Sustainability at IKEA Group In 2014, the IKEA Group was pursuing…

Sustainability at IKEA Group
In 2014, the IKEA Group was pursuing an aggressive growth strategy, initiated in late 2012 to double sales to €50 billion by 2020. The Group Management (GM) planned to achieve this growth by increasing the market share of their 303 existing stores and by opening nearly 200 more stores, many of which would tap into the billions of new customers entering the middle class in emerging markets, especially China and Russia. The market share of IKEA Group in emerging markets was far lower than its conventional markets in Europe and North America, where demand was expected to grow much more slowly.
Steve Howard, IKEA Group’s Chief Sustainability Officer (CSO), saw major opportunities from this planned growth: “Growth is the priority. If you’re growing as a company, everything becomes possible.” But he also viewed the implications of such aggressive growth through the lens of the company’s equally ambitious sustainability plans, noting: “Worldwide economic activity, if left unchecked, is already on track to consuming 150% of planet earth’s resources, and on top of that we will have 3 billion extra consumers by 2030, mostly from the emerging market countries. If we’re growing as a company, we have to balance how we use resources to be sustainable. We can grow and be sustainable.”
In late 2012, IKEA Group launched a comprehensive sustainability strategy called “People & Planet Positive” that focused on the company’s entire value chain, from its raw materials sourcing to the lifestyle of its consumers. Sustainability had become integral to IKEA Group’s core business strategy. As Howard put it, “We are transforming our material base, becoming an independent power producer, lifting working conditions through the supply chain, and accelerating change in product sectors by becoming one of the world’s largest retailers of energy-efficient LED lighting. Sustainability is a driver of growth and is now a fundamental part of our decision making—we have changed the mindset across the business.” Peter Agnefjäll, IKEA Group’s president and CEO since September 2013, was confident that the company’s growth strategy would not conflict in any way with the company’s sustainability targets.
Sustainability issues in the IKEA Group wood supply chain were especially challenging because the company sought to procure wood and wood products close to its consumer markets to minimize transportation costs, but the growth plans focused on emerging markets in which wood supply chains lacked well-developed markets for wood that met the company’s stringent sustainability standards. IKEA Group’s global lumber purchase volume trailed only The Home Depot and Lowe’s among global retailers1 and represented 60% of IKEA Group’s total raw material procurement by volume and 40% by value (followed by plastic, steel, and cotton). The enormous scale of IKEA Group’s wood procurement made the company’s management of its wood supply chain an especially salient issue to the company’s bottom line, environmental activist groups, and many ecosystems.
Company Overview
IKEA was founded in Sweden in 1943 by Ingvar Kamprad when he was 17 years old. He named the company with an acronym for his initials and the village in which he grew up, Elmtaryd, Agunnaryd. Initially selling small items and then furniture through a mail-order catalog, by 1974 the company had grown from one showroom in Älmhult to more than a dozen stores throughout Europe. Kamprad sought to sell affordable, quality furniture to mass-market consumers around the world. He believed his company would succeed if it operated according to a particular set of values: “Our enthusiasm, our constant will to renew, on our cost consciousness, on our willingness to assume responsibility and to help, on our humbleness before the task, and on the simplicity of our behavior.” By 2013, the company had grown to earn €3.3 billion in net income on €28.5 billion in salesa (see Exhibit 1 for IKEA Group’s financial performance in 2010-2013).
IKEA Group
Organizational structure In 2013, IKEA Group employed 135,000 people, of whom 75% worked in retail and 70% were in Europe. IKEA Group was organized into three operating units (see Exhibit 2 for IKEA Group’s organization chart). Range and Supply was responsible for all new product design and development, and for supply chain management. Production operated and managed several company-owned furniture and particleboard factories that produced roughly 15% of the furniture sold at IKEA stores. Retail and Expansion managed the company’s owned and operated IKEA stores. IKEA Group franchised the IKEA retail system from Inter IKEA Systems B.V., which was the owner of the IKEA concept and was the worldwide IKEA franchisor.
Stores There were 345 IKEA stores in 42 countries by the end of 2013, most of which were located at the outskirts of large cities. IKEA Group owned and operated 303 IKEA stores and franchised the remaining 42 stores. IKEA Group store sales were predominately in Europe (69%), followed by Asia and Australia (16%), North America (8%), and Russia (7%) (see Exhibit 3 for the geographic distribution of IKEA Group stores). IKEA Group stores averaged 28,700 square meters (309,000 square feet) and €85 million in annual sales. The largest store, in Shanghai, was twice the average size. IKEA stores were designed to maximize customer time in the store, with a meandering pathway laying out a designated route to guide customers through all departments. The store layouts had been described as “effectively IKEA’s catalogue in physical form, with furniture placed in different settings, which is meant to show you how adaptable it is.”2
Home furnishing market Home furnishing was IKEA Group’s main market. The €331 billion global home furnishing market was highly fragmented, with the top five companies accounting for less than 8% of sales value in 2011. The market was characterized by a large number of category specialists with limited geographic scope. As a whole, IKEA stores were the world leader in the home furnishing market, capturing 4.9% of the global home furnishings market in 2011, and faced no comparable global competitor. The world’s second-largest furniture retailer was Ashley Furniture Inc., whose €4 billion sales spanned just three countries (the U.S., Canada, and Mexico), constituting a 1.2% share of the global furniture market. Sealy, the world’s third-largest furniture retailer, recorded sales of €1.7 billion, mainly in North America and Europe, achieving a 0.5% share of the global furniture market.3
