IKEA: INDIAN RUGS & CHILD LABOR (A)
Atika Miranda – 2101704905
Gabrielle K Audra – 2101705145
Ouk Sivkheng – 2101777163
Zahwa Mariam – 2101705025
Heidy Aurelia – 2101705050
Vuthy Vichit – 2101778052
International Business 2021
June 21st, 2018
For International Business – Final Report
Word Counts :
TABLE OF CONTENT
TITLE PAGE i
TABLE OF CONTENTS ii
EXECUTIVE SUMMARY iii
CHAPTER 1. INTRODUCTION 3
1.1 What is IKEA3
1.2 Summary of The Case3
CHAPTER 2. DISCUSSION OF CASE QUESTIONS5
2.1 How should Marianne Barner respond to the invitation for IKEA
to have representative appear on the upcoming broadcast of the
German video program? 5
2.2 What actions should she take regarding the IKEA supply contract with Rangan Exports?
2.3 What long-term strategy would you suggest she take regarding IKEA’s
continued operation in India? Should the company stay or should it exit?5
2.4 For those recommending that IKEA continue to source carpets in India, would you suggest that she:
a) continue IKEA’s own monitoring and control processes or sign-up to Rugmark?
b) continue to focus only on eliminating the use of child labor in
IKEA’s supply chain or engage in broader action to address the root
causes of child labor as Save the Children is urging? 6
CHAPTER 3. CONCLUSION ; RECOMMENDATION
The purpose of this report is to discuss, explain, and analyze the study case of IKEA’s: global sourcing challenge. IKEA is the largest furniture retail not only in the home-country but the overseas. IKEA was made in 1943 by Ingvar Kamprad Elmtaryd Agunnaryd. As IKEA gets bigger, IKEA built a lot of branches. IKEA faced a problem that the company unaware of, such as child labor and environmental awareness. In 1994, IKEA, as a well-known company, was mentioned in local television in Sweden as a company that used under age children as a workforce. Child labor is the underage childs that forced to work, and it violated human and child rights. Children are supposed to get educated on the early age and get access to health. One of the major supplier of IKEA, caught hiring underage childs as the workforce in India, South Asia. Rangan Exports, is the major supplier for IKEA’s carpets and rugs. Regarding the issue, IKEA needs to take an action regarding the supplier that violated human and child rights and also violated IKEA’s no under age children labor clause. Due to this issue, many international organizations and local televisions targeted IKEA for using child labor. India as well as other countries and IKEA should be more aware about environmental and workforce awareness. The government, local organizations, and international organizations can strike a deal with the company to stop the company in using child labor as the workforce. Thus, the company should consider more on making a contract and do a corporation with others, and not work with other companies or suppliers that use child labor.
CHAPTER I: INTRODUCTION
This chapter will explain about the background and the introduction of the company which is IKEA and the social issue with child labor and about German TV station and Swedish television documentary.
1.1 What is IKEA
IKEA is a multinationals company that design and sell affordable furnitures with a high quality products and it has become one of the world’s major and well-known furniture retailer. This company was established by Ingvar Kamprad in 1943 located in Almhult, Sweden. The headquarter of IKEA is in Netherlands but its heart is still in Almhult, Sweden, that is called IOS (IKEA of Sweden). Ingvar Kamprad established IKEA which was the product of innovation, persistence, and tenacity. Ingvar Kamprad grew up in a small village which is called Agunnaryd. Kamprad starts the world of business since he was at a young age approximately at 5 years old by buy matches with very low price and sell it again to his neighbors with small profit.
