ikea paper v9

IKEA And the Child Labour Challenge December 2, 2010 Mehran Motamed Nesli Ozhusrev Gilberto Pena

BAHR 509 – Group Project Paper Mehran Motamed, Nesli Ozhusrev, Gilberto Pena

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1 Background

1.1 Company

At the age of seventeen, Ingvar Feodor Kamprad started a small firm he named IKEA. The word IKEA combined Kamprad’s initials with those of the family farm he grew up on, Elmtaryd, and his village Agunnaryd, located in southern Sweden. His first business transactions included the sales of small items such as cigarette lighters, binders, and fountain pens, which he purchased from low‐priced sources. Later IKEA added furniture to its range of core products and with the sudden and unexpected success of this new product line, he gave up the small items.

Kamprad’s first display store welcomed its first customers in a nearby village and before long he had several people regularly visiting the display store, which enabled these customers to inspect products before the actual purchase. The customers traveled eight hours from the capital city just to have a peek at the items in the store. Kamprad and his team also launched the famous IKEA catalogue shortly afterwards: they mailed catalogues to potential customers, who would come all the way from the capital city with the catalogue in one hand, and a long shopping list in the other.

1.2 Developing the Mission

The young Swedish entrepreneur grew increasingly upset over the way the furniture manufacturer cartel set the prices as they wished, and controlled the market as well as the industry. This made him perceive the issue as a social problem as well as a business opportunity. He vowed to offer a wide array of home furnishing items at much lower prices than before, so the majority of people would now be able to afford them. Soon he came up with the concept of self‐assembled furniture sold in flat packages, saving huge amounts on transport and storage costs.


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Kamprad realized that he was not able to meet demand with limited local supply, so he decided to contract with some furniture factories and suppliers located in Poland in 1961. IKEA formed strategic alliances with suppliers in Poland. While doing so, IKEA considered its suppliers as its business partners, making loans to them at reasonable rates. Kamprad always thought that this sourcing partnership should result in a win‐win situation, as he strived to keep his suppliers competitive by helping them improve their managerial and manufacturing capacity, which would return to IKEA with low cost yet high quality products.

In line with its aggressive low cost production strategy, IKEA’s main sourcing strategy shifted to global sourcing from regional sourcing. A key component of IKEA’s low cost strategy can be identified as owning only a limited number of the means of production. A cornerstone of the firm’s strategy was based on the ownership of product rights, which enabled IKEA to switch suppliers who, in turn, perceived this as an incentive to preserve their competitiveness to be able to keep their contract. IKEA’s operational strategy centered around working with few suppliers. This strategy allowed the company to balance its market choices and focus on marketing efforts and investments in specific geographic regions, which offered more competitive opportunities compared to others.

IKEA sales for the financial year ending August 1994 totalled $4.5 billion, with a net margin at 8.4%. The firm’s core strategy was based on the idea of offering home furnishings at reasonable prices. Growth was the long term objective of the organization, as Kamprad emphasizes throughout his book The Furniture Dealer’s Testament. Cost reductions served as the main driver towards international purchasing, which started with the firm’s focus on suppliers in Poland, to be followed by global sourcing efforts in India and Pakistan.

1.3 IKEA strategy

IKEA’s vision statement, “to create a better everyday life for the many people” lays the foundation of company’s strategy that is selling affordable and good quality furniture to mass‐market consumers around the world. Kamprad nurtured in many ways the sense of importance of being cost conscious. Thinking outside the box allowed IKEA to reduce or eliminate typical costs on the furniture industry. The IKEA concept is such that furniture assembly and shipping are passed onto customers, cost savings associated to these two activities are also passed to customers. Another way of how IKEA realizes savings is by looking for suppliers with unused capacity, like seasonal industries for example, and contracting capacity to produce IKEA’s products even when these manufacturers don’t have furniture as their core business. That is how IKEA had sail makers manufacture seat cushions, window factories produce table frames, and ski manufacturers build chairs during off‐season.