Products The company’s Scandinavian roots were key to the IKEA brand identity and was manifest in its product designs and Swedish product names (see Exhibit 4 for a sampling of IKEA Group furniture). IKEA produced a range of 9,500 products that spanned home furnishing, indoor furniture, home improvement, housewares, and gardening supplies. Roughly 60% of its sales were in furniture (of which 80% was indoor furniture4) and 40% in non-furniture items in 2011. Much of the company’s furniture was designed and sold in unassembled flat packaging, which the company introduced in 1953 to help keep costs and prices low by minimizing transportation costs and transferring assembly costs to customers. The company had retained Kamprad’s founding principles of maintaining very low prices without compromising on functionality or technical quality. For example, its LACK coffee table was priced at less than €10, “cheaper than the coffee itself,” as one IKEA designer joked. IKEA’s continuous efforts to reduce costs had enabled it to reduce prices every year since 2000. On the revenue side, the company had experienced a compound annual growth rate (CAGR) of 5% between 2010 and 2013.
Supply chain IKEA Group managed 1,046 home furnishing suppliers in 52 countries. Nearly 60% of production, including third-party suppliers and wholly owned suppliers, took place in Europe, followed by Asia and Australia (33%), North America (3%), Russia (3%), and South America (1%).
While it relied heavily on third-party manufacturers, the IKEA Group furniture and particleboard factories manufactured 25% of its own particleboard and nearly 15% of its furniture (representing 27% of its total volume of sourced wood). IKEA Group had already invested €550 million in 2013 to expand its own board manufacturing capacity by 66%, increasing the number of plants from two to six. The company also owned and operated 38 furniture manufacturing plants worldwide by the end of 2013 Achieving a Sustainable Wood Supply Chain: Next Steps
As CSO, Howard was proud of the progress being made on implementing the People & Planet Positive strategy and the integration of sustainability concerns into core business decisions. This was certainly true with the company’s sustainable wood initiatives, which spanned its design, procurement, and supply chain functions. But Howard wanted to construct a framework for how these interrelated tactics might be integrated into a coherent strategy.
IKEA’s managers faced a substantial challenge as they attempted to decide how to meet the goals laid out in the company’s ambitious sustainability plan. Among the four potential options described below, it was unclear which was preferable in terms of risks, profits, and growth. What were the tradeoffs, and what were the potential synergies among them?
Option 1: Owning More Forests
Per Berggren, IKEA Group Industrial Strategy Manager, noted, “We could possibly replicate what we do in Russia and Slovakia and lease more forest land.” This would have IKEA Group employees directly managing timberland and being responsible for ensuring that it was managed according to its More Sustainable Source terms. Currently, IKEA Group could not tell customers what forest a particular piece of wood in a product came from, and directly managing forest land could improve IKEA Group’s ability to trace wood from the forest to the end consumer.
By 2013, IKEA Group was sourcing 20% of its wood from leased forests in Russia. Hildeman explained, “In Russia there is limited regulatory oversight of illegal logging and low protection of high conservation value. Integrating vertically can considerably strengthen the control of the origin and the sustainability aspects of the wood. What’s more, Russian forestry legislation mandates clear-cutting, which means uniformly cutting all trees in an entire square of forest, which is contrary to sustainable forestry practices.” He added, “In Russia, there are also a lot of small-scale sawmills, so wood availability, quality, and prices can fluctuate a lot. In these conditions, it makes sense to vertically integrate our supply chain.” He therefore wondered if IKEA Group could increase its share of wood sourced from direct timber management in the coming years, maybe up to 80%.
Vertically integrating the supply chain could also help IKEA Group secure access to more FSC-certified wood in the future. IKEA Group had started in 2012 to import wood from Russia into China to overcome the wood shortage in China. IKEA Group contracted with an exclusive supplier, a Russian and Chinese joint-venture firm that built the entire supply chain to meet IKEA Group’s specifications. The advantage for IKEA Group was twofold. First, it allowed the company to diversify procurements away from China’s costly wood market for the logging of birch and pine, which, together represented 60% of the wood used by IKEA Group in the country. As a result, 25% of the wood sourced in Russia was used in furniture sold in China. Second, it allowed IKEA Group to closely monitor every step of the supply of wood from Russia to China. IKEA Group China’s Forestry Manager, Mikhael Tarasov, commented, “Backward integration allows IKEA Group to control the entire supply chain and push for a sustainable change.”
While there were many advantages to owning or leasing more timber forests, there were some downsides too. To manage more forest land, IKEA Group would need to deploy more capital to cover the high fixed costs of lease holds. It would also divert management attention to leasing and managing timberland, which would require developing forestry planning. Berggren explained, “Managing a forest in essence makes you a wood trader, which means you need to sell most of the wood you produce, including residual material that can be hard to sell.” Furthermore, reaping the benefits of sustainably managing forest lands could be uncertain because the forest rotation period—the time it takes the forest to grow again after being harvested—could exceed the lease term.
Conclusion
The wood supply chain was just one of many strategic dimensions that IKEA Group would have to address in going forward with its ambitious growth plan to double sales to €50 billion by 2020. Howard believed that IKEA Group would continue to refer to the multifaceted People & Planet Positive strategy (see Exhibit 6) over the next few years, using it to help guide the business and each department’s
business strategy. Wood sourcing nevertheless constituted a key lever that IKEA Group could use to increase its positive impact on sustainability. Worldwide consumers and employees throughout the entire IKEA Group organization would therefore look to how the company would develop a transformative wood sustainability strategy, especially with respect to the company’s aggressive growth plan in emerging markets.

1) Please give a brief overview of your case!
2) 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?
3) How do you feel about the progress IKEA Group has made implementing this plan?
4) How does IKEA’s sustainability strategy align with its business model? What are the overlaps? What are the conflicts?
5) Which option(s) should IKEA Group pursue to address IKEA’s Wood Supply Chain sustainability? Which has the highest leverage for IKEA?

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