Friday, November 6, 2009

Case Study of IKEA with Indian Rugs and Child Labor


IKEA is a Swedish company producing home furnishing products at low prices to make them affordable to people. The company was founded in 1943 by Ingvar Kamprad and kept growing tremendously from 2 stores in 1964 to 114 stores in 1994 to 231 stores in 2007 in 24 countries welcoming a total of 522 million visitors. IKEA‘s success story is the result of its founders opening store in 1951 to allow customers to inspect products before buying them, using a catalog to tempt people to visit an exhibition. Its key feature of providing self-assembled furniture starting from 1953 significantly cut transport and storage costs.

Besides its success stories, the company has faced environmental and social issues. The environmental issue in the early 1980s was raised as IKEA products were proved to emit more Formaldehyde than was allowed by legislation. The reason is that most of its suppliers bought from subsuppliers, who collected materials from glue manufacturers. Afterward, the company worked directly with glue companies and reduced the formaldehyde off-gassing in its products. The problem was solved but sales dropped by 20% in Denmark. In 1992, the company hit the same issue, which cost IKEA $6 million to $7 million. IKEA learned a lesson; publicity can bring a great loss in sales, not counting the damage to the brand image.

In regard to social issues, the company confronted the child labor problem, which this paper mainly discusses about. In 1994, a Swedish television showed a documentary film about children working in Pakistan, targeting IKEA. In India, IKEA faced criticism about child labor from various international organizations. In the spring of 1995, another film is threaten to be shown on German television about children working at looms at Rangan Exports, a company used by IKEA and the producer then invited IKEA to send someone to take part in a live discussion during the airing of the program. These events urged the company to consider environmental and social issues more seriously.


Environmental and Social Issues: Cost of Globalization

On the process of globalization, IKEA needs to get the cheapest supplies and therefore go to countries that offer cheap labor. However, these developing countries such as India, Pakistan and Nepal are facing a lot of social issues about human rights. When IKEA set its foot in these countries, it could not avoid these problems. For example in India, estimates of child labor in India vary from the government’s 1991 census figure of 11.3 million children under 15 working to Human Rights Watch’s estimate of between 60 million and 115 millions child laborers and about 200,000 were employed in the carpet industry. Its corporate strategy style partly exacerbates, instead of helps the situation. The fact that IKEA does not have its own manufacturing facilities; instead it uses subcontracted manufacturers all over the world for supplies makes it more complex and difficult to keep track of the company’s suppliers and subsuppliers. It is even more difficult to keep track of children working in homes where whole families worked on looms from the subsuppliers’ level. However, on the positive side, this corporate strategy gives IKEA’s the advantage of being able to change its suppliers without much cost.

IKEA realizes the challenge and questions itself how deeply the company wants to engage and to help eliminate local social issues of child labor. At the initial period, the way that IKEA dealt with Formaldehyde and forestry issues showed its engagement in social responsibility still remained at the reactive step but not yet at the proactive step or interactive step. This inadequate engagement explains why the company keeps undergoing social and environmental issues pushed by the public. IKEA is outstanding at new ideas for marketing but the company is still passive in social responsibility action. To fix this weakness, IKEA needs to be more aware of social responsibility and potential upcoming social issues.


Public issues: Big threat

The best strategy is to avoid social and environmental issues right from the beginning as when these issues emerge, they immediately affect the products’ sales tremendously. In the case of the Formaldehyde problem, the company’s sales dropped by 20% in Denmark. Moreover, those issues lead to a big damage to brand image. IKEA’s main tactic is to reduce cost between IKEA and its customers to offer the lowest possible price. In the case the company confronts child labor issue and customers perceive that the low price they benefit is by child labor exploitation in India, customers will react by avoiding products from IKEA which results in a drop in sales.

To avoid this threat of loss in profit, IKEA may consider withdrawing from India. However, if IKEA withdraws from India market, it will restrain itself from a big opportunity of cheap labor and put the company at disadvantage position as other competitors like Wal-Mart is accessing the same opportunities to compete for lower product prices. IKEA therefore should not look for a new business opportunity by withdrawing from India but keep up with the trend and get ahead of the issue and its rivals. Some people may argue that if the company is actively involved with the issue, it may undergo a drop in profit compared to its competitors. The threat may hold true in the short run. However, IKEA can turn the threat into an opportunity in the long run by actively involving and publicizing its achievement to let customers appreciate the effort. Afterward, IKEA will soon be better off, with better profit and better brand image.


The way out

First we take a look at how the company responded to environmental and social issues when they first emerged. According to the case document, to address the Formaldehyde problem, IKEA “quickly established stringent requirements regarding formaldehyde emissions but soon found that suppliers were failing to meet its standards as the binding material originally comes from glue manufacturers”. Therefore, IKEA worked directly with glue-producing chemical companies and, with the collaboration of companies such as ICI and BASF, soon found ways to reduce the Formaldehyde off-gassing in its products. When the problem returned a decade later, IKEA immediately “stopped both the production and sales of Billy bookcase worldwide and corrected the problem before resuming distribution”. The Formaldehyde events urged IKEA to be more aware of the environmental issue. The company started showing its progress from reactive to proactive steps in addressing social responsibility when it approached forestry event. This time, IKEA anticipated the forestry issue and solved the problem before it was raised by public pressure. IKEA made a move in “establishing a forestry policy under discussion with Greenpeace and World Wide Fund for Nature and standards set by the Forest Stewardship Council”. Instead of investigating at its suppliers level as the company did in the Formaldehyde case, this time IKEA was ready to trace all wood used in its products back to its source. This is a responsible evolution, compatible with its commitment of “the true IKEA spirit” as “willingness to assume responsibility and to help, on our humbleness before the task, and on the simplicity of our behavior.” This progress continued to expand to four other areas: adapting the product range; working with suppliers; transport and distribution; and ensuring environmentally conscious stores.

