bear the risk of forest ownership. Multi-domestic sourcing like using particleboard and recycled wood can reduce the risk but also maintain a middle level of inspection and policy control. Driving higher procurement targets is an ideal way of maintaining sourced materials quality with common industry standards. In order to promote the management of particleboard usage, IKEA can establish widely accepted industry standards for the wood portion in force-bearing components and the chemicals gluing the wood and resin.

Supply capacity & independence is somehow contradicting. In common understanding, independence would cause inelastic supply while depending on third party or outsourcing would bring elastic supply capacity. Owing forests and driving higher procurement targets bring the highest degree of autonomy but do not obtain the highest supply capacity due to ownership duration and FSC-certification.  However, the multi-domestic particleboard production capacity will be technically possible replacing 80% of solid wood. Since quality is not a major concern for particleboard, obtaining enormous supply capacity outweighs the point of depending on multi-domestic sourcing.

Customer perception is mainly depending on the price and the appearance. As the IKEA Group Industrial Strategy Manager has put, “Customers perceive solid wood to be worth more than particleboard”. The appearance and texture of solid wood would gain perception of quality. Though particleboard products are perceived as fair quality, their cheap price can be a temptation for customers to purchase.
IKEA’s plan alignment and sustainabilityis closely linked. Plan is specific about product design and operation strategy in short term while sustainability is a concept of balance among environmental, economic and social aspects in long term. Owing forests and driving high procurement standards can definitely meet the product and operation needs. On the other hand, using recycled wood is also an excellent sample of re-use. Only using particleboard fulfills the operation strategy as well as the raw material reduction goal. 
Market growth alignmentis depending on demand and supply aspects in corresponding IKEA’s market. IKEA is aiming at a double amount of sales and openings of more than 200 stores in emerging markets like Russia, China and India. Hence, an elastic production capacity and a price-attractive product development approach are the essentials. Using particleboard is the only option that fulfills both requirements and thus it is the final choice.

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