The IKEA Edge

Anders Dahlvig: Well Ingvar Kamprad started off, as all entrepreneurs I guess, with two hands and nothing else, and then he started selling pens and pencils, really everything, nothing to do with furnishing at the start. Then gradually this developed into furnishing because the area where he lived in Sweden, there was a lot of furniture producers, and this was a mail order business at the time in the mid-1950s. Then after a little while he found out that to sell furniture you need to have somewhere to show it, so he needed some kind of showroom. So mail order gradually grew into stores as well, and the first store was a small showroom in this little town of Agunnaryd, where the headquarters of IKEA still is, in the middle of nowhere in Sweden. Then, in the 60s, he took the decision, at that time the range had pretty much become a home furnishing range altogether, to take the big leap and build a big store in Stockholm, the capital of Sweden. I sometimes say I think this was the biggest risk the company ever had taken up until this very day basically. I mean, to put all your money, after a small showroom in a small town, what became the biggest store in Sweden at the time and still is today, it's about 45,000 square meters, 50,000 square meters, from basically nothing, I thought was a huge risk and just shows the belief that some big entrepreneurs have in their idea, to bet everything on this, and that became a big success, and then the rest is history, basically.

Rachel Salaman: How many countries is it in now?

Anders Dahlvig: Today stores in around 26 countries, and I think including purchasing, which is another number of countries, in total I think there are operations in some way or another in 50 countries.

Rachel Salaman: Now in the book you talk about the IKEA philosophy, what is that?

Anders Dahlvig: Well if I should nail it down into one sentence, it is the idea that most people have more time than money, and therefore IKEA's idea is to integrate the customer in the distribution chain if you like, so the more the customers does the cheaper the product can be. So also those with limited financial means, who probably have more time than money, should have the possibility to have good stuff, good home furnishing of a high quality and design at low prices.

Rachel Salaman: Now the idea that companies should contribute to society runs throughout the book and it's part of the subtitle. Can you explain how, exactly, companies can make a contribution to society, because it's not always the obvious thing of giving money to a local charity?

Anders Dahlvig: The power of this is something that has grown on me over the years and what this actually does to a company. I think from society's perspective it's important that business in general does contribute to society, because business will be one of the main engines to address some of the big issues that we have in our world, like poverty and the environmental challenges. From a business perspective it makes sense I think mainly for two reasons; one is the effect it can have on the reputation of the company with its many stakeholders, anything from governments to suppliers to its employees, customers and society at large, if you contribute to society in a big way. The other big advantage is what it does to motivational loyalty amongst your own people, and I have seen this, experienced this in reality over these 26 years.

I think most of us would agree that most people come to work, put all their efforts into what they're doing, not because they want to enrich some anonymous owner a pension fund or something like that, and if ideally a company can provide its employees with some kind of meaning in what they do, something where they feel they're actually contributing to society, this has a huge impact on the motivation, engagement and loyalty of the people. I've seen research recently where people were asked all over the world to what extent they felt that they were 100 percent engaged in their work, and on average 33 percent of any company said that they felt that they were really putting all their efforts and energy into their work. So most companies pay 67 percent to come to work and just do the motions really, but the best companies are up to about 67 percent that say that they contribute with all their energy and power. In the case of IKEA we are close to 60 percent, because we do measure that as well, and I would put a lot of that down to the fact that through strong values, company culture, and through having a vision with a social ambition, and in IKEA's case the vision is to create a better everyday life for the many people in the sense of providing good home furnishing to people with limited financial means, through having such a social ambition a lot of people at IKEA felt very motivated in what they were doing and stayed loyal to the company for many years.

Rachel Salaman: So in the case of IKEA the contribution to the social good is through the actual business that it undertakes every day?

Anders Dahlvig: Yes, exactly. I think that's where it has to start, it's not in the periphery, it's not like doing stuff for the environment or diversity, that is important too, but it has to be the core of the business where you contribute. I think anyone who thinks this is important should find a way to see what they actually do, the production or the services they provide or the products they provide do contribute to society in a bigger way. Then on top of that, obviously, you have to do this in a way where you feel you are doing a good job in some sort of environmental work, the working conditions, the suppliers that you are using, how you treat your employees and all these other things that the expectations of society have on most companies today.

Rachel Salaman: Well you mentioned the environmental agenda, what's IKEA's record on the environment?

