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The Four Cornerstones of a Good Business
Companies should seek to deliver value in a broader sense than merely returning value to shareholders. They have a larger social mission beyond profit. What are the important prerequisites for retail companies to deliver true value? There are four main points.
1. A vision with a social ambition combined with a strong value base. This vision is the very foundation of the business. It defines who you are and how you do things—how you make decisions, what behaviors you exhibit, and what strategies you employ. Building strong values and creating a vision with a social ambition will help you improve not only your profitability but it will also help you gain the respect and trust within society at large.
2. A business model wherein the product range and price are the main differentiators between you and the competition. You achieve this business model through company control of the entire value chain from product development and production to retail outlets.
3. Market leadership and a balanced global portfolio of markets that defines the company's short- and long-term growth ambitions. To leverage risk and prepare for future growth, you must establish a healthy mix of mature markets and future growth markets.
4. Company control by a committed owner. This will ensure important criteria for success, such as a long-term perspective and a willingness to take risk, as well as establish a company heritage, a purpose, and strong values.
I will discuss these points in the subsequent sections of the book. Although Ikea is the primary business example throughout the book, I do think that the majority of the points I am making apply to the entire retail sector. Some of these concepts—primarily the parts about vision, values, and ownership structure—are even more general and could have some relevance to any business sector. The reader will of course make his or her own judgment about what is of interest.
Detailed Discussions of the Four Cornerstones
You will notice that the four cornerstones are interlinked and dependent on each other. The vision, values, and owner control have a strong influence on the business model and the globalization agenda. They are also important prerequisites for taking the step from being a company that is merely profitable to becoming one that contributes to a better society.
In the first part, I concern myself with explaining the importance of the vision and values in establishing the scope of the business—why vision and values are important; what they could, can, and should be; and how they influence the organization. As well, I will present some thoughts on developing and maintaining a company culture that reflects these values. I take up the often- controversial subject of diversity and why it makes good business sense to build a diverse organization. We'll also take a look at how developing a social and environmental agenda rests on the company's vision and culture as well as on the commitment of managers and employees in carrying it out. Finally, I take the example of one market and show how a company can engage many different stakeholders in an emerging society and make a difference.
In the second part, we turn to the practical questions of "differentiation through control of the value chain," elaborating on what companies actually do and how the day-to-day business is conducted. I will offer my advice on how to develop a strong business model and its ingredients, such as the product range, supply chain, and retail stores. This part also covers how to manage the transformation from a small to a big global company and how to build an organization that effectively supports the entire value chain from product development, production, supply, and sales through its own stores.
The third part deals with the geographical scope of the company. I discuss how companies can decide what markets they should be in and the different challenges and business strategies that may be relevant for global companies.
In the fourth part, you'll learn the merits of different ownership structures to support a successful business and the importance of building for the long term.
Chapter 19, "The Role of the CEO," falls outside the scope of the four cornerstones of a good business and is a more personal reflection. Finally, I will summarize the main points of the book and give my view on the prospects for developing companies in the direction discussed throughout the book.
Ikea as a Model—Good and Bad
My experience at Ikea and the story of this company will be used to illustrate and exemplify my four cornerstones of successful retailing. Thus the reader will also gain insights into the workings of that company. This is not to imply that all of Ikea's decisions have been perfect—like any company it has made mistakes—but I believe it's a good model for the kind of business I wish others would build.
The company Ikea was registered in the small town Älmhult, Sweden, in 1943. The first 67 years of its existence, up until 2010, could be summed up in three distinctive phases.
1. The development of the business model and the values
2. The development of the vision and the retail expansion in Europe
3. The transformation to a big global retailer
During the first phase, covering the 30 years from 1943 to 1972, the company established the business idea, the value base, and the most significant components of the company's concept. In other words, these were the foundations that the company lives by, and upon which the company still rests. Sales reached $58.2 million (&8364;40 million).
The second phase, from 1973 to 1998, was the period where the vision was formulated (1976) and the importance of a strong corporate culture in an international setting was established. In this period, Ikea underwent an expansion that was predominantly European with regard to stores; with regard to sourcing, it was global. Out of 27 retail markets in 2010, 19 were added in this 25-year period. Three had been opened before that period (Sweden, Denmark, and Norway), and five markets were to be opened later. Sales increased to $9.5 billion (&8364;6.5 billion) by 1998.
