Case study of the performance management of the Food department Management control at IKEA Groningen

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Management control at IKEA Groningen

Case study of the performance management of the Food department

Author: Karel A. Smid, M.Sc

Student number: 1539396

Study: Business Administration

Specialization: Organizational and Management Control

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Executive summary

This research has been conducted as part of the Master specialization Organizational & Management Control of Business Administration, which is part of the Faculty of Economics and Business of the University of Groningen. This research was carried out at IKEA Groningen and is aimed at increasing the level of performance and control of the Food department. The main objective of this research is to provide recommendations that will lead to an increase in the level of control and performance of the IKEA Groningen Food department.

The performance of the Food department in recent years has been below expectation and the department is currently even operating at a loss. This has been caused by very high operating expenses, rather than low revenues. The underperformance in financial terms might be related to a low level of job satisfaction among employees, a suboptimal leadership style, or a low level of communication. These issues result in the Food department not being under sufficient control of the management of the IKEA Groningen store. Therefore, the research question is: ‘What changes in management control system have to be made in order to improve the level of performance and control of the IKEA Groningen Food department?’

The theoretical review of this research mainly focuses on performance management and management control systems. In addition, leadership style and communication competence are assessed in relation to performance. After the theoretical part, semi-structured interviews are conducted in order to analyze the issues of the Food department and to identify areas for improvement.

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Preface

The paper you are currently reading is the final part of my master program Organizational and Management Control of my education Business Administration at the University of Groningen. This thesis has the objective of clarifying what measures need to be taken in order to improve the level of control over and performance of the Food department of IKEA Groningen. The analysis has been based on interviews of the leaders of the Food department, two of its leaders to be and on the reviewing of internal documentation.

I would mainly like to thank IKEA Groningen’s store manager Jelle Visser for providing me the opportunity to take on the challenge of investigating the Food department. I sincerely hope that this research contributes to an increased level of control over this department shortly. In addition, I would like to thank my supervisor of the University of Groningen, drs. Marcel Bergervoet, for his very quick and critical reviewing of and concise comments on earlier versions of this paper. This has definitely contributed in being able to handing in this thesis quickly, without loss of quality.

Karel Smid, M.Sc

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IKEA Group is a privately owned, globally operating company, founded in 1943 by Ingvar Kamprad, which currently sells close to ten thousand home furnishing items. Nowadays, IKEA is operating in 26 countries, has 287 stores and 131.000 employees. The organizational structure of IKEA group can be found in Appendix 1. The parent company of IKEA Group, INGKA Holding B.V. is owned by Stichting INGKA Foundation, which is a Dutch organization. The headquarters of IKEA Group is based in Sweden, whereas both INGKA Holding B.V. and the Stichting INGKA Foundation are based in the Netherlands.

The vision of IKEA is to create a better everyday life for the many people. This is supported both by the business idea of IKEA, which is ‘to offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them’ and by the fact that sustainability is of great importance. IKEA is able to sell its products at very low prices, mainly because it controls the entire production chain, from the woods to sawmills to the manufacturing facilities.

Stichting IKEA Foundation is a Dutch charitable foundation, which is funded by the Stichting INGKA Foundation. The Stichting IKEA foundation mainly focuses on improving the rights of children and youth in order to provide them with the opportunity to take charge of their own future. In 2011, Stichting INGKA Foundation donated 65 million euros to Stichting IKEA Foundation. IKEA also cooperates with partners like the WWF, UNICEF and the Save the Children-foundation in order to be both an environmental friendly organization and a social organization.

IKEA is a relatively decentralized organization, since each store has a lot of influence on the way they do business. One store therefore contains a wide range of departments, including Human Resource Management, Sales, Food, Logistics and Customer Relations. The only aspect that is fully controlled centrally, on a national basis, is marketing. The organizational chart of IKEA Groningen can be found in Appendix 2. The store in Groningen is in terms of square meters the second largest store in Europe, and includes the national customer contact center.

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Chapter 2. Problem statement

The Food department of IKEA Groningen has some issues that need to be addressed, since this department is underperforming both in relation to other departments of IKEA Groningen and in relation to other IKEA Food departments in the Netherlands. The management team of IKEA Groningen wants to have this department under control. Management control, as defined by Merchant & Van der Stede (2007), includes all the devices or systems managers use to ensure that the behavior and decisions of their employees are consistent with the organization’s objectives and strategies. The objective of a management control system is to influence the behavior of employees in such a way that the probability that the organizations goals will be achieved is increased (Merchant & Van der Stede, 2007). Currently, there is a discrepancy between the goals and the actual performance of the Food department. There are some symptoms to the problem within this department, which will be discussed hereafter.

An issue for the IKEA Groningen Food department is that the profit margin of the Food department is lagging significantly behind the other stores of IKEA in the Netherlands and the departments own performance in recent years. Compared to other IKEA stores, the market for the Groningen store is relatively large, since the closest other IKEA stores are in Amersfoort and Hengelo. The Food department has significantly more customers than other IKEA stores in the Netherlands. This results in one of the largest turnovers of all of the IKEA Food departments in the Netherlands. It is rather straightforward that an organization, division or department cannot operate at a loss indefinitely. Therefore, the stores management team wants to decrease the costs of the Food department in order to increase the profit margin. This research will focus on providing recommendations on how to do so.