Anders Dahlvig: Next I will say IKEA went through in the 80s a couple of bad incidents if you like, where IKEA was caught off-guard, not being so good in their environmental records. One has to do with formaldehyde in the products, which was discovered in Germany by an institute at higher levels than we could, and the other had to do with accusations of child labor, in fact it was in Pakistan, also in the 80s. This was never verified, we couldn't find out if this was right or not, but nevertheless, IKEA was accused of this and it triggered a lot of actions inside the company. I think we were not prepared for this, we didn't have a good environmental agenda and we were naïve about how things were happening at the supplier side. So the good thing with media here was that it provoked and triggered actions at IKEA, and that was one of the first things that I spent a lot of time on when I became the CEO in 1999, to put a comprehensive environmental and social agenda into place for the company that we have been working with since then. Today, at least from what I hear, we seem to be pretty well seen in terms of our environmental record.

Rachel Salaman: And what impact have all those activities had on the company's profits?

Anders Dahlvig: Positive only, I would say. I think that's another misconception, a lot of people believe that doing environmental work is costly and actually it's to the detriment of profitability of a company. I have seen no evidence of that over my 10 years as a CEO, I would say quite the contrary, because usually a good environmental work means using less resources, and using less resources is usually good for the environment, so there is no real contradiction that I can see. Sometimes I'm asked now, "When you push the suppliers to reduce their purchasing prices, won't that have a negative impact on the environment and social conditions at the factories?" Again, I think if we push the suppliers to reduce the prices, they have to think harder about how to use less resources, less material, and also less energy in the production process, which would be good for the environment. So again I think there is no controversy or contradiction in this actually, and over these years I've seen no evidence of higher costs as a consequence of environmental work.

Rachel Salaman: You mentioned earlier IKEA's strong corporate culture, and you talk in the book about this too, about the importance of maintaining a strong corporate culture. Maintaining it is one thing, but how do you create it in the first place?

Anders Dahlvig: Yes, a good question. If we look at IKEA as an example here, I think that the values of IKEA are the values of the founder, and that's probably where it starts. It is the founder of any given company that sets the tone of the values of the company, and then it can develop from there. That's probably, in most cases, how it starts.

Rachel Salaman: And how do you spread it through everybody?

Anders Dahlvig: Yes, in the beginning its word of mouth and it's the good example of the leaders. When you grow bigger, at IKEA, when I left, we were about 125,000, obviously word of mouth doesn't do it any more, you have to find other ways of doing it, and we tried to establish it in a lot of our HR processes. So, for instance, the recruitment process, we had something called "A Value Based Recruitment Tool," so everyone who went into recruitment process anywhere at IKEA, and I'm sure at IKEA we interview 100,000 people every year for different jobs, used that same tool to try to establish whether the candidate could work for us and like it with the values we had. Then after they were recruited we built these values into all our training programs, like the introduction programs, different leadership training programs, they were everywhere. In our management review process we were also looking at the records of the people that we were discussing promotions for, to what extent they were living up to the values and good examples of the IKEA values. We had anonymous surveys with all our employees every year, where they're responding to a number of questions, one of which was "To what extent is your manager a good example of the IKEA culture? So that way we actually knew from our co-workers exactly which of our leaders and managers were good examples of this, and we could take actions on that. So there were quite a lot of instruments that are more structured processes in order to keep this alive.

Rachel Salaman: You also mentioned diversity earlier and in the book you say it's a good business choice. How is IKEA's commitment to diversity demonstrated?

Anders Dahlvig: I think we were most successful in the question of gender, promoting more women into management positions in my years at the helm. I think in terms of store managers, we moved from maybe 15 percent to close to 50 percent store managers that are women today. Country managers and deputy country managers is also getting closer to 50/50. I promoted two women into my top management team when I took over in '99, which was new to the company, we hadn't had it before. So the record on gender I think is improving reasonably okay. I think the record on ethnic minorities is not so good, and I would even say we probably have failed on that.

Rachel Salaman: Doesn't it depend where your stores are?

Anders Dahlvig: No, I think ethnic minorities, we have them on the shop floor, everywhere, and the challenge has been to promote them to more senior management positions. Why this is, I think women and gender is easier, there are more people, including women themselves, promoting it and to push that I think. It's a bigger challenge with ethnic minorities.

Rachel Salaman: What impact do you think your success as far as women in diversity is concerned, what impact has that had on the company do you think?

