E-135: Corporate Sustainability Strategy

Economic Responsibility and IKEA

(Case, Week 7: Oct. 17-23, 2016)
Companies engaging in responsible environmental and social practices are more often
economically successful as well. Economic success is one of the results of incorporating
environmental and social management systems. Resources are more carefully
managed, risks are avoided, employees are more engaged and fulfilled, and data is
tracked more carefully.

According to a recent study by the Governance & Accountability Institute, companies

who are measuring and managing their resources and social responsibilities appear to
also perform better in the long term in capital markets. In 2016, 81% of the S&P
companies were reporting on sustainability, up from only 20% in 2011. This shows a clear
understanding of the importance of strategic planning and managing environmental,
social and governance responsibilities for companies. It also indicates a response to
shareholder and other stakeholder requests for this type of information (G&A Inst., 2016).

In Week 2 we provided links to the MIT Sloan Management Review surveys of

companies and sustainability practices. The 2013 MIT/BCG survey stated that since 2010
a consistent 35% of companies reported that their sustainability efforts contribute
directly to profits. The most recent survey from 2016 reported that 60% of senior
corporate executives said sustainability was “materially important” to their company’s
bottom line. Although the query wasn’t quite the same, it appears to be an
improvement from the 2013 results. In contrast, a remarkable 75% of senior investment
firm executives stated sustainability was materially important. This is encouraging news
in a way, showing that there is growing pressure from the investment community for
businesses to act responsibly (Kiron, et al, 2013; Unruh, et al, 2016).

This week we will look at IKEA Group, the world’s largest furniture retailer and also leader
in sustainability. It was listed by Fast Company #40 out of 50 as one of the most
innovative companies of 2015. They noted in particular that IKEA uses the MIT Living
Wage Calculator as a reference for its wages, which sparked increases in wages for
50% of its workforce in 2015 (FC, 2015). They were also listed fourth on the list of
sustainability leaders by GlobeScan and SustainAbility in their 2016 survey (G&S, 2016).

IKEA Group was founded by the Swede Ingvar Kamprad in 1943 – he was just 17 years
old. Since then it has grown to a multi-billion dollar company with operations mostly in
Europe, where 70% of their stores are located, but the US is also a major market. It now is
owned by a foundation in the Netherlands, whose purpose is to reinvest IKEA earnings
into the company itself as well as charitable concerns, or keep the earnings in reserve
for future investment. Hence they are not dependent upon the stock market and have
a somewhat unique corporate structure. Their vision is “to create a better everyday life
for the many people” as well as to grow the company by using internal resources. This
protects the company for long-term growth rather than the fluctuations of market
swings (IKEA, 2015a; Forbes, 2016). IKEA has made headlines for their commitment to
energy savings and environmental responsibility. We will provide some of that

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information for you here and will also encourage you to investigate more deeply on
issues that interest you.

IKEA had revenues of 32.7 billion Euros ($36 billion) in 2015, an increase of 11% over 2014.
As a comparison, their sales in 2005 were 14.9 billion Euros. They have had steady
growth throughout the period in between, with only two years of relatively level sales in
2008-2009. This could be expected with the height of the recession in the US and Europe
during those years. The figure below gives you an idea of their growth over the past
decade. They now have operations in 43 countries, with 328 stores in 28 countries, and
978 suppliers around the world, with a total of over 150,000 “co-workers” (IKEA, 2015a).

IKEA Revenue History (IKEA, 2015a)

IKEA’s unique governance structure may be part of the key to its strong economic
performance coupled with high goals in environmental and social responsibility. We
encourage you to think about this as you study this company this week. They do have
independently owned franchises for the sales points, with their own governance and
ownership, but they still own many of their retail outlets. The chief sustainability officer for
IKEA is part of the IKEA group management (their executive council of sorts) and reports
directly to the CEO (IKEA, 2015b, p. 83-84).