The high costs of the Food department are hypothesized to be related to relatively high operational expenses. For instance, the personnel costs for the Food department are thought to be higher than that of other IKEA Food departments in the Netherlands, due to a low personnel efflux and high absenteeism. The low efflux implies that the personnel is highly sedentary, in the sense that both inter and intra-firm transfers are rarely used for the personnel in the Food department, which causes their salary costs to increase much more than that of other departments.

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8 department is officially separate from the IKEA Groningen store (it is also not included in the organizational chart in Appendix 2), these people do use the same canteen as all the other employees and hence, they eat the meals produced by the Food department. Since, according to the collective agreement, dinner is for free when working at least seven hours a day and in the evening, the Food department does incur the costs of those meals and all drinks, but they do not receive anything in return. Because none of the other IKEA stores have a customer contact center, the Food department in Groningen incurs significantly more costs than other stores. This might indicate that a more refined cost allocation system might increase the accuracy of actual costs incurred by the Food department, which in turn could increase their profit margin. This increase in profit margin for the Food department will not lead to lowering of total costs, if costs are allocated to other departments. However, it might provide the Food department with a more real picture of the profit margin.

Related to the low profit margin is that the personnel satisfaction of the Food department, as recently measured by an independent research institution in March 2012, is significantly below that of the store and national average. Especially in terms of efficiency, cooperation and communication some significant improvements can be made. The productivity within the Food department is relatively low and absenteeism is high. Between 2007 and 2009 the personnel satisfaction of the entire store was at the lowest level of the last decade. Since then, the personnel satisfaction of many departments has increased, but the satisfaction of the Food department, though it increased a little, is still below national and store average. The focus of the store is to improve the personnel satisfaction within six months to a level more consistent with the other departments. These issues indicate that there are some personnel and/or cultural problems within this department.

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9 The low job satisfaction of the Food department employees can be traced to a leadership struggle. Leaders of the Food department are said to be underperforming, as judged by the Food department employees. Same as the personnel satisfaction level, the leadership struggle was highest in the period 2007-2009. A change in management team composition has made a slight positive change, but there still is some level of underperformance. Once hired, the manager and team leaders generally have approximately one year to adjust to their function, before results have to be shown. Currently, some of the Food department leaders are in function for more than a year and the results remain unfulfilling. This leads to the question why there is underperformance and what can be done to improve performance.

Both a transformational leadership style and the communication competence of a leader strongly influence employee job satisfaction (Fuller et al., 1996; Madlock, 2008), employee motivation and satisfaction with the leader (Judge & Piccolo, 2004). A transformational leader, or in the words of Madlock (2008) a ‘relational leader’, appeals to the socio-emotional needs of employees (Jansen, 2011). For a leader to be perceived as a competent communicator, the leader has to (i) share and respond to information in a timely manner, (ii) actively listen to other points of view, (iii) communicate clearly and efficiently to all levels of the organization and (iv) use various communication channels (Shaw, 2005). This shows that the leadership styles and/or communication competence of the Food department leaders could be related to the low employee satisfaction, as mentioned in the previous paragraph. Since employee satisfaction appears to be related to organizational performance (Judge et al., 2001; Wood et al., 2012), three of the issues of the IKEA Food department, bad financial performance, low job satisfaction and a leadership struggle, might at least partly be related to each other.

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10 initiate or increase investment and/or operating myopia of that department and hence, further decrease value for the owners.

Based on the issues of the IKEA Groningen Food department, it can be said that there is a lack of adequate control. Management controls are used to make sure that the objectives of an organization are achieved (Anthony, 1965). According to Merchant and Van der Stede (2007), management control addresses the question whether employees are likely to behave appropriately. The tightness of management control systems is related to the likelihood that organizational goals are achieved (Merchant & Van der Stede, 2007). Both too little and too much control can be harmful to the organization (Herath, 2006). Being in perfect control refers to the situation in which the employees behave in a way which is best for the organization (Herath, 2006). In order to get the Food department under control, and increase the likelihood that organizational goals will be achieved some changes in the management control system have to be made. Although an increased level of control is related to a higher likelihood of better firm performance, such a relationship between control and performance has been questioned (Chenhall, 2003).

The goal of this research is:

‘To gain a thorough understanding of the situation within the IKEA Groningen Food department and to make recommendations for improvements in order for IKEA Groningen to get the Food department under control and improve the performance.’

The research question is:

‘What changes in management control system have to be made in order to improve the level of performance and control of the IKEA Groningen Food department?’

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11 located in this section of the Performance Management Systems Framework (Ferreira & Otley, 2009). In addition, the theoretical part will discuss the leadership style and communication competence.

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Chapter 3. Theoretical framework

3.1 Performance Management Systems Framework

In order to assess the performance management system at the IKEA Groningen Food department, the Performance Management Systems Framework (PMSF) of Ferreira & Otley (2009) will be used. Their framework is a ‘tool to describe the structure and use of the ‘package’ of controls deployed by management and designed to ensure that an organization’s strategies and plans are effectively implemented’ (Ferreira & Otley, 2009, p. 277). Their framework can be found in Figure 1. The performance of an organization is optimal when all the items in this framework are in line with each other.