By running the business, Kamprad eventually sold many other goods such as fish, seeds, and Christmas decors. Later on, he started to sell stationery items such as pen, book, and pencils. When he was 17 years old, in 1943, he got cash from his father as a reward due to his good scores in school. He then established IKEA and the name of IKEA was taken from his initial name and his hometown’s initial name, Ingvar Kampard Elmtaryd Agunnaryd. During the first few years of his IKEA business, Kamprad began to sell and deliver his merchandise utilizing milk trucks. In 1945, IKEA first advertisement appear in the newspaper that increase their selling rapidly. 1948, IKEA first announced furniture range that made by the local manufacturers in the forest close to Kampard’s house. Then, he started to diversify his business by increasing the intake of furniture made by local manufacturers. To attract the customers, IKEA made catalogue that they think will easier the customers seen the product by look at the picture. Soon, IKEA furnitures fame increase, where there are many people know the brand. And to increase the sale, IKEA established their first furniture showroom for the customer see and touch the furniture before they ordered. This stage is where the important time for IKEA’s concept development. Their first showroom in Almhult, Sweden. However, IKEA eventually faced some problems such as boycotting due to the low price but high quality goods, forcing Kamprad to design all the items at his own warehouses”. Ingvar embarked to introduce the revolutionary ready-to-use furniture, which was also known as ‘flat pack’ furniture. In spite of being affordable and easy to construct, these flat pack furniture items did not sacrifice the quality and style and many people thought that IKEA’s items were modern and futuristic.
Today, there are more than 331 IKEA stores in 48 countries, most of them in Europe, North America, Asia, and Australia. IKEA is known for its creative, futuristic, economical, and highly customizable furniture. However, the company has also diversified its goods and services from flat-pack houses food stores. IKEA known as the largest furniture retailer, but the company does not manufacture the furniture that they sell. Despite that, IKEA products are designed in Sweden but almost all of the actual manufacturing takes place in China and in developing countries such as Malaysia, Vietnam, India, and Romania, Myanmar and Poland (Eastern European). Now, there are 1350 suppliers are responsible for supply the IKEA’s Scandinavian-style furniture.
Add IKEA’s selling chart from years to years to show how ikea grow.
According to IKEA Jobs, IKEA have a vision and mission “To create a better everyday life for the many people and IKEA have business idea is to offer a wide range of well designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them”.
1.2 Summary of The Case
Ingvar Kamprad is a founder of IKEA which began from a small company that based on mail-order in the Forest of Southern Sweden and sold products such as wellspring pens, cigarette lighters, fasteners, and publicized it in bulletins. From that point onward, he began to open a shoe store or an offline store to enable clients to review the items before purchasing the products. Along these lines, the IKEA idea was made which the index close by, clients can see straightforward insides for themselves, contact the furniture they need to purchase and afterward work out a request. With the new idea, IKEA started to experience firm restriction from Sweden’s extensive furniture retailers. Afterward, Poland turned into IKEA’s biggest source as Kamprad traveled to another country to discover new sources. At that point, IKEA had extended their market, into Oslo, Norway, Switzerland and in conclusion, Germany and turned into its biggest market. IKEA has its own particular logic in association with culture and administration styles. To start with is the organization worked casually as they have open-design office scene, the CEO did not have a different office and the recognizable way all representatives tended to each other. The other organization’s reasoning incorporates the IKEA focused on effortlessness and consideration in detail, cost awareness, the pursuit of imaginative arrangements and to wrap things up is the dread of committing errors. In 1986, Kamprad selected his own right hand to assume control as president and CEO, however, he keeps stayed as administrator.
Afterward, in the 1980s, IKEA was confronted environmental and social issues. Danish experts passed control as far as possible for formaldehyde outflows allowable in building items. IKEA was fined as the tests demonstrated that some IKEA items utilized more formaldehyde that was permitted by enactment. The case was generally announced. To recoup the issue, the organization even changed their provider to meet the control made. Those case make IKEA be more worry about natural. The organization even have the dialog with WWF and Greenpeace and utilizing the measures set by the Forest Steward Council. IKEA makes an approach for not utilizing any sources originated from unblemished regular timberland or from backwoods with a high protection esteem. Following the strategy, IKEA distinguished four other natural criteria to be connected in the business task which incorporates adjusting the item extend, working with providers, transport, and circulation and guaranteeing ecologically cognizant stores. IKEA’s unawareness of environment, the use of particleboard on IKEA products can cause illness because it is dangerous for health. IKEA is unaware of the resources that the company used on production and it is not standardize. Because of the environmental issue, IKEA learn new things and change the way of production with help from environmental organization such as WWF.