The third phase of Ikea's development began in 1999 and is ongoing. In this period, Ikea more decisively has begun the transformation from a "small" entrepreneurial company to a structured, efficient global giant (for better or for worse). Sales in the 10 years from 1999 to 2009 tripled from $10 billion (&8364;7 billion) to $31 billion (&8364;21.5 billion).
The Growth of the Ikea Philosophy
During Ikea's growth over these three phases, its management and founder have gradually evolved the philosophy outlined above as the four cornerstones of good business. These guidelines have been key to the company's success and its expansion from a national to a global brand. Had the company not had these cornerstones in place by 1999, it would have been limited in its ability to grow revenues at the pace it did during the following decade.
Ikea's story in the third phase of its expansion is notable precisely because it was during this same period that some businesses that had been viewed as leaders within their industries came to a resounding crash—notably Enron and WorldCom, although there were a number of smaller instances as well.
In the following chapters, I will demonstrate how these four cornerstones were essential to Ikea's success story and how they have broad applicability within the business community throughout the world.
Maintaining a Strong and Dynamic Corporate Culture
The challenge of attracting and retaining good people is something all retail companies struggle with, bringing to the forefront issues including:
High turnover of staff
The best managers being headhunted by competitors
A general reluctance to work in retail because of working hours, workload, low pay, etc.
To determine the best way to meet these challenges, we need to unravel some of the concerns by managers and workers that lead to it. What factors are important to managers and employees when looking for a job or staying with their employer? Is the way to attract and retain good people simply to pay the highest salary? From some of the discussions that go on concerning bonuses and stock options, you can easily get the impression that what counts is who earns the most.
Setting high salaries as a strategy is a dangerous path to follow. Although you may initially find that your prospective pool of employees is broadened, you risk attracting people who are primarily motivated by money. They have no real allegiance to the company, and they are likely to leave you as soon as someone comes along who pays a bit more.
In fact, many surveys show that more than money, employees value job security, recognition, a sense of belonging, professional development possibilities, and working conditions. Salary usually comes further down the list as long as it is reasonable and fair.
Ikea's policy regarding the salaries the company pays is to position itself in the middle of the market. The salaries Ikea offers its employees must be fair, but they must not be the main reason for choosing to work for the company.
Many companies supplement salary with a complex network of bonuses, stock incentive programs, stock options, and other features. I confess that in most cases I prefer working with a straight salary. I do believe in ownership involvement in the business. Offering managers the possibility to acquire shares in the company is great; however, when these are acquired through a stock incentive program as an additional form of compensation, they often seem to miss the point. Too often they are overgenerous and short-term. With very limited investment of their own money in shares, managers carry very little risk, in combination with a fairly short-term program time (often three years). Such a situation risks diluting the whole point of ownership—commitment and long-term thinking and actions.
The Value of Bonuses
Bonuses can be appropriate when you need to focus individuals or the organization on a very specific task. If bonuses are used, in my opinion they should normally not exceed a maximum of three to four months of salary per year. Another possibility is to institute a very broad bonus program through which, ideally, all employees can participate in the success of the company. Workers are motivated by a moderate compensation that recognizes that when the company does well, I as an employee can share in that success.
Overly generous salaries, bonuses, and option programs for top managers have too many downsides. They risk alienating managers from the workers, who feel their salaries are under constant pressure while managers receive excessive compensation. For instance, in the United States in 2010, median CEO salaries increased 27 percent, while worker pay increased 2.1 percent. It can also create a culture of greed and suggests that money is what keeps managers loyal to the company.
There is plenty of evidence to suggest that extensive bonus programs lead to very short-term thinking and actions. We have seen the consequences of this in the finance sector but also in many other companies. Excessive compensation usually results in a negative perception of the company among customers, the media, authorities, and other stakeholders. It is not always easy for a company to opt out of this system, particularly when everybody else is doing it. Some sort of legislation could be one solution to level the playing field; however, even without legislation, it can be done. I think this has been proven in many private companies. With a strong owner present, compensation tends to remain at a more moderate level without the company losing good people. In 1984, Peter Drucker suggested that an executive's salary should be no more than 20 times that of an average employee. Today, total executive compensation—including salaries, bonuses, etc.—can often be 50 times or more than an average employee's compensation.