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13 Firstly, the upper part (Q1-Q4) of the Performance Management Systems Framework (Ferreira & Otley, 2009), consisting of the vision, mission, key success factors (KSF), structure and strategy, will be discussed. Based on the problem statement, there are no issues in this part of the framework. Therefore, this part will be discussed briefly, in order to provide an overview of the framework. Thereafter, the lower part of the framework (Q5-Q8), consisting of key performance measures (KPM), target setting, performance evaluation and reward system, will be discussed in more detail, since this part is where the issues for the IKEA Groningen Food department have their root cause. This part will be discussed using the management control system of Merchant & Van der Stede (2007).

3.1.1 Vision, mission, KSF, structure & strategy

According to Ferreira & Otley (2009), performance management begins with the vision and mission, which are the purpose and main objective of an organization. The vision of an organization is a long term view of how the organization wants to see the world it operates in. Collins & Porras (1996, p. 66) stated that ‘truly great companies understand the difference between what should never change and what should be open for change’. The vision is part of the organization that should never change, since it represents the core ideology and the envisioned future (Collins & Porras, 1996). The mission of the organization is also part of the organization that is solid and not open for change. The mission statement defines why an organization exists. The mission statement must be clearly defined long term goals, which can be used for shared expectations, planning and performance evaluation. In addition, the mission provides direction for managers, which is, or should be, transcended throughout the organization (Pearce, 1982).

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14 The structure of an organization is the arrangement of people for getting work done (Perrow, 1967). Hall (1977) adds to this definition that structure serves two objectives. Firstly, structure is ‘to minimize or at least regulate the influence of individual variations on the organization’. Secondly, structure is ‘the setting in which power is exercised, decisions are made and the organization’s activities are carried out’ (Hall, 1977). The strategy and structure of an organization are mutually interdependent and have to be examined together (Chenhall, 2003; Ferreira & Otley, 2009). Porter (1980) stated that ‘the essence of formulating competitive strategy is relating a company to its environment’. The firms positioning determines the likelihood that firms earn an above average return in an industry.

3.1.2. Management control systems

3.1.2.1 Results, action, personnel and cultural controls

A management control system is defined by Merchant & Van der Stede (2007) as ‘everything managers do to help ensure that their organization’s strategies and plans are carried out’. A management control system is set up in order to counteract three of the main control problems: (i) lack of direction, (ii) motivational problems and (iii) personal limitations (Merchant & Van der Stede, 2007). Therefore, management control systems can be seen as the key performance measures, target setting, performance evaluation and reward system (Q5-Q8) in the Performance Management Systems Framework (Ferreira & Otley, 2009). In the words of Collins & Porras (1996), this part of the organization is more open for change.

Merchant and Van der Stede (2007) have split up management control systems into four control areas. These are results controls, action controls, personnel controls and cultural controls. Results controls are about rewarding employees for generating good results (Merchant & Van der Stede, 2007). By rewarding employees for good results, they are likely to think about the consequences of their actions and hence, behave in a way that maximizes value for the owner.

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15 (Merchant & Van der Stede, 2007). The results of the IKEA Food department are a first indicator that there is an issue. The financial results will be the first aspect under investigation, since the financial results clearly indicate decreasing performance.

Action controls are about ensuring that personnel of the organization behave in such a way that is beneficial for the organization. Action controls are mainly used to stimulate wanted behavior and to reduce unwanted behavior (Merchant & Van der Stede, 2007).

Personnel controls are used to stimulate employees to control and motivate themselves. Personnel controls are used to clarify expectations, to help ensure that employees are able to perform their job well and to stimulate self-monitoring. Personnel controls are best implemented through selection and placement of employees, training and job design, and provision of resources (Merchant & Van der Stede, 2007).

Cultural controls are to stimulate monitoring of each other. Group pressure is a strong tool to stimulate someone who does not perform as required to do so again. In order to shape the culture within an organization, codes of conduct and group rewards are highly influential. Other approaches to shape organizational culture are intra-organizational transfers, physical arrangements and tone at the top (Merchant & Van der Stede, 2007).

The low personnel satisfaction and high absenteeism indicates that there are one or more issues in the personnel and/or cultural control areas. In addition, both lack of direction and motivational problems are issues that are concerned with these two control areas (Merchant & Van der Stede, 2007, p. 91). These control areas will therefore be investigated more thoroughly. Hofstede’s cultural dimensions (Hofstede, 1980) will be used to assess the organizational culture of the IKEA Food department. Since the job satisfaction is strongly related to leadership style and communicator competence (Fuller et al., 1996; Madlock, 2008), the leadership style and communicator competence will be investigated as well.

3.1.2.2 Cultural dimensions

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16 Masculinity is about whether the people have a preference for achievement, heroism and materialism, while feminism is more about preference for relationships, caring for the weak and quality of life. Individualism refers to the extent to which people take care of themselves or close relatives, rather than collectivism, which refers to taking care of others without asking questions (Hofstede, 1985). The fifth dimension, long term orientation, has been added after studying Asian countries that have a more long term orientation than Western countries (Hofstede & Bond, 1988). Since this dimension is used to differentiate between Western and Eastern countries, this dimension will be disregarded in this research.