Not only environmental issue, IKEA also faced social issue, IKEA was first gone up against with the issue of adolescence in Pakistan, a Swedish TV narrative demonstrated that kids worked at weaving looms that cover provider of IKEA, which was the main prominent name on the rundown. A move made was apologized for their obliviousness, recognized the frailty of the issue. IKEA sent a lawful group to Geneva and looked for exhortation from ILO (International Labor Organization). At that point balanced their agreements with providers, the organization designated an outsider specialist to screen tyke work hones at its providers in Pakistan and India.
Child Labor Issue, Child Labor is a practice of employing children who are under the legal working age. IKEA first recognized the involvement of child labor in 1994 when a Swedish documentary showed that children in Pakistan were working at weaving looms. According to the case IKEA was completely unaware of this practice and apologized for its ignorance in this regard immediately. At the case describes of IKEA’s global sourcing of rugs from India, following were the child labor issues found in IKEA global sourcing of rugs from India. In 1994 child labor scandal in Pakistan, The Swedish documentary showed child labor used at weaving carpets in Pakistan. Fist the most blamed due to its high-profile public issue at the time. In fact, the U.N. Convention on the Right of the Child had only been published in December 1989. And media attention like TV program had an important role to play in raising awareness on a topic not well known and understood including at IKEA that has no awareness of Child labor problem. IKEA was not even aware of involvement of child labor in its suppliers, factories in countries like India and Pakistan. Second, Children in India also worked as bonded laborers to pay off the debts incurred by their parents and the enforcement of bonded child labor laws in India was not significantly as strong as to abolish this practice from its roots. And the issue of unbonded child labor was not absolutely pressing for the Indian government as the government felt that majority of the children work along with their parents under their supervision. In spring 1995, while they just finished with the child labor issue, a German documentary maker ask one representative from IKEA to be a speaker in the airing. But they didn’t allow IKEA to see the Video they make about child labor in Rangan Export, IKEA’s major supplier. To conclude, it can also be said that it was unreasonable for the Swedish TV channel to accuse IKEA in 1994 considering the fact that India, Pakistan, and Nepal were not even signatories to the ILO’s convention 138.
The further Actions that Marinne Barner took was she and the company direct supervisor went to Southern Asia which is India, Nepal, and Pakistan. Barner and the company direct supervisor met with numerous partners: providers, U.N., government officials, activists, lawmakers, NGOs, cover send out associations. Thus, she learned of the data of Rugmark Foundation, an as often as possible met with the Swedish Save the Children’s specialists. Barner received a lot of new knowledge about the child labor issue and more aware about the human rights. IKEA also got a lot of help and advice from human rights organization, to help the company take the right action.
For a profoundly implanted issue, the Issue in South Asia, India, the greater provider for carpet and rugs. Barner soon found that the youngster work differed from the administration, in 1991 it is around 60-115 million tyke work in India with different ventures, around 200,000 were in the cover business, fortified and unbonded tyke work was taken by the legislature. Another emergency, a German narrative indicated youngster work at Rangan Export, a noteworthy provider of IKEA, in instantly that German-created program adopts a showdown and forceful strategy pointed specifically at IKEA and its providers.
India as the biggest purchasing source for carpets and rugs. India also has an i
Child labor prohibited due to child and human rights, but in India there are still a lot of company that use under age child as the company workforce. The under age child that are force to work, payed with a low wages. Most of the child is forced to work is because to help their parent to pay the debt. Poverty and the lack of development that happen in India also triggered to do the child labor exploitive. The poor and weak law, there are a lot of child labor. Government should take an action in avoid hiring under age child as the company work force.
CHAPTER II : DISCUSSION OF CASE QUESTIONS
This chapter would like to explain and breakdown the analysis about the case study which is child labor and also answering the questions given from the case study.
2.1 How should Marianne Barner respond to the invitation for IKEA to have representative appear on the upcoming broadcast of the German video program?
On 1994, IKEA still facing their past issue, Formaldehyde. At the same time, they get shocked by the news on TV program that say their company on the list of Swedish company that use child labor as their workers. Even though child labor is not a big issue at that time, but the label of IKEA is the only high profile name on the list made the issue become bigger. In 1994, the child labor issue pop-up with the intention of raising awareness for the public about child labor.
