IKEA – Case Study Essay
IKEA – Case Study
Synopsis of the situation
IKEA (Ingvar Kamprad Elmtaryd Agunnaryd) is a privately held, international home products company that designs and sells ready-to-assemble furniture, appliances and home accessories. The company is now the world’s largest furniture retailer. IKEA was founded in 1943 by 17-year-old Ingvar Kamprad in Sweden, named as an acronym comprising the initials of the founder’s name (Ingvar Kamprad), the farm where he grew up (Elmtaryd), and his home parish. Kamprad started the company at his home as a mail order company. He sold goods which he purchased from low priced sources and then advertized in a newsletter to local shopkeepers. In 1948 he added in his catalogue furniture. Furniture was a success so he gave up the small items and focused only on furniture. In 1951 he opened the first display store in nearby Almhult where the customers could preview and inspect products and then order from the catalogue.
This was also an immediate success as people travelled even from Stockholm to visit the store. This led IKEA to stop accepting mail orders. Now, the IKEA strategy is to publish a yearly catalogue, distribute it to the clients and encourage them to visit the store name (Barlett, Ghoshal, & Beamish, 2008). The sales take off in the late 50s led IKEA to look abroad for new sources of supply as the local industry could not respond to the demand. In 1961, IKEA outsourced production to furniture factories in Poland. Poland became IKEAs largest source and lowered significantly the production costs. This allowed IKEA to reduce its prices even more. The success in Poland led IKEA to adopt a general principle that it should mot own its means of production but should look for suppliers with whom it should develop close long term relationships.
Building on the first store’s success, the first store in Stockholm opened in 1965. Even before that, in 1963, IKEA operated a store in Oslo. Other countries followed and today IKEA operates 313 stores in 38 countries, most of them in Europe, North America, Asia and Australia (IKEA, 2010). Some of IKEAs competitive advantages are that the brand is associated with simple, low cost, stylish products. The concept was furnishing products and house-wares that had wide appeal to a variety of markets and segments, both consumer and the business market exclusively. Both markets were looking for well styled, high quality furniture that reasonably priced and readily available.
Also, IKEA developed a model for the business, where it was able to keep costs low. From the customer point of view, they were able to buy low cost furniture, even though they had to assemble and collect the flat-packed furniture from stores. IKEA to was able to reduce costs, as this costly part of the value chain was carried out by the customer.
Adding to that, IKEA promoted the Swedish lifestyle. Many people associate Sweden with a fresh, healthy way of life. This Swedish lifestyle is reflected in the IKEA product range. The freshness of the open air is reflected in the colors and materials used and the sense of space they create: blond woods, natural textiles and untreated surfaces. Also IKEA stores promote Swedish food and products. IKEAs low-priced restaurant and grocery shop have made IKEA Sweden’s leading food exporter. However, global expansion was not without problems for IKEA. During the 1980’s environmental problems arose with some of IKEAs products and during the 1990’s IKEA was accused that its suppliers were using child labor. In the 1980’s the formaldehyde regulations passed in Denmark caused problems to IKEA. After the discovery that some of its products emitted more formaldehyde than the legislation allowed the company was fined.
The company responded and established stringent requirements regarding formaldehyde emissions. Even though, the problem did not vanish as in 1992 a German investigation team found that an IKEA bookcase had higher emissions that the ones allowed by the German law. Since then, IKEA has improved its procedures to evaluate the environmental impact of its products. Currently, IKEA uses a tool called the ‘e-Wheel’ to evaluate the environmental impact of its products. The e-Wheel helps IKEA to analyze the four stages within the life of a product. This also helps suppliers improve their understanding of the environmental impact of the products they are supplying (The Times 100).
Next, the issue with child labor arose in 1994 when a Swedish television documentary showed children in Pakistan working at weaving looms. IKEA was one of the several Swedish companies that were mentioned as importers of carpets from Pakistan. IKEA was unaware of the problem and tried to respond by sending a legal team to Geneva for input and advice from the International Labor.
Association(ILO). IKEA discovered that child labor was not illegal in these countries so the only way to handle the problem was by adding a clause for child labor in their contracts and outsource the monitoring of this clause to a third party company. But it seems that this measure was not effective enough, as in 2007, Anders Dahlvig, the multi-national’s Chief Executive Officer, admitted that some of the company’s products were still produced using child labor (Wadsworth, 2007).
Key Issues and Players
The key players in this case are the IKEA company and its suppliers. In order to keep its competitive advantage IKEA outsources its product manufacturing to third party suppliers throughout the world. But, this practice is often the source of many issues. Many times the legislation in these countries does not match the standards and the ethical values of the western developed countries which are the main customer base of the company. This fact can cause issues like weak environmental policies or child labor that hurt the public image of the company. This has direct effect on the company’s sales.
The main problem that IKEA faces nowadays is the uncontrolled child labor in countries which supply the company with carpets. Child labor in countries like India and Pakistan is a common phenomenon. The company lacks effective ways to control its suppliers in these countries. At the same time, child labor is socially acceptable in these places as poverty pushes people to find ways to survive. So the company cannot rely on the local authorities for help. Also, any attempts on behalf of IKEA to control this issue didn’t seem to succeed.
A possible solution for controlling the child labor for IKEA is to cancel any contracts with suppliers in countries that do not adopt the convention 138 of ILO, that deals with the child labor issues. This way IKEA will be able to get assistance for child labor issues from local authorities since it will be prohibited by local laws. Another solution would be to come to more strict agreements with the suppliers and launch intensive controls for the effectuation of the agreement.
The selected solution is IKEA to enhance its agreements with the suppliers and intensify its controls against child labor. The company should appoint inspectors in these countries that would inspect the suppliers and report the situation on frequent basis
Results and Rationale of the Solution
The cancelation of the contracts does not seem a rational choice at the moment because it will have a big cost for the company. The company will need to find new suppliers in other countries with higher labor cost and doubtable product quality. This is a move with higher risk and cost that the selected solution.
Positive and Negative Results
The positive results of the selected solution are that the child labor issues will decrease and the company’s profile will be protected. The negative results are that the company’s cost will increase as inspection staff will be hired to perform the inspections and some contracts will need to be canceled due to failure to adhere to the conditions of the contract by the suppliers
Barlett, C., Ghoshal, S., & Beamish, P. (2008). Transnational Management. Singapore: McGraw-Hill.
Building a sustainable supply chain. (n.d.). Retrieved November 27, 2010, from The Times 100: http://www.thetimes100.co.uk/case-study–building-a-sustainable-supply-chain–110-279-3.php IKEA. (n.d.). Retrieved November 28, 2010, from IKEA:
http://www.ikea.com/ms/sv_SE/about_ikea/facts_and_figures/ikea_group_stores/index.html Wadsworth, M. (2007, May 22). IKEA exposed over ‘child Labour’ and green issues. Retrieved November 27, 2010, from The Latest: http://www.the-latest.com/ikea-slammed-over-child-labour-andgreen-issues