The value dimensions for national cultures can also be used to assess organizational cultures (Hofstede, 1985). Therefore, the described values can and will be used to assess the culture within the Food department and whether and if so, how, the culture differs from the optimal culture at IKEA. Changing an organizational culture, however, will not be achieved quickly or easily (Wines & Hamilton, 2009). This is due to the fact that organizational cultures are relatively fixed over time, whereas strategies and goals can change (Collins & Porras, 1994) and because organizational culture is one of the most powerful forces in an organization, yet it is invisible and intangible (Wines & Hamilton, 2009).

3.2 Leadership style and communication competence

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17 Transformational leaders have been related to being more effective and satisfying (Bass, 1990) and to increased financial performance (Idris & Ali, 2008). However, Judge & Piccolo (2004) have found that both transformational and transactional leaders are significantly and positively related to, among others, follower job satisfaction, follower leader satisfaction, follower motivation and group performance. This would indicate that leadership is a contingent factor, and that in one organization transactional leadership is preferred, while in another firm, transformational leadership is preferred.

Not only the leadership style, but also the communication competence of the leader can influence the employee job satisfaction, (Fuller et al., 1996; Madlock, 2008), employee motivation and satisfaction with the leader (Judge & Piccolo, 2004). Therefore, both the leadership style and communicator competence of the leaders within the Food department of IKEA Groningen will to be assessed.

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18 3.3 Conceptual model

Based on the theoretical framework, the following conceptual model has been made (Figure 2).

Figure 2. Conceptual model for the IKEA Groningen Food department research

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19 3.4 Research questions

In the chapter that focuses on the problem statement, the main research question has been formulated. This research question is:

‘What changes in management control system have to be made in order to improve the level of performance and control of the IKEA Groningen Food department?’ Based on thetheoretical framework, nine sub questions can be formulated.

1. What are IKEA Food’s key performance measures?

2. What is the required level of performance on the key performance measures and how challenging are those targets?

3. Which financial results controls are used and how do they work within IKEA Food? 4. What rewards must be provided for attaining the desired targets?

5. In which way are the employees of the Food department evaluated?

6. To what extent should the employees of the Food department improve on stimulating and motivating each other?

7. What is the culture of the Food department and to what extent does the culture need to be changed?

8. To what extent should the leadership style of the managers of the Food department be changed?

9. To what extent should the communication between management and employees be improved?

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Chapter 4. Research methods

4.1 Data collection

Since there is a multitude of symptoms regarding the underperformance of the IKEA Groningen Food department, a case study is the most appropriate research design to researching the Food department. In this case study, financial data and many other internal documents of recent years will be reviewed (Appendix 6, page 51).

Hereafter, seven semi-structured interviews will be held with the Food manager, the four team managers of the Food department and two ‘potentials’, who are team leaders to be (for the list of interviewees, see Appendix 5, page 50). These people are the most influential within the Food department and they have the most knowledge about the management control system, or parts of it. The deputy Food manager will not be interviewed for this case study. He started in this new function mid-June 2012, so he has relatively little inside information about the management control of the Food department. Also, none of the employees are interviewed for this case study, in order to prevent a skewed analysis when only interviewing a few of the approximately 90 employees.

4.2 Data processing

The internal documents and the semi structured interviews are used to study the various aspects of the conceptual model (Figure 2, page 18). The list of internal documents and the part of the analysis they refer to can be found in appendix 7 on page 52. The interview questions are partly based on the questions used in the master thesis of de Vreeze (2008) and can be found in Appendix 4, on page 47. In Appendix 4, the questions are grouped to the part of the analysis they refer to. Since the employees have all filled out a VOICE questionnaire, in which they are asked various questions about what they think of the way of doing business, communication and their own team leader, the results from this questionnaire are used as representation of the employees.

4.3 Data analysis

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Chapter 5. Analysis

5.1 Introduction

In this chapter, the analysis of the ten sub questions will be provided. The seven sub questions are all part of the management control system that has been proposed by Merchant and Van der Stede (2007). Sub questions 8, 9 and 10 are concerned with communication, leadership style and the costing system. Firstly, the sub question about the key performance measures and target setting will be analyzed (questions 1 and 2). Secondly, the financial results controls will be analyzed, which include financial responsibility centers, planning and budgeting and incentive compensation (questions 3, 4 and 5) (Merchant & Van der Stede, 2007). Next, in the paragraphs of the action controls and personnel controls, the sub question regarding the employee self-motivation will be analyzed (question 6), followed by an analysis of the culture within the Food department (question 7). This chapter will continue with an analysis of the wanted and actual leadership type (question 8), followed by an analysis of the communication within the Food department (question 9). Finally, the influence of both planning and resource efficiency will be discussed (question 10).

5.1 Management Control System

5.1.1 Results controls

5.1.1.1 Key performance measures and target setting

The key success factors of the IKEA Food department are customer focus, hygiene, planning of schedules and employee satisfaction. The targets for the Food department are set on an annual basis and are based on the key performance indicators (KPI) results of the two most recent years. In addition, they are discussed by the Food managers on a national level. According to the interviewees, the targets of the Food department are high (Appendix 7, page 52).

Customers are generally satisfied with the food of the store. This results in many customers and high revenues, although currently the amount of customers in the Swedish Food Market is a bit too low. Both number of customers and revenue has increased compared to last year’s performance.