The first solution that IKEA take is apologized for their ignorance and acknowledge the problem and IKEA committed to doing something about the issue. Then, IKEA sends their legal team to Geneva to get information and knowledge from International Labor Organization on how to solve the problem and they also signed a contract that states if the supplier employed children under legal working age, the contract will automatically cancel. To reduce the duties of trading manager and give freedom in monitoring the process, IKEA appoints a third party in India and Pakistan. But, in doing this activity, IKEA has difficulty finding a reputable and competent company to do the monitoring. In the end, they select well-known Scandinavian company. In order to expand their knowledge, IKEA cooperate with International Labor Organization, Unicef, and Swedish Save the Children. By cooperating with them, IKEA know the background of child labor in India.
Source: Trading Economics
Mostly the main reason is wages rate in India is very low which is only sixty-thousand rupiah per day (as shown on the table above) and it could take a year for the parents to pay the debt. So, the children have to help their parents in order to pay debts.
After a year IKEA breathing sigh of relief from rebuilding reputation from child labor issue, a well known German documentary maker and an invitation about showing children that worked for Rangan Exports, IKEA’s major suppliers. The producer asked one representative from IKEA to take part on their live discussion. According to Mrs. Barner, comparing to Swedish documentary program that also documented use of child labor in Pakistan that made to bring awareness to public without targeting any single company, but this German producer clearly wants to take a confrontation and aggressive approach directly to IKEA and one of the suppliers. Based on our group discussion, Marianne Barner has to decline the invitation. There is a positive side from this invitation, the opportunity for IKEA to educate public about how the company journey to fight child labor. But, with the fact that producers won’t allow the company to preview the video and fact that the program, planned to take confrontational and aggressive approach aimed directly to IKEA will affect blindsided the public and IKEA’s message will not accurately delivered.
2.2 What actions should she take regarding the IKEA supply contract with Rangan Exports?
IKEA is the most well-known company and the world’s largest furniture retailer. Ikea sells good quality furniture, kitchen appliances, and home accessories with low prices. As a company, IKEA is growing and expanding the market abroad. Thus, IKEA started to face many issues that can directly give a bad or good impact to the company. Marianne Barner, as the business area manager for carpets, has to face the most dilemmatic situation. She has to make a decision that can affect IKEA’s future. She has to take an action regarding the supply contract with the major supplier of IKEA which is Rangan Exports because of the child labor issue.
Child labor is a socioeconomic phenomenon that happened because of poverty and the lack of development. Child labor violated human or child rights. A child has the right to be educated and go to school (Unicef, 2017, July 10). If they are forced to work, they will not have time to be able to study and to do activities with their friends. A child has the right to get access to health. If they are forced to worked, they will work with some dangerous chemicals in the factory. The chemicals are not only dangerous for the present time, but it actually affects the child’s future health. The number of under age children that work in the carpet and rugs industry is rising in southern asia, especially India and Pakistan. Across nine states in India have hundreds of forced labor cases, child labor, and human trafficking at carpet factories that export their products to some of the biggest retail stores overseas (Forbes, 2014, February 06). Rangan Exports is based in India, South Asia. Rangan Exports is the biggest purchasing source for carpet and rugs for IKEA. The human rights organization targeted Rangan Exports because the company used under age children as the company’s workforce.
The child labor that happened inside Rangan Exports can affect IKEA’s long-run business. Thus, Marianne Barner has to take an action. The child labor issue already hit IKEA from 1994. Child labor became a major issue because Swedish television made a documentary that showed children under age working. IKEA was the only well-known company on the list of the companies that used child labor. No one in the company was aware of the child labor issue. IKEA’s business area manager for carpets recalled the shockwaves after the child labor issue related to the company that she work with. The first step she took was to apologize to the public for IKEA’s unaware and acknowledge to the issue. She also explain about how IKEA was not in full control of this problem and issue. IKEA also sent a legal team to get some advice on how to solve and deal with the problem and issue from the International Labor Organization (ILO) in Geneva, Switzerland. In order to take an action on child labor, Marianne Barner added a clause to all supply contracts, stating that if the suppliers employed under age children as their workforce, the contracts would be cancelled.
