Introduction
Enterprise resource planning or ERP refers to the integration of management information systems across an entire organisation or business unit (Gupta, 2000, p. 114). The goal of such integration is to merge information systems (or the information flows which they enable) organically into the business processes and different business functions throughout the organisation, eliminating the gaps and bottlenecks that arise from using separate hardware or software solutions for finance, accounting, manufacturing, sales, human resources, and customer relationship management (Klaus, Rosemann, and Gable, 2000, pp. 142-146). While sometimes hard to define precisely, ERP and other enterprise wide business systems can also be a key element in helping to drive organisational change and improve how business processes are conceived and implemented.
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However, especially for large and complex organisations, implementing such a system can be an immense technical, logistical, and management challenge. This paper will examine some of the key factors which help determine the success or failure of an enterprise resource planning implementation through the lens of a case study of a major global retail organisation’s experience in the United Arab Emirates.
As noted above, the challenges of successfully implementing an enterprise resource planning system have been widely noted in the academic literature on business, management, and information systems. Therefore, the first section of this paper will first look at how, why, and in what contexts ERP is important for business organisations. Next, the literature on success factors for enterprise resource planning system implementations will be critically examined, with an eye towards identifying key features that determine a successful ERP implementation.
In order to understand what ERP implementation in a complex real world scenario looks like in practice, this paper will then introduce a case study of Swedish home furnishings retailer IKEA. After providing some background on the company’s entry into the Middle East regional market, and Dubai in particular, this paper will then examine the potential implications of the company’s recent global roll out of a standardised ERP system and its particular impact on business processes and operations in Dubai, focusing on an organisational change management perspective.
The paper will then conclude with some conclusions and recommendations based on the material presented.
The Importance and Implications of ERP
Enterprise resource planning systems and other organisation-wide business information systems are important not only in their role as pieces of technology, but also in how they help businesses to characterise, understand, and rationalise their key business processes.
In addition to its role in helping a business to work better, the process of implementing an ERP system itself can often have a transformative effect as companies carefully analyse their business processes and possibly re-engineer them to more efficiently integrate into the new information system(s). Hall, for example, argues that ERP systems are an important source of organisational change, and can directly result in a variety of sometimes paradoxical changes: organisations become leaner and more decentralised, while power and control can become more centralised; some jobs require greater depth and skill while others become more routine; and more work can be created in some jobs despite the general goal of greater efficiency (2002). Koch even suggested that information technology implementations like ERP could be used as a ‘steamroller’ for pushing management politics (2001). Clearly, it is important to look beyond the software aspects of ERP at its impact on the overall way an organisation does and thinks about business.
With the reality that many companies (especially smaller and mid-sized enterprises) now choose from industry standard business information system packages, it is important for managers to recognise how the in-built assumptions and understanding of business processes embodied in these systems will interface with the way to the company currently does business (Brehm et al, 2001). Even though most vendors of such technologies offer extensive customisation options, their particular view of how certain business processes should be carried out will likely show through in how the software works, and a poor choice in this regard can result in an ERP system that does not fit with the way the company actually works towards its business goals in practice (Holland and Light, 1999, p. 60). Kallinikos, for example, a close relationship between how ERP systems are designed as software and the effects they have on ways of thinking about human action, agency, and systems of organisation (2004).
It is perhaps for this reason that much of the empirical literature has shown the impact of enterprise resource planning systems and other business wide integrated information systems to have mixed performance at best. While some organisations clearly gain a great deal from these projects, many seem to simply ‘jump on the bandwagon’ and see limited or even negative results for their investment. Wieder et al, for example, found no systematic evidence of improved performance at the firm level for ERP adopters (aside from those who also adopted supply chain management systems at the same time) (Wieder et al, 2006, pp. 25-26). Other researchers have noted different effects on different types of companies: Mabert, Soni, and Venkataramanan, for example, found that smaller firms saw more advantages in manufacturing and logistics while larger firms gained increased financial performance from adopting ERP systems (2003, p. 245). For this reason, the business literature has extensively investigated key success factors involved in successful ERP implementation, which will be examined in the following section.
Measuring ERP Success
Like any complex information technology project, implementing an ERP system across an organisation is a major project management challenge first and foremost, demanding many of the same features and kinds of support as other major IT projects in order to be successful. However, ERP systems go deeper than most ‘typical’ IT projects, and therefore it is recognised in the literature that there is a key set of ‘critical success factors’ which determine whether or not an organisation is able to successfully implement such a system. Many such models have been proposed in the literature, which also have important relationships to how ERP impacts an organisation after implementation.
