IKEA Case Report

The Performance Measurement and Management System of IKEA AB

By

Massimo Cirillo

Christina Poensgen

Arjun Sheerbahadursing

Thanh Vo

January 2018

BUSN 76 – Performance Measurement and Management

Executive Summary
IKEA AB through the PMS framework (Ferreira & Otley, 2009)
Vision and mission
- To create a better everyday life for the many people.
Key Success Factors
- Low-cost, well-designed furniture for everyone.
- Efficient value chain production structure.
Organization Structure
- IKEA AB under the ownership of IKEA Group.
- Low levels of formalization, centralization and structure in decision-making processes.
- Non-hierarchical.
Strategies and Plans
- Established on a global level to which sub-companies and divisions align resources.
- People and Planet Positive 2020; make it more convenient to shop at IKEA; help the people create a
better everyday life at home.
Key performance measures
- KPMs mainly focused on non-financial measures
- KPMs are linked directly to the overall strategy of the group
Target setting
- Targets are set based on a mix of three specific factors: market conditions, historical figures and what
can actually be measured
- Targets are set by the management by taking into consideration input from lower hierarchical level
Performance evaluation
- One-to-one talks with managers and employee to evaluate individual objectives once a year
- Performance evaluation process is partly subjective
Reward system
- No use of individual incentive scheme, no extra bonuses for management
- If overall targets are reached, all employees on every hierarchical level get financial incentives in form of
the same percentage of their salary
PMS Use
- Business planning and performance evaluation are used diagnostically.
- Efforts are made using PMS in an interactive way on organizational and individual level.
Strength and coherence
- Performance measurement system seems to be coherent in itself and within its environment.
- Special focus on team-oriented PM approach
- The system is strong but not insusceptible for failure.

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Table of Contents
1 Introduction.......................................................................................................................................... 1
2 Research Methodology...................................................................................................................... 1
3 IKEA AB – Company Overview ........................................................................................................ 1
4 Findings and Analysis of IKEA AB’s PMS ..................................................................................... 2
4.1 Key Performance Measures ................................................................................................................... 2
4.2 Target Setting .............................................................................................................................................. 3
4.3 Performance evaluation .......................................................................................................................... 3
4.4 Reward System ........................................................................................................................................... 4
4.5 PMS Use ......................................................................................................................................................... 5
4.6 Strength and Coherence .......................................................................................................................... 6
5 Limitations ............................................................................................................................................ 7
6 Conclusion ............................................................................................................................................. 7
References ..................................................................................................................................................... 8

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1 Introduction
The report analyzed and evaluated the performance measurement and management system (PMS)
of IKEA based on the 12-question framework suggested by Ferreira and Otley (2009). The focus of
the analysis is mainly on six aspects within PMS including the key performance measures, target
setting, performance evaluation, reward system, the use of PMS and finally the link between these
parts of PMS and the way they are used (Question 5-8, 10 and 12). Information regarding the
remaining questions (Question 1-4) within the framework are also included as supporting grounds
for the main analysis.
The report is structured into three main sections. The first section the method of collecting data for
the report, the second section then provides an overview of IKEA and IKEA AB as the focal point
of analysis. In this section, the company’s vision and mission, key success factors, organizational
structure as well as strategies and plans are presented. From this background, section three utilized
information collected from an interview and analyzed it in relation to theories. There are six main
aspects that are covered in this section: (1) key performance measures (2) target setting (3)
performance evaluation (4) reward system (5) use of PMS and (6) the strength and coherence of
links between PMS components and its use. Finally, in the last section, limitations of the report are
presented.

2 Research Methodology
The method that was used to collect the relevant data for the case study is a face-to-face semi-
structured interview as well as data available on IKEA’s website and annual reports. For this
interview, one participant from the HR Department of IKEA AB in Sweden was invited to sit in a 2-
hour interview answering a list of prepared questions, which was built based on Ferreira and Otley’s
(2009) framework and sent to the participant in advance. The participant’s answers were recorded
during the interview and transcribed into written document.