Anders Dahlvig: I think it has a huge impact. I mean, just looking at our customers, first of all, you know, the people who are shopping home furnishing, the majority are women, and if it comes to the decision making at home, who makes the decision about home furnishing? It's even stronger on the women's side. So the fact that we have women in senior positions who understand the needs of women obviously is important and has helped everything from product development to how we develop our stores. Then I think all the other business reasons we've had, one being that our management team should reflect the customers and the employees of the customers if we want to understand them. Another one being that from a decision making point we are more challenged if we have a diverse group of people. So that's a lot of good business reasons for this that I think most people logically can see, but nevertheless it is a challenge in many companies. At the bottom of it all I think it is prejudices, I think there's still a lot of prejudice out there, and that needs to be addressed.

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Rachel Salaman: In your book you talk about IKEA turning the conventional business model on its head. Can you explain what you mean by that?

Anders Dahlvig: Yes. Back in the, let's say, 60s, 70s, when IKEA took off as a company, the home furnishing sector was very traditional, conservative, and when IKEA came it turned it on their head in the sense that it did the opposite to what everything was. So if furniture stores were small, specialist stores in the town centers, IKEA built big stores out of town, with everything for the home in one place rather than just sofas or something else. If the traditional business had personal service, you came in to the store and someone approached you and helped you; IKEA started with self-service, you had to serve yourself. If the traditional furniture business had assembled furniture taken home to you; IKEA introduce flat pack, where you have to assemble it yourself as a customer. The traditional furniture business worked with traditional mass marketing; IKEA introduced the IKEA catalog free for everyone, distributed, hadn't existed before. The traditional furniture business sourced locally, local suppliers; IKEA started global sourcing already in the 60s. So you could pick point by point here, and IKEA turned it upside-down in the sense that it did it pretty much the other way round that the traditional business did. That I think put IKEA in a very special position in the eyes of the customers, it stood out as a brand, being so different to everything else, and that has really kept IKEA ahead of the crowd ever since.

Rachel Salaman: Is that the main reason do you think that IKEA has been so successful, when other home furnishing stores or home furnishing companies haven't?

Anders Dahlvig: I think it's one reason. Other reasons are those four main reasons that I point out in the book; one being that the vision with the social ambition and the values, second being the fact that IKEA controlled the entire value chain, as opposed to most other retailers where you have one company controlling the brand and another controlling the retail outlets, which has a huge impact on profitability and also the uniqueness of the range. A third one being its ability to go global and all the components of that, and the fourth one being the ownership structure, where IKEA have been and still is a private foundation instead of a listed company, which I also think, not least in bad times, has been a huge help for the company.

Rachel Salaman: In the book you talk about five basic customer needs from IKEA's point of view and the importance of meeting those needs. How difficult was it to settle on those five?

Anders Dahlvig: Not very difficult. I think they gradually came into being, if you like, over time. Again this is a process of trial and error, you do things and then you find it's good and then you move on, so this has I think grown over maybe 20 years' time into being.

Rachel Salaman: So do you have any tips for companies that want to narrow down their customer needs, is there a process they can go through to find out the most important ones?

Anders Dahlvig: No, I don't have any good ideas on the process to do it. I think the reason for why customers like to come to IKEA, these five reasons that I point out, has to do with offering good design and quality at very good prices, reasonable prices. Having a unique product range that you can only buy in IKEA stores and not in other stores, in the IKEA case with unique Scandinavian designs that sets it apart. Convenience, that you have anything in one place, that you offer food at good prices, that you have ball rooms to put your kids in is another example, and that you offer solutions for the customers, not just products; you put them together in a way so that, in the room sets in the store and in the catalogs, the customers can see how they fit together. Most people are pretty uncertain about how to furnish their homes, they need ideas and real solutions. So if you have solutions, you have convenience, you have a unique product range and you have great prices, these are very basic customer needs, and I think a lot of companies would say that that is what they are trying to do. The difference, obviously, is IKEA does it better, and that IKEA offers all these different things. Most other companies may offer the low price but they don't have the quality, they may offer good design but they don't have the price and they don't have the choice. So they have one or two of these components, but the fact that IKEA have them all and odes it in a good way is really the trick.

Rachel Salaman: Because since IKEA's been around on the global scene there have been lots of what you might call copycat companies or companies that have tried to copy some of those success factors, but they haven't succeeded. Is that just because they didn't bring all of them together in the way that works?

Anders Dahlvig: Yes. I always said that the copycats are the one I'm least afraid of because they don't think for themselves, you know, they just do what IKEA does, and to be a bad second is never a good idea I think, you have to come up with your own idea that is something different to IKEA. I think that's why they haven't succeeded.

Rachel Salaman: So when you were CEO, how difficult did you find it to strike the right balance between maintaining profits, the business side of things, and meeting those customer needs that you talked about?

