Part A: Case study – IKEA
Part A of this EMA will be marked out of 60 marks. The wordlimit is 2400 words.
Read the case study, which you can find in the assessment areaand on the study planner in Week 23, and answer the followingquestions:
- Using concepts and theories from Block 1, explain why IKEAplaces high importance on innovation. You should consider how thevarious business functions within IKEA integrate to facilitateinnovation.
- Globalisation has created a new and dynamic relationshipbetween the ‘global’ and the ‘local’. Based on your work duringBlock 2, how would you advise IKEA to balance these two competingperspectives as it continues to pursue its global expansionstrategy?
- Applying concepts from Block 3, explain how IKEA seeks tonurture long-term value creation.
Part B: Presentation
Part B of the EMA will be marked out of 20 marks.
Drawing on your work with the IKEA case study, create apresentation showing the main opportunities and threats that IKEAface over the next five years. Make sure to address the criticalareas of IKEA’s global expansion strategy and its sustainabilitystrategy.
Your presentation should use no more than 6 slides and 300words. Your first slide should be a title page for yourpresentation.
IKEA
Introduction
IKEA is an internationally known global brand and pioneeringhome furnishings retailer. It has grown rapidly since it wasfounded in Sweden in 1943. Today, it is the world’s largestfurniture retailer, recognised for its Scandinavian style.
IKEA carries a range of 9500 products, including home furnitureand accessories. This wide range is available in all IKEA stores,and customers can order much of the range online through IKEA’swebsite. As of June 2019, there are 423 IKEA stores operating in 52countries (IKEA Group, 2019a). A staggering €38.8 billion ($44.6billion) worth of IKEA goods were sold in 2018 with a similarprojected forecast for 2019 trading (Ringstrom and Dowsett,2018).
IKEA’s strategy is underpinned by its vision, which it believesis the foundation of its growth. The IKEA vision states they aim‘to create a better everyday life for the many people’ and ‘tooffer a wide range of well-designed, functional home furnishingproducts at prices so low that as many people as possible will beable to afford them’ (IKEA Group, 2019b).
1 Flat-pack pioneers
IKEA is associated with products that are simple, low cost butalso stylish. This has given IKEA a very broad appeal to differentgroups of consumers and ensured that IKEA products appealed in boththe business and consumer markets. Starting as early as 1956, thecompany were the pioneers of flat-pack furniture. This offered agreat solution for all sorts of customers who were looking forstylish high quality furniture at an affordable price. Theflat-pack approach to furniture design allows IKEA to reduce costsacross the supply chain, from initial design, standardisedmanufacturing of components, to transport costs and warehousing.Part of the approach to cost saving is in store location. IKEAstores are commonly built on the outskirts of cities where businessrates and operational costs are cheaper and customers can parkeasily.
Due to the way IKEA produces and sells its furniture it has alsoensured that it is readily available and convenient. Conventionalfurniture makers often only begin production once an order has beenplaced by a customer. This means that it can often take severalweeks for delivery. By contrast, IKEA’s products are instantlyavailable in their stores and easy to transport home in customers’own vehicles. The flat-pack business model has continued to bebeneficial for IKEA as it allows a further significant cost savingat the end of the value chain. Effectively, IKEA have outsourcedthe highly costly assembly part of the value chain directly tocustomers who are willing to trade the extra work of self-assemblyfor a large saving on the retail price they pay. This helps IKEAmaintain high profits.
The IKEA business model is reliant on a highly effectiveapproach to procurement. With 31 trading service offices ofprocurement staff in 26 countries, IKEA sources from over 1400worldwide suppliers. With the bulk purchasing power behind IKEA andthe large procurement team it is able to negotiate prices between20% and 40% lower than any of its competitors. Over time, IKEA hasdemonstrated that it can successfully manage global suppliers whilealso maintaining the quality of its products, key to maintainingits brand reputation. The network of service offices is crucial totheir global procurement activity, as each office is geographicallyspread out so that they can cultivate strong working relationshipswith all local suppliers, wherever in the world they happen tobe.