3 IKEA AB – Company Overview

The company chosen for this analysis of performance measurement and management system is
IKEA AB in Älmhult, Sweden. This is the very first company where the name IKEA started before
it grew into a big organization with several companies operating within its network. IKEA AB is
now under the ownership of IKEA Group. The company mainly provides business shared services
for the other companies within IKEA Group, including human resource, finance and meetings and
facilities services. Because all shared services are centralized to be handled by IKEA AB, the group
can have experts and professionals in various fields within HR or Finance to assist the remaining
companies with very specific problems. Currently, IKEA AB is employing around 300 employees,
also known as “co-workers" in IKEA terms, and have three main departments according to its
functions: Human Resource, Finance, and Meetings and Facilities. As part of the IKEA Group,
IKEA AB follows the vision and mission, key success factors, organization structure, strategies and
plans set out on the global level and applicable to all companies under IKEA Group. (S Knutsson
2017, interview, November 24).
The IKEA’s vision is “to create a better everyday life for the many people” and the vision goes in
tandem with IKEA’s business idea, where the company commits to offer a wide range of well-
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designed and functional products with affordable prices so that many customers can buy them. To
IKEA Group, the largest franchisee of the IKEA concept, the vision and business idea means
making sure IKEA products are accessible to customers through the system of existing and new
IKEA stores around the world (IKEAa, 2017).
In order to support growth, IKEA Group principle is to grow with their own resources by
reinvesting a majority of profits in product development, ensuring that it can offer quality products
at low prices; in sustainable solutions to support its people and planet positive strategy and in co-
workers’ personal development. According to Ingka Holding B.V’s summary in 2017, IKEA
Group’s strategic objectives are set out to support its vision in three domains: to help the many
people create a better everyday life at home, to make it more convenient to shop at IKEA and to
become people and planet positive (IKEAb, 2017). The Group also states that togetherness,
simplicity and leadership will be key to their success in using sustainability as a driver to innovative
and transformational solutions (IKEA, 2014). As to organizational structure, in our opinion, the fact
that IKEA specifically refers to all people working for IKEA as co-workers implies the company's
ideology of a non-hierarchical organization structure.

4 Findings and Analysis of IKEA AB’s PMS

4.1 Key Performance Measures

According to the information acquired during our interview, it is specifically stated that IKEA AB
have more non-financial KPMs than the other companies in the group. The reason for this is
explained by the nature of responsibilities that the company mostly deals with, including people and
services in support to IKEA retail companies. Thus, these retailing companies put a stronger
emphasis on financial indicators, whereas IKEA AB can focus more on non-financial KPMs (S
Knutsson 2017, interview November 24). Even though the full list of KPMs could not be retrieved
from the interview due to company policy, two measures were mentioned as examples of the most
important non-financial KPMs to IKEA: customer focus and working environment. This awareness
of non-financial measures shows a consistency with trends of performance measurement identified
by Ittner and Larcker (1998).
It can be clearly seen that people is one of most important part of IKEA’s strategy. The vision of
making better everyday life is not only confined to customers, but it also expands to all people and
businesses that are impacted by IKEA’s business activities (IKEAa, 2017). Thus, it can be inferred
that IKEA Group has built its KPMs in close relation to global strategy and objectives, which state
that customer’s and co-worker’s personal development are among the critical growth areas. On the
group level, it was not clear to us how the link between customer, employee satisfaction and
performance is validated. However, secondary data shows that customers and employees are two
factors that drive the company to success in the changing business environment and are the main
drivers that co-create the organizational image and strategic direction towards sustainability (IKEA,
2014).
It is interesting that interviewee did not mention the use of balanced scorecard in IKEA Group.
Instead, according to the participant, the group global management will assign the key performance
measures for individual companies (such as IKEA AB) depending on what they are doing. This
approach is also in line with literature regarding balanced scorecard suggesting that key
performance measures should be customized to different business units (Ittner & Larcker, 1998).

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Ittner & Larker (2003) also restate this common mistake of companies that adopt balanced
scorecard without carefully consider the link between their measures and strategy.
It is then IKEA AB’s responsibility to connect these measures with their action plan, and how they
can effectively measure it. Currently, for customer focus, IKEA AB is working towards creating a
comprehensive customer index to measure its level of customer focus. In regard to working
environment, the company tries to ensure that IKEA maintains a great place to work and measures
this every year through the Co-worker Survey (S Knutsson 2017, interview, November 24).