In order to see the situation and deeply understand the problem and issue, Barner and her direct manager traveled to three countries in South Asia (India, Pakistan, and Nepal). Barner met the suppliers, NGOs, organizations, and unions in order to gain knowledge and discuss the real situation that happened in South Asia. While they traveled and met the suppliers and NGOs, Barner should do a visit to Rangan Exports without any announcement or appointment, so she will see the real situation inside Rangan Exports. Or she should hire a third-party agent to monitor the situation inside Rangan Exports. In addition to deeply understand and know the real operation in Rangan Exports, she should cooperate with international organization such as the International Labor Organization (ILO), United Nations, and other NGOs that focus on human rights and children. If there are some children who work in Rangan Exports factory, IKEA should do a penalty toward Rangan Exports for doing a violation. IKEA can halt the contract with Rangan Exports as a penalty, or IKEA can take the case to court, because Rangan Exports do a violation that affects IKEA’s reputation. IKEA got a bad reputation because of Rangan Exports using under age children as the company workforce and pay the child with low wages.
If Rangan Exports is proven with accurate evidence of using under age children as Rangan Exports workforce. IKEA should take legal action and stop the contract, because the supplier is violating IKEA’s no children under age labor clause. Other than violating IKEA’s clause, Rangan Exports also violated human or child rights.
On the other hand, stop the contract with Rangan Exports may cause a massive loss in sales and it may deprive IKEA of a lucrative supplier relationship. If IKEA still kept the contract with the supplier with under age children as a workforce, the loss will be much bigger than stop the contract with Rangan Exports for the long-run term business. There will be a lot of international organizations and people from around the world against IKEA, and IKEA will have a bad reputation. People from around the world may not want to buy products from IKEA due to the child labor issue, or people may force the government to shut down IKEA from doing business.
In order to minimize the contracts with suppliers that have under age children as the workforce, IKEA should do a “warning” or warn all IKEA suppliers, so other suppliers also realize how serious IKEA is in taking action on using child labor. IKEA also indirectly educate the suppliers about the child labor issue. IKEA also has to maintain good relations with many suppliers from around the world. It may increase the sales revenue. IKEA has to maintain ethical behavior in doing business, in order to stay away from accusations that can cause loss because no supplier that want to work with IKEA and IKEA will have a bad reputation because it will slow down the company’s performance. Thus, IKEA should immediately and publically announce and state about IKEA’s relations with Rangan Exports. IKEA should do a press release stating that IKEA already halted or stopped the contract with the supplier that violated IKEA’s no under age children labor clause which is Rangan Exports and the reasons why IKEA made such decision. IKEA also has to use this opportunity to state briefly about the company’s policy with the suppliers that use under age children as a workforce.
Other than IKEA, there are also a lot of well-known companies that have faced the child labor issue such as H;M clothing company and Nestlé food and beverage company. H;M is known as the most well-known fast fashion clothing brand, with so many branches around the world. H;M attracted customers with low prices and a high fashion clothing design. H;M has similarity with IKEA. Both companies provided low price products with a high quality and design. H;M got criticized after a book-writer found evidence and wrote a book called “Modeslavar” about child labor that happened on cotton farms and factories that are connected with H;M. Child labor on cotton farms and factories that are connected with H;M are located in Uzbekistan, Myanmar, and Cambodia. H;M got a bad reputation in the media and humanity organization, but not in fashion. Thus, H;M customers still buy the company’s products, even though there are a lot of campaign to complain to H&M on using child labor and slavery. H&M responded to the issue by reducing the use of cotton every year. H&M stated that the company is not tolerate and against child labor. H&M also monitor the case or issue, in order to prevent child labor. H&M gave more attention to all the company’s branches, cotton suppliers, and factories around the world to avoid hiring under age children.
Child labor issue also happened to Nestlé. Nestlé known as the biggest company in producing food especially their product with chocolate based ingredient which is Kit-Kat. A reporter find evidence about child labor that happened on cocoa farms in Côte d’Ivoire and Ghana Connected to Nestlé. Nestlé took an actions immediately regarding to the issue. Nestlé do some research with International organization regarding to find an accurate data and evidence about the child labor issue in cocoa farms that connected to Nestlé. Nestlé also took an actions such as giving access to education for children and the adult or the workforce and made a systems of age verification at farms so Nestlé can avoid under age worker (theguardian, 2015, September 02). Nestlé also took an action by stating a clear statement publically that Nestlé is against the child labor, and gave a brief data on Nestlé’s official website regarding to the issue. Nestlé promised to end the use of child labor in the company supply chain.