Referring to the child labor problem raised by a Swedish television documentary which showed children in Pakistan working at weaving looms, we first look at how IKEA addressed the event according to the case document. It “sent a legal team to Geneva to seek input and advice from the International Labor Organization (ILO) on how to deal with the problem. It turned out that India, Pakistan, and Nepal were not signatories to the convention”. The fact that India, Pakistan, and Nepal were not signatories to the convention implies it is unreasonable to accuse IKEA of violating the law of child labor. Still, this fact did not help IKEA much as child labor is an ethical issue. IKEA therefore “added a clause to all supply contracts, stating simply that if the supplier employed children under legal working age, the contract would be cancelled”. The third step was to appoint a third-party agent to monitor child labor practices at its suppliers in India and Pakistan. This third step helped the company in publicity and media, and made things seem fairer from the public’s view. The business manager Barner did some more research about the child labor issue by contacting concerned organizations, such as Swedish Save the Children, UNICEF, and the ILO to get advice. After acquiring some knowledge about the issue, Barner and her direct manager traveled to India, Nepal and Pakistan to investigate the real situation [This action reflects the company’s culture and management style as “management by running around”]. On the trip, Barner learned more about Rugmark Foundation, “organized by the Indo-German Export Promotion, Indian carpet manufacturers, and exporters, and some Indian NGOs, to develop a label certifying that the carpets to which it was attached were made without the use of child labor”. Barner then returned to Sweden and met frequently with the Swedish Save the Children’s expert on child labor. This helped Barner internalize the importance of child labor action which shaped up IKEA’s new attitude and stand. So what Barner initially did is compatible with the situation until the child labor issue called for more specific actions in the next event. In the spring of 1995, a well-known German documentary maker “notified the company that a film he had made was about to be broadcast on German television showing children working at looms at Rangan Exports” and “invited IKEA to send someone to take part in a live discussion during the airing of the program”.

To deal with this complex situation, it is recommended that IKEA should participate in the program. Up to that point, the company had gained some positive achievements to the child labor issue since the problem was first raised by Swedish television. IKEA could discuss the information it had collected so far from UNICEF, Swedish Save the Children and the ILO and show it possesses the same attitude as the director of the documentary film as well as pursuing the same goals of erasing child labor. It could turn the conundrum around by showing its gratitude to the director for helping spot the child labor at the company’s manufacturer and emphasizing that the company is going to consider the case thoroughly. IKEA possibly mentions its spirit of not avoiding mistakes to search for creative solutions. With a carefully considered plan, participating in the television program would help save the brand and image.

After the television program, IKEA needs to come up with a solution for the case and the long-term strategy to deal with child labor issue. Barner may need to make a trip to Rangan Exports and investigate the case thoroughly. All the children working there should be collected and offered education opportunities. The company needs to create its own children budget to help children discovered working at the company. IKEA also should provide a hot line for people to spot children labor cases and hire experts to keep track of the problem and to execute investigation at its supplier and subsupplier level. By this way, IKEA could continue its relationship with its suppliers, calling for the cooperation from suppliers to allow IKEA’s professional random inspection. Working with Rugmark is another good option if IKEA can make sure the child labor problem is under control. Because IKEA does not have its own manufacturers and gets its supplies from other suppliers, it is challenging for IKEA’s ability to manage and control the whole production process. Unless IKEA can be sure that there’s no child labor in the company, it is encouraged to allow Rugmark to monitor the use of child labor on IKEA’s behalf.

If IKEA follows the steps described above, it will advance itself to the proactive level of social responsibility. The company could advance itself to the even higher level, interactive level, by executing more assertive plans. The interactive level promises a long-term advantage in brand image and profit. As child labor is considered “Indian culture”, it requires a lot of time, energy and finance to make progress. The company needs to work tightly with UNICEF, NGOs, and Save the Children Alliance to learn from each other. In India, because of economic initiatives, families send children to work. Therefore, to help improve the situation, IKEA need to fund a budget in the need of education for those families. Besides, the company should lobby to coerce the government to get involved more actively in the process. In the long run, family income boosting plans need to be implemented to achieve a better standard living for Indian families as poverty is the root of the problem. Even though all these effort sounds challenging, a withdrawal from India, Nepal and Pakistan can inhibit IKEA from the opportunity of cheap labor which is fundamental to compete for cheap prices, especially when other giant rivals are looking at this opportunity at the same time.






Reference:

1. Bartlett, Christopher A. Dessain, Vincent. Sjoman, Anders. “IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)”. November 14, 2006.

2. IKEA Webpage. [ http://www.ikea.com/ ] October 20, 2009.

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