4.2 Target Setting

Targets for IKEA AB are mainly set by the management team and applied to various hierarchical
levels. These are established by the collective involvement of the workforce. The managers set out
various approaches to collect as much input as possible, and take in consideration the viewpoint of
co-workers and managers when constructing their objectives plan, avoiding the otherwise common
method in other organizations of deciding in private amongst the management team. On a functional
and team-level, the leaders of these divisions are responsible for setting the appropriate goals. All
the way down to the individual who sets 3 targets towards personal development goals (S Knutsson
2017, interview, November 24). This involvement throughout the firm touches on Falke and
Kosfeld’s (2006) stance on the relationship between managers and employees, in which
performance is optimized if the former doesn’t assert control and rather trusts the agent to perform
the tasks. Additionally, this is mentioned in Franco-Santos et al’s (2012) study on contemporary
performance measurement systems, in which they conceptualize team performance optimization to
be achieved by involving employees in setting of performance targets. Essentially, it reflects the
IKEA’s culture in addressing the wellbeing of co-workers, and has proven to be a pinpoint in their
organizational success from an efficiency and creative viewpoint. Whilst this may allow for targets
to be set within rational parameters (as result of the input received on the working floor) and avoid
establishing them too ambitiously, this is not always the case. IKEA AB integrates a mix of realistic
and ambitious targets throughout the year, and in 2016, three unachieved targets were witnessed in
the firm. This was the result of setting objectives with no rational foundations and an unclear action
plan to approach these systematically which is contrary to the process mentioned previously.
Usually targets are set based on a mix of three specific factors: market conditions, historical figures
and what can actually be measured. IKEA AB therefore ensures the necessary resources are
analyzed and aligned to effectively set targets in various hierarchical levels (S Knutsson 2017,
interview, November 24). Overall there is a sense of dynamism throughout the firm, where the key
element to optimally function is the role of cooperation and involvement, despite areas for
improvement in relation to clearly communicating action plans. Groen et al (2012) highlight this in
their article, by touching on the theory of planned behavior. In short, they reaffirm the power of
participatory development in solidifying the direct linkages between employee initiatives and
operational efficiency.

4.3 Performance evaluation

IKEA AB operates with a three-year business plan in place with actions set for each year. A follow-
up on the action and the degree of achievement on the three-year goals is done once a year. The
follow-ups are mainly based on relevant data which is assessed by the person responsible. A more
thorough evaluation is examined after three years. Workshops, discussion within the different teams
and divisions is part of communicating the objectives and training the team to achieve these (S
Knutsson 2017, interview, November 24). It is important to communicate the objective clearly and

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link them to the overall strategy. Banker (2004) found that communicating the business unit’s
strategies in a clear way affects the strategic linkage of objectives.
Individual performance assessment follows a clear process which is mostly the same on a global
level of the whole IKEA group to make transfers between countries and departments easier. There
is a performance evaluation done every year in which goals are set for the following year and salary
is reviewed in terms of the new goals and individual career development. The current process
includes only one follow-up talk a year, but IKEA AB is working on including the performance
evaluation in one-to-one talks with co-worker and manager which are already happening every 4 to
6 weeks. These talks can be used to discuss individual objectives and development on a more
regular basis. This can help employees to get feedback on their current performance and the
expectation of the supervisor in the following weeks, as well as assessing their goals and if
necessary adapting them to unexpected situations. (S Knutsson 2017, interview, November 24)
Within IKEA, individual performance evaluation is done by looking at the whole person, not just
the employee but also the private person. This is the reason why informal information plays also a
role in that process. If an employee goes through a difficult personal situation, this will be taken into
consideration when assessing the performance (S Knutsson 2017, interview, November 24). It can
be implied here that this leads to a more subjective evaluation of individual performance since not
only the actual result is taken into consideration but it is also possible to adjust the evaluation scope
on the individual. This can positively affect the pay satisfaction and productivity of employees.
Nevertheless, subjective evaluation is criticized for the possibility of bias (Gibbs et al, 2004;
Ferreira & Otley, 2009). To have a balance between objectivity and subjectivity IKEA is setting
individual goals using S.M.A.R.T. criteria. Due to the more subjective evaluation of each employee
as an individual, no relative performance measurement is done on an individual level. Every
employee is assessed depending on his or her own abilities and capabilities. Relative Performance
evaluation is in the IKEA group and only used on higher level (S Knutsson 2017, interview,
November 24), which is in line with the theoretical findings of Ferreira and Otley (2009) that there
is little evidence for the efficiency and effectiveness of relative performance evaluation on a lower
managerial level. On a divisional level managers are expected to follow-up on their division goals
regularly and assess these within their teams during monthly team meetings. On this level, a relative
performance evaluation is done by using a competence review which gives an overview of the
team’s performance and abilities. On a higher level, it is assessed where high potentials are located.
On a global level, a co-worker’s survey is used as a benchmarking tool between different IKEA
companies. This way best practices can be determined within the company (S Knutsson 2017,
interview, November 24).

