Value Chain Of The Company

Almost 300 stores in 36 countries, IKEA is one of the world’s largest furniture maker. Ultimate global factory, network of 42 distribution centre, nearly 300 stores, and over 1,000 suppliers, to create a 10,000 item product line.

Introduction

IKEA is one of the known leading brands and one of the world’s largest furniture maker with more than 330 stores in 40 countries with about 154,000 co-workers (IKEA, 2012); having the ultimate global factory with a network of 42 distribution centres. There are nearly 300 stores, and over 1,000 suppliers, to create a 10,000 item product line. The founder of IKEA, Ingvar Kamprad who was born in southern Sweden begin his journey in 1926 developing a business selling matches at the age of five. He then slowly move forward to selling pens and small furniture by making deliveries with his bicycle. He was able to keep his price low.

In 1943, at the age of 17, Kamprad was given a small amount of money from his father, with this money he decides to start IKEA. He began producing furniture in 1948 but IKEA’s first retail-furniture store open in 1958 in Älmhult, Sweden.

In today’s context, IKEA is known as trendy, Scandinavian furniture designs that are sold at affordable price. The IKEA concept is based on offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.

IKEA’s timeline

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IKEA sets it’s vision “To create a better everyday life for the many people.” In order to meet their vision, they have decided to produce well-designed, functional products for households and price them at low cost so as many people can afford to buy the products.

How will IKEA able to sustain good quality product with low prices? At what price that is reasonable to be considered low and affordable? To IKEA, they supply goods and services that is beneficial to the people and the environment. Keeping prices low has also been a secret to IKEA’s success, with the company actually lowering its prices over the past 10 years on average 2-3% (Thomas White International, 2013). This has been evidence that the low prices attracted customer in sustainability.

The value chain of the industry

When a customer goes into IKEA to look for a product, they are looking at a vast range of different products being displayed and seek for quality customer service. However, customers are not aware of the process that the products have to go through.

The value-chain provides a flow of activities that supports the industry’s growth of production and processes. By using Michael Porter’s value-chain analysis, we can breakdown IKEA’s activities in two categories. The primary activities contribute to the physical creation of the product and services while the support activities that add value through assist in relationships between both categories.

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Primary Activities

Activity

Implementation by IKEA

Inbound Logistics

Distribution of products to the stores from 42 distribution centres.

10,000 item product line manufactured by over 1,000 suppliers.

Operations

Operations in 40 countries.

Stores are operated by franchisees.

IKEA does not manufacture its own products.

Outbound Logistics

Preferred method for customer to transport their products themselves.

Marketing & Sales

Targeted at families.

Low prices.

Family-friendly store environment.

Service

Information provided through catalogues and displays.

Self-help service.

Support Activities

Activity

Implementation by IKEA

Firm Infrastructure

Hierarchical organisational structure.

Large scale stores in size.

Human Resource Management

Orientation, trainings and development for staffs.

Technology Development

Research and development activities initiated in Sweden.

Using of different technologies for their development.

Procurement

Maintain relationship with suppliers.

Since IKEA products are based on the low prices, we can use the low cost-leadership strategy as a competitive advantage.

Starting with the primary activities, inbound logistics; IKEA has large shipments and massive warehouse to product their products. Operation runs in various countries. In procurement; IKEA purchases from numerous sources having a strong bargaining power with suppliers. Technological development; learning and experienced amortized over large volume. Human resource management; providing intensive training to emphasise cost savings means and firm infrastructure; having to centralised cost controls.

Having said that, IKEA’s value chain constructed would be as follows;

Everything starts from the raw materials that they use to make the furniture. The primary sector; extracts and develops natural resources such as wood, timber and agriculture, oil and minerals. Followed by the secondary sector in manufacturing; making use of the extracted primary resources to build and manufacture/develop finished goods. Lastly, the tertiary sector; needed to provide services to meet the needs of the end users. This is in the distribution towards retailer with other support activities such as insurance and customer services.

IKEA has a way to aim that products they use for manufacturing will not harm the environment and people and where products are manufactured in a responsible manner.

The primary sector

As we all know IKEA is not the primary sector in their organisation. However, raw materials are needed to develop and manufacture their products. They have to work closely with its primary sector suppliers to ensure a sustainable impact on the people and the environment. IKEA have strict regulations and requirement for the supplies of its product. Maintaining at the lowest price, IKEA buys products from more than 1,000 suppliers and thoroughly check the quality of the materials and scanning the environmental impacts through the chain.

Environmental impact

IKEA uses a tool to evaluate its environmental impact of their product. The four stages of life cycle help to improve their product quality.

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Products that are made from particles from wood fibres can be recycled and is a renewable resource. Examples of IKEA products that are sustainable and reduce the impact for the environment are: tables made out of recycled plastics; rugs that are made of material clippings; products made can be stack which can reduce the number of transported journey leading to a low cost fuels.

Supplier codes of conduct

One of the ways IKEA supports the sustainability of the environment is the relationship with its suppliers. IKEA has a code of conduct called the IKEA Way of Purchasing Home Furnishing Products (IWAY). This contains guidelines that help manufactures to reduce the impact on the environment. Examples would be: products should not cause allergies; energy consumption should be use efficiently; products should be possible to reclaim or recycle so that new products can be generated.

The secondary sector

Since IKEA designs many of their own products, they only need a small amount of resources to make the best quality products. For example, using a honeycomb-paper filing material instead of solid wood for the inside table tops (LACK series). The IWAY code helps in monitoring the development of each product within the manufacturer.

Sustainable partnership

IKEA joints projects with UNICEF and WWF to show their commitment in supporting sustainable practices.

The tertiary sector

Businesses in this sector provide support activities such as banking and retailing.

In retail, IKEA has achieved cost savings and hassle-free environment:

Stores are set up as showrooms in concepts to match customer’s taste of products.

Customers are self-taught to assemble furniture at home.

Customers handpick products themselves using trolleys.

Catalogues are provided for easy reference.

Restaurants are provided for customers dining in.

Conclusion

IKEA’s vision help in improving lives for the many people in practicing sustainable environment. IKEA took responsibility for its product to be sustainable and took the leadership role to educate its suppliers to understand how and why sustainable production is vital. This is one of the key differentiators as compared to its competitors. IKEA is one of the trustworthy company that is responsible for their product and its impact on the environment.