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IKEA’s business and operating models

“For us, good design is the right combination of form, function, quality, sustainability
and a low price. We call it ‘democratic design’, because we believe good home
furnishing is for everyone. It’s why we’re constantly exploring smarter, thriftier ways
to do things.” – IKEA Website

With revenue of over 29 billion euros in 2014, 315 stores in 27 countries, 9,500 product
types, and 147,000 employees, IKEA Group is one of Sweden’s best-known companies.
IKEA designs, manufactures, and supplies quality furniture at low prices to make it
accessible to the majority of people. IKEA’s furniture products are designed to be sleek
and minimalist, and manufactured to be easy to assemble and maintain.

IKEA is a great example of a company that effectively aligns it business model and
operating model. In order to deliver on its customer promise of providing quality
furniture at affordable prices, IKEA relies on its value chain to optimize its production
and overhead costs, as exemplified below:

Product design process:


In order to reach the shop floor, a product must meet four criteria: affordability,
sustainability, good design, and functionality. Interestingly, the design-planning of any
product starts by first setting a price at which a product will be sold. As part of that,
designers have to select which design elements, raw materials, and production techniques
to use in order to reduce production costs. Furthermore, the designers often work on the
factory floor, directly interacting with the manufacturing team in order to understand the

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capabilities and constraints of the manufacturing department, thereby streamlining the
design process and minimizing the cost of the prototyping phase.
In addition to that, IKEA standardizes the production processes by using a limited
selection of raw materials across the product ranges and it uses the same base design for
different products (example: the chairs from the PELLO series have the same base design
as chairs from the POÄNG chairs). This level of standardization results in lower rates of
defect and scrap, therefore less waste and cost.

Production & Distribution:


IKEA has over 50,000 SKUs; in order to relieve the challenge of product variability,
IKEA relies on extensive forecasting, and usually planning production five years in
advance. Similar to Toyota’s Heijunka practice, IKEA relies on long-term planning to
evenly balance production volumes across its network of more than 1,000 third-party
manufacturers. As we learned in the TOM course, spreading out production demand
allows for suppliers to have a uniform cycle time which ultimately leads to lower
production costs per unit. Furthermore, with the help of an Advanced Planning and
Scheduling software, IKEA allocates production to suppliers based on each supplier’s
production capacity and raw material availabilities.
After productions, the products are transported to a network of 47 IKEA-owned, highly-
automated distribution centers located in 17 countries. In order to optimize on
warehousing and transportation requirements, the finished products are tightly packed
into flat packages. This type of packages makes the finished goods easy to transport
(leading to decreased transportation costs) and easy to store (leading to decreased
warehousing costs).

Retail:
After customers browse the shop floor and select the items to purchase, they head to the
store’s warehouse to retrieve the packages themselves. Because the customers are
responsible for picking up their packages, IKEA does not have to hire labor that would
otherwise assume such a responsibility. This helps drive down IKEA’s labor cost.
Consumers play another role in IKEA’s low-cost strategy. Because the customers are
responsible for transporting the furniture out of the store and assembling it, IKEA further
saves on labor, shipping and overhead costs associated with furniture assembly and
delivery.

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Overall, IKEA effectively manages several key elements of its value chain from design-
process to its retail stores, and it has access to customer’s demand patterns. With this
information flow and control from one end of the supply to the other, IKEA is able to
smoothen the bullwhip effect that other firms typically experience. This in turn helps
IKEA drive operational efficiencies throughout the supply chain, resulting in reduced
costs and lead times. Given IKEA’s strong financial performance with profit margins of
over 11%, it is believed that that IKEA’s business and operating models are strongly
aligned with one another.

Can Ikea’s Business Model Translate to Global Sustainability?

IKEA’s $1.13 billion commitment to renewable energy and climate change relief
makes it an unexpected environmental leader. The company hopes it can leverage its
size and efficiency to become a global driver of sustainability, offsetting its huge
consumption of resources.