As we have mentioned in class and in our materials, having access to top leadership
helps ensure that sustainability is considered in all management decisions. IKEA also has
its unique ownership structure, which helps to insulate it from short-term pressures on
investments in sustainability. In the US, the use of a B Corp structure, such as that utilized
by Patagonia, is another way to ensure the support of environmental and social
objectives. Is this the way of the future for multinational corporations? Are companies
like IKEA and Patagonia raising the bar for their peers in business?

IKEA has been pursuing environmental and social responsibility for decades. Its original
mission of bettering humankind by providing quality furniture at a lower price was the
basis for this vision. But in the mid 1980s they had a wakeup call of sorts. Their
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particleboard used in many of their products was found to have serious formaldehyde
emissions. Knowing that strict regulations were on the horizon, they worked with the
founder of The Natural Step to develop a system-wide set of protocols to improve their
materials across their product line. Since then, IKEA has continued to develop its own
processes and systems across various areas of the company to ensure their products
are produced responsibly (TNC, 2008).

This fits with their general long-term view of keeping the company in a strong position
and reducing risk of negative publicity from irresponsible practices. In most cases, they
have used international frameworks and standards as guides, and they have
developed their own customized frameworks to manage their processes and
procedures. IKEA partners with many other organizations to help facilitate its
sustainability performance and develop its frameworks. Examples include:

• The Ellen MacArthur Foundation, which promotes the Circular Economy 100. In
turn, IKEA has developed their own “Circular IKEA” program, which includes:
using materials and developing instructions for repair to prolong product life;
designing their products so that they can be reused in various ways or recycled;
and developing demand for recycled materials and facilitating that process
(IKEA, 2015b, p. 47).
• In 2014 they helped to form We Mean Business, a coalition of businesses and
NGOs working to promote meaningful commitments to counteract climate
change. In fact, IKEA has committed to becoming 100% net zero by 2020 –
producing as much energy as it consumes, and by renewable means. This
appears to be a lofty goal, but chief sustainability officer Steve Howard has said,
“going all in” is a way to encourage employees to be truly innovative and not try
to cut corners when it comes to reducing their climate footprint (IKEA, 2015b, p.
10; Holder, 2016).
• They were co-founders of RE100, a collaborative partnership of businesses
committed to 100% renewable power. The CDP (Climate Disclosure Project) and
the Climate Group are leaders of this initiative, along with support from Swiss Re,
a major reinsurance company (IKEA, 2015b, p. 10).
• On the social side, they partner with the Fair Wage Network, working with stores
and suppliers to promote fair wages and finding the root cause of problems. This
helps them go beyond their minimum standards established by their codes of
conduct and audits (IKEA, 2015b, p. 72).
• They also cooperate with the International Organization for Migration to wrestle
with the complicated issues of labor exploitation and human trafficking. They are
working together to resolve issues throughout their supply chain in this difficult
area (IKEA, 2015b, p. 74).

Part of what IKEA seeks is to “future proof” the company from upcoming risks – such as
energy prices, climate change, lack of available resources, and a solid reputation for
social awareness. As we will see when we start to talk about sustainability management
systems in the second half of the semester, part of the goal of a mature sustainability
program is to plan well, consider solid strategies, and execute your strategies according
to plan – tracking your data and correcting your course to ensure success.

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IKEA seems to understand this well and has succeeded in making real progress along its
ambitious goals. They see investment in sustainability as a long-term investment for the
company, protecting themselves against swings in energy prices and scarce resources.
Says Steve Howard, “Sustainability will be a decisive factor in terms of which business will
be here in 30 years time. It’s also the future of business” (Kelly-Detweiler, 2016).

Besides finding good partners, you can see that IKEA has also played a leadership role
in promoting its sustainability goals. This is obviously paying off for its bottom line, as
shown from the results at the beginning of this case. We hope that you will find this to be
an interesting week connecting the dots between IKEA’s sustainability investments and
its bottom line.

