supply chain management

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From Value Chain to Value Constellation

[Adapted from: Harvard Business Review, July/August 1993, Vol. 71, Issue 4]

IKEA: The Wealth of Realising New Ideas

By now, the key elements of IKEA’s winning business formula are well-known: simple, high quality,

Scandinavian design, global sourcing of components, knock-down furniture kits that customers transport

and assemble themselves, huge suburban stores with plenty of parking and amenities like coffee shops,

restaurants, even day-care facilities. A portion of what IKEA saves on low-cost components, efficient

warehousing, and customer selling service it passes on to customers in the form of lower prices,

anywhere from 25% to 50% below those of its competitors.

But to focus on IKEA’s low costs and low prices is to miss the true significance of the supply chain’s

business innovation. IKEA is able to keep costs and prices down because it has systematically redefined

the roles, relationships, and organisational practices of the furniture business. The result is an integrated

supply chain that invents value by matching the various capabilities of participants more efficiently and

effectively than was ever the case in the past.

Customer Management

The company offers customers something more than just low prices. It offers a brand new division of

labour that looks something like this; if customers agree to take on certain key tasks traditionally done by

manufacturers and retailers -- the assembly of products and their delivery to customers' homes then IKEA

promises to deliver well-designed products at substantially lower prices.

Every aspect of the IKEA business system is carefully designed to make it easy for customers to take on

this new role. For example, IKEA prints more than 45 million catalogues every year in 10 different

languages. Though each catalogues features only 30% to 40% of the company’s roughly 10,000 products,

every copy becomes a "script”, explaining the roles reach actor performs in the company’s business

system.

So too with the company’s stores. Free strollers, supervised child care, and playgrounds are available for

children, as well as wheelchairs for the disabled and elderly. There are cafés and restaurants so customers

can get a quick bite to eat. The goal is to make IKEA not just a furniture store but a family outing

destination.

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At the front door, customers are supplied with catalogues, tape measures pens and note-paper to help

customers make choices without the aid of salespeople. Products are grouped together to offer not just

chairs and tables but designs for living. In addition, each item carries simple readable labels with the name

and price of the product, the dimensions, materials and colors in which it is available, instructions for

care, and the location in the shop where it can be ordered and picked up. After payment, customers place

their packages in carts to take them to their cars. If the package won't fit, IKEA will even lend or sell at

cost an automobile roof rack.

IKEA wants its customers to understand that their role is not to consume value but to create it. IKEA offers

families more than co-produced furniture, it offers co-produced improvements in family living --

everything from interior design to safety information and equipment, insurance, and shopping as a form

of entertainment.

To call these services amenities is to underestimate their central significance to IKEA’s strategic intent: to

understand how customers can create their own value and to create a business system that allows them

to do it better. IKEA’s goal is not to relieve customers of doing certain tasks but to mobilise them to do

easily certain things they have never done before. Put another way, IKEA invents value by enabling

customers' own value-creating activities. As one company brochure puts it, “Wealth is the ability to

realise your ideas."

To mobilise its customers to create value, IKEA must similarly mobilise its 1,800 suppliers, located in more

than 50 countries around the world. In order to keep its side of the work-sharing bargain, IKEA must find

suppliers that can offer both low costs and good quality. It takes enormous care to find and evaluate

potential suppliers and to prepare them to play their role in the IKEA business system. Thirty buying

offices around the world seek out candidates. Then designers in the centralised design office at IKEA’s

operational headquarters in Älmhult, Sweden, who work two to three years ahead of current product,

decide which suppliers will provide which parts.

Supplier Management

Once part of the IKEA system, long-term suppliers not only gain access to global markets but also receive

technical assistance, leased equipment, and advice on bringing production up to world quality standards.

This effort got started in the early 1960s, when IKEA began to purchase components from Polish

manufacturers. Today IKEA works with some 500 suppliers in Eastern Europe. There, as elsewhere, the

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company plays a major role in improving the business infrastructure and manufacturing standards of its

partners.

For example, the company employs about a dozen technicians in a unit called IKEA Engineering to provide

suppliers with technical assistance. The company’s Vienna-based Business Service Department runs a

computer database that helps suppliers find raw materials and introduces them to new business partners.

Finally, what is true for IKEA’s relationships with customers and supplier is also true to its internal

business processes, which it designed to mirror and support the logic of the whole value-creating system.

A good example is IKEA’s highly efficient logistics system.

The company’s insistence on low costs from its suppliers has two important implications. First, the

sourcing of components is widely dispersed. The back and seat of a chair may be made in Poland, the legs

in France and the screws that hold it all together in Spain. Second, the company must order parts in high

volumes. Both factors make it imperative of IKEA to have an efficient system for ordering parts,

integrating them into products, and delivering them to stores -- all the while minimising the costs of

inventory.

The centrepiece of this system is IKEA’s world network of 14 warehouses. The largest, 135,000 square

metres in Älmhult, holds enough items to furnish 30,000 three-bedroom apartments. Most ordering is

done electronically. Cash registers at IKEA stores around the world relay sales information to the nearest

warehouse as well as to operational headquarters in Älmhult, where information systems oversee and

analyse sales and shipping patterns worldwide.