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IKEA has designed its operations to be highly efficient and keeps challenging its processes to reduce waste in all its forms, passing the savings to its customers. However, in order for IKEA’s operations to be sustainable, IKEA has to maintain long‐term relationships with suppliers. IKEA understands that the only way for suppliers to keep competitive is to work with them on the same side. IKEA also develops suppliers technologically by helping them to design their factories, select equipment, and even making loans to them at reasonable rates. By creating this two‐way dependence IKEA vertically integrates its operations, which lowers production and supply chain costs.

In summary, IKEA’s strategy is to achieve high volume sales through low margins, and what makes this strategy sustainable is the long term relationship with suppliers that are constantly challenged to improve efficiencies. That way IKEA can met its vision statement, “to create a better everyday life for the many people.”

1.4 The Issue

IKEA’s differentiation through cost leadership by investing in new sourcing markets puts pressure on the company’s supplier network, and on its efforts to source internationally and then globally: By the end of the nineties, IKEA was sourcing 11,500 different products, with the help of almost 2,500 suppliers located in 70 different countries. For rug production, IKEA particularly focused on India and Pakistan. The firm’s investments in the production facilities and its efforts to help local people into employment, strengthened the labour market in those countries, and enabled IKEA to reach its low cost production strategies, which was a win‐win relationship. However, something unexpected happened.

In 1994 a Swedish TV documentary showed Indian and Pakistani children working at weaving looms. IKEA decided to send a legal task force to Geneva to seek advice from the International Labour Organization on ways to deal with the problem. Then the management team decided to appoint a third party agent, a well‐known Scandinavian company with extensive monitoring experience, to investigate the complaints and audit the child labour practices at some of its suppliers in India and Pakistan.

However, IKEA executives decided that they needed to handle the matter themselves, and headed straight to India and Pakistan to find out more about the nature of the problem. There they learned of Rugmark Foundation, a third party organization that monitored the child labour practices in these countries. At that point, the company had to make a decision on whether it should allow Rugmark to monitor the use of child labor on its behalf, or recognize that the problem was too deeply embedded in the culture of these countries for it to have any real impact and simply withdraw.


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2 Analysis

2.1 Leadership Style

Leading by example, Kamprad is all over the business. At 83 years of age, he visits his stores quite frequently to infuse the culture he believes is the secret sauce of the business.

There is a vast amount of written material around Kamprad’s lifestyle and leadership, focusing on his frugal and down‐to‐earth approach to life and business. Kamprad expresses in one interview: “Why do I take cheap air trips? Take second‐class train rides? How the hell can I ask people who work for me to travel cheaply if I am travelling in luxury? It's a question of good leadership.” [2]. In another encounter explaining his frugal nature, he said: “I am a bit tight with money, a sort of Swedish Scotsman. But so what? If I start to acquire luxurious things then this will only incite others to follow suit. It's important that leaders set an example. I look at the money I'm about to spend on myself and ask if IKEA's customers could afford it.” [6].

Another aspect of his leadership is his strong internal focus on family and his own business. Kamprad went out of his way to formulate a financial structure plan that not only saves him tax money but also protects the ownership and perpetuety of the business into future. “I've paid an awful lot of money to protect what I've built," he says. "I can only hope the money was well spent.” [2].

Fig1. Kamprad and his wife.


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2.2 Ownership and Control

As mentioned IKEA is a privately‐held company. The Kamprad family owns the complicated holding companies that ultimately own IKEA stores. Kamprad’s family has six members: Ingvar Feodor Kamprad, his wife Margaretha and 4 children: sons Peter, Jonas and Matthias; and a daughter. Kamprad and his wife owned the company fully but started to transfer ownership to his three sons (transfering ownership from acquired stores e.g. Storehouse, etc.), and eventually getting them involved in the business. Therefore the ownership, once sole‐

proprietorship with Kamprad as the sole owner, is changing slowly to siblings’ partnership after Kamprad. Figure 2 depicts this transitional change1,2.

