Analysis of Sustainability at IKEA

Question 1:  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?

 IKEA Group’s People and Planet Positive sustainability plan focuses on three areas: “a more sustainable life at home for consumers, resource and energy independence for the company, and a better life for people and the communities touched by IKEA” (Rangan, Toffelm Dessain & Lenhardt, 2017, p. 4). IKEA has already seen success in each of these areas. Through its 21 million-euro investments in energy efficiency, it has been able to save roughly 40 million euros in the given period (Rangan et al, 2017, p. 4). In addition to the cost savings generated through sustainable sourcing, this indicates the plan’s effectiveness in long-term profitability and commitment to the environment. IKEA has also been improving their relationship with suppliers and workers, ultimately refining their working conditions, which shows their corporate social responsibility. They have also been introducing new subsets of furniture to adapt to the lifestyles of their consumers, which demonstrations their commitment to their consumers (Rangan et al, 2017, p. 4).

Ultimately, IKEA Group’s People and Planet Positive Plan translates to a complete transformation of the company’s value and supply chain, sustainable sourcing, labor conditions improvements, efficiency improvements, profit maximization, etc. This plan will absolutely help the company to transform the business and directly links with the company’s desire to grow. The overall plan is very ambitious, but feasible given the commitment the company has in achieving their goals. IKEA is methodically planning each step through their “22-person corporate Sustainability Group” that works to implement each phase of the People and Planet Positive strategy (Rangan et al, 2017, p. 5). Additionally, combined with the leadership of the Chief Sustainability Officer (a first for the company), the group has involved over “500 people at IKEA Group that are directly accountable” for the implementation of the plan (Rangan et al, 2017, p. 5). This proves the commitment that IKEA has to achieving their goals and it will allow them to be successful by 2020.

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

 While the IKEA Group’s People and Planet Positive sustainability plan may seem ambitious and aggressive, they do appear to be taking positive steps to achieving their goal. Their 21-million-euro investment of LED lighting products have “yielded a cost savings of around 40 million euros” and the company was “a third of the way of their 2020 goal by 2012” (Rangan et al, 2017, p. 4). Additionally, they have developed renewable energy such as wind farms, biomass, and solar panels to assist with meeting their goals. (Rangan et al, 2017, p. 4). They have also been achieving a more sustainable supply chain through the methods in which they source wood. As they are “one of the largest lumber consumers” in their industry, this area presents a huge opportunity to seek sustainable options, (Rangan et al, 2017, p. 5). They have developed a code of conduct that specifies “minimum acceptable standards” where suppliers who do not meet these standards “were phased out” (Rangan et al, 2017, p. 6). Their procurement of FSC-certified wood, recycled wood, and use of particle board (which uses less wood) has steadily increased. IKEA had committed to “reach 50% of wood from more sustainable sources by 2017 and 100% by 2020” and reached “32.4%” in 2013 (Rangan et al, 2017, p. 7). Overall, IKEA is taking very positive steps, particularly in materials and energy, and thus is making good progress in the implementation of their plan.

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

 IKEA’s ultimate business model is to offer high quality products at low prices. The IKEA group announced in 2014 that it was “pursuing an aggressive growth strategy” to “double sales by 2020” (Rangan et al, 2017, p. 1), while simultaneously reducing costs. Increasing their market share of “303 existing stores” and by “opening nearly 200 more stores” was the primary driver to meet their desired growth goal. (Rangan et al, 2017, p. 2). Additionally, IKEA anticipated that they would need to alter from their “conventional approach of designing a common product range for all of its stores” by offering ranges of products to fit needs of particular regions (Rangan et al, 2017, p. 4). This aggressive goal of growth would require a revolution of all of their processes, and thus CSO Steve Howard determined that “sustainability had become integral to IKEA Group’s core business strategy” (Rangan et al, 2017, p. 2).

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 The People & Planet positive strategy “focuses on three areas: a more sustainable life at home for consumers, resource and energy independence for the company, and a better life for people at the communities touched by IKEA” (Rangan et al, 2017, p. 4). Sourcing wood from alternative methods simultaneously meets their goals of sustainability while also keeping true to their business model. Owning more forests would allow IKEA complete control over practices and quality, and sourcing more recycled wood would maximize the use of wood/reduce quantity needed. This makes products “lighter to transport,” which allows for trucks to be “filled up to 30% more efficiently” as well as the fact that “particleboard is about 20% cheaper” (Rangan et al, 2017, p. 10). These alternative wood methods ultimately meet their business model of high quality at low prices.

