IKEA Company’s Circular Economy Model

Description of Organization

The subject for this report is IKEA, a Swedish producer of furniture and other home accessories. IKEA provides its customers with a wide range of products including furniture (home, outdoor, and for storage), home electronics, indoor gardening, diverse textiles, lighting, decoration, leisure and safety products, kitchen and cooking appliances, and goods for pets. Although the products of IKEA can be purchased and assembled by the customers themselves, the company suggests delivery and assembly service as well as online planning. With its vision to create a better everyday life for many people, IKEA targets diverse customers. Still, the company focuses on young people with middle and low income, mainly single or just married, who rent homes or live in small apartments.

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Theoretical Aspects of the Circular Economy

Social responsibility and the ability to think ahead are among the principles of contemporary business. All stakeholders including governments, companies, and individuals are interested in reducing the human footprint on the Earth and manage natural resources more carefully (Lacy & Rutqvist 2015). The evolution of environmental awareness gave rise to a new economic system known as the circular economy which is considered to be a way to sustainable development (Korhonen, Honkasalo & Seppälä 2018). Taking into account a diversity of definitions, it can be concluded that the circular economy follows a 4R framework, which includes four dimensions. They are Reduce, Reuse, Recycle and Recover (Kirchherr, Reike & Hekkert 2017). The primary goals of the circular economy comprise sustainable development, environmental quality, economic prosperity, social equity, and the consideration of future generations.

Concepts and Characteristics of the Circular Economy

The circular economy model as opposed to the linear model that has been implemented for centuries. Unlike the linear model which constituents are raw materials, production, distribution, consumption, and waste, the circular economy functions in a cycle that includes raw materials, design, production/remanufacturing, distribution, consumption, use, reuse, repair, collection, and recycling that provides raw materials (Gallaud & Laperche 2016). There are four basic concepts applied by the circular economy known as 4R framework, which is Reduce, Reuse, Recycle and Recover (Geisendorf & Pietrulla 2017). The first R, which is “reduction,” is related to the implementation of eco-efficiency principles in the production of goods and their consumption. Eco-efficiency presupposes the creation of value with simultaneous reduction of impact on the environment. It also implies two types of motivation, those of economic and environmental improvements (Geisendorf & Pietrulla 2017).

The second R, which is “reuse,” presupposes an improvement of product designs and business models and implementation of the “disassembly and reuse” principle. A specific feature of the principle of reuse is the provision of remanufacturing and repairing on a regional basis to reduce costs on packaging and transportation (Kirchherr, Reike & Hekkert 2017). However, successful reuse is possible in case consumers are ready to purchase remanufactured and reusable products.

The third R, “recycle,” comprises all kinds of recovery actions aimed at reprocessing waste materials into “products, materials, or substances” (Geisendorf & Pietrulla 2017, p. 3). The fourth concept, “recover,” presupposes the recovery of natural resources due to their careful use and thoughtful management.

Another aspect to mention about the circular economy is its tools. Brears (2018) singles out fiscal and non-fiscal tools that enable the realisation of circular economy principles. Thus, fiscal tools include environmental taxes and charges, subsidies and incentives, and tradeable permits. Non-fiscal tools comprise regulations, green public procurement, enhancing business competitiveness, cluster policies, education and training, raising industry awareness, industry-based standards, etc. (Brears 2018). The complex application of these tools empowers the establishment of circular economy principles.

The circular economy is characterised by the focus on sustainable development, interventions to increase environmental quality, achieve economic prosperity, advocate for social equity, and particular attention to future generations’ development.

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The Main Drivers of the Circular Economy

The issue of the circular economy is the focus of the present-day business and environment research. Thus, Jesus and Mendonca (2018) define drivers of the implementation of circular economy principles. The major drivers are institutional/regulatory, economic/financial/market, social/cultural, and technical factors. Moreover, these drivers are divided into “soft” and “hard” (Jesus & Mendonca 2018).

Technical factors are the hard drivers of the circular economy. The availability of new technical solutions empowers the improvement of such product characteristics as durability, efficiency, and quality. They allow creating “optimal product life-cycle scenarios for new products and processes” (Jesus & Mendonca 2018, p. 81). Such products usually can be restored, which contributes to waste reduction. Another issue here is product life extension, which means that it can be reused or recycled. These product advancements are possible due to the constant development of technological options. Moreover, the processes of recycling and waste management are also under the impact of technical capacities (Jesus & Mendonca 2018). Also, such technical aspects as the availability of information and communication technologies contribute to the establishment of the circular economy. Consequently, it depends on a variety of technologies.

Economic, financial and market drivers empower the circular economy transition. With an increase in resource consumption, there appears a need “to decouple revenues from the material input and to improve resource performance” (Jesus & Mendonca 2018, p. 82). It stimulates industries and enterprises to search for and apply new economic solutions to stay competitive. A focus on sustainability develops, which motivates manufacturers to alter their resource management policies.