Big, renowned companies have some advantages when attracting competent people.
Being a well-recognized brand is an advantage.
Being international implies many career opportunities.
Being perceived as relatively successful implies job security and personal success for the individual working for the company.
Most companies work hard to provide training and development opportunities, improving leadership skills among their managers and improving working conditions and benefits as a means to retain and motivate their people. These are the things that all retailers do, although some have proven better at it than others.
To attract and retain the best people, a company needs a strong competitive advantage in the labor market—something that is difficult to copy. I believe a strong company culture is just such an advantage.
The Structure of a Company Culture
What is a company culture? An informal definition might be that it is simply "the way we do things around here." Ask someone about the company culture at their organization, and chances are you'll get an explanation of the attitude and approach to the daily work that's common throughout the company. A number of more or less informal rules and values give guidance on how daily work should be approached, and these form the nucleus of the company culture—but they are not all of it. These rules and values should be strongly connected to the vision and business idea. Therefore, you can say that the company culture's foremost aim is to assist in the realization of the corporate vision and business idea.
Companies that develop and cultivate their own identity—their own company culture—by creating their own values, standards, and informal rules have an advantage over others. Such a culture has three important attributes:
1. Creating belonging and fellowship. This in turn radiates security and strength, and they give the organization efficiency and success.
2. Bringing employees together. Containing clear moral and ethical principals, it gives guidance to their behavior, persuading them to do what is right in all situations and accept the consequences. This will be a stronger guardian against corruption, fraud, and other misbehavior than any policy, guideline, or legal requirement. And, most important, strong moral and ethical values will support a vision with a social ambition and guide corporate actions and behavior toward the broader purpose of contributing to society.
3. Inspiring allegiance to the company. To be employed in a successful company whose culture one appreciates means that one considers work as being more than a meal ticket. Instead, work has something to do with the quality of life.
Strong values certainly give a company a competitive edge in the labor market, both in attracting and retaining good people. Strong values can also be valuable in creating loyalty and credibility among customers and other stakeholders.
Ikea's Company Culture
Now let us look at some examples of Ikea's culture. What are the values and ethics that are embedded in this culture? And how do they influence the company's ability to attract and retain good people?
Simplicity in behavior. One element of a corporate culture is how people working for the company behave toward one another. Do people respect each other regardless of title? This element, if it's properly done, breaks down visible and invisible barriers between manager and employees. At Ikea, people greet each other with first names. Managers and employees on all levels conduct business travel in the same way—there's none of the division between first-class and coach that one sees at many organizations. Managers and employees eat together in the staff canteen. Everyone adopts the same informal and common dress code.
The company tries to eliminate all status symbols and create a trustful relationship between employees and managers. This makes a difference to many workers and entices them to stay with Ikea even when other firms offer them more money.
Excerpted from THE IKEA EDGE by ANDERS DAHLVIG. Copyright © 2012 by Studentlitteratur AB. Excerpted by permission of The McGraw-Hill Companies, Inc..
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CHAPTER 1 The Four Cornerstones of a Good Business................
PART 1 A Vision of Social Responsibility....................
CHAPTER 2 Maintaining a Strong and Dynamic Corporate Culture......
CHAPTER 3 Diversity: A Good Business Choice....................
CHAPTER 4 The Environmental Agenda....................
CHAPTER 5 The Market Perspective....................
PART 2 Differentiation through Control of the Value Chain.........
CHAPTER 6 Creating a Unique Product Range....................
CHAPTER 7 Building a Supply Chain to Deliver Low Prices...........
CHAPTER 8 Efficient Retail Stores....................
CHAPTER 9 Effective Communication....................
CHAPTER 10 Working as One Company....................
CHAPTER 11 Staying on Track....................
PART 3 Market Leadership and a Balanced Market Portfolio..........
CHAPTER 12 The Market Strategy....................
CHAPTER 13 The European Expansion....................
CHAPTER 14 Strengthening Ikea in the United States................
CHAPTER 15 Developments in Russia and Asia-Pacific................
CHAPTER 16 A Local Company or a Global Retailer?..................
CHAPTER 17 Global Expansion in Retail....................
PART 4 Building for the Long term....................
CHAPTER 18 The Financials....................
CHAPTER 19 The Role of the CEO....................
Conclusion: Doing Good Business while Being a Good Business.......