Jarrar et al argue that the key success factors for a successful ERP implementation are: top management support and a clear business vision, as well as factors related to the configuration of the software chosen and its implementation (2000, p. 123-125). This echoes the widely cited critical success factors model proposed by Somers and Nelson (2001), which combines top management support with a ‘project champion,’ proper management expectations, and a number of factors related to the IT implementation itself such as a focus on user training, a good relationship with the vendor, use of consultants, selection of the appropriate ERP package, and minimal customisation of the vendor offering once this selection has been made.
From a business process perspective, many writers in the 1990s argued that companies needed to or should engage in so called ‘business process re-engineering’ as part of implementing ERP and other enterprise wide management information systems. Business process reengineering consists of systematically analysing and reorganising work flows and tasks needed to achieve different business goals (Grover et al, 1995, p. 110). Because a systematic understanding of business processes is usually a prerequisite to successful implementation of an enterprise-wide information system, the ERP implementation process is often seen as an advantageous opportunity to improve or streamline existing business processes which may have never been fully documented or analysed in this way before (Koch, 2001).
Finally it should be noted, as Akkermans and van Helden point out, that many of the success factors identified in the literature are in fact interrelated, and can lead to both vicious and virtuous circles when it comes to implementation (2002). Their analysis shows that it is important to understand how many of these success factors are in fact deeply related to each other and therefore appear highly correlated, so changing one may change others, while a particularly serious failure in one area can bring an entire project down.
IKEA in the Middle East
Ikea is perhaps one of the most iconic retailers in the world, having its signature ready-to-assemble furniture and home accessory stores in 32 countries around the globe. The privately held company is the largest furniture retailer in the world, with revenues of 23.5 billion Euros in 2010. Ikea’s management structure is complex, with intellectual property, logistics, distribution, franchising, and other aspects of the business controlled by an interlocking network of foundations and holding corporations based in places like Netherlands Antilles and Luxembourg (The Economist, 2011). The majority of Ikea’s 313 stores worldwide are run by INGKA Holdings (the Ikea Group), with a small minority of 37 stores in 17 countries being run by franchisees. This includes most of the company’s Middle East presence, including the stores in the United Arab Emirates as well as Kuwait, Israel, and Saudi Arabia (IKEA, 2010). The Saudi and Emirates stores are operated by the Al-Futtaim Group, a private holding company which operates numerous retail brands throughout the Gulf region (Al-Futtaim, 2010).
Ikea entered the region in 1991 with its first Emirates store in Dubai. Since the takeover of a new chief at Ikea in 2009, the company has focused aggressively on emerging market growth, an approach which appears not to have been changed by the global financial crisis even in the hard hit Gulf region. As of 2009, the Ikea Group company still planned to expand with new stores in Oman, Qatar, (Hartley, 2009) while Al Futtaim confirmed these plans and possibly a store in Egypt in 2010, as well as noted that its stores in Dubai and Abu Dhabi continued to out perform those elsewhere in the Middle East (Diala, 2010).
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Understanding Ikea’s complex management structure is important when considering the implementation of any ERP system at Ikea; while many of the firm’s activities (such as its global supply chain) are linked across the organisation and could benefit greatly from an enterprise-wide information system, franchise and corporate stores may have very different processes for other tasks like finance and accounting, human resources management, and operation of the catalogue and online elements of the business.
These management issues are especially important when considering the extent to which aggressively efficient global supply chain management is the key to Ikea’s success, allowing them to offer the low prices and high quality goods that draw in customers. Likewise, Ikea’s product development operations would need to draw on global business intelligence and customer sales data from franchise as well as corporate stores for maximum efficiency. But the fact that Ikea’s Middle East stores are run by a franchisee means that other common elements of the total ERP package, such as finance and accounting, may be left out or will be difficult to integrate, or could even be resisted by local managers who do not want to see greater control passing to the corporate ‘centre.’
Some have suggested that companies like Ikea are becoming so-called ‘hollow’ organisations, in which a strong brand, committed leadership, and lean and agile organisational structure are used to manage a much larger network of trusted suppliers and partners. As Gadman writes, ‘While this growing trend towards business process outsourcing and off-shoring is increasing, so too is the permeability of corporate boundaries and increasing pressure to ensure that clear contractual terms of reference are agreed and the promises they generate are kept across a whole network of suppliers and partners’ (Gadman, 2004, p. 342). In this respect, information systems are a crucial part of the ‘nervous system’ of an organisation like Ikea which allow it to manage such a complex web of partnerships, suppliers, and franchisees in an efficient and coordinated manner, and in support of a widely recognised global brand known for high quality and low price. Moller and Rajala refer to these networked systems of business processes and their underlying logics as ‘business nets’ (2007), mirroring the imagery of computer networks from the IT and IS world.