The parent company that holds all IKEA stores is Ingka Holding, a privately registered company. Ingka Holding, in turn, belongs entirely to Stichting Ingka Foundation; a Dutch‐registered, tax‐exempt, non‐profit‐making legal entity, which was given the shares of Kamprad in 1982. Although by doing this Kamprad technically has given up ownership of IKEA, the very complicated “stichting” assures his complete and utter control over the group. Chaired by Kamprad, a five‐person executive committee runs the foundation. This committee approves

1 Based on available information. Assumptions made where information about a family member were lacking. 2 The figure is based on the understanding of the group members of how IKEA’s ownership and business is best represented in practice and not necessarily depicts what is technically correct according to the legal documents.

Fig2. Left: Kamprad as owner and CEO; wife and four children in the family circle. Right: The three sons move into business and ownerships while Kamprad transfer ownership to his charitable foundation, sits on company board and is influential in the business.

Past Present

Family Business

Ownership

Family Business

Ownership


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any changes to the company's statutes, appoints the boards of Ingka Holding, and has pre‐emption rights on new share issues. Kamprad's wife and a Swiss lawyer have also served as members of this committee, which takes most of its decisions by simple majority, since the foundation was set up. When one member of the committee quits or dies, the remaining four appoint his replacement. In other words, Kamprad is able to exercise control of Ingka Holding as if he were still its owner. In theory, nothing can happen at IKEA without the committee's agreement [1].

The control is designed to be so tight that not even Kamprad's heirs can loosen it after his death. The foundation's objectives require it to “obtain and manage” shares in the Ingka Holding group. Other clauses of its articles require the foundation to manage its shareholding in a way to ensure “the continuity and growth” of the IKEA group. The shares can be sold only to another foundation with the same objectives and the same executive committee, and finally, the foundation can be dissolved only through insolvency [1].

Although this might sound negative at the hindsight, this has to be put in the perspective of the family and the business succession planning. Kamprad’s sons are not yet able to take control of the business as stated by Kamprad: “I admire my three sons. They are very clever,” he stated. “But I don’t think any of them is capable of running the company, or at least not yet”, as interviewed by Forbes [2]. Therefore, his way of ownership transfer without losing control can be viewed as a yet unfinished process towards an ultimate transfer of control.

2.3 Succession Planning

Having said this, there seems to be missing steps in assuring the success of this transfer of control which has roots in IKEA’s culture and its main drive relative to the sons’ personality traits: As has been said in the introduction, IKEA’s culture is strongly based on frugality, efficiency and cost consciousness. This suggests a potential issue in succession planning because Kamprad’s quirky personality has been the single most influential and defining element of IKEA’s culture, one of IKEA’s competitive advantages and sources of success. A Harvard Business School case study recounts: once a senior manager phoned Kamprad to get approval to fly first class, explaining that the economy class was full, and that he had an urgent appointment to keep. In response Kamprad said “There is no first class in IKEA, perhaps you should go by car.” The executive then completed the 350‐mile trip by taxi [3]. As reported by Guardian News, “He is famous for eating in cheap restaurants, flying economy and going on the bus.” [4]. The question not only is whether his sons could inherit this personality but also is whether they could preach this seemingly‐essential “mindset” to sustain what we know as IKEA today. There is no reference as to whether there is an indication that his sons are adopting the frugality mindset and there is no strong motivation for them to do so. They have their own dreams and might not want to give up their lifestyle to sustain IKEA the way it is; something


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that Kamprad did with the motivation as an entrepreneur to babysit his growing business. As [2] mentions: “Whether it is Peter, Jonas or Matthias who succeeds their father, it is a safe bet that all three will enjoy the family money rather more than him.”

On the positive note, the three sons seem to be in good relationship: “If they are clever they won't compete, they will work as a team,” Kamprad advised. “The person who tries to take all could lose all. There are plenty of successful firms run by brothers and the Kamprads are mature and talented enough to work together. At the moment they seem very warm towards each other and it would be a shame if that changed.” [5].

2.4 Governance

The board composition as explained above and the very complicated business structure Kamprad made give little space for effective scrutiny and proper governance. Moreover, unlike in the US where comparable charitable foundations like the Gates Foundation operate transparently and publishing the details of every grant they make, Stichting Ingka Foundation like any other Dutch foundation is very loosely regulated and is subject to little or no third‐party oversight. They are not, for instance, legally obliged to publish their accounts. Therefore there are less external pressures as disciplinary forces and there may be more chances of slippage.