References:
Fast Company (FC). (2016). The most innovative companies of 2015. Fast Company.
Retrieved from: https://www.fastcompany.com/3039598/most-innovative-
companies-2015/ikea
Forbes. (2016). The world’s most valuable brands. Forbes. Retrieved October 10, 2016
from: http://www.forbes.com/companies/ikea/
GlobeScan & SustainAbility (G&S). (2016). The 2016 Sustainability Leaders; A GlobeScan
/ SustainAbility Survey. Available from: http://www.sustainability.com/library/the-
2016-sustain-ability-leaders#.V5QRZI5ySUA.
Governance & Accounting Institute, Inc. (G&A Inst.). (2016). FLASH REPORT: Eighty one
percent (81%) of the S&P 500 Index companies published corporate sustainability
reports in 2015. Retrieved from: http://www.ga-institute.com/nc/issue-master-
system/news-details/article/flash-report-eighty-one-percent-81-of-the-sp-500-
index-companies-published-corporate-sustainabi.html
Holder, M. (2016). IKEA argues for businesses to go all-in on sustainability. GreenBiz.com.
Retrieved from: https://www.greenbiz.com/article/ikea-argues-businesses-go-all-
sustainability
IKEA. (2015a). About the IKEA Group: Welcome inside our company. Retrieved October
10, 2016 from: http://www.ikea.com/ms/en_JP/this-is-ikea/about-the-ikea-group/
IKEA. (2015b). IKEA Group 2015: Sustainability report. IKEA. Retrieved from:
http://www.ikea.com/ms/en_US/img/ad_content/2015_IKEA_sustainability_report
.pdf
Kelly-Detweiler, P. (2016). IKEA's aggressive approach to sustainability creates enormous
business opportunities. Forbes. Retrieved from:
http://www.forbes.com/sites/peterdetwiler/2014/02/07/ikeas-aggressive-
approach-to-sustainability-creates-enormous-business-
opportunities/#4a4a2e104ec8
Kiron, D., et al. (2013). (2013). Sustainability’s next frontier: Walking the talk on the
sustainability issues that matter most. MIT Sloan Management Review & Boston
Consulting Group. Retrieved from:
http://sloanreview.mit.edu/projects/sustainabilitys-next-frontier/
Newsweek. (2015). Top green companies in the world 2015. Newsweek. Retrieved from:
http://www.newsweek.com/green-2015/top-green-companies-world-2015
The Natural Step (TNC). (2008). IKEA case study. The Natural Step. Retrieved from:
http://www.thenaturalstep.org/ikea/

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Unruh, G, et al. (2016). Investing for a Sustainable Future: Investors care more about
sustainability than many executives believe. MIT Sloan Management Review &
Boston Consulting Group. Retrieved from:
http://sloanreview.mit.edu/projects/investing-for-a-sustainable-future/

Questions for this week:

1. Environmental Management Thread: How has partnering with the WWF, Forest
Stewardship Council and others helped IKEA to improve their environmental
performance? Do their goals seem achievable? How are these goals improving their
economic performance? Can you see evidence of “shared value” in any of their
strategies?
2. Social Responsibility Thread: Which partners do you think have been the most
advantageous for IKEA for social responsibility? What types of investments have they
made in their social value chain, and how has that paid off for them from an
economic perspective? How have they played a leadership role in this area, and
are they working with competitors, or businesses across other industries?
3. Economic Responsibility Thread: How do the investments in environmental and
social responsibility help to improve the bottom line for IKEA? Have they had any
particular challenges in making the business case for particular improvements, and if
so, how have they met those challenges? Do you see any evidence of their respect
for the “five capitals” in their strategies? How can you see their performance
affecting their competitors – are they moving the needle for other furniture retailers
to improve their environmental and social footprints?
4. Leadership and Strategic Planning Thread: How does IKEA’s “all in” strategy help to
engage employees and suppliers? Is this a reasonable way to set goals and
strategies, or should they be using more incremental goals – and how would you
support your arguments? What kinds of internal leadership mechanisms is IKEA using
to promote progress on their goals? How do their own standards, such as IWAY and
Product Sustainability Scorecard compare to other international standards or
balanced scorecard mechanisms?

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