Business & Marketing Case Study: IKEA Case Study

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IKEA Case Study
1 In what ways does the Ikea case demonstrate the risks/challenges of expanding internationally?
International presence increases the risk of business partners engaging in activities that can damage the company's reputation and hurt its business in the short and long-run. IKEA’s global expansion exposed the company to several challenges that it had to solve to remain competitive on the world stage. When a company expands internationally, many factors are outside their control especially, regarding their business partners in foreign countries. In the case of IKEA, its expansion caused its supply chain to become international to meet the diverse needs of a global customer base. With increasing inventory, so did the supply chain expands exponentially, and policing the entire network to ensure compliance with fair business practices by the company’s partners became harder. With limited resources to ensure compliance with local laws and company policy, a bigger network to cover reduced the efficacy of IKEA’s oversight team. It was easier for its business partner to engage in business malpractices or break terms of their agreement with IKEA but, the company hardly noticed as long as the suppliers supplied goods. While IKEA was attempting to structure its business to be more environmentally sustainable through investment in forestry management, business partners in South East Asia were using child labor for a different line of product unrelated to furniture. The company found out about their suppliers using child labor from the media which was too late as IKEA's reputation was already damaged.
Secondly, it is nearly impossible to determine whether global business partners engage in fair business practices. It is easy for business partners to cut corners to deliver products and the company may not notice. In the case of IKEA, while the company compelled its southeast business partners to sign contracts that prohibited them to use child labor, the companies still used child labor and managed successfully to hide their questionable practices from IKEA. As IKEA came to find out, their suppliers used sub-contractors who also had sub-contractors and with the long supply chain and many players, it is difficult to enforce labor laws in the entirety of the supply chain.
Another challenge of international business cooperation is a different legal framework for different countries. When IKEA sought input and advice from the International Labor Organization (ILO) on how to deal with the child labor problem in South East Asia, it discovered that India, Pakistan, and Nepal were not signatories to convention 138. Convention 138 was designed to abolish child labor but some countries where IKEA had issues of child labor had not ratified it. This showed a deeper societal problem and compelling business partners from these countries to avoid using child labor was difficult. It almost seemed normal that children can be used as laborers even at the expense of their education and other important rights they should enjoy. It is nearly impractical for IKEA alone to root out such a problem unless it changes the worldview of the society.
International cooperation also exposes a company to wider scrutiny by different parties and whenever any of them find business malpractices, their findings affect sales. When Danish authorities found that IKEA furniture had formaldehyde, they published the findings and led to a 20% drop in sales in Denmark. A decade later, a German media house also conducted its investigation and their findings cost IKEA $6 -$7 million. As for the case of the company that published the child labor used in the IKEA supply chain, it was German but it was investigated in India. This highlights the extent to which business operations of a multinational are scrutinized even by non-stakeholders and they are bound to find issues. For each issue found, it costs the company revenue and damages the brand reputation.
2 Should Ikea’s relationship with its suppliers remain largely a commercial one or should it expand to cover social/environmental issues? Provide justifications for your stance.
IKEA's relationship with suppliers should cover social and environmental issues. There are varied reasons why IKEA should invest in social and environmental issues. First, it is a beneficiary of those investments. If IKEA stands on the wayside while forests are destroyed, eventually sourcing its goods will become harder because of the scarcity of the wood. IKEA is known for furniture which is mainly wood and hence it must invest in protecting its bottom line to ensure the sustainability of its business. Therefore, it is in the best interest of IKEA to care about issues that affect its business processes.
Secondly, IKEA customers expect the company to source its products from reputable and honest business partners who do not engage in unfair business practices. The company risks its brand image damage if it does not pay attention to social and environmental issues especially if the company is involved. Consumers care about where the product they purchase has been produced fairly without exploiting children and or in a sweatshop. Consumers have become increasingly sensitive to ethical sourcing and they repay with brand loyalty. Hence, IKEA must ethically source to earn customer loyalty. Since consumers are sensitive about where products are sourced and how they are produced, it is very easy to lose market share when consumers notice any exploitation in the supply chain. Barner, IKEA’s carpet manag...