2.5 Professional Management

Kamprad has done an excellent job in bringing in professional management to run IKEA. With the growth and scale of the IKEA operations, however, this was not a choice but a necessity. He is the only one overlooking all aspects of operations and his sons are taking responsibilities of running some independent branches. Other than that, the business is ran mostly by professionals carefully selected to relate to and expand the IKEA’s culture.

3 Recommendations

3.1 Dealing with the Press

Family business leaders should take the ownership of having to deal with the press on behalf of their organization whose vision they represent during press conferences. Kamprad did not choose to deal with the media right after this incident, whereas we think he should have done so: he should have answered all the questions from the reporters who were investigating this issue, as we believe that not doing so leads to more questions and suspicions over time. However, his successors might want to learn how to deal with the media at times of crises like the issue of child labour in this very case: they need to have a communication framework to utilize before press conferences for instance, which comes in handy while having to explain the


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crisis situation to a curious and insisting audience. A wrong message, gesture or eye contact can lead to serious consequences at such a critical point in time. It is always recommended to prepare well in advance and study the specific guidelines for using effective communication tools (such as sound bites, eye contact, etc.) in press conferences. Leaders should be focused and factual in their message. They should start by apologizing, and then state the course of action before informing the audience of regular updates. They should remember to make eye contact with the audience, taking the control early on, with a prepared statement that is relevant to the issue.

In addition to how to communicate, family business leaders should also acknowledge the importance of where to communicate. Although the internet and the social networking sites have changed the rules of branding crisis management, most organizations still fail to utilize the online environment to their advantage as part of their defense strategy, ultimately putting the brand reputation at risk. Kamprad’s successors should take this into consideration at times of crises. According to Allan Blair, director of social media at DDB UK, brands should not fail to announce the problems immediately through social media, without fearing that putting out the issue in the online world would hurt the brand more and lead to more negativity. In fact the opposite is often true: if utilized properly, social media can diffuse problems rather than worsen them, with Facebook groups offering support to their brand following crisis.

3.2 The Family Influence in Business Decisionmaking

Being a family‐owned business, IKEA’s business is influenced by family values. Therefore, business decisions may not only be made based on net profit but also based on the risk of family reputation as well as inherited social values. This is important and we believe Kamprad should welcome this fact and not only seek out advise from family members in what affects them but also voice this to public as a sign of their business honesty, sincerety and social connection.

3.3 Governance

Good corporate governance process can lead to value creation. Since corporate collapses such as Enron or WorldCom, winning the investors’ trust and confidence has translated into a major competitive advantage. Investors are willing to pay more for shares of companies that are transparent and have formal corporate governance rules. According to a survey conducted by McKinsey, companies incorporating even a single element of governance can expect a 10 to 12 percent boost in their market valuation.

Family businesses usually have established corporate governance in their roots. In the IKEA case its vision statement, “to create a better everyday life for the many people” includes not just


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customers, but stakeholders and community in general, and serves as the blueprint of its corporate governance. However, corporate governance correlates with the culture where the company works in. For IKEA there was no doubt that child labour was an unacceptable practice on its supply chain. However, as the company grew globally, it became important to investigate what risks the company could face. In India and Pakistan, even when child labor has been abolished since 1933, current practices still put children at risk of being exploited due to poor law enforcement and prosecution rarely severe in some regions.

Because in some family businesses the board of directors consists of family members, they may not be exposed to or aware of overseas practices which could go against company values, and damage the company’s public image.

It is recommendable then that IKEA recruit independent directors outside of the family who have had exposure to companies growing abroad and knowledge about how governance should change in order to lower the risk of being exposed to practices not aligned with company values and culture.

3.4 Strategic Planning

Family businesses are unique in two ways, they are committed for the long run and are driven by values.

In late 50’s and early 60’s, Kamprad encountered stiff opposition from Sweden's large furniture retailers who pressured manufacturers not to sell to IKEA, so he was forced to look abroad for new sources. Eventually in 1961, Kamprad contracted with several furniture factories in Poland, building one of the competitive advantages of IKEA, long and dependable relationships with suppliers.