With a view towards continuing to successfully manage this type of global, decentralised, network type of business, Ikea corporate headquarters mandated in 2010 – after a review of its global IT requirements – that all of its franchisee partners worldwide adopt a standardised retail ERP platform. Ikea has reportedly managed the roll out of this new global ERP system to franchisees through continuous monitoring of Key Performance Indicators, and has reportedly achieved improvements in product availability, reduction in customer complaints, reduction in time to process orders, and faster inventory processing and order execution times by introducing ERP in its supply chain operations (Savvas, 2008). The following section will look at the potential implications of the global retail ERP rollout for franchisees, particularly in the Dubai and other Gulf Region operations managed by Al Futtaim.
IKEA’s ERP Implementation: Implications and Success Factors
The most obvious potential impacts which can be identified are the supply chain management improvements. Ikea is well known for successfully managing a globe spanning chain of suppliers and manufacturing partners, and staying on top of sales and customer demand is crucial to keeping each of it’s 12,000 different retail items in stock and managing inventories at each location. Integrating the Dubai and Abu Dhabi stores into this network will allow them direct access to Ikea’s global supply chain, as well as providing better business intelligence across demographically similar stores and regions throughout the Middle East.
The business intelligence and data mining factors here are particularly important. Ikea is still a new presence in emerging markets, with the vast majority of its sales and its long experience being in either Western countries or places like China and Russia. The Middle East is in many ways a unique market, particularly in the Gulf region, with a mix of extremely wealthy and extremely budget conscious shoppers and possibly very different tastes than other regions. Integrating Al Futtaim’s Ikea stores into a global business intelligence and data mining paradigm will allow stores across the Middle East to share data on what products and types of products are in demand, which promotions are working and not working, and what characteristics impact on successful store location. Using this information could prove invaluable to the franchisee as they go ahead with plans to expand into other countries throughout the Arab world, avoiding costly store moves as was done in Abu Dhabi and reducing the risk on launch.
Integrating these stores in a global ERP system can also ease the burdens of training, particularly for middle managers and also staff in places with limited exposure to Western style retail service norms. A good ERP system will free up employees to focus on customer service, knowing the product and sales data they need will be at their fingertips; for example, they could assist a customer in locating an out of stock product at another location if necessary, or at least let them know precisely when the new stock will arrive. At the purchasing and store manager levels, store managers should have a much better idea about what kinds of products to order and which products and promotions will work or not work in their particular store, while having less burden of training thanks to standardised information technology components.
However, the impacts of the mandated ERP roll out may not be all positive for the global franchisees. Incorporating them into Ikea’s global ERP network will necessarily mean some reduction of local autonomy and local management control, particularly at the store manager level. Managers who previously relied on their own intuition and skill may now resent being ‘told what to do’ by a ‘faceless’ computer system. These kinds of information systems-mediated organisational and corporate culture clashes can have very real effects on both individual perceptions and organisational performance, as was mentioned above.
Success Factors
Given these potential positive and negative impacts, it becomes clear that issues relating to management and particularly the partnership between Ikea corporate headquarters and their global franchisees, will be critical to the success or failure of the ERP roll out in these franchises. On the software and project management side, Ikea faces the best of possible worlds, having a best in class ERP system that has been thoroughly tested managing the complex global supply chain feeding their hundreds of retail stores in diverse locations around the world. With this experience, integrating a relative handful of franchisee stores into the system should pose very little technical challenge. However, there is the caveat that organisations should always choose the vendor and package that suit their particular needs: in the case of the Ikea franchisees, the vendor and package have already been chosen for them by Ikea corporate management. While this package obviously has the benefit of being thoroughly field tested and known to successfully support Ikea’s operations in other places, it nevertheless brings with it certain assumptions about how Ikea stores should do business. In this way, the imposition of ERP on the franchisees can be seen as a management tool by corporate headquarters as much as a neutral efficiency improving process.
Therefore, the critical factor in determining whether or not this introduction is successful will likely be management and partnership issues. In this case, Ikea would take the role of ‘top management’ (who do strongly support the programme) along with their chosen vendor, K3. It is up to them to find a ‘project champion’ among each franchisee corporation, however; as noted above, failure in any one success factor element can lead to the failure of the whole project.
Conclusion and Recommendations
While Ikea will likely continue to enjoy tremendous success, in part through its successful use of ERP to manage a complex global supply chain and retail network, the continued performance of increasingly ‘hollow’ organisations like Ikea requires careful attention be paid to human factors as well as raw efficiency.
As the literature examined in this paper showed, ERP systems can have tremendous impacts on how an organisation functions, both intentional and unintentional, as well as on the broader organisational culture and the various power roles and relationships within it. In addition to looking at business processes and basic notions of ‘management support,’ those responsible for considering or implementing ERP systems should always be cognizant of this bigger picture and the increasingly deep and important role that information systems play in the way that modern corporations and individuals interact and do business.
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