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22 focus on the amount of products that can be sold on one day, which regularly results in a high level of waste. The purchase of direct materials is a lot higher than that of other IKEA stores in the Netherlands. Amsterdam has approximately the same level of direct materials, but their revenue is a lot higher compared to Groningen. The costs of direct materials and in addition, very high personnel costs in 2012 contribute to the department currently operating at a substantial loss. Both the low resource efficiency and high personnel costs will be discussed in the paragraph ‘Efficiency’. In order to increase the profit margin of the department, the interviewees stated that one of the targets of the Food department is to increase the sales to each customer (Appendix 7, page 52).

5.1.1.2 Financial results controls

5.1.1.2.1 Financial responsibility centers

The financial responsibility centers of the Food department can be found in Appendix 3 on page 47. Both the store manager and Food manager are profit centers. For (large) investments the Food department, in cooperation with Business Navigation, which is the controlling and accounting department, need permission from the national Business Navigation department. The Food manager of IKEA Groningen can therefore not be regarded as responsible for the return on investment and cannot be held accountable for investments. The Food manager is responsible for the profit of the Food department.

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5.1.1.2.2 Planning and budgeting

The budget for the Food department is established on an annual basis. The budget is agreed upon in coordination with Business Navigation and is based on the financial performance of the last two years. Besides the negotiation with Business Navigation, the Food managers of all the IKEA stores in the Netherlands also meet to discuss the general target for the coming year. The targets for the Food department include the growth of revenue and gross margin, which are also discussed nationwide, and targets for the KPI’s, which are discussed at store level. This shows that the targets for the Food department are both based on historic performance and on negotiations. The planning horizon is generally one year (Appendix 7, page 52).

A too challenging target, which has a low likelihood of being achieved, has a negative effect on the motivation to trying to reach this goal (Merchant & Van der Stede, 2007). For the current Financial Year, the budget is said to be very challenging and will most likely not be achieved this year (Appendix 7, page 52). Since the Food department is already struggling, the targets are perhaps set too high, which demotivates employees.

5.1.1.2.3 Reward setting and performance evaluation

IKEA has both an individual incentive system and a nationwide bonus system. The individual incentive system is an annual salary increase based on the performance of the previous year, as judged by the team leaders of a department. The assessment is based on the agreements that were made with each employee in the beginning of the financial year. The better the performance of an individual has been, the higher the salary increase for the next year.

The bonus system of IKEA consists of two parts. There is one incentive system for regular employees and one incentive system for specialists and members of a management team. Besides some differences, the common aspect is that only when the average targeted profit, costs and revenue of all the stores in the Netherlands (except Delft, which is a privately owned store) is exceeded, the employees are rewarded monetary incentive compensation. This shows that the incentive compensation is a mostly monetary incentive for all the employees and is based on the short-term, namely one year.

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24 compensation system. This is not necessarily a bad thing, since there is an individual incentive system and since the performance of all the stores together is considered to be more important than the performance of a single store.

The incentive compensation has not been rewarded to employees or to managers in the past 5 years. This shows that the targets are consistently set too high, or the employees consistently underperform, or a combination of the two.

5.1.2 Action controls

Action controls are intended to ensure that employees act in a way that is beneficial to the organization and does not harm it (Merchant & Van der Stede, 2007). The daily activities that are conducted by the personnel of the Food department are highly routinized. There are many standard operating procedures (SOP) (Appendix 7, page 52), which is mainly due to public safety concerns when the food is not prepared to a certain standard. The SOP’s and hygiene of the Food department are very important.

Within the daily activities, there are also many opportunities for the personnel to make decisions themselves, without management approval. However, many of the personnel do not take this opportunity. As will be explained in the cultural controls, the personnel are very uncertainty avoiding (Appendix 7, page 52). Employees therefore often don’t make decisions they could easily make themselves. A portion of the personnel is a bit too dependent on direct supervision of the team leaders. Besides some of the employees not taking a part of the decisions themselves, the action controls do not lead to any form of friction within the Food department.

5.1.3 Personnel controls

Personnel controls are intended to make it more likely that employees will perform desired tasks satisfactorily on their own (Merchant & Van der Stede, 2007). Personnel controls are used to clarify expectations, they help to ensure that employees are able to do a good job and they increase the likelihood that employees engage in self-monitoring (Merchant & Van der Stede, 2007).

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25 supervision from the team managers. However, not every team managers is present on the work floor all the time, so they might be unaware of what is going on in their respective section.

This lack of adequate personnel controls for the employees has to do with communication as well. Part of the employees are unaware of what the team managers are doing ‘in the office’ and argue that they are separated from the managers. A larger degree of openness from both team managers and employees is needed for more mutual understanding and respect for everyone’s respective jobs. In the recent past the team managers have focused on this aspect a lot and it has shown some improvement, but there are still improvements to be made (Appendix 7, page 52).

5.1.4 Cultural controls

The culture IKEA is aiming for is known as ‘the IKEA way’. Some of the main values are togetherness, enthusiasm, accepting responsibilities, humbleness and willpower. These values aim at creating a culture that is very open, both towards other employees and managers, but also to the way of doing business. These values and the culture are the typical Swedish aspect of IKEA. The culture of the Food department is assessed using the cultural dimensions of Hofstede (1985).