IKEA can learn from Nestlé and H;M, because Nestlé took an actions that solved the problem immediately. Nestlé solved the problem immediately not because the company care about the reputation, but Nestlé care about the environment and the human rights, that is why Nestlé give child access to education, so the child can stop work and get educated. The education not only for child but also for their parents who work in the cocoa farm and factory, so not only the child got educated, but also their parent so the parent also can teach their child and realize that as a parent they should not force their child to work. IKEA also can implement how Nestlé took an action on giving a brief data publicly about against child labor and there is no child labor in Nestlé chain supply. Nestlé not only tell public that the company against child labor, but also for the supplier, and many factories around the world that connected with Nestlé. And what IKEA can learn from H;M are H;M do a solid movement to reduce the use of cotton every year. H;M also monitoring all production and the company’s workforce in order to prevent under age children workforce. H&M targeted with ILO (International Labor Organization) because of the used of child labor. Thus, it is made the company realized about how bad is child labor for children and made the company more aware about what is happening inside and outside the company.
2.3 What long-term strategy would you suggest she take regarding IKEA’s continued operation in India? Should the company stay or should it exit.
IKEA has a major global business by selling affordable, good quality furniture to mass market customers around the world. But in the mid-1990 a problem occurred for IKEA when a social challenges emerged from the surface where IKEA suppliers used child labor in India. This creates a disruption to IKEA because in 1994 IKEA is still working to resolve the problems that emerged due to the formaldehyde that causes environmental problems. Formaldehyde “Was used as binding glue in materials such as plywood and particleboard and often seeped out as gas” (Bartlett, Dessain, ; Sjöman, 2006). This chemical can cause health problems such as headache, nausea, and breathing problems for those who inhale the chemical. “So when a test showed IKEA product emitted more formaldehyde than was allowed by the legislation, the case was widely publicized and the company was fined” (Bartlett, Dessain, ; Sjöman, 2006). IKEA revenue was reported to drop due to the formaldehyde chemical that was used for materials in IKEA especially their best seller product which is the bookshelves. Despite the environmental problem that IKEA is having, IKEA’s latest problem was the child labor that occurred in several places due to the manufacturers that hire underage kids. These countries include India, Nepal, and Pakistan. The child labor that happen in the IKEA manufacturer was because of the need of money, this means the children was bonded because of the debt that they have to settle in order to live and have a shelter and food for their daily life or they may have to pay their previous debts like the debts of their parents who had not been paid. Since India is one of the major craftsman for carpets and rugs that supply IKEA, IKEA must take action in order to resolve the problem, IKEA takes action by “Provide external monitoring of companies quality assurance programs and gave them mandate not only to investigate the child labor that was happening in India but also to undertake audits from the suppliers factory and child labor activities” (Bartlett, Dessain, & Sjöman, 2006). IKEA contracted India for the manufacturing of carpets and rugs is due to the fact that rugs are the biggest activity source in India, where many people purchase carpets and rugs and where the labor costs are low. But sometimes due to the cheap labor, many manufactures decide to hire underage children and do child labor in order to utilize the costs to be low.
Regarding the issue of child labor in India, IKEA’s long term strategy should use the corporate strategy. Corporate strategy itself is “A corporate strategy entails a clearly defined, long-term vision that organizations set, seeking to create corporate value and motivate the workforce to implement the proper actions to achieve customer satisfaction. In addition, corporate strategy is a continuous process that requires a constant effort to engage investors in trusting the company with their money, thereby increasing the company’s equity. Organizations that manage to deliver customer value unfailingly are those that revisit their corporate strategy regularly to improve areas that may not deliver the aimed results” (my accounting course, 2007).
