IKEA's history and development
IKEA is a Swedish multinational group founded in 1943 by Ingvar Kamprad. The company name is an acronym that consists of the initials of Ingvar Kamprad (name of founder), Elmtaryd (the farm where he grew up), and Agunnaryd (his hometown in Småland, southern Sweden). It initially sold small items, then changed to sell furniture through a mail-order catalog. It aims to sell affordable, quality furniture to mass market consumers around the world.
It has been the world's largest furniture retailer since 2008, capturing 4.9% of the global home furnishings market in 2011. There are 345 IKEA stores in 42 countries (including Europe, North America and Asia) by the end of 2013 in which 303 are owned by IKEA and 42 are franchised, employing 135,000 people. It has large product range from home furnishings, indoor improvements to gardening supplies. Much of the company’s furniture as designed and sold in unassembled flat packaging, which the company introduced in 1953 to keep costs and prices low by minimizing transportation costs.
IKEA Group stores averaged 28,700 square meters (309,000 square feet)
IKEA Group has an ambitious growth strategy, by creating better products at lower prices, being more inspiring, improving its existing stores and expanding e-commerce offer, it plans to double its sales by 2020. In order to meet customer’s needs and address the higher price of raw materials. IKEA Group created the role of Chief of Sustainable Officer (CSO) in 2011. The CSO is responsible for formulating and implementing the company’s sustainable strategies and helping the company seek transformational change to better anticipate and address sustainability issues.
People & Planet Positive Strategy
IKEA aims to apply sustainability into the company’s strategy, which means reducing environmental impacts and emissions while using sustainably sourced materials within IKEA’s supply chains. It helps to develop sustainable life for consumers, biodiversity and ecological processes. Therefore, the Group Management introduces its People & Planet Positive Strategy, which focused on three areas:
- More sustainable life at home for consumers
- Resource and energy independence for IKEA
- Better life for people & the communities
The strategy sought to transform all aspects of IKEA’s value chain, including designing products to minimize raw materials use, selecting sustainably sourced materials to reduce environmental impacts and improve labor conditions, improving production and logistics efficiency and developing programs to ensure its products could be reused or recycled at their end of life.
IKEA plans to convert its entire range of lighting products to LEDs, which were nearly 10 times more efficient than incandescent lighting
Reasons for launching the sustainability project
Since IKEA’s leadership was seeking transformational change, launching of sustainability project can help the company to better anticipate and address sustainability issues. As the problem of global warming and resources depletion becomes more and more severe, customers nowadays pay more attention on company’s sustainable issues. Launching the project can therefore help to meet future customer needs and grow in emerging markets. Moreover, raw materials constituted the largest cost item for wood-based products. By using the sustainable wood sourcing and energy efficient products can help IKEA to minimize its costs, reduce emissions and maintaining low prices for the customers as well.
IKEA only source their wood from FSC certified forests
Alignment between IKEA's sustainability strategy and its business model
IKEA’s business idea aims to offer a wide range of home furnishing with good design and function at low and affordable price to reach more customers. Hence, IKEA is proud of their flat packaging of products which allow more merchandise to be shipped and stored between distribution centers as to reduce plenty of shipping and storage cost. IKEA focuses on the core competency of sustaining profitability through a low-cost business model. As a result, IKEA has integrated its sustainability strategy with its business model.
Since year 2000, IWAY is developed to specify the standards for suppliers as well as the forestry practice. IWAY prohibited the wood sourcing from illegal ways and unstainable sources. IKEA also partners with WWF to increase the FSC-certified forest areas in 2002. From these, IKEA gets greater access to FSC-certified wood and greater control of the origin and sustainability. In 2011, Chief Sustainability Officer took office and launched sustainability strategy “People & Planet Positive” which enables IKEA to achieve energy efficiency along its whole supply chain. Despite its investment on producing its own renewable energy, another significant example is the complete conversion of lighting products to LEDs in 2016. LEDs use less electricity and produce less heat that lead to higher energy saving. This plan implemented sustainability from the consumer level. Through backward integration with wood suppliers, IKEA is able to monitor every step of the supply of wood. While IKEA work hard on producing low cost furnishing, it also tried to reduce the global amount of wood usage by introducing particleboard in 2010. IKEA has done a lot to integrate sustainability in their business model.
Throughout the year, IKEA has a great progress on implementing its sustainability plan. Within three years, €21 million investment in energy efficient measures save €40 million in 2011-2013 and one third of energy consumed is from own renewable energy by the second year. IKEA has achieved 100% of home furnishing suppliers complying with the IWAY standards in 2013. In the end of 2013, 32.4% wood was sourced from “More Sustainable Sources”. All the results above significantly demonstrate the success of IKEA on integrate sustainability into its business model.
Analysis of options to address wood supply chain sustainability
IKEA Group is committed to enhancing its wood supply chain sustainability and providing products made of FSC-certified materials. In order to achieve these targets, directors of IKEA have proposed four options.