The actual culture of the Food department, based on the interviews (Appendices 7, page 53), can be described as highly collective. There is a very high group cohesion, which results in a strong subculture that is different from the culture within other departments. A weaker person in the group, or someone who is given negative feedback by one of the team leaders which is regarded to be unfair, will be supported by other members of the group. This high group cohesion results in a very large power distance between the employees and the leaders of the Food department, even though the leaders regard the extent of the power distance to be much smaller, or even non-existent (Appendix 7, page 52).

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26 and they want that to stay that way. Intra-organizational transfers are therefore never used unless someone’s personal well-being is at stake when continuing to work for the labor intensive Food department. Short term intra-organizational transfers, however, are regarded to be efficient in opening up the closed culture of the Food department (Appendix 7, page 52). In addition, the Food employees can also broaden their view within IKEA, so that they will gain knowledge and understanding about other aspects of the store.

The power distance and uncertainty avoidance are the main indicators of discrepancies between the wanted and actual culture of IKEA. These issues show that the power distance and uncertainty avoidance of the employees create a distinct subculture, which can clearly negatively influence both the job satisfaction of employees and the actual performance of the Food department.

5.2 Leadership

The leaders IKEA is aiming to attract, or even better, train themselves, need to have the knowledge, motivation and capability to perform in all situations and activities that an assignment requires. A leader has to be able to inspire, clarify, create togetherness, improve the way of doing business, lead and develop other people, deliver results and enable change (Appendix 8, page 56). IKEA’s leaders should lead by example. Such a profile mostly resembles a leadership style that is more towards a transformational leadership, since those leaders focus mostly on the socio-emotional needs of employees (Bass, 1990b; Jansen, 2011). IKEA considers hierarchy to be not very important, which decreases the focus on transactional leadership even more. Cooperation and mutual respect are much more important. As mentioned before, someone is not either a transformational or a transactional leader, and being more of one of the two cannot be regarded to be better than the other. It is more a matter of contingency, since it is important to have a fit with the organization and the context of the organization at a certain point in time.

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27 leadership style. The Food manager also has high people skills as judged by his interview (Appendix 7, page 52).

5.3 Communication

Based on the interviews (Appendix 7, page 52) and personnel satisfaction questionnaires, the communication within the Food department appears to be the main issue. In the results of the questionnaire it is indicated that cooperation, openness and being different are large issues. The communication from the Food department management team, consisting of the Food manager, four team leaders and the recently added deputy Food manager, to the employees can be much improved. As mentioned in the description of the culture, the employees regard the power distance to be very large, although this is small, or even non-existent, according to some members of the Food management team (Appendix 7, page 52). This power distance is actually an obstruction for the employees to directly contact one of the managers. Since communication flows in two directions, lacking communication from managers to employees and a large threshold for employees to contact managers is actually a vicious circle which needs to be broken.

The inefficient communication is regarded by the interviewees to severely impact on the financial performance of the department, since it holds back the performance that can be achieved. This shows that the gap between desired and actual performance can be bridged, at least partly, by improving the level and style of communication. The employees themselves have also asked for a course in handling feedback, as some of them have never learned to cope with feedback (Appendix 7, page 52).

As discussed in the previous section about leadership, the focus should be more on the transformational leadership style. It is indicated that the managers have to be more present on the work floor so that they are better able to contact their employees directly and can improve their understanding of the way things are going (Appendix 7, page 52). The managers are in that way much more able to give direction, give compliments when something is going right and confront personnel when things are not.

5.4 Efficiency

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28 showed that the direct costs and staff costs in Groningen are consistently among the highest, of the IKEA stores. Also the results of the personnel satisfaction questionnaires and interviewees (Appendix 7, page 52) indicate that efficiency is a concern within the Food department.

5.4.1 Food efficiency

Under cost of goods sold in the profit and loss statement of the Food department only the purchase costs for food and change in stock is incurred. The cost of goods sold is normally calculated as ‘opening finished goods stock + cost of goods manufactured – finished goods stock’ (Bhimani et al., 2008). Cost of goods manufactured includes all the costs of goods brought to completion, irrespective of whether they were started before or during the current accounting period (Bhimani et al., 2008, p50). Cost of goods manufactured consists of direct materials, direct labor and indirect manufacturing costs. The latter two are not included in the cost of goods sold in the profit and loss statement of the Food department and hence, the term ‘cost of goods sold’ is not used appropriately.

The gross margin in the profit and loss statement is currently the lowest of all the IKEA stores. The direct materials purchased by the Food department are too high for the level of sales. Comparing IKEA Groningen to Amsterdam, which has approximately the same level of direct materials reveals that Amsterdam has a 4,3% larger turnover. This indicates that there is a rather high level of inefficiency.

5.4.2 Man-hour efficiency

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30 5.5 Costing system

The relatively low ratio between sales and direct materials might at least in part be due to the larger number of personnel in the Groningen store. As mentioned in the introduction, the national customer contact center (CCCN) is located in the building of IKEA Groningen. The 150 personnel members do eat and drink the products that are provided by the Food department, but Food does not incur any revenue for this service. The CCCN has its own profit and loss statement. It therefore seems no more than fair that the costs of supplying food and drinks to the employees of the CCCN are allocated to the CCCN. This would prevent the high costs incurred for the Groningen Food department for which they receive nothing in return and therefore confounds the profit margin relative to other IKEA stores.