This means that IKEA already has a vision and strategy that they have used, and with that IKEA wants to keep the customers satisfied and the investors with a cheap cost. In the corporate strategy, IKEA used ‘related diversification’ where IKEA and other manufacturers and suppliers share skills and competency and can leverage the brand name which in this case is IKEA. One of the example for the related diversification in IKEA is IKEA with India, IKEA as a retail company that sells product and India as the major source for the manufacturing and suppliers for the material such as carpets and rugs, which means that India share their skills to manufacture and material and sell it to IKEA’s and because India is the biggest manufacturing and purchasing for carpets and rugs this can leverage the IKEA brand name.
IKEA should also use the overall cost leadership because the business strategy that IKEA gives is by selling affordable, good quality furniture to mass market customers around the world, where IKEA offers a good quality of a product by focusing on highly efficient operating procedures so that its costs are lower than its competitor’s, this can gain profit because of the increase sales.
A SWOT analysis is a careful assessment of the strengths, weaknesses, opportunities, and threats that an organization faced. The function of a SWOT analysis is to find out whether IKEA should stay or exit.
The first category is strengths, in which IKEA is able to minimize production costs to the lowest, “Constantly using innovations to drive costs down. Low prices are the cornerstone of IKEA business idea and the company always try to do things as efficient and cost-effective as possible. To drive costs down all the time, the company must find new and innovative ways to do that and to incorporate them in its businesses model. The business’ innovations include new materials that contribute more to sustainable environment and are less costly or using newest ways of packaging, handling and transporting materials” (Jurevicius, 2013). One of the examples that IKEA constantly using innovation to drive costs down is when in the 1965 IKEA stores add a section called ‘The Cook Shop’ that offers quality at low prices, this means that IKEA innovates substantial product with affordable prices that have a good quality so that the customer can buy it with a reasonable price. The second strength that IKEA have is customer knowledge. Since IKEA is a multinational retail company that sells furniture goods with one of the goods quality and reasonable prices many customers think highly of the brand. “One of the key competitive advantages IKEA has is its extensive knowledge about the customers. The company understands the purchasing factors that influence customers to buy and implements the best practices to induce that decision. IKEA offers low prices and a huge range of products. Designers constantly introduce new design products that look stylish in the eyes of customers. All the products are designed so it would be easy to transport and assemble. Moreover, the company offers the widest product range and positive shopping experience” (Jurevicius, 2013). This shows that IKEA does an analysis for their market segmentation and research for their product, so that they can become better than their competitors, IKEA also listen and understanding the customers by always trying to innovate and strives to become better, this way the customer feel like the company cared for them and always understanding the customers therefore the customers are satisfied and have a high chance of the customers to buy the goods from IKEA again.
In one of the Ingvar Kamprad nine listed aspects where there is one cornerstone that says ‘profit gives us source’ which means that IKEA will reach profit from the customer insight of the IKEA brands due to the low costs products that they can buy with a reasonable cost and premium quality which will improved the purchasing process. The third strengths that IKEA have is leading brand with strong financial position and brand image, this means that IKEA has maintained a strong brand reputation and image as a retail organization that sells various range of products with a superb design and quality that catches the eyes of the customers. “According to Interbrand, IKEA is the most valuable furniture retailer brand in the world, valued at nearly $US 12.8 billion in 2012. The business operates 332 stores in 38 countries and is present in the major world markets. More than 600 million customers visit IKEA stores every year. Worldwide market presence and strong brand reputation ensures that customers will often choose IKEA over its competitors” (Jurevicius, 2013). This shows not only IKEA is a stable company which shows in the financial statement, it also shows that IKEA can leverage the brand and the customer trust on how great the reputation of the brand.
The second category is for weaknesses, where IKEA damaged reputation due to a series of incidents. Although IKEA brand has a good reputation for its retail company that sells goods for affordable price with a good quality, there have been a few problems that occur IKEA one of them is the child labor activity that was done by one of the manufacturers and suppliers of IKEA in India. This creates bad public image for the company since India is the biggest purchase source for the company, it also shows that IKEA is being ignorant from the problem due to the lack of insight that the child labor is occurring and when the child labor in India already become a big news it creates a problem for IKEA itself such as their potential consumers and investors of course this will bring a major loss of sales. Meanwhile the problem took a while until the news stops spreading, and up until now IKEA still tries to take the people’s heart and resolve the problem from their previous issues, one of the example is that on IKEA webpage it clearly says that IKEA does not support child labor in India.