Institutional and regulatory factors belong to “soft” ones and are considered to facilitate the circular economy. The major role belongs to policy measures (such as legal frameworks, taxes, incentives and infrastructure development), analysis of market failures and the development of an environment favourable for innovation and entrepreneurship. Moreover, the role of government is also significant in advocating an institutional framework through altering the existing legislation, developing new regulations and coordinating public education (Jesus & Mendonca 2018). Social and cultural drivers are as well significant for establishing the circular economy. They include, for example, social sensitivity to environmental problems, which has the potential to change customer preferences as well as the business perception of reputational gains.

In fact, the circular economy is frequently considered to be a new sustainability paradigm (Geissdoerfer et al. 2017). Still, despite many similarities, differences do not allow considering them equally. Nevertheless, the circular economy, similarly to a sustainability approach, has certain environmental benefits for the locations that adopt this model as well as for the world as a whole. European Environment Agency (2016) defines such major benefits of adopting the circular economy for the environment as the reduction of waste and shortening the dependence on raw materials’ imports. Moreover, the circular economy contributes to environmental sustainability, is beneficial for nature due to the focus on renewable resources and reduces the human footprint in general (Malets, Dornacl & Ziyang 2018).

The Role of Circular Supply Chains in Supporting Restorative Processes Advocated by the Circular Economy

The implementation of the circular economy influences the change in supply chains. Moreover, the circular economy advocates for restorative processes. Principles of the circular economy applied to diverse constituents of supply chains, such as wood and paper, plastics, metals, water, agricultural products and waste, and land (Winans, Kendal & Deng 2017). Furthermore, the circular economy is supposed to stimulate a supply chain revolution (Weetman 2017). It develops new value for businesses and adds additional dimensions to supply chains. Thus, circular supply chains are important for the economy since they support restorative processes.

It is executed through the implementation of new social and environmental policies that support circular economy principles (Blood-Rojas 2017). The introduction of the circular supply chain also contributes to the reduction of the carbon footprint that humanity leaves. Thus, the application of waste recycling interventions, as well as the reuse of products that are integral components of the circular economy, is a step to the restoration of renewable natural resources. Angelis, Howard, and Miemezyk (2017) investigate implications of the circular economy-related to supply chain management and come to a conclusion that circular supply chains can be developed in conditions of the circular economy providing a shift from product ownership to leasing, increasing the significance of start-ups in regional and local loops, more effective collaboration of industries and procurement in the service industry, both private and public, to implement circular business models.

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Application of Concepts of the Circular Economy

In 2018, IKEA won the Accenture Strategy Award for Circular Economy Multinational at the World Economic Forum in Davos (Ikea wins the circular economy award at World Economic Forum 2018). Being an innovator in introducing flat packaging for their furniture thus reducing the cost of products for customers, IKEA is open to new ideas. As of 2017, there were 403 IKEA stores in 49 world markets generating 38.3 billion Euros in sales (IKEA 2017 by numbers 2017). During recent decades, the company has been focusing on environmental sustainability. For example, the application of LED lighting in IKEA products allowed saving energy consumption by 3.3 billion kWh a year (IKEA 2017 by numbers 2017). Thus, IKEA can provide a good sample for the analysis of circular economy concepts application.

Business Model of Ikea

For decades, the main focus of the business model of IKEA was to reduce costs through allowing customers to select furniture in stores where they drive by themselves and assemble it at home according to the manual without the assistance of professionals (Milne 2018). Nevertheless, a contemporary market with online competitors such as Amazon and new customers who do not own cars brings up challenges for the company. Moreover, new consumers prefer paying extra for delivery and assembly by professionals to saving costs and doing it by themselves. To address these changes, IKEA develops a three-year plan for 2019-2021 to implement change and meet the needs of its target audience.

On the whole, the business model of IKEA follows the aim of creating value in the sector of home furnishings uniting an affordable price, modern design, and functionality in its products. The business model of IKEA is focused on customers and their needs. To achieve customer satisfaction and provide them with affordable products, IKEA developed a unique supply chain that is an integral part of its business model. First of all, IKEA builds long-term relationships with reliable and sustainable partners (‘Some assembly required’ 2017). Since the company adopted a circular model, it is careful in selecting new suppliers that have to support environmental sustainability. IKEA introduced a new tool, the e-Wheel, that allows assessing products for their environmental influence (‘Some assembly required’ 2017). Another specific feature of the IKEA supply chain for manufacturing facilities based in other countries is the choice of sources from locally available sustainable raw materials. For example, in India, IKEA prefers to use “bamboo, jute, banana fibres, sugarcane, coconut, water hyacinth etc.,” which contributes both to making the company sustainable and its products unique (Ikea wins circular economy award at World Economic Forum 2018, para. 4).