5.7 Results of analysis

In this paragraph, the results of the analysis and the relationships between the results of the analysis are provided. The analysis shows that the IKEA Groningen Food department scores well on amount of customers, customer satisfaction and revenues, but that the profit margin is low, since the costs are too high. This is mainly due to planning and resource inefficiency. The targets of the Food department are considered to be rather high.

The team managers, who form the middle management of the Food department, are not held responsible for any part of either costs or revenues. Holding them for instance responsible for one or some aspects of costs gives them a direct incentive to focus on them, which makes it more likely that the costs will be decreased. Since the high level of costs is one of the main issues, making team managers financially responsible will significantly affect the level of costs.

The reward system IKEA uses is based on the individual level. Each employee’s team manager judges what the level of performance of an employee has been the past year. The employee has direct influence on the results of the evaluation by working hard, or improving the way he/she works when receiving feedback. There is a national bonus system, but that bonus has not been awarded in the previous five years.

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31 Some of the employees do not stimulate and motivate other employees, as some of the employees are alienated from the organization. The team managers are also not present on the shop floor enough. Therefore, the team managers are not completely aware of everything that is going on in their section. This might also lead to a large power distance.

The analysis of the interviews and internal documents shows that there is a strong coherent subculture within the Food department, which has a large distance from managers to employees. Partly due to the high group cohesion, the employees are very uncertainty avoiding and not enthusiastic towards challenges. This group of employees also has a more feminine culture, which makes them more social towards each other rather than more masculine, which is more business-like. Approximately 50% of the managers of the department have a more transactional leadership style, which makes them more business-like managers, rather than socio-emotional leaders. This shows that there is a discrepancy between the leadership style of some of the leaders and the culture of the group of employees. Therefore, the leadership style might in fact contribute to the rather large power distance and low level of communication. It also shows that the communication, leadership style and culture within the Food department are likely to be related to each other. This will be discussed further in next paragraph, the discussion of the results.

The two main causes of the high level of costs are the man-hour efficiency and resource efficiency. These items have to be improved in order to improve the performance of the Food department. This can be partly achieved by holding team managers responsible for parts of costs and/or revenues. If team leaders are held directly responsible costs and/or revenues, the level of efficiency might be much improved. A change in the costing system, by correcting for the level of employees, does affect the costs for the department and improves the financial performance relative to other Food departments in the Netherlands a bit. However, it does not significantly alter the overall performance of the department, since it is mainly benchmarked by managers against its own performance in previous years.

5.8. Discussion of results

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32 improve the level of performance and control of the IKEA Groningen Food department?’ Based on the analysis, there are a number of aspects of the management control system that can be improved.

The analysis showed that the Food manager is a profit center, and is therefore judged on the profit of the Food department. The lower level managers, the team leaders, are not held accountable for any aspect of financial performance, whereas this would provide a strong incentive. Therefore, it is recommended that team leaders are labeled as a financial responsibility center. Based on their respective duties and goals, the team leaders can be held responsible for some aspects of costs, revenue, or a combination of the two, which would make them ‘incomplete profit centers’ (Merchant & Van der Stede, 2007).

The main issues of the Food department are the large power distance and the communication gap between managers and employees, due to a lack of managerial presence on the work floor and lack of understanding by employees about what managers are actually doing. To a large extent, these issues are related to each other. In a situation with a large power distance, (i) employees are unwilling to participate in decision making, (ii) jobs are narrowly and tightly specified, (iii) communication takes place vertically downward and there is a communication gap between managers and employees, (iv) managers have a lot of power over employees, (v) older employees get respect due to tenure rather than competence, (vi) employees are rather submissive, (vii) quality of decisions is poorer than in low power distance situations and (viii) unethical behavior is likely to happen (Khatri, 2009). Each of these conclusions of Khatri (2009) can to some extent be found within the Food department. Lowering the power distance and communication within the department is therefore a critical aspect in getting the Food department under control. Before redesigning the way of working, the culture needs to be changed first. If the values, way of thinking, managerial styles and approaches to problem solving remain the same, attempts to improving organizational performance often fails (Cameron & Quinn, 2006).

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33 The leadership type has for instance a large influence on the power distance. Transformational leadership is especially important when employees have a low power distance orientation (Kirkman et al., 2009). Since there currently is friction due to a large power distance, the employees of the Food department prefer a low power distance and hence, the focus should be more on a transformational leadership style. According to Bass (1990a), transformational leaders generate awareness and acceptance of the mission and purposes of the group, and they remind employees of the interests of the group, rather than their own. Leaders can learn to become transformational leaders (Bass, 1990a). Teaching the more transactional leaders of the Food department to become more transformational can therefore decrease the power distance and improve the communication process within the department. Since the level of alienation among employees is fairly high, an additional benefit of more emphasis on a transformational leadership style is that transformational leadership is related to a lower level of work alienation (Sarros et al., 2002).

Opening up the rather closed subculture of the Food department can also be achieved by using intra-organizational transfers and increasing the level of internal competition. Since the employees are very uncertainty avoiding, it is not likely that they will ask for a transfer themselves, nor will they like being pressured to being transferred. By transferring employees on a short term basis and only within the Food department, the culture could open up. In addition, it would show employees more about the entire department rather than merely their own job, which would increase flexibility of the department. Intra-organizational transfers also strengthen the culture, since the socialization process is extended to other departments (Merchant & Van der Stede, 2007). However, intra-organizational transfers can lead to less quality on a short term basis that is delivered to customers, as new employees are not fully aware of the way things work at another department.