Big as they are, these warehouses are much more than simple storage facilities. Instead, they operate as

logistical control points, consolidation centres, and transit hubs. They play a proactive role in the

integration of supply and demand, reducing the need to store production runs for long periods, holding

units costs down and helping retail stores to anticipate needs and eliminate shortages.

The image of a value chain fails to capture the complexity of roles and relationships in the IKEA business

system. IKEA did not position itself to add value at any one point in a predetermined sequence of

activities.

IKEA is more than a link on a value chain. It is the centre of a constellation of services, goods, and design.

Rather, IKEA set out systematically to reinvent value and the business system that delivers it for an entire

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cast of economic actors. The work-sharing, co-productive arrangements the company offers to customers

and suppliers alike force both to think about value in a new way -- one in which customers are also

suppliers (of time, labor, information, and transportation), suppliers are also customers (of IKEA’s business

and technical services), and IKEA itself is not so much a retailer as the central star in a constellation of

services, goods, design, management, support, and even entertainment. The result: IKEA has succeeded,

arguably, in creating more value per person (customer, supplier, and employee) and in securing greater

total profit from and for its financial and human resources than all but a handful of other companies in

any consumer industry.

The New Logic of Value

IKEA’s extraordinary business innovation is made possible by a fundamental transformation in the way

that value is created in its entire supply chain. But what is this new logic of value, and what are its

strategic implications for today’s managers?

To answer these questions, begin with the simple observation that any product or service is really the

result of a complicated set of activities: myraid economic transactions and institutional arrangements

among suppliers and customers, employees and managers, team of technical and organisational

specialists. In fact, what we usually think of as products or services are really frozen activities, concrete

manifestations of the relationships among actors in a value-creating system. To emphasise the way all

products and services are grounded in activity, we prefer to call them offerings.

Every economic revolution redefines the roles and relationships on which offerings are based. This was

true during the industrial revolution when technological breakthroughs in the application of energy to

useful work made possible the factory system with its highly specialised division of labor. Today, under

the impact of information technology and the resulting globalisation of markets and production, new

methods of combining activities into offering are producing new opportunities for creating value.

This is not merely a change in technology or even in the transaction itself. It is a change in the entire

value-creating chains. The scene, the script, the roles of the relevant actors have all been transformed.

When ATM’s where first introduced, some observers questioned whether customers would play their

assigned part. Critics even speculated that customers would resist this attempt by banks to burden them

with extra work, that customers would insist on retaining the personal interaction with the teller. Such

criticisms missed the point and for a simple reason. The reconfiguration of the cash-withdrawal

transaction offered customers a qualitatively new kind of value. In particular, it eliminated traditional

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constraints of space and time. No longer do customers have to go to their local bank branch during

business hours. They can get cash at any time and with the proliferation of ATM networks, pretty much

anywhere. Thus the vast majority of customers flocked to ATM’s and adapted to them quickly and eaily.

So much so that, today, few remember the long lines that used to form at banks on Friday afternoons as

depositors rushed to cash their payroll checks or get money for the weekend.

What is so different about this new kind of value? One useful way to describe it is that value has become

more dense. Think of density as a measure of the amount of information, knowledge, and other resources

that an economic actor has at hand at any moment in time to leverage his or her own value creation.

Value has become more dense in that more and more opportunities for value creation are packed into

any particular offering. A visit to an IKEA shop is not just shopping but entertainment. ATMs allow people

not just to get cash but to get it anytime and nearly anywhere. A Swatch watch allows its owner not only

to tell time but also to make a fashion statement (which explains why the average Swatch customer in

Italy owns six).

The new logic of value presents companies with three strategic implications:

• First, in a world where value occurs not in sequential chains but in complex constellations, the

goal of business is not so much to make or do something of value for customers as it is to

mobilise customers to take advantage of proffered density and create value for themselves. That

is why ATMs are so popular despite the critics. And that is why IKEA has become the world’s

largest furniture retailer. To put it another way, companies do not really compete with one

another anymore. Rather, it is offerings that compete for the time and attention and money of

customers.

• Second, what is true for individual offerings is also true for entire value-creating systems. As

potential offerings become more complex and varied, so do the relationships necessary to

produce them. A single company rarely provides everything anymore. Instead, the most

attractive offerings involve customers and suppliers, allies and business partners, in new

combinations. As a result, a company’s principal strategy task is the reconfiguration of its

relationships and business systems.

• Third, if the key to creating value is co-produced offerings that mobilise customers, then the only

true source of competitive advantage is the ability to conceive the entire value-creating system

and make it work. IKEA creates more value because it mobilises more activities -- of customers

and suppliers. It reshuffles activities among actors so that actor and activity are better matched.

To win, a company must write the script, mobilise and train the players and make the customers

the final arbiter of success or failure. To go on winning, a company must create a dialogue with

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its customers in order to repeat this performance over and over again and keep its offerings

competitive.

Supply chains create value when they make not only their offerings more intelligent but their customers

(and suppliers) more intelligent as well. To do this, companies must continuously reassess and redesign

their competencies and relationships in order to keep their value -- creating systems malleable, fresh, and

responsive. In the new logic of value, this dialogue between competencies and customers explains the

survival and success of some companies and the decline and failure of others.

END