I love Ikea. You love Ikea. We all love Ikea. The funny names, the Billy bookshelf,
the lingonberry soda. But any environmentalist will admit that nagging feeling when
you walk into one of its 300,000 square-foot stores. Or after you’ve cobbled together
one of their pressboard masterpieces, with the suspicion that it might not survive the
move to the next apartment.

If you ever wonder just how much of this stuff Ikea is cranking out, it’s about 1
percent of the world’s commercially logged wood.

During most of its rapid growth, Ikea developed a reputation for making stylish,
affordable furniture that is practically disposable. But now, as it expands globally,
it’s hoping to change that reputation and become a worldwide juggernaut in pushing
forward clean energy and fighting climate change.

The retailer’s recently announced environmental commitment has a few components.


First, it’s going to invest 600 million euros on wind and solar power. That’s on top of
the 1.5 billion it has invested since 2009. Then the company’s foundation will invest

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400 million euros to combat the impact of climate change in vulnerable nations. It’s
also planning to plant as many trees as it chops down by 2020. This all follows
sustainability efforts to phase out non-LED bulbs, use more recyled materials, etc.

There are a couple of aspects that are particularly interesting about this plan, aside
from the incredible size of the investment (greater than some countries).

For one, the global relief component is pretty unique for a corporate environment
program. Most big companies tend to connect their sustainability programs with a
very local, or a CYA sort of approach (my words, not theirs). Basically saying, "We
have X impact on the environment, we’re working to reduce that." It’s also not that
common to see monster companies taking climate change head on quite this way
(aside from Apple). Ikea is explicitly saying that climate change is here, we need to
stop it and help poor countries cope.

This is interesting, as it runs parallel with Ikea’s massive global expansion efforts,
outlined in detail recently in Fortune. The company has been building stores around
the world, carefully and deliberately working to become the affordable retailer for the
world’s growing middle class. This is especially relevant is it expands into India and
China, whose populations are increasingly able to buy a Malm or a Gullholmen.

Ikea wants to provide the modernizing world with nice, cheap stuff, and it really
doesn’t want to be seen as the planet’s Walmart, plunking down big box stores
everywhere and perpetuating mass consumerism. (That sentiment of environmental
responsibility is actually increasingly common among Europe's corporate giants for a
number of reasons, as more of them seem to be outpacing their nations on the
environment front.)

Of course, there's a big public relations element of to this, although Ikea swears that's
secondary. Walmart and Target have tried to bring their big-box approach abroad and
results have been hit and miss. Ikea is very conscious of how it's perceived by the
countries it expands into (it learned a lesson from a notoriously clumsy first effort at
moving to the U.S.). The company famously ran marketing in the '90s that celebrated
throwing things away, with its “Chuck Out Your Chintz” ad campaign, and now it
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desperately wants to chuck out that branding. The company has an internal goal to be
perceived by 70 percent of its customers as "taking social and environmental
responsibility," whereas last year, that number was just 41 percent.

As the company grows and simultaneously becomes an environmental player, it will


be interesting to watch whether its business model can be leveraged to move the
needle on sustainability and clean energy.

Ikea thrives entirely on economies of scale. Huge stores cranking out the same
modular products over and over, cheaply. The bigger it gets (sales are up 31 percent
in the past five years), the more costs drop. That size might seem incompatible with
environmental responsibility, but in some ways it's an advantage.

For example, if Ikea invests so much in renewable energy, maybe it can bump up the
critical mass it takes to drive down wind and solar prices for everyone else. Or, as
they are demonstrating with the $1.13 billion, as it grows and lowers overhead, it can
return that growing savings/profits into investments to offset its massive footprint.

But is it really enough to keep up with all that pressboard? Ikea, of all companies,
finds itself at the center of this huge question of how a global middle class can grow,
and consumption along with it, in a way that doesn't devour the planet.

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