Although the level of group coherence is already high, an increase of the level of competition might result in improved performance. A moderate level of internal competition has been shown to be advantageous for performance, as it challenges the status quo and increases the motivation to perform (Birkinshaw, 2001). Increased internal competition can also lead to more open communication between team leaders and the employees.

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34 interviews, it became very clear that the employees of the Food department are very good at working very hard when it is very busy. However, when it is not so busy in the store, employees are often just hanging around. The weekly schedules showed that the employees do not only work hard, but in fact that they have to work hard, due to understaffing at busy moments, but also overstaffing at quieter moments. This creates a very uneven workload. In the planning of the schedules, the expected amount of customers should be used more consistently. By doing so, both the overstaffing and understaffing can be prevented, so that the workload can be spread more evenly. This is likely to have a large impact on employees’ job satisfaction, since the schedules currently cause frustration.

Since some of the employees themselves have informed team leaders that they have issues with taking in feedback from both team leaders and from other employees, providing them with a course about how to handle feedback is a very good initiative to learn to cope with others, improve communication and opening up the culture, without anyone getting frustrated or alienated.

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Chapter 6. Redesign of performance management system

Based on the analysis and the discussion of the analysis, some recommendations are provided on how to change the level of control of the Food department of IKEA Groningen.

The key performance measures show that there are some issues in the Food department, but the performance measures themselves don’t need to be changed. The targets are set rather high. High and ambitious targets for a department that is already struggling are not the best choice, since people get discouraged at high levels of difficulty (Merchant & Van der Stede, p 336). The financial targets that are set for the Food department are currently set too high. It is therefore recommended that the targets are set less high, in order to focus on improving the way of working and personnel motivation rather than focusing on targets.

Furthermore, the team leaders should be held accountable for some lines of the costs and/or revenues of the profit and loss statement. By knowing that they are directly held accountable creates an incentive for them to change things that are currently not going efficiently, such as man-hour planning and resource usage. The individual personnel evaluation system does not have to be changed. Awarding the Food employees a group reward is a strong incentive to improve the team-based structure, cooperation and productivity (DeMatteo et al., 1998), but only if the performance of the Food department justifies a group reward.

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36 leadership style, communication and culture go hand in hand and currently are the main cause of a negative vicious circle.

Other ways to break the currently negative vicious circle are to use intra-organizational transfers within the Food department. These transfers also teach employees about other parts and jobs of the Food department, which creates understanding of each other’s duties, decrease power distance and increases the flexibility in terms of planning work schedules.

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37

Chapter 7. Conclusion

7.1 Conclusion of the research

This research has the objective of improving the level of performance and control of the IKEA Groningen Food department. The results of this study show that the targets for the Food department are currently too high and should be lowered in order to improve the way of working and to improve personnel motivation. Also, team managers should be appointed as financial responsibility centers, preferably a cost, revenue or partial profit center. This would provide them an incentive to focus on those aspects.

The main result of this research is that the culture, leadership style and level of communication are the core issues of the IKEA Groningen Food department. The main cultural issue is that the power distance is too large, which is directly related to lacking communication between managers and employees. Both the large perceived power distance and lack of open and efficient communication are related to a too transactional leadership style. Therefore, in order to improve the level of control and the performance of the Food department, it is of critical importance to change the culture of the Food department, mainly by decreasing the power distance and improving the level of communication.

Not changing the culture first might lead to other changes not having an effect (Cameron & Quinn, 2006). The cultural change can be achieved by teaching the managers of the Food department on how to communicate efficiently and effectively and in addition, how to become more transformational leaders. Feedback training for employees, intra-organizational transfers and an increase in the level of internal competition can be used as well. Furthermore, the planning of the weekly schedules and resource efficiency need to be much improved and the costing system can be refined by correcting for the number of employees.

7.2 Critical evaluation

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38 research. This research has been carried out by assessing the Food department ‘from a distance’. This is because the researcher has not worked within the Food department, but only assessed the department based on the interviews and internal documents. This might have led to not being fully able to get the clearest possible picture of the Food department.

The main goal of research is to influence and improve the business operations (De Leeuw, 1996). This research seems to contribute to the business operations of IKEA, since it is aimed at improving the level of control and performance of the Food department. However, whether and if so, how quickly, this research contributes to an increased level of control and performance in reality remains to be seen.

Academic research should be relevant, precise, verifiable, reliable and objective (De Leeuw, 2000). Knowledge is relevant if it refers to a practical problem, is understandable and is timely available (De Leeuw, 2000). This research refers to a practical problem, since the issues of the Food department are a real issue for IKEA Groningen. This research has been presented in an attempt to maximize the understandability and it is timely available, since this research has been finished before the start of the new financial year of IKEA, which starts at September first. Therefore, the results of this study can be used to improve the level of control and performance before the new financial year.

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Chapter 8. Appendices

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Appendix 3. Organizational chart IKEA Food department.

Profit Center

Not defined

Case study of the performance management of the Food department Management control at IKEA Groningen

Management control at IKEA Groningen