Owning More Forests
Sources of wood are the most important role in a wood supply chain. IKEA intends to lease more timberland from regions like China and Russia to act as a material base for their business in those particular countries. This option can help IKEA diversity procurement away from the local market. Also, it allows the company to monitor its wood supply and ensure whether its raw materials are sustainable.However, with owning more forests, it will increase the expense substantially. Due to the uncertain forest rotation period, IKEA has to deploy more capital to cover the high fixed costs. As the length of lease is limited in certain years because of different policies in countries. Therefore, a circumstance of longer rotation period than lease period may be occurred. IKEA may incur a huge loss from it. Moreover, with processing more loggings, IKEA has to face the residual materials issue. With more forests, more materials will be acquired. IKEA has to pay its attention into controlling the number and quality of wood; it may divert its management on those abundant wood.
Driving Higher Procurement Targets and Standards
Another approach proposed by IKEA is to increase the number of FSC-certified wood. By cooperating with environmental organizations such as WWF, IKEA accelerates the procedure of certifying forgets by the Forest Stewardship Council. Anders Hildeman, Range and Supply Forestry manager, reflects that IKEA sets it objective of using More Sustainable Sources in world by 2017. In order words, to achieve this target, 100% sustainable products will be applied in regions like China, Northern Europe.
Reviewing the details of this option, infeasible target is established by the IKEA Group. The key point of this method is the full percentage of achieving sustainability in China and Russia. To promote sustainability in those enormous areas, hardly can people estimate how long should we take to tackle the obstacles operating business, not to mention to fulfill the requirement of performing 100% sustainable for all merchandises. What is more, apart from infeasible goal, the plan of IKEA does not involve any other elements of sustainability. Although it can convey a message of sustainability to public, no practical actions will be took for improving the sustainability of running a business or protecting the forests.
Using More Particleboard
Particleboard, known as engineered wood, is made of wood particles or fibers bound with glue. Although particleboard is restricted in usage for particular design of products, however, due to the cheaper cost and light characteristic of fibers, particleboard can earn three times more and 30% less dense than solid wood. Therefore, IKEA can sell the product made of particleboard with a lower price to attract customers to opt this material as the element of their furniture. This can bring a huge economic benefit to IKEA and customers respectively.
What is more, this option can bring a positive sustainability effect to the wood supply chain. As the combination of particleboard is wood particle and fiber, it means that huge amount of wood can be avoided for the production of particleboard products. This advantage can promote an idea of using less wood globally and comes to a consequence of sustainable development.
Using More Recycled Wood
This option is also a cheaper way to achieve the sustainability objective. In countries like Germany and France, well established facilities and policies are set for the collection of recycled wood. Nevertheless, it is a heavy investment for countries to deploy the initial set up cost to do the sustainability project such as building factory for mechanical work on recycled wood. Also, recycled wood is not popular in some countries. For instance, in India, it lacks of logistical infrastructure to transport and process the materials. Furthermore, apart from the hardware, it is difficult to encourage people to use recycled wood due to the conservative mind of using second-hand goods.
Comparison
Particleboard, known as engineered wood, is made of wood particles or fibers bound with glue. Although particleboard is restricted in usage for particular design of products, however, due to the cheaper cost and light characteristic of fibers, particleboard can earn three times more and 30% less dense than solid wood. Therefore, IKEA can sell the product made of particleboard with a lower price to attract customers to opt this material as the element of their furniture. This can bring a huge economic benefit to IKEA and customers respectively.
What is more, this option can bring a positive sustainability effect to the wood supply chain. As the combination of particleboard is wood particle and fiber, it means that huge amount of wood can be avoided for the production of particleboard products. This advantage can promote an idea of using less wood globally and comes to a consequence of sustainable development.
Using More Recycled Wood
This option is also a cheaper way to achieve the sustainability objective. In countries like Germany and France, well established facilities and policies are set for the collection of recycled wood. Nevertheless, it is a heavy investment for countries to deploy the initial set up cost to do the sustainability project such as building factory for mechanical work on recycled wood. Also, recycled wood is not popular in some countries. For instance, in India, it lacks of logistical infrastructure to transport and process the materials. Furthermore, apart from the hardware, it is difficult to encourage people to use recycled wood due to the conservative mind of using second-hand goods.
Comparison
Reviewing the four options, “Using more particleboard” can bring an economic efficiency and achieve the target of promoting sustainability among the other options.
If we have to find out the highest leverage option for IKEA, it is vital for them to compare the options by cost, benefits, time and feasibility.
Cost
Cost is not only considered in the aspect of money, but also any negative effects brought to the IKEA Group. For the sake of saving cost, unnecessary consumption should be avoided. However, huge capital injection is required for the option of leasing forests and using more recycled wood. Also, extra resources used on tackling the restrictions from local government hinder the development of these two options. Conversely, driving higher standards and using particleboard costs less than other relevantly. This advantage let this two options own a key part of improving the leverage.
The highest leverage option for IKEA
If we have to find out the highest leverage option for IKEA, it is vital for them to compare the options by cost, benefits, time and feasibility.
