IKEA Growth and Sustainability - Essay Example

?IKEA Growth and Sustainability Table of Contents Chapter Introduction 3 Chapter 2 - of the issue 6 Chapter 3 – Analysis using all four frames 8 3.1 Structural Analysis focusing on control 8 3.2 Human Resource Analysis focusing on commitment 11 3.3 Political Analysis revealing the “influence” aspects of the organisation 13 3.4 Symbolic Analysis concentrating on the organisation’s cultural patterns and its problems of legitimisation 14 Chapter 4 – Conclusion and Recommendations 18 Bibliography 20 Chapter 1 – Introduction Ikea is a privately owned enterprise which engages in the design, production, and retail distribution of home furniture and other products useful for the home. It is the world’s largest and best known distributor of low-priced furniture and housewares. The company’s founder, Ingvar Kamprad, was a resourceful youth who began his business at the age of 17. He opened the chain’s first store in Almhult, Sweden in 1953. Located in the Smaland region, one of the poorest regions in the country where the young Kamprad developed his characteristic Spartan work ethic and austere management style typical of the province. The company is intimately infused with the personality of Kamprad; the very name is derived from the initials of his name (I and K), and the first letter of the farm Elmtaryd and the village Agunnaryd where Kamprad was raised (IKEA website, 2011). Ikea’s products are characterised by self-assembly, which means that the customer purchases the product components with instruction on how it is to be assembled. The broken-down product is sold in flat packs that save on space and are easy to transport in the customer’s van or car, without the need for delivery service. The core strategy of the company is the creation of furniture of high value in terms of workmanship and aesthetics, at the lowest possible cost to the customer. Its overriding philosophy remains unchanged from Kamprad’s initial vision, that people of all walks of life are entitled to affordable and beautiful furniture. The company constantly explores emerging efficiencies in its value chain, allowing it to realize an average 2-3% reduction in its prices for each year over the last 10 years (Thomas White Global Investing, 2011). The company’s growth from the time it was established has been consistent and steady. Annual turnover has risen from the equivalent of about 1 million euro in 1954 to 13.6 billion in 2004 (see diagram below). Even through the recent economic recession from 2007 to the present, the group’s sales turnover improved from 17.7 billion euros in 2006 to 23.8 billion euros in 2010, with a yearly positive increment. Visitors to Ikea stores through the years have increased from a mere 50,000 in 1954 to 401 million in 2004, to a recent 699 million in 2010, again with constant positive year-on-year growth. The growth in visitors is driven by a continuous growth in the number of Ikea stores worldwide. In 1954 there was the lone Ikea store opened by Kamprad, and by 2004 the total stores numbered 201. Ikea store continued opening while others were closing, from 237 in 2006 to 316 in 2010 (Ikea Website, 2011). Ikea turnover history. (Source: Boscor & Bratucu, 2009:55) Concerning its sustainability, Ikea has adopted several initiatives which promise to enhance the company’s operations to a level of minimal waste and maximum productivity. According to green design advocate Inhabitat (2011), Ikea has committed to use 100% renewable energy, banned the sale of incandescent bulbs, and promises to use only sustainable cotton. The company has also been reported to install charging stations for electric vehicles at its US stores, and in Sweden it has built a company-owned wind farm to power 17 of its stores. Undoubtedly, the company’s growth and sustainability are synergistically intertwined, such that one cannot prosper without the other. This study shall thus analyse the drivers of growth and sustainability of the Ikea Group using Bolman and Deal’s four frames model. Chapter 2 - Description of the issue The company had its history of controversial issues, each of which is capable of posing a serious threat to any company’s public image and continued growth and sustainability. In 1999, small retailers protested against the seeming favors granted by the government to big businesses (particularly Ikea) whose superstores crowded them out of whatever available commercial space was available in the city and forcing their relocation to an industrial park (Philippidis, 1999:1). Aside from the fact that the eviction has been pursued under the state’s power of eminent domain, Ikea had likewise been granted a 10-year property tax abatement for the acquired property, where the chain would be assessed real property tax at lower-than-full-value basis for a period of ten years (Philippidis, 1999:25). Another issue levelled against Ikea is the culpability for “the collapse of British manufacturing” (Cabinet Maker, 2003:4). There is, however, no tangible proof to this assertion, which may merely be sour-graping by competitors in the face of Ikea’s phenomenal