Is IKEA Ethical and Sustainable?

Political, social, and economic factors that challenge IKEA

Introduction

Founded in 1943 by 17-year-old Ingvar Kamprad as a mail-order company, the small business sold goods such as pens, lighters, and binders to customers in Sweeden. Kamprad noticed that rivals also sold furniture and to stay competitive, he decided to enter this industry. Kamprad opened his first storefront in the early 1950s and business flourished. IKEA’s goal became to “offer a wide range of home furnishing items of good design and function at prices so low that the majority of people can afford to buy them” (Bartlett, Dessain, & Sjoman).

Customers loved the catalogs, prices, quality, and the ability to touch, feel, and see IKEA’s furniture in showrooms. By the mid-1990s, IKEA became the world’s largest specialized furniture retailer with more than 98 stores in 17 countries. According to IKEA’s website, there are 313 IKEA stores across 38 countries today.

However, it has not always been glitz and glamour for IKEA. Similar to many other multinational businesses, the company faced numerous challenges across the political, social, and economic spectrum. These challenges motivate IKEA to improve the company’s business process, innovate, and remain relevant to consumers.

Fierce Competitors

The first issue arose early for IKEA. Upset with the tightly knit group of furniture manufacturers who controlled the Swedish industry to keep prices high, Kamprad desired change. He viewed competitor business practices as corrupt and unethical — set up only to benefit the dominant players in this field.

Common for many underdeveloped countries, especially where governments are developing and information is not easily accessible, corruption becomes a barrier to development and economic growth. Kamprad’s main focus became sourcing quality materials at low prices so everyday consumers could enjoy high-quality furniture.

Through the business strategy of selling high-quality self-assembled furniture at affordable prices, the company began to increasingly grow. IKEA’s sales doubled from 3 million SEK to 6 million SEK between 1953 and 1955.

IKEA’s motivation to combat social injustice and innovate early in the business life stage allowed for the company to thrive. This exemplifies that businesses, both global and domestic, can successfully generate profit even when putting the best interests of consumers first.

As IKEA grew, another common social and political issue that global and domestic businesses face arose. Competitors soon became so envious of the company’s success, they began colluding with trade fairs to stop allowing the company to show IKEA’s products. Also, competitors pressured manufacturers not to sell to IKEA.

Once again, corruption in the business environment forced Kamprad to look abroad for suppliers. The company decided not to produce furniture, but to support unused production capacity from suppliers.

IKEA’s motivation to grow amongst stiff competition exemplifies the company’s strength never to give up. Many multinational companies face similar problems from competitors, and it is up to the decision-makers to find the best solutions.

For multinational businesses competing in fierce or corrupt markets, hiring strategical problem solvers with strong business acumen will be imperative for growth and success.

Environmental Concerns

In the early 1980s, another problem arose for the multinational company. This time it concerned the company’s practice of using high levels of formaldehyde in its products. Tests showed that some IKEA products emitted more formaldehyde than allowed by legislation which was harmful not to only people, but also the environment. The negative perception of the company caused sales to drop by 20% in Denmark.

The company explored techniques to combat this problem. However, suppliers still failed to meet the company’s standards. IKEA decided to work directly with glue-producing chemical companies to reduce the formaldehyde in its products. This was IKEA’s solution to this social problem; the company decided to work directly with the suppliers. It is not uncommon for multinational businesses to go to the source for solutions.

However, in 1992, a German newspaper and TV company found that IKEA’s best-selling bookcase series had emissions higher than German legislation allowed. This time it was the lacquer on the bookshelves and IKEA stopped production immediately, costing the company up to $7 million. Although this had a negative economic impact on the company, IKEA’s stakeholders valued ethical practices over money. The company worked with various organizations including Greenpeace and World Wide Fund for Nature — and even hired inspectors to set new standards for suppliers.