IKEA staff also visit all of the suppliers on a regular basis,not only to continue to build relationships with their suppliersbut also to build on their quality control processes. As part ofthis, IKEA is a strong believer that it should only work withethical suppliers and as such it inspects the working conditionsand the social conditions surrounding the factories, ensuring itadds value to the local communities it works with. Some 66 per centof IKEAs products are sourced from Europe. However, to keep costsdown IKEA’s largest supplier is China, which provides 18% of allIKEA products. Production of a single product is spread acrossmultiple suppliers and optimised in order to reduce prices. IKEAalso purchases raw materials and hardware in bulk, which is sold toits suppliers to help them keep the final cost down.
IKEA’s supply chain is supported by cutting-edge ITinfrastructure. The complexity of the supplier network and thelarge range of products has meant that over time IKEA has found itnecessary to develop its own systems. This is more expensive thanbuying standard IT systems to manage its stocks. However, this doesmean it can manage the demands of stores and ensure effectivedistribution of its stock between them. Ensuring that nothing staysin storage for long is key to keeping IKEAs inventory costs low aseverything is built to shelf rather than built to order like mostother furniture manufacturers.
2 Global expansion
IKEA has a long history of expansion beyond its natural marketsin Western Europe.
IKEA has always adopted an ethnocentric strategy forinternationalisation, weighing up the effect of the local cultureagainst IKEA’s own to select relevant products. In the early daysIKEA often ignored local tastes and preferences in favour ofkeeping costs low, but learned the hard way in the US that thiswasn’t appropriate and adapted to the way furniture is purchasedthere. To do this greater control was handed over to the USsubsidiary, allowing them to customise products for the localmarket. This led to increased costs, but this localisation approachwas essential in order to see market growth in the US. Thisstrategy has been repeated in other markets to help IKEA adapt tolocal culture and purchasing behaviour.
Over recent years, IKEA has been looking for growth by expandinginto emerging markets with a growing middle class, such as Chinaand India. In August 2018, the company opened its first Indianstore in Hyderabad and saw around 40,000 customers on its first day(TNN, 2018). Further stores are to be opened in Mumbai andDelhi.
In order to remain successful IKEA needs to further adapt itsproduct lines to local demand and ensure that pricing strategy iscorrect. “We are selling many products from our global portfolio ata lesser cost in India and working on lower margins, but we knowthe volumes will make up for this,” Amitabh Pande, StrategicPlanner at IKEA India said (Das, 2018). On IKEA’s India website,the leading corner sofa-bed is tagged at about 37,500 IndianRupees, while the same item is sold in the UK for about 43,000Indian Rupees, representing a significant price difference betweenthe two markets. Average income is still much lower in emergingmarkets, meaning prices have to be lower, and with many peoplestill only using public transport central city locations areessential. Consequently, IKEA is having to change a traditionalpart of its business model. In developed markets, customersassemble the furniture themselves. In India this is not commonpractice, so IKEA has partnered with home services company,UrbanClap, to help customers put together their furniture afterpurchase (Das, 2018).
The company says it realised localisation of products to suitthe needs of Indian families and customers was the key ingredientto win over a market that is extremely sensitive to price. Inadapting to the Indian market IKEA undertook more than 1000 homesurveys to see how Indians lived (Goel, 2018). “There is nothingmore powerful than watching and talking to those people in theirnatural environment. We watched how they cooked, slept, and sat,and then we thought how we could tweak our existing products tosuit them,” an IKEA India spokesman said (Das, 2018). Indianfamilies tend to spend a lot of time together, far higher thanglobal averages. So IKEA added more folding chairs and stools thatcould serve as flexible seating. Indians are also known to preferhard mattresses for sleeping, a complete opposite to the globalnorm, which made IKEA work with its local suppliers to launch suchmattresses just for Indian consumers (Goel, 2018).
Sustainable vision
Since it was founded IKEA has always had concern for people andthe environment. The IKEA vision ‘to create a better everyday lifefor the many people’ puts this concern at the heart of thebusiness. IKEA has responded to the public’s rising concern forsustainability in its choice of product range, suppliers, storesand communication. It has also spotted business potential inproviding sustainable solutions. IKEA’s concern for people and theenvironment encourages it to make better use of both raw materialsand energy. This keeps costs down and helps the company to reachits green targets and have an overall positive impact on theenvironment.