success. Additionally, Ikea is being blamed for congestion problems surrounding the sites of its superstores. The crowd-drawing success of its stores had created problems for parking and traffic congestion with which the inconvenienced motoring public (and customers, for that matter) have taken issue. Because of this tendency to attract large groups of shoppers, Ikea stores located in urban centers are drawing the ire of residents nearby who tend to resist moves of the company to establish stores in their areas. The government, on the other hand, is torn between giving in to residents’ demands to prevent Ikea’s entry into their communities on the one hand, and the possibility that the opening of an Ikea store would mean the creation of at least 300 new jobs on the average, and increased revenues for the locality (Cabinet Maker, 2003:4). More recently, consumer groups have severely criticized the manner in which Ikea lays out its superstores, insinuating that the layout was intentionally designed to confuse and disorient customers, such that they are psychologically enticed to purchase more than they originally planned and causing them to impulsively overspend. Ikea stores are designed such that customers who enter have to follow a set path through what is the physical equivalent of their entire catalogue, where the furniture pieces are displayed in different settings to show off their adaptability. The customer is bombarded with these imagery without recourse to going directly to their intended purchase, and the effect is that they are so overwhelmed by the product’s presentation and low price that they end up including it among their purchases. After the furniture, the customers find themselves in the housewares are that offer such items as light bulbs, cheap casseroles, and other bargain items laid out in a confusing display. According to detractors, the trick is to bring the customers to believe that they would not be able to navigate back to a particular item, when it has finally been decided upon, because of the difficult in locating it again. The customers end up taking the item and putting it in the trolley before they have had a chance to think about it (Bloxham, 2011). These issues individually could be addressed, as many of them have been, by measures the company could take by way of public disclosure concerning government dealings, coordination with local authorities on the traffic situation, and adjustments in store operations to enhance consumer experience and eliminate inconveniences. The overall problem does not lie in these, however, but probable systemic faults and weaknesses that may underlie the firm’s operations. If Ikea growth and sustainability is to be maintained, its particular strengths should be identified and supported, and its weaknesses addressed and eliminated. Chapter 3 – Analysis using all four frames This chapter provides an analysis of Ikea by means of the four frames model devised by Bolan and Deal. These are the structural, human resources, political and symbolic frames. 3.1 Structural Analysis focusing on control Ikea group’s organizational structure follows, showing the interrelated holdings of various companies that attend to the different aspects of Ikea’s operations. The basic functions of franchising, manufacturing and distribution are discharged by different companies in the group. The parent holding company is a Dutch trust controlled by the Kamprad family. The group remains privately held, since Ingvar felt going public would slow the decision-making process. Source: IKEA Group Yearly Summary FY09 & FY10, p. 11 The legal personality of the firm is a web of cross-border corporate ownerships. The parent company which manages the group is INGKA Holdings BV, a Danish corporation; the group includes Swedwood, the industrial firm which manufactures Ikea furniture. In turn, INGKA Holding BV is wholly owned by Stichting INGKA Foundation, which is actually based in the Netherlands The Foundation was established by Ikea founder Ingvar Kamprad, . With its headquarters located in Helsingborg, Sweden, the group’s operations span Europe, North America, the Asia-Pacific, Middle East, and the Caribbean. It employed approximately 118,000 workers and registered an annual growth of 14.5% as of the end of fiscal year 2007 (Datamonitor, 2007). The internal organizational chart of Ikea Sweden is given in the following diagram: Organizational Chart of Ikea Sweden. Source: Klevas (2005) Immediately discernible in the graphical depiction of the corporate structure of Ikea is the complete absence of the upright pyramid structure of the typical business organization. The usual organizational chart stressed the top-down control structure with the top management issuing orders, middle management transmitting them and lower levels enforcing and actualizing them. In the above structure a matrix-type organization is depicted, where the business areas intersect with the competence functions to create a cross-sectional approach to the various products and services. The teams thus formed are more empowered and are better able to address the specifics of their particular