4.4 Reward System

IKEA’s financial reward system includes a bonus program which is consistent throughout the whole
IKEA group. The bonus program is based on the IKEA’s global achievements, local market goals
and the objectives of the independent IKEA Group organizations such as IKEA AB. When the set
targets are achieved, all managers and employees receive an equal percentage of their salary as their
bonus (S Knutsson 2017, interview, November 24). This team-oriented approach reflects IKEA's
avoidance of a common management reward failure, in which organizations often reward individual
effort while hoping for teamwork (Kerr, 1995). However, team-based rewarding also means that co-
workers who are not contributing as much as others are getting the same bonus while they are not
putting as much effort in as others. Frey (1997) implies that this can lead to shirking, not
contributing to a solution of the principal-agent problem. In addition, Baule and Soost (2016)

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mention the sorting effect that comes with individual financial incentives. Not having these can
cause high-performers to become demotivated and leave the company. Contrary, Ryan and Deci
(2000) found that by emphasizing the importance of teamwork there is little competition between
co-workers which can actually lead to higher intrinsic motivation since one threat to intrinsic
motivation is competition pressure within the workplace.
Although financial rewards are only implemented on team-level, non-financial rewards are given
both on individual and on team level. As the team achieves a specific goal, the company rewards
them by organizing small events such as team breakfasts or lunches. The idea behind this is to
emphasize again on team spirit and solidarity. Individual non-financial rewards are also part of the
company’s reward system in form of flexible career opportunities and development within the
whole IKEA group, especially for high performers. They can have individual dialogs with their
managers to openly discuss their personal goals and career opportunities. During this dialogue, the
high performer has the chance to make a development plan with the manager (S Knutsson 2017,
interview, November 24). This fosters employee’s motivation due to the feeling of control and
choice over their own career path and self-determination (Ryan & Deci, 2000).
Underperformers who do not achieve individual goals or other expectations are not penalized,
however, they do have a dialogue with their manager to analyze the reason behind their current
performance. The manager and underperformer establish a clear action plan together and look for an
alternative position within IKEA which suits them better. On one side, this can lead to more
motivated employees since they get the impression of self-determination (Ryan & Deci, 2000). On
the other side, by not using any sanctions, there is no disciplining effect which can cause shirking
(Frey, 1997).

4.5 PMS Use

Through the interview, information shows that there are certain control mechanisms within IKEA
AB that were used diagnostically. Simons (1994) categorized diagnostic control systems as those
that enable formal feedback and can be used to monitor outcomes and performance standards. On
the organizational level, diagnostic use of PMS can be observed in IKEA AB’s business plan setting
and in their human resource mapping mechanism. For business plan setting, formal meetings are
held on a yearly basis to work out plans that can align with the global level strategy. The plans are
also revised based on the current changes in the market and environment throughout the timespan,
as long as they remain consistent with the global strategy. As to human resources allocation,
diagnostic use can be seen in re-positioning actions. Every year, management team and department
of human resource get together in a formal meeting called “human resource mapping” process.
Performance evaluation is then utilized and employee’s expectations are also taken into
consideration when IKEA AB decides which layout of employee repositioning is best for the
company performance and for the satisfaction of co-workers next year.
Based on Simons’ (1994) interactive system, Bisbe et al (2005) developed a five-property model
with observable indicators to identify interactive use of control mechanisms. We found that in
IKEA AB there are factors observable in the model by Bisbe et al (2005), where dialogues at all
levels is an important factor that facilitate the diagnostic use of the PMS system. According to our
interview, it is known that in IKEA, there is ongoing encouragement of conversations between
managers and co-workers, all of which are face-to-face. This is an indicator of intensive and
frequent attention from managers at all level to employee decisions. There is also a focus on
strategic uncertainties as changing conditions are considered as the norm in IKEA’s individual and

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organizational objectives. The company also applies informal communication of strategies and
plans in forms of launch parties, where top management is invited to convey the message of strategy
(S Knutsson 2017, interview, November 24). This interaction helps create involvement throughout
the organization between managers and employees. Although our data does not reveal the
dimension of strategic renewal and how co-workers are challenged to new ideas and initiatives as
well as how action plans are revised (bottom-up or top-down), there is sufficient evidence to
conclude that in IKEA AB indicators exist for an interactive PMS use in certain control
mechanisms.

