Case 2: IKEA SustainabilityCase

Company History

What is sustainability?

Sustainability is a balancing act. The United Nation’s 1987 Report of the World Commission on Environment and Development: Our Common Future noted that sustainable development meets the needs of the present without compromising the well-being of future generations.

In this case, IKEA launched “People & Planet Positive” in order to achieve sustainable development. It invested a great deal of time to improve the sustainability of wood procurement practices. In 2000, IKEA Group developed its code of conduct—the IKEA Way on Purchasing Products, Materials and Services (IWAY)—to specify minimum acceptable standards for working conditions and environmental protection at its manufacturing suppliers.

What is “People & Planet Positive”?

“People & Planet Positive” is a sustainability strategy that released by IKEA in late 2012. The objective is using sustainability to drive innovation and transform its business operation. It can strengthen IKEA’s competitive power by securing raw material, maintain and develop supplier base, deepen relationships with co-worker and customer and also lead change in society.

 

More sustainable life at home

IKEA committed to inspiring and enabling their customers to live a more sustainable and healthier life at home. More than 1,138 products enable more sustainable way to save water or energy. For example, it covert all traditional incandescent bulbs into LED bulbs in 2015. The LED bulbs can save 85% energy and last up to 20 years. 

 

Energy and resources independent

IKEA applied sustainability at all stages of product design, and use it as a guideline to work with supplier. In an entire operation, all resource and energy will have used as efficiently as possible. For example, IKEA is responsible in sourcing, they achieved the goad that 61% wood and 100% cotton were from sustainable sources.

 

Better life for people and communities

IKEA keen on promoting equality among workplace and society. It believed that everyone should live a better life and have same level of respect. In workplace, for example, the management position was shared a half between male and female. In society, IKEA address human right in several aspects, such as preventing child labor, supporting young worker and provide job opportunities for migrant workers.

Why did IKEA launch the sustainability project?

First, IKEA seek to control the raw material and energy in low cost. Wood is the major raw material for IKEA’s products, but many forests were not adequately protected by local governments. Thus, IKEA needs to protect forests and ensures the long-term wood availability in order to maintain its cost in acceptable level.

 Second, “Sustainable Development” was a hot topic and more people concern with the issue of environmental protection since 1990s. The sustainability project can reduce environmental impact and show that IKEA is willing take social responsibility. It can attract the customer who supports the environmental-friendly products. So, this project is conducive to promote IKEA’s brand image and meet future customer’s needs.

How does IKEA’s sustainability strategy align with its business model?

IKEA’s Business Model

The main business idea in IKEA’s business model is to offer a wide range of home furnishing with good design with high quality and function at prices so low that as many people as possible will be able to afford them.

The above business idea is based on a partnership with the suppliers. First, IKEA starts with their designers working with manufacturers to find smart ways to make furniture using existing production processes. Then IKEA buyers look all over the world for suppliers with the most suitable raw materials. Next, they buy in bulk, on a global scale and when IKEA can get the best deals, the customers can get the lowest price.

Furthermore, 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.

IKEA’s sustainability strategy

In late 2012, IKEA launched a sustainability strategy called “People & Planet Positive” which sets out the way IKEA Group is working to make a positive difference for both people and environment today and tomorrow. The sustainability strategy focuses on three areas that the IKEA group can have most positive impacts.

The first area is to inspire and enable millions of customers to live a more sustainable and healthier life at home. IKEA will take the lead in developing and promoting products and solutions that help customers save and generate energy, reduce and sort waste and use water more efficiently at the lowest possible price.

The second area is to strive for resource and energy independence by securing long-term access to sustainable raw materials, promote recycling, and use resources within the limits of the planet. Moreover, IKEA will produce more renewable energy than they consume and drive energy efficiency throughout IKEA value chain.

The third area is to take a lead in creating a better life for the people and communities impacted by our business by extending IKEA code of conduct throughout their value chain.

Alignment between business model and the strategy

FSC certification ensures that products come from well managed forests that provide environmental, social and economic benefits and mostly is based on the sustainability of those aspects. Using FSC-certified wood can ensure a more sustainable life; and using IWAY standards wood can ensure the wood is not harmful to the customers.

IKEA emphasize that the designers will find smart ways to make furniture using existing production processes. These can ensure that all product can be manufactured by using less resources and energy. Also, by owning more forests in Russia, IKEA can have ability to trace wood from forest to customers and is able to secure more FSC-certified wood with high quality in the future. The bonds between customers and IKEA becomes closer while the reputation of the brand could be maintained.

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

IKEA Group is doing quite well in implementing the plan. When the sustainability strategy was launched in 2012, lots of positive targets had been set. According to the sustainability report for financial year 2016, some of the target has already been met and others are making good progress. For example, IKEA hoped that by August 2017, at least 50% of our wood will come from more sustainable sources and In FY16, 61% of IKEA wood was from more sustainable sources; By August 2015, all cotton used in IKEA products will be sourced from more sustainable sources and in FY16, all cottons used are from more sustainable sources.