The company could have easily decided to ignore the issues and continue to make a profit. IKEA’s approach to the backlash once again shows the company’s motivation to put people and the environment first. In a recent study by Advances in Management and Applied Economics, Schirone and Torkan found that “not only does IKEA promise to reduce CO2 emissions by intervening in the most influential business areas, but also to attempt to create synergies with stakeholders. More specifically, IKEA wants to create relationships with both suppliers and subcontractors involved in the transport sector” (2012).

Here it is evident that the company is constantly looking for ways to improve its business process instead of ignoring the issues. Many domestic and multinational businesses are faced with the same hurdles when deciding on the business processes. Decision-makers should make choices that mirror the company’s values.

Child Labor

In 1994, a Swedish television documentary exposed IKEA for utilizing child labor in weaving looms in Pakistan. IKEA decided to send a legal team to Geneva to gather advice from the International Labor Organization, as they learned that this was a global business problem. IKEA also began working with Swedish Save the Children and UNICEF to better understand the issue of child labor in countries like India and Nepal, where many suppliers were located.

Stakeholders from IKEA met with suppliers, unions, political, activists, NGOs, and U.N. organizations to find solutions. IKEA developed a new clause to their contracts stating that if the supplier employed children under the legal working age, the business relationship would be terminated. The company even went as far as appointing a third-party agency to monitor child labor practices at supplier locations.

However, one year after IKEA began to address the issue of child labor, another German documentary maker exposed the underage children working at Rangan Exports, one of IKEA’s major suppliers. The producers invited IKEA to send a representative to take part in a live discussion during the airing of the documentary.

Children are a major source of labor that many domestic and international businesses utilize whether willingly or unknowingly. Businesses who exploit children for work often do it for financial gain. Studies show that “child labor was significantly and positively related to adolescent morality, to a population’s nutrition level, and to the presence of infectious disease” (Roggero).

Outsourcing production to foreign countries increases the chance of a business being involved in child labor. Although child labor can be viewed as a strategic economical move for domestic and international businesses, IKEA understood the negative consequences and how child labor causes more harm than good. IKEA continues to closely watch suppliers and cut ties with partners who exploit children.

The company’s motivation to improve business practices and ethics sparked investigations and change. It is important for domestic and multinational businesses to fully understand the consequences of child labor and how to avoid it at all costs.

Conclusion

Multinational businesses will face ongoing social, political, and economical problems. IKEA is an excellent example of a multinational company whose motivations shape its business decisions. Through the company’s actions, it is evident that IKEA values its customers as well as the process involved to produce products for customers.

The company combatted corruption amongst competitors, as well as implemented solutions to improve the company’s environmental impact and unethical practice of child labor. IKEA understood that consumer trust will lead to positive growth, therefore the company strives to continuously improve its social, political, and economic impact.

For many multinational businesses, it is not uncommon for political, social, and economical motivations to characterize actions in the global marketplace. Many external and internal factors influence multinational business activity. These will pose challenges as well as opportunities for business.

As a business leader, it is imperative to understand the impact of business decisions and to always evaluate new ways to improve business processes.

References

Bartlett, C. A., Dessain, V. M., & Sjoman, A. (2006). IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A). Harvard Business School. Retrieved from https://www.hbs.edu/faculty/Pages/item.aspx?num=33278

Cohn, T. Global Political Economy. Routledge (2016). Print.

Roggero, P. “The Health Impact of Child Labor in Developing Countries: Evidence from Cross-Country Data.” American journal of public health 97.2 (2007): 271–5. Print.

Schirone, D. A., & Torkan, G. (2012). New transport organization by IKEA. an example of social responsibility in corporate strategy. Advances in Management and Applied Economics, 2(3), 181–193. Retrieved from http://ezproxy.redlands.edu/docview/1040716318?accountid=14729

Wilhelm, P. G. (2002). International validation of the corruption perceptions index: Implications for business ethics and entrepreneurship education. Journal of Business Ethics. Retrieved from: http://dx.doi.org.ezproxy.redlands.edu/10.1023/A:1013882225402