Still, one of the major contemporary concerns of the company is the adoption of a new mindset and introduction of a circular model for both design and production. IKEA actively implements circular strategies and concepts to become a circular business in the near future (Akesson 2018). For example, the “reuse” concept is implemented in the production of a spray bottle, which is made from the protective film used for covering some IKEA products. Also, some parts of IKEA furniture can be replaced in case they lose their functionality, which provides an opportunity not to change the whole piece of furniture, thus contributing to the reduction of waste. There are many other IKEA products that are made of recycled or reused materials that can be further recycled. Thus, storage boxes are manufactured using PET bottles, rugs are made of left-over materials from IKEA linen production, chairs made of wood and plastic composite contain 30% of wood and about 55% of the recycled plastic, and re-melted recycled glass is used to create new IKEA vases (Akesson 2018)

Speaking about the IKEA supply chain, logistics should be mentioned. The company aims to deliver materials as well as goods to its customers in the most cost-effective way and with minimal harm to the environment (‘Logistics’ 2018). The transportation of IKEA products is made easier due to the use of flat packaging, which was a unique invention for furniture delivery (Heathcote 2018). Another benefit of flat packs is that they take less space during transportation, which means that fewer trucks are needed to deliver the same number of products. It is another contribution to a better environment because fewer trucks provide less CO2 emissions. Thus, the company manages to achieve its business goals and contribute to environmental sustainability.

Economic, Social, and Environmental Benefits

The implementation of the circular economy model is beneficial for IKEA in many ways. First of all, the economic benefit of the company is evident. The majority of IKEA factories are located in Europe, which is not rich in cheap raw materials. The application of reuse and recycle concepts provides the company with self-produced raw materials thus reducing the cost of the final product and saving on transportation. A social benefit for IKEA is in the improvement of the company’s image. The issues of environment and sustainability are popular in society at present, and a company that adopts circular economy is likely to have a better reputation than the one using non-renewable materials and producing much waste. Finally, the greatest benefit that appears due to the use of circular economy principles is environmental. Not only does the company benefit but society as a whole. Moreover, due to the fact that more companies adopt circular interventions, their competitors tend to pay attention to the issues of environment and sustainability as well.

Reference List

Akesson, E 2018, ‘Taking steps to create a circular IKEA’, Web.

Angelis, R 2018, Business models in the circular economy. Concepts, examples, and theory, Palgrave Macmillan, Cham.

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Angelis, R, Howard, M & Miemezyk, J 2017, ‘Supply chain management and the circular economy: towards the circular supply chain,’ Production Planning and Control, pp. 1-37.

Blood-Rojas, C 2017, The benefits of a circular supply chain, Web.

Brears, RC 2018, Natural resource management and the circular economy, Palgrave Macmillan, Cham.

European Environment Agency 2016, Circular economy to have considerable benefits, but challenges remain, Web.

Gallaud, D & Laperche, B 2016, Circular economy, industrial ecology and short supply chain, John Wiley & Sons, Hoboken, NJ.

Geisendorf, S & Pietrulla, F 2017, ‘The circular economy and circular economic concepts-a literature analysis and redefinition’, Thunderbird International Business Review, pp. 1-12.

Geissdoerfer, M, Savaget, P, Bocken, NMP & Hultnik, EJ 2017, ‘The circular economy – a new sustainability paradigm?’ Journal of Cleaner Production, vol. 143, pp. 757-768.

Heathcote, E 2018, ‘Ikea: a rebellion in flat-pack’, The Financial Times, Web.

IKEA 2017 by numbers 2017, Web.

Ikea wins circular economy award at World Economic Forum 2018, ETRetail, Web.

Jesus, A & Mendonca, S 2018, ‘Lost in transition? Drivers and barriers in eco-innovation road to the circular economy’, Ecological Economics, vol. 145, pp. 75-89.

Kirchherr, J, Reike, D & Hekkert, M 2017, ‘Conceptualizing the circular economy: an analysis of 114 definitions’, Resources, Conservation, and Recycling, vol. 127, pp. 221-232.

Korhonen, J, Honkasalo, A & Seppälä, J 2018, ‘Circular economy: the concept and its limitations’, Ecological Economics, vol. 143, pp. 37-46.

Lacy, P & Rutqvist, J 2015, Waste to wealth, Palgrave Macmillan, New York, NY.

‘Logistics’ 2018, Web.

Malets, R, Dornacl, C & Ziyang, L 2018, Source separation and recycling. Implementation and benefits for a circular economy, Springer, Cham.

Milne, R 2018, ‘Ikea vows ‘transformation’ as it reshapes business model’, The Financial Times, Web.

‘Some assembly required. IKEA’s unique supply chain philosophy’ 2017, Web.

Weetman, C 2017, A supply chain revolution: how the circular economy unlocks new value, Web.

Winans, K, Kendal, A & Deng, H 2017, ‘The history and current applications of the circular economy concept’, Renewable and Sustainable Energy Reviews, vol. 68, pp. 825-833.

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