functions without the abandonment of the necessary control measures. The Changing Organizational Structure of Ikea Sweden, its advantages & disadvantages. Source: Klevas (2005) The organizational structure of Ikea underwent an evolution through time. For each change or adjustment to the structure, the company’s management brought the organization to a configuration that was more responsive to the changing times. Transformation also addresses past inefficiencies and enables the company to better respond to challenges that have materialized that were not there before. Another indication of the structure of the organization is reflected in the manner the store is structured. According to the Guardian (2 June 2000), order, classification and progress are conveyed in the highly organized flat packs containing bookcases, shelving systems, and other furniture assembly sets which each have a place in a limited storage area containing thousands of products. Clocks are everywhere in an Ikea store, drawing attention to the importance of time. 3.2 Human Resource Analysis focusing on commitment Ikea acknowledges its committed workforce as the principal driving force behind its continued success. The human resources framework in Ikea is one that supports its flat matrix type organization. People work more effectively in teams particularly in the conceptualization and design of products which are supposed to be attractive, easily assembled, and inexpensive. The Ikea principle of serving the common people extends to its treatment of co-workers with a common-sense approach to people. At Ikea, making mistakes is acceptable and considered a healthy opportunity to learn and improve. Another characteristic of work at Ikea is the variety of jobs open to co-workers, and company policy on this is to encourage co-workers to diversify and enrich their jobs and try something else new when the former job ceases to be challenging. Family life is given emphasis among co-workers, as part of the firm’s ‘life balance’ approach (ICMR, 2005). Ikea also is an equal opportunity employer, espousing diversity in its recruitment practices regardless race, creed, ethnicity, gender, age, sexual orientation, and physical disability for as long as the employee is competent and capable to accomplish the job. One of the most important values espoused in the company culture is the community spirit and the discouragement of ego-feeding practices. There are no big fancy titles, private jets or corner offices with scenic views. Camaraderie and team spirit at emphasized. Ingvar Kamprad sets the example for his workers even in his personal life. For instance, he drives himself around in a two-year-old Volvo, and opts to grocery shop in the afternoon because prices were discounted at that time; he urges Ikea employees to write on both sides of the paper, and even on his personal journeys prefers to fly economy class. Kamprad is extremely private, but he is known to be an egalitarian and avid promoter of “going-green”. He has an affinity for the little people in his employ, treating each of his employees respectfully and addressing them as his “co-workers” long before other companies adopted the practice of referring to their employees as colleagues. He has never borrowed money or issued a single share of stock; he has also never lost sight of his humble beginnings as a youth in the depression years in Agunnaryd (Thomas White Global Investing, 2011). This outlook translates to Ikea’s human resources programs and policies, although the multinational workforce of the company presents special challenges in the application. The company shows its concern for its co-workers by going the extra mile and providing the personal touch. For instance, in 2006 Ikea handed out folding bicycles as Christmas presents to all of its 9,000 staff in the UK, as a sustainable travel alternative. As a result of such attention and concern, the company is able to create an atmosphere that engages co-workers develop a sense of equity in the company, which reflects in their work. 3.3 Political Analysis revealing the “influence” aspects of the organisation Ikea’s political frame is defined by the power structure conveyed to it by its network of relationships. These relationships and network are in turn “pivotal in fostering development of IKEA’s products and technologies, and in sustaining efficiency in its daily operations” (Strategy in Industrial Networks, 2007:4). Ikea’s power structure extends beyond its internal organization into its external value chain and distribution network to relate to suppliers, sub-suppliers and logistics partners. This is depicted in the following diagram. Source: Strategy in Industrial Networks: Experiences from IKEA At Ikea, power relations are diffuse and power distance is low, one of the effects of the absence of titles and designations to distinguish company officials from the other workers. The company’s flat organization and matrix structure enables it to make use of interaction mechanisms that do not typically characterize hierarchical organization. Teamwork and collaboration are more relied upon than the chain of