Cost
Cost is not only considered in the aspect of money, but also any negative effects brought to the IKEA Group. For the sake of saving cost, unnecessary consumption should be avoided. However, huge capital injection is required for the option of leasing forests and using more recycled wood. Also, extra resources used on tackling the restrictions from local government hinder the development of these two options. Conversely, driving higher standards and using particleboard costs less than other relevantly. This advantage let this two options own a key part of improving the leverage.
Benefits
The options can contribute a positive effect on the economic and sustainable perspective. Except for 'driving higher standards', the other options can provide a plenty supply of wood, higher return and sustainable plan for wood supply chain. As driving a higher standards request an extreme target for achieving sustainability, it is infeasible and inefficient for promotion of sustainability comparing to the other choices.
The options can contribute a positive effect on the economic and sustainable perspective. Except for 'driving higher standards', the other options can provide a plenty supply of wood, higher return and sustainable plan for wood supply chain. As driving a higher standards request an extreme target for achieving sustainability, it is infeasible and inefficient for promotion of sustainability comparing to the other choices.
Time
Options with effectiveness and efficiency can shorten the time spent on enhancing the sustainability of wood supply chain. Leasing forests and driving higher standards are time consuming in executing its detail of planning to promoting sustainability. Conversely, using more particleboard and recycled wood can be adopted rapidly by replacing current materials. These methods can help IKEA Group boost the speed of improving sustainability.
Options with effectiveness and efficiency can shorten the time spent on enhancing the sustainability of wood supply chain. Leasing forests and driving higher standards are time consuming in executing its detail of planning to promoting sustainability. Conversely, using more particleboard and recycled wood can be adopted rapidly by replacing current materials. These methods can help IKEA Group boost the speed of improving sustainability.
Feasibility
Whether the practices of sustainability can be achievable. Without reference and statistical data, hardly can we predict and choose the most suitable option for the IKEA Group. Measuring the existing resources, it is difficult for the IKEA Group to deploy capital to execute the option of leasing forests and driving higher standards due to constraints mentioned above. Therefore, it is more practical for IKEA to opt using more particleboard and recycled wood.
Whether the practices of sustainability can be achievable. Without reference and statistical data, hardly can we predict and choose the most suitable option for the IKEA Group. Measuring the existing resources, it is difficult for the IKEA Group to deploy capital to execute the option of leasing forests and driving higher standards due to constraints mentioned above. Therefore, it is more practical for IKEA to opt using more particleboard and recycled wood.
Conclusion
Integrating the above four factors, we can sum up that using more particleboard has a highest leverage due to the lower cost, higher benefits, shorter time and bigger degree of feasibility.
Assessing IKEA's People & Planet Positive Sustainability Plan
Dedicating to transform its business from traditional furniture retail business into sustainable furniture retail business, IKEA had proposed People & Planet Positive Sustainability Plan for years. This plan, most likely, had helped IKEA to transform its business. We can see the effectiveness from its revenue reports. From 2011 to 2013, IKEA invested €21 million in energy efficiency and yielded cost savings of €40 million, which means every €1 spent in energy efficiency would save for €2. In addition, the sustainability actions done by IKEA had helped it to deliver a better brand image to customers and eventually attracting more customers for IKEA.
The plan’s targets are, overall, appropriate. We are going to analyze IKEA’s People & Planet Positive Sustainability plan by evaluating its three major purposes, which are to create a more sustainable life at home, develop resource and energy independence and provide a better life for people and communities.
First, in terms of creating a more sustainable life at home, IKEA has set some targets such as to be the number one home furnishing retailer for operating in a way that is better for people and the environment on each market. We do not see this target is too ambitious as IKEA is currently the world number one furniture retailers, while its competitors such as Sealy, has not yet taken any large actions in producing sustainable products. In contrast, IKEA took the lead in developing products and solutions that enabled customers to live a more sustainable life at home. For example, it converted the entire range of lighting products to LEDs by 2016. However, IKEA still has to put more effort into developing differentiated sustainable products, in order to attract more new customers.
Second, IKEA has taken numerous actions and set appropriate targets on resource and energy independence. It had invested €21 million in renewable energy including wind farms and solar panels. In addition, IKEA set its targets to reach 50% wood from more sustainable sources by 2017 and 100% by 2020, while IKEA had already reached 32.4% from more sustainable sources by end of 2013. And the growth rate of the total forests certified to FSC was already 25.5% only in between 2011 and 2013 (Figure). Seeing the figure, we believe that the targets set by IKEA is suitable and had great chance to be reached.
Lastly, IKEA determined to provide a better life for people and communities. Therefore, it had established its own code of conduct “IWAY”, which specify minimum acceptable standards for working conditions and environmental protection. IWAY was set appropriately and usefully as a deterrence to prevent violated actions performed by suppliers. If suppliers do not maintain compliance, they. IKEA can then control the quality of suppliers with a larger extent. In 2015, 100% IWAY approval for all national IKEA food, indirect materials and services, and retail suppliers. It was, in fact, a great result and IKEA should keep maintaining this record in long term by doing thorough investigations and assessments.