Anders Dahlvig: I can't say I had any conflict here, I think it all worked tremendously well together. I think an important component again has been the ownership, the fact that we have been able to take long-term decisions, that we have been able to reduce the prices to the customers, even if this was to the detriment of the gross margin sometimes, taking long-term perspective here. I think with another ownership where the quarterly results were top priority, I think the conflict would have been much greater.

Rachel Salaman: There's one interesting passage in your book where you talk about the guided route through the stores, where you don't let customers roam free, they have to go on a certain route, which some customers might not like, especially if they're short of time, and yet you say, on looking at that, you decided as a company it was better to keep that, steering customers rather than letting them roam. Isn't that the kind of conflict that puts profits in conflict with customer needs or customer wants?

Anders Dahlvig: I don't think so really. I mean, as you say, we've tried both; we've tried a free-flow technique and the steer-flow technique, and from a pure business perspective we didn't see much difference, it was a little bit better when we had the steer-flow. I think the important thing when you have the steer-flow, you have to have short possible routes as well, so inside the company we talked about the long natural and the short possible route. So there are these shortcuts all throughout the stores, also with guidelines on how to get to the checkouts etc. So for the customer there's always a way to get out of the main loop, if you like, but many customers, when they make the trip to IKEA, you know, they spend a long time in the car to go to that store anyway, they want to make sure they don't miss anything. So I think many of them feel pretty good about knowing that "If I keep to this main aisle I won't miss anything, then if I really want to get off I can do that'.

Rachel Salaman: Yes, and I suppose the better they know their own local store the more they'll know their shortcuts?

Anders Dahlvig: Yes, and most customers have been in the store three to four times a year, so, you know, they know it pretty well.

Rachel Salaman: Yes. Do you have any tips or advice for businesses operating in a recession or an economic slowdown?

Anders Dahlvig: Yes. My view on that has always been that I think too much worries and discussions are going into the lack of demand in a recession or in a slow circle, and too little discussions are going in to seeing the opportunities of the slowdown in the economy. I mean, there are so many things that work positively for businesses in a downturn; you have less pressure on salary costs, you have less pressure on rental costs, you have less pressure on site and construction costs, it's easier to get retail licensing, if you want to acquire a company they're usually cheaper in a downturn, your buying prices will be lower because lack of demand will push the suppliers to decrease their prices. You know, when you add all that up that's probably more positive things than negative in a downturn, so I think there's a lot of opportunities. Some of your competitors will probably go out of business, and that consumption will have to move to someone else, hopefully yourself. It's an opportunity for new entrepreneurs to get into the market when these old hands are leaving. You know, the idea of creative destruction, those old formats that run out of steam or run out of interest to the consumers, go out of business and leave place for something else is not a bad thing.

So I think the downturn is an excellent opportunity for companies who are in relatively good shape to take a better market share, and therefore I see it as an opportunity. I think it's important not to compromise too much on some of your key things in your offerings; for instance, trying to push up your sales prices to save the bottom line or reduce the service to the customers with shorter opening hours or less staff in the store, that you don't compromise on some of those for the customer, crucial elements. You may cut other costs but not that, and then rather not be too greedy on your margin or your bottom line for a few years, I think that will help you build a stronger long-term position.

Rachel Salaman: Your book finishes with your reflections on the role of the CEO. In your view what are the key steps to successful leadership?

Anders Dahlvig: Leadership to me is all about how you motivate people really. Management is about how you organize the business and your budget processes and all these things, but leadership is about motivation. Key for me in defining my own leadership has been to understand my own needs and build on them, rather than trying to be for others, you know, what others are or looking at other good examples. Usually you're better at doing what is good for yourself, and to build on those strengths rather than trying to build on weaknesses that you have.

Rachel Salaman: So in your case what were the strengths you built on as CEO?

Anders Dahlvig: In terms of leadership I think, what people told me at least, and it's better to ask someone else than what you think, I think integrity, ethical and moral standards, giving people a lot of responsibility. I've always worked better with people who are competent and want to be independent, you know, we agree on targets, I follow up that they have reached them, but I let them get on with finding how to do it rather than more detailed leadership, if you like, where you're in control of everything. That's not really my style. So I think these are some of the components of my leadership.

Rachel Salaman: That was Anders Dahlvig, former CEO of IKEA, talking to me in London. The name of his book is "The IKEA Edge: Building Global Growth and Social Good at the World's Most Iconic Home Store."

I'll be back in a few weeks with another Expert Interview. Until then, goodbye.