command, and empowerment of each individual brings with it a commensurate accountability for the work to be done. Ikea’s strategy is to view the long-term goals of the company, and foster mutual trust and commitment within and outside the organization through interaction mechanisms other than the use of power. It is common for Ikea to avoid abusing its power position with regard to its network. The company’s management avoids exerting unilateral control over its networks, and instead emphasizes the mutual benefits that may be explored between them. One of the major determinants of Ikea’s power relationships in its network is, understandably, the size of the entity involved. Small suppliers and sub-suppliers are particularly vulnerable to any power plays, which may likewise redound to the disadvantage of the big companies relying on their participation. Ikea is aware that its success is connected with the health and growth of its suppliers and sub-suppliers, and even while Ikea is keen on exerting its power to keep prices down, it nevertheless uses this same power to induce its suppliers to upgrade their operations and technologies that benefit both them and Ikea. This principle of mutuality is “the hallmark of all IKEA’s business relationships, even of those where IKEA could exploit a power position due to the overdependence of a supplier” (Strategy in Industrial Networks, 2007:6). 3.4 Symbolic Analysis concentrating on the organisation’s cultural patterns and its problems of legitimisation In 1970, Ingvar Kamprad wrote “A Furniture Dealer’s Testament” which stood as his message to his “co-workers” (i.e., employees). The Testament is replete with musings of the company founder that have found their way to the present as the core company philosophy. The Testament by Kamprad is appendixed to “The Ikea Story” by Bertill Torekull, the authorised history of the company. The following are some such sayings appearing therein: “We have decided once and for all to side with the many.” (This is the phrase with which it opens.) “Happiness is not reaching your goal. Happiness is being on the way.” “By always asking why we are doing this or that, we can find new paths.” “Part of creating a better everyday life for the many consists of breaking free from status and convention – becoming freer as human beings.” “What we want to do, we can do and will do together. A glorious future!” “We do not need fancy cars, posh titles, tailor-made uniforms or other status symbols. We rely on our own strength and our own will!” Aside from the Testament, there is also the Little Word Book, another literature authored by Kamprad which encapsulates the Ikea philosophy in key words: humility, strength of will, simplicity, cost awareness, fellowship. Torekull described this as “a kind of catechism; its explanations are in the spirit of Martin Luther’s teachings to the faithful” (The Guardian, 2000). A clear symbol of how the company sees itself is evident in its “Tattooman” advertisement where a character called the Tattooman appears like Moses with two flat-packs as tablets, on which are symbolically written strength, joy and achievement. In the ad a co-worker suggests to forego self-assembly to save the customer the added effort. The co-worker is immediately reprimanded, and stresses the lesson that “sweat is honest, work represents integrity, and it is good that Ikea customers are given a chance to sweat, too” (The Guardian, 2000). Clearly, these symbolisms evoke religious or ideological overtones, underscoring the fact that the Ikea philosophy is regarded as more than mere company motto or slogan. Detractors of Ikea go so far as to say that Kamprad’s Testament is similar to Maoist propaganda and teachings and argue that it supports the accusation of a dictatorial management style in the company. Supporters explain that more than a mere workplace, Ikea is a way of life, and the Testament and other values espoused by the company seek to engage its co-workers in the spirit and principles that guide the company’s business. Symbolism has also been made to work against Ikea. For some time, the image of Ikea came under fire because accusations of tyranny, racism and sexism were levelled against Kamprad whose persona is so entangled with the spirit and workings of Ikea. The vehicle of this campaign was the book by Johan Stenebo entitled Sanningen om Ikea (i.e., “The Truth About Ikea”). On its cover, Stenebo portrayed the Ikea logo, the blue and yellow symbol of the company that triggers sight recall with countless consumers, as reflected in “Terminator-style sunglasses” (Nelson, 2009) in a manner dark and foreboding. In its pages, Stenebo exposes in detail the secret business decisions portrayed as sinister and unethical by founder Kamprad, now in his eighties. Stenebo is a former managing director of Ikea; he wrote that “devious methods resembling those used by East German secret police, the Stasi” (Nelson, 2009) were employed. More than the management style, Stenebo intimated that in the interest of driving costs down, Ikea’s materials (e.g., the Chinese wood for its furniture) were supplied from suspicious sources