This was an example of how family commitment helped to preserve the IKEA brand even during though times. Similarly with the case of Indian child labor, family commitment to the future of the business must be the starting point for strategic planning. Is the family willing to sacrifice short‐term gains in order to recall all products associated with the child labour issue? Or even withdraw from the entire rug business unit until a reliable supplier selection and follow up process is on place? IKEA family owners as they demonstrated before, should sign a statement committing to whatever it takes in order to sustain the business in a way that is aligned with the company values and vision statement.

Long‐term commitment should be demonstrated by investing in and working with NGO such Rugmark Foundation, an organization created in response to the child labour problem in the Indian carpet industry, or UN organizations such as UNICEF.


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Another cornerstone in strategic planning is to keep the company from financial “harvesting” practices of the family members. Natural forces and the illusion of a prosper business encourage disinvestment from the business over time to reward family members. Kamprad has created a corporate structure that keeps his family members from this temptation. Through a complicated array of non‐profit and for‐profit organizations.

3.5 Succession Planning

Besides allowing IKEA to obtain non‐taxable profit, the IKEA corporate structure gives Kamprad tight control of the company. The five‐member executive committee appoints the board of the Stichting Ingka Foundation and approves changes on its bylaws. If a member of the committee quits or dies, the other four members will appoint the replacement.

Kamprad has designed this structure in order to spread risk, secure capital reserves, and ensure financial security for his family members.

The question is, how succession could be established if not family involvement is formaly laid out after Kamprad’s time? Since family businesses are driven by family values and beliefs, and no family member other than Kamprad is involved in the IKEA strategic planning, it is the responsibility of the Stichting Ingka Foundation committee to spread company values and beliefs. To make it happen IKEA formally documents company history and Kamprad’s achievements and these learnings are transmitted on the “IKEA’s way” seminars given to management, then managers train all personnel on IKEA’s culture and values.

Although it seems to be a good plan, the charismatic and leadership qualities of Kamprad, makes it difficult to replace him just with seminars. Strategy may work for the next generation of management who have lived directly Kamprad’s culture and thoughts, but for future generations learning about IKEA’s culture and values in a classroom would not be as effective.

3.6 Third Party Relations

3.6.1 Suppliers

It was easy for IKEA to put the whole blame on its suppliers, claiming that they were the ones who employed child workers. However, we believe that this was to a large extent IKEA’s fault. In our Family Business classes we’ve learned that the family businesses have close, long lasting ties with their business partners, and one of them is the suppliers of course. During its transition from a small family start‐up to a global industry giant, IKEA assumed that sourcing from low cost supplier with labour practices might translate into low labour costs, which would enable the company to gain cost leadership and increase profitability in the long run. The


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company’s overriding motivator was cost, and it viewed the idea of global sourcing from a cost reduction perspective.

The firm failed to see however that the law of diminishing returns applies to the cost advantages, which may diminish in foreign markets: studies show that global sourcing does not result in improved competitiveness due to problems in a foreign environment, like communication problems, political instability, differences in legal systems and implementation of new rules and regulations, as well as longer delivery times in most low‐cost supplier countries. In addition, many suppliers in low labour cost countries have the risk of not meeting the required quality standards, the reason why multinationals spend a lot of time and money to bring their suppliers to the required level. Hence IKEA should have done a more thorough analysis of its suppliers and chosen them from amongst those that met the ethical and operational standards to become long term business partners. By leaving the family business perspective of having close ties with suppliers and prioritizing low cost over ‘fit’ with its standards, IKEA undermined its own foundation as an idealistic family business, which was founded on the mission of serving the customers as both a product differentiator and a cost leader. It fell into the trap of omitting the first for the sake of securing the latter.

What lessons can the successors learn from this case? First of all, the next generation should conduct a more thorough research before deciding on their suppliers. From now on, IKEA should evaluate its suppliers based on several criteria, like the suppliers’ (second tier) subsuppliers to their ethical and operational management capability, their sensitivity to environmental regulation compliance issues, whether they are committed to total quality management, and whether they understand the importance of strategic sourcing, for instance.