 A large part of maintaining quality of products is through having checks and balances on the production process. Through their sustainability plan, IKEA developed the “IWAY” that “specifies minimum acceptable standards for working conditions and environmental protection at is manufacturing suppliers” (Rangan et al, 2017, p. 6). As mentioned earlier, suppliers that do not comply with the given set of regulations are not allowed to conduct further business with IKEA. This gives IKEA a lot more control over their processes and ultimately allows them to meet their business model of higher quality.

 The only major point that does not align with their business model is the significant investment that would be required to alter their production of particleboard and recycled wood. Due to “limited demand for particleboard in markets like China or India” there is “little or no particleboard production capacity” that would meet IKEA’s quality specifications (Rangan et al, 2017, p. 10). To increase production capacity, IKEA would need to invest a lot of money upfront. Additionally, to be able to “increase the share of recycled wood, IKEA Group would need to adapt its board manufacturing plants to accept recycled wood, which required heavy investment” (Rangan et al, 2017, p. 10). Even when accepted, “countries like India lack the logistical infrastructure to transport and process used furniture into recycled wood” (Rangan et al, 2017, p. 10). All in all, these sustainability measures would require significant investment upfront, which does not match their goal of profit-maximization. It will, however, have the potential to yield long-term benefits and still should be pursued.

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

 Each of the four options provide IKEA Group with various advantages and disadvantages. Option 1 is for IKEA to own more forest land, which would allow for them to “vertically integrate their supply chain” (Rangan et al, 2017, p. 8). It would also allow them to “secure access to more FSC-certified wood” and ultimately allow for them to “diversify procurements away from China’s costly wood market” (Rangan et al, 2017, p. 8). Ultimately, it would allow them close control of every step of the production process. While these are very beneficial, managing forest land will require a lot of capital. IKEA would also need to develop “forestry planning” due to the requirement of “management attention to leasing and managing timberland” (Rangan et al, 2017, p. 8). It is also risky due to the fact that the “forest rotation period is uncertain and it makes IKEA “directly accountable when problems” arise (Rangram et al, 2017, p. 9).

 The next option is to “drive higher procurement targets and standards” by setting a “target for using more FSC-certified and recycled wood” (Rangram et al, 2017, p. 9).  This option would help IKEA to improve production efficiency, show a commitment to sustainability, and improve control over forest governance. A downside of this would be the time required to facilitate these standards and reliance on suppliers. The third option is to use more particleboard, which ultimately reduces the amount of wood they use. This not only lowers costs (about 20% cheaper), but it also is much lighter to transport and allows for “30% more efficiency” in loading trucks (Rangan et al, 2017, p. 10). In doing research, IKEA group also concluded that it is “technically possible to increase the share of particleboard by 80% by 2022” (Rangan et al, 2017, p. 10). Downsides of this include “significant investment” to “develop particleboard production capacity” in regions such as China and India as well as a potential decrease in consumer’s perception of IKEA wood due to the change in weight. The final option of using more recycled wood is cheaper than particleboard, but would also “require heavy investment” to build “infrastructure to transport and process used furniture” (Rangan et al, 2017, p. 10).

 In looking at the advantages and disadvantages of all four options, it would appear that using more particleboard would provide the greatest leverage and should be pursued by the IKEA Group. As mentioned above, this option will help to save the company material costs as well as improving packing efficiency. With IKEA’s model of lowering the price of materials so that they can lower the cost of the product, (Rangan et al, 2017, p. 3), this aligns with their principles. IKEA will need to adapt its marketing strategy to convince consumers of the quality of the product and sustainability, but consumers will appreciate the lower prices. Additionally, while this option does require initial investment, it ultimately will save money in its ability to reduce the amount of wood required to make their products. The ability to use less wood contributes the most to the idea of sustainability, and ultimately brings the most leverage to IKEA Group.

References

• Rangan, V., Toffel, M., Dessain, V. & Lenhardt, J. (2017) Sustainability at IKEA. Harvard Business School Case 9-515-033.