However, by my personal observation, the reasons that most customers purchase home furnishing from IKEA are the low price and good design, but not the FSC-certified wood used by them. If IKEA can promote more on this area and arise customers’ awareness on environmental sustainability, it can also help them to fulfil the target that they wish to take the lead in creating a better life for the people and communities.

Give an analysis on each option to address IKEA’s Wood Supply Chain sustainability.

Option 1- owning more forests

Pros	Cons
Improve IKEA Group’s ability to trace wood	Higher capital investment divert management attention to leasing and managing timberland
Stabilize the  price, available wood and quality of wood	Forestry planning development
Help IKEA Group to secure access to more FSC- certified wood diversify procurements away from China’s costly wood market	Uncertain benefits of sustainably managing forest lands – forest rotation period
	To be fully responsible for forest practices
	Different sourcing standard

Option 2-Driving Higher Procurement Targets and Standards

Pros	Cons
To exercise forestry management control	Not enough FSC-certified materials
Clearly committed to sustainability	Long time taken By the end of 2013, only 7% of the world’s forests were FSC-certified, but IKEA Group strived to increase that rate by 2020
Improved forest governance
Responsible forest management
Responsible transparent trade
Improved production efficiency

Option 3-Using More Particleboard

Pros	Cons
The yield from log to lumber is a lot higher for particleboard solid wood	Design and commercial concerns
To reduce the global amount of wood to be used	Consumers perceived solid wood to be worth more than particleboard, particle board could diminish consumers’ willingness to pay
Lighter to transport trucks can be filled up to 30% more efficiently	Limited demand for particleboard in markets like China and India resulting in little or no particle board production capacity that met IKEA’s quality specifications
20% cheaper than a product made of solid wood	Require significant up-front investment in China and India

Option 4-Using More Recycled Wood

Pros	Cons
Recycled wood was cheaper than virgin particleboard in countries (such as France and Germany)	Required heavy investment to adapt its board manufacturing plants to accept recycled wood
	To minimize the cost of collecting recycled wood, only board plants located near urban areas
	The availability of used wood could prove problematic in many regions

Which option(s) may have the highest leverage for IKEA?

It is believed that option 2 & 3 may have the highest leverage for IKEA.

When IKEA adapts option 2, production efficiency can be improved along the wood supply chain. It affects the procurement procedure as ensuring a higher standard of input should be met. Therefore, a higher standard of input will achieve sustainability goal. What is more, the benefits include improved forest governance, responsible forest management, responsible and transparent trade, and improved production efficiency will definitely enhance system efficiency for wood supply chain so as to reduce cost and make more revenue.

Option 2 will affect option 3 since the higher standard of procurement will help sourcing high-quality particle board, the cost will be significantly reduced. As mentioned before, particle board is cheaper than solid wood, because of high availability of particle board compared to solid wood. It is obvious that cost efficiency is one of the key benefits since it is 20% cheaper and lighter to transport.

To conclude, option 2 & 3 can utilize the production efficiency along the supply chain, achieve sustainability goal and cost efficiency at the same time.

How would you assess IKEA Group’s People and Planet Positive sustainability plan?

IKEA Group’s People and Planet Positive sustainability plan is ambitious and far-reaching as the strategy tried to transform all aspects of the company’s value chain. However, we think that the strategy is likely to help the IKEA Group transform its business. The plan is feasible as it creates long term benefit and allowing the IKEA Group continues to grow after a long time.

To accomplish the goals of A more sustainable life at home, Resource and energy independence and A better life for people and communities, the IKEA Group has developed strategic plans and keep tracking of the performance against KPIs every year.

For A more sustainable life at home, the company is taking the lead in developing and promoting products and solutions that enable customers to live a more sustainable life at home. Comparing to financial year of 2013, 58% and 105% increase in sales from products and solutions inspiring and enabling customers to live a more sustainable life at home has been achieved in 2014 and 2015 respectively.

For Resource and energy independence, the company has transformed their way of consuming raw materials and energy. Since 2009, the IKEA Group has invested EUR 1.5 billion into renewable energy. For example, building and operating biomass, wind power and solar power generation equipment, purchase renewable electricityBy 2015, all cotton used in IKEA products will be sourced from more sustainable sources and the company aim to source 100% of wood, paper and cardboard from more sustainable sources by 2020. Today, 71% of IKEA made products are recycleable, made from recycled material, all both the company tries to do so in a sustainable and environmentally responsible manner.

For A better life for people and communities, IKEA Group has set up the code of conduct IWAY for suppliers to follow. IWAY covers working conditions, the prevention of child labor, the environment, responsible forestry management etc. IKEA Group wishes to expand the reach of supplier Code of Conduct by securing 100% IWAY approval. By 2015, 98.9% home furnishing suppliers, 85% retail suppliers are IWAY approved.

Although the People and Planet Positive sustainability plan is ambitious, the recent performance and figures of IKEA Group have demonstrated its abilities to transform the business into sustainable way. Just like what IKEA Group stated in their website, IKEA can be a small, but significant, force in helping to create this more sustainable world.