of unverifiable legitimacy. Moreover, since all Ikea executives came from the same city in Sweden, they formed a close and racist clique, and that many of them were likewise sexist. Many of the personal allusions to Kamprad are arguably irrelevant to the company’s reputation, but Stenebo’s claims have a bearing on the perception of governance and ethical business decisions in Ikea. These include the accusation that workers are subjected to dictatorial practices, that races and sexes are discriminated upon, and that the company obtains some of its supplies from ethically and legally questionable sources in the interest of cutting costs. Ikea’s sustainability report shows no such indications of these claims, particularly the organizational chart that shows a matrix-type structure. Such a structure belies dictatorial control, and the absence of titles and interim positions of authority negate the idea of power centralization. Exception to this is the fact that as born by the ownership structure shown in the discussion on Ikea’s structural frame, the Kamprad family holds tight control over the group by avoiding going public and using the benefits of the Dutch trust as holding company. There is nothing illegal or unethical about such a set-up, however, as a private corporation is free to discharge its business within the discretions allowed it by the law. If anything, it shows Kamprad’s competent business sense. Chapter 4 – Conclusion and Recommendations Ikea is one of a few, highly successful business undertakings the core strategy of which is relevant in whatever phase of the economic cycle the industry is in. The key tenets of low cost, high quality, design simplicity and customer involvement keep Ikea stores and products strong performers in the furniture and housewares market, even when other industry players are faltering. The consistency of Ikea’s success may be attributable to several factors. The structural analysis of Ikea shows that the firm does not follow the traditional hierarchical (upright pyramid) structure. Instead, it is fashioned after the matrix model where teams are formed combining competencies targeted at specific business areas. This set-up influences the political frame of the organization, where the top-down control model is rendered unnecessary and instead, empowerment, trust and confidence are reposed upon the front-line co-workers. This sort of job enhancement engages the company’s human resource, resulting in a committed and motivated workforce. The firm’s guiding philosophy, articulated by company founder Ingvar Kamprad, finds a symbol in the common working man (“Tattooman”), who stands for humility, strength of will, simplicity, cost awareness, thrift, and fellowship. The four frames model by Bolman and Deal reveal factors that bear upon the firm’s prospects for continued growth and sustainability. But as research unearthed the good points, it also highlighted negative aspects relating to the public perception of the company. The irrelevant accusations aside, Ikea’s idiosyncratic image may eventually turn out to be to its most serious disadvantage if the distortionary publicity is not kept in check. Ikea has the unfortunate position of being highly successful in a business hard hit by hard times because its strategy of simplicity and frugality is appropriate to it. Competitors and activist consumer groups are bound to highlight its faults and weaknesses, whether real or perceived. As a consequence of the foregoing, this study recommends that: (1) The company consider a more flexible store arrangement that allow for greater customer mobility within the store; ease of product access should likewise support this direction. (2) Greater transparency be adopted in the firm’s dealings with the government on matters of location designation, tax privileges, and similar matters. (3) Where possible, new stores be located in areas yet unoccupied by existing businesses, as Ikea has sufficient drawing power to attract customers even to slightly more out-of-the-way locations. (4) Ikea publicly disclose its suppliers and sources of materials; while private corporations are not committed to public disclosures, the public is owed the opportunity to know that their purchases do not support unethical or environmentally unsustainable sources. (5) Ikea make an effort to address the idiosyncracies it is erroneously attributed, and show that its values and philosophy are consistent with those actually held by a wide segment of the population. Bibliography Barnett, D 1999 “Wind of change.” Cabinet Maker, 01/08/99, Issue 5120, p10 Bentley, R 2007 “Logical Location.” Estates Gazette, 3/10/2007, Issue 710, p156-157 Bloxham, A 2011 “Ikea layout ‘intended to confuse shoppers’” The Telegraph. 24 January 2011. 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Accessed 5 October 2011 from http://www.guardian.co.uk/g2/story/0,3604,336379,00.html Thomas White Global Investing 2011 Global Players: Ingvar Kamprad, Founder and Senior Advisor, IKEA. Sept. 20, 2011. Accessed 5 October 2011 from http://www.thomaswhite.com/explore-the-world/global-players/ingvar-kamprad.aspx Read More