4.6 Strength and Coherence

The coherence between the performance measurement system and the overall strategy of the IKEA
group and the environment in which it operates (Neely et al, 2005) are demonstrated by the
following aspects. Firstly, as mentioned before, targets are set on a global level, from which sub-
companies, and divisions then set their own objectives, aligning to the initial global direction. This
shows that IKEA’s performance management system is linked back to its key success factors as
well as the overall global strategy (Van der Stede et al, 2006). To achieve this, management in
various hierarchical levels base their decisions on the input from employees, and this reflects the
values of IKEA by providing a voice for everyone and involving the employees in the process of
important organizational decisions. This practice is optimally achieved with clear communication.
The recent failure, elaborated in section 4.2, contrasts with this aspect and shows areas for
improvement in IKEA’s communication structure. This entails a stronger focus on the top-down
approach while trying to initiate a bottom-up approach, thus leading to an overall misalignment. It
could be argued that even though IKEA is trying to use a un-hierarchical, transparent and
employee-involving PMS, it is still a global acting company with certain layers of hierarchies that
can’t be denied, which might cause this miscommunication. Secondly, IKEA’s team-based
incentives are coherent with the organization's values of equality and togetherness. In addition, the
absence of penalties for underperforming employees reflect how the company values its personnel.
Instead of penalizing its employees, IKEA focuses on employee development, which is also
consistent with the company's strategy of having positive impact on all stakeholders.
To evaluate the strength and coherence of PMS components, we based our evaluations on the
factors that were suggested by Chenhall (2003). From the information presented above, it could be
said that there is a strong vertical link between IKEA's overall vision and strategy with its
operational levels. We found that individual personal evaluation is not directly linked to financial
incentives for employees, but rather to their non-financial incentives. This is considered a smart
move for IKEA AB as the crowding out effect could be stronger if their highly motivated
employees are given bonuses individually in monetized type of rewards (Frey, 1997).
Chenhall (2003) also recommend looking at the system to see if it considers multiple stakeholders.
In our case of IKEA, the control system includes multiple stakeholders (customers, employees,
management team) and takes into consideration the importance of non-financial outcomes
(employee personal development, customer satisfaction) to go alongside with financial results. In
the aspect of external environment adaptation, even though IKEA does not use internal bench-
marking as a way to set targets, the global group does, in fact, bench mark the whole group
performance with the outside market to see where the company goes in the future (S Knutsson
2017, interview November 24). Within IKEA AB, flexibility to changes and adaptability are also
demonstrated by involving employees in regular talks with managers. In addition, since IKEA’s
strategy is customer focused, changes in customer data can exert influence on the organizational

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decision-making process, so the company makes effortInter to include employees in the decision-
making process as well. Therefore, it is possible to assume that IKEA can adapt “to its external
environment” (Chenhall, 2003, p.136). All in all, IKEA’s performance measurement system is
considered coherent in itself and within its environment. The system is strong but not insusceptible
for failure.

5 Limitations
The evaluation of IKEA AB performance measurement and management system is not entirely
comprehensive due to several inherent limitations. First, as there was only one participant from
IKEA AB taking part in the interview, information collected can be subjective to personal opinions
and different facets of the answers could be incomplete because the participant was not allowed or
able to answer them. Thus, the possibility of this report to explains IKEA PMS on a global level is
limited. Second, due to confidential policy, the interview did not acquire a full set of KPMs for
analysis. Also, the horizontal link between IKEA AB and other companies within the Group, as
well as the link between IKEA companies with its value chain constituents were not thoroughly
explored due to time limit of the interview.
These limitations are seen as opportunities to further analyses that could cover the rest of the
companies under IKEA Group to compare their different which could be explained by the type of
tasks prominent in each company. Further studies can also include studying IKEA PMS over the
course of time to better observe how the system has changed or remained the same over the years.

6 Conclusion
The analysis of IKEA AB performance measurement and management system provides a lot of
insights into the world’s largest furnishing company. These insights are valuable because we
assume IKEA as a group has had years of learning to be able to arrive with the current system of
performance measurement. Thus, it certainly has strong points that can be learned from.
Throughout the years, IKEA has shown to be a pioneer in leveraging their human capital towards
achieving a work culture, which is a pillar to their ongoing success, and the analysis conducted is
proof. Apart from the obvious focus on non-financial aspect of the system by implementing
customer index and co-worker survey to monitor growth factors, it is clear that the all-round
involvement of employees provides the management with valuable information to guide their
decision-making and evaluations when implementing changes or achieving goals. Elements of the
performance measurement and management system are aligned with each other and each has a
specific purpose of motivation and control. The unique approach in valuing each individual
employee enables a sense of transparency and a dynamic flow of information throughout the
various hierarchical levels. It becomes clear that to IKEA, reward system is built to enhance
employee’s intrinsic motivation, not diminishing it. The matter of monetized rewards is considered
thoroughly and distributed fairly. By encouraging participation and focusing on team-based
rewards, IKEA AB successfully eliminates the deterring possibility of inter-firm competition,
conveying a long-term approach to build on their vision and reflecting ethical practices from
society’s viewpoint. Performance evaluation is also used for personal development rather than
placing threats or constraints towards employees. Nevertheless, due to recent failure by setting
unrealistic goals, IKEA can’t always achieve the transparency and motivational impact that it is
aiming for. This suggests that there is still room for improvement in its communication structure.

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