3.6.2 Collaborating with Rugmark

IKEA’s approach and solutions should not be limited to its collaboration with Rugmark. In fact, we believe that its collaboration with Rugmark might not provide a long term and realistic solution to the problem of child labour in India and Pakistan. Rugmark’s GoodWeave label assures that no child labor was used in the making of the rugs, and in order to earn this label, rug exporters and importers must be licensed under the GoodWeave certification program initiated by Rugmark. The new products with the RM label may help regain credibility hurt by the recent events that undermined the value of the brand to a large extent. However, the carpet production is spread over large geographical areas in India, with about 180,000 looms and 550,000 weavers, which makes it impossible for IKEA or Rugmark to provide a 100% guarantee that no child is involved in the production of a carpet. Great organizations can turn adversity into advantage: IKEA should come up with a long‐term and sustainable solution to this problem, and focus on more community involvement efforts.


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4 The Proposed Approach To The Family

Because the Stichting Ingka Foundation committee is responsible for IKEA’s strategic planning, they have to be immediately informed about the child labour practices of the suppliers in India. IKEA’s vision statement, “to create a better everyday life for the many people” should be re‐established by taking immediate action and working with third party organizations to guarantee that no child labor is used in the manufacturing of IKEA products.

IKEA should remember the very values it was founded on decades ago as a family business which aimed to serve the community that was being exploited by the furniture cartel in Sweden at the time. One of these was strong relationships and communication with the suppliers in Europe in an effort to form a strategic alliance to serve the customers in the best way possible. Having said that, the successors and IKEA’s executive team should be able to implement a stronger communication and information sharing strategy for supplier evaluation, and visit the production sites, so all parties are on the same page in terms of the execution of company vision, values and strategies. If they cannot come up with suppliers that are ‘fit’ with their corporate social responsibility strategies, the successors might also want to consider departing from the strategy of outsourcing and take ownership of manufacturing facilities. This way the company can better control the conditions of its value chain.

We know that IKEA has been in collaboration with UNICEF to build schools and hospitals for children in India and Pakistan, in an effort to improve the children’s education and living standards. The successors who are taking over the burden of what went wrong in India, and the responsibility of proving their worth in terms of corporate social responsibilty efforts, should remember that strategic alliance with UNICEF in India and Pakistan alone is not enough though: IKEA should collaborate with other organizations in other parts of the world. Not doing so would weaken their brand image in the eyes of socially responsible customers who might think that they do this to ‘regain its reputation’ that was damaged by the news regarding the child labour in India and Pakistan.


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REFERENCES:

[1] “Flat‐pack accounting: Forget about the Gates Foundation. The world's biggest charity owns IKEA—and is devoted to interior design”, The Economist, published on 11 May 2006. http://www.economist.com/node/6919139?story_id=6919139. Accessed on 27 November 2010.

[2] Dan Gledhill, “Ikea boss sets heirs the Habitat test,” The Independent, Published on: 23 July 2000. http://www.independent.co.uk/news/business/news/ikea‐boss‐sets‐heirs‐the‐habitat‐test‐708146.html. Accessed on 25 November 2010.

[3] Christopher A Bartlett, Vincent Dessain amd Andres Sjoman, “IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)”, HBS 9‐906‐414, November 14, 2006.

[4] “1974 Ikea Chair, One Careful Owner, Not for Sale”, Guardian News & Media, 2008. Published on 19 December 2006. http://www.buzzle.com/articles/120793.html. Accessed on 25 November 2010.

[5] Michael Green, “My Three Sons,” Swiss News, Published on 1 April 2001. http://www.highbeam.com/doc/1G1‐72997282.html. Accessed on 26 November 2010.

[6] Lucy Ballinger, “He lives in a bungalow, flies easyJet and 'dries out' three times a year... the man who founded Ikea and is worth £15bn”, Published on 14 April 2008. http://www.dailymail.co.uk/news/article‐559487/He‐lives‐bungalow‐flies‐easyJet‐dries‐times‐year‐‐man‐founded‐Ikea‐worth‐pound‐15bn.html. Accessed on 29 November 2010.

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