To meet its vision IKEA provides many well-designed, functionalproducts for the home. It prices its products low so that as manypeople as possible can afford to buy them. However, in creating lowprices IKEA is not willing to sacrifice its principles. ‘Low pricebut not at any price’ is what IKEA says. This means it wants itsbusiness to be sustainable. IKEA supplies goods and services toindividuals in a way that has an overall beneficial effect onpeople and the environment.
IKEA does not produce its own raw materials, but it needs theseto develop its products. Consequently, it works closely withprimary sector suppliers to ensure a sustainable impact on thepeople and the environment in which it operates. IKEA designs itsown products. At the design stage, IKEA checks that products meetstrict requirements for function, efficient distribution, qualityand impact on the environment.
IKEA uses a tool – the ‘e-Wheel’ – to evaluate the environmentalimpact of its products. The ‘e-wheel’ has several checkpoints,which are divided into five phases: raw material, manufacturing,distribution, use and end of life (IKEA Group, 2019c). This alsohelps suppliers improve their understanding of the environmentalimpact of the products they are supplying (see Figure 1).
Figure 1: The e-Wheel
Around 50 per cent of IKEA’s products are made from wood or woodfibres. IKEA ensures that the wood it uses comes from sustainablesources. It also works to ensure that at the end of a product’slife the wood can be recycled. IKEA creates many design solutionsto minimise the use of materials. For example:
- some furniture is made from recycled plastics
- some rugs are made of material clippings that would otherwisebe wasted
- products such as water cans are designed to be stacked. Thismeans that more can be transported in each load, reducing thenumber of lorry journeys and therefore lowering fuel costs.
Since 2015 IKEA has reached its goal of phasing out woodenpallets from its global transport network; it now uses only paperpallets and loading ledges. Cotton is used in many of IKEA’sproducts. Because conventional cotton farming is often harmful tothe environment and the people who grow it, IKEA works with thecotton farmers so that 100 per cent of the cotton used is from moresustainable sources certified by the Better Cotton Initiative, ofwhich IKEA is a founding member (IKEA Group, 2015).
Each of these ideas helps IKEA’s products to be more sustainableand reduce the impact on the environment.
A close working relationship with all suppliers is fundamentalto IKEA’s sustainability vision. During manufacturing IKEAspecifies to its producers that waste should be avoided. Wherewaste does occur IKEA encourages suppliers to try to use it in themanufacture of other products. IKEA has a code of conduct calledthe IKEA Way of Purchasing Home Furnishing Products (IWAY). Thiscontains minimum rules and guidelines that help manufacturers toreduce the impact of their activities on the environment. The IWAYcode of practice expects suppliers to:
- follow national and international laws
- not use child labour
- not use woods and glues from non-sustainable forests
- reduce their waste and emissions
- contribute to recycling
- follow health and safety requirements
- care for the environment
- take care of their employees.
A product in use should not have a harmful effect upon consumersor their environment. For example, it should not cause allergies.If it uses energy, it should do so efficiently. When a productcomes to the end of its useful life, it should be possible toreclaim or recycle the materials that make up the product. Suchmaterials can then be re-used for making other products. To monitorsuppliers, IKEA regularly carries out an IWAY audit. This involvestalking to employees and inspecting documents and records. IKEAvisits suppliers on-site on a number of occasions to ensure thatthey are following the code of conduct.
By the end of 2020, IKEA aims to be running on 100 per centrenewable energy. So far, the company has installed more than700,000 solar panels at IKEA locations around the world and ownsapproximately 157 wind turbines in Europe and Canada. A further 104wind turbines are being constructed in the US. Last year, thecompany committed to rolling out solar across all its Australianeast coast stores and warehouses. To date, IKEA has invested €2.5billion in renewable energy and assisting communities most impactedby climate change (Energy Monitor Worldwide, 2015).
As a global organisation IKEA has chosen to undertake aleadership role in creating a sustainable way of working. IKEA hasformed partnerships with UNICEF and other global agencies to combatchild labour by raising awareness and addressing the root causes.It has educated suppliers to understand how and why sustainableproduction is vital. This has helped IKEA differentiate itself fromits competitors.
Case study written by Matthew Hinton