The third category is opportunities, increasing presence in developing countries and expanding their brand. “Further expansion into developing economies. Retail markets grew by at least 5% on average in emerging markets in the last year, opening huge opportunities for IKEA’s revenue growth. The company currently operates in most of the developed economies but hasn’t firmly stepped into developing economies, except China. There are great opportunities for IKEA to expand into Brazil, Mexico, Indonesia and Malaysia to increase its presence in these markets to sustain future growth” (Jurevicius, 2013). Due to the reputation of the brand despite IKEA’s previous issues there is no denying that if IKEA tries to leverage and expand the brand it would bring opportunities such as profits and IKEA increasing market growth, and last but not least, IKEA can develop e-commerce to help expand and enter new markets smoothly through the use of Internet and social media such as an application to order online which IKEA already launched in 2017.
The fourth category is threats. Competitors, IKEA’s competitors have the same specific as IKEA that ‘sells an affordable price with a good quality’, some of IKEA’s competitors even have another product to sell with, other than furniture which is groceries. Another threats that IKEA faced is the shift of customer income, this will impact IKEA because if the average income for customers is increasing then the customer will look for goods that sold with a better quality than IKEA and if the customer income is decreasing then the customers will look for product that are much cheaper than the products that are sold by IKEA even though the quality is bad.
Because IKEA uses the corporate strategy where it is related diversification and from the SWOT analysis it can concluded that IKEA should stay and continuing their operation in India. From the SWOT analysis it can concluded that if IKEA have an opportunities to expand and leverage it would look bad on IKEA public reputation at first, but if IKEA brand stays in India and resolve their problem then sooner or later then the news will subsided by itself. Because if IKEA stays, the impact would be on IKEA’s sales and IKEA’s global revenue, the major problem were the public damage that IKEA have to burden, despite IKEA public image is not good it brings the positive side on IKEA because it will prove that IKEA is responsible on taking care of their problems and trying to resolve the problem instead of looking like running away from the problem. Instead IKEA should resolve the problem by taking a proactive stance, and if IKEA stays then it could help the people in India to get jobs and money since they work as labor in IKEA. On the other hand if IKEA exit India it will look like IKEA abandoned their issues and does not address the child labor issue, where IKEA does not resolve the issue and it seems that IKEA is hiding and running away from the problems and would look guilty in the public eyes another impact on IKEA if IKEA itself withdraw from India IKEA will lose investors, potential consumers, and customer trust. It will also create an opportunity and advantage for IKEA competitors and rivals to take the customers and investor’s heart due to the fact that IKEA is running away from the issues the public will have an image that it seems that IKEA’s reputation and image itself as the global retails is not reliable.
2.4 For those recommending that IKEA continue to source carpets in India, would you suggest that she:
a) continue IKEA’s own monitoring and control processes or sign-up to Rugmark?
IKEA should continue its own internal monitoring group and control process. Moving out from the market does not solve the problem and it’s not a good idea to ignore the supplier in India. In this case, IKEA can hire auditors as third party to supervise its operation in India. Internal group should monitor these suppliers to see whether they are following the organization’s rules and regulations or not, especially look over those suppliers that against the child labor. Moreover, delivered the report to the outside world that make IKEA act as an ethical company that keeps avoiding the use of children labor force in order to receive the good reputation from public. Moreover, we think IKEA can set the detailing framework for the child labor issue, which makes everyone screen the organization, when the public or the internal employees see the situation happened in the suppliers and to contact the free phone number to reveal the issues. In addition, IKEA can develop themselves with Rugmark by creating poster to show that there is no use of child labor in their procedures. By seeing the Rugmark brand label on a carpet or mat would impart that IKEA was not working with child labor anymore and that these items wouldn’t struggle with their customer’s ethics and convictions. Consequently, the customers would wind up mindful and make more buys in light of this new obvious name. So IKEA can accomplish their goals which is first, to increase in sales and profitability and second, to gain a good reputation for company by not using child labor. Overall, the purpose of continuing cooperation with Rugmark which is looking forward to increase consumer fulfillment and sales.
b) continue to focus only on eliminating the use of child labor in IKEA’s supply chain or engage in broader action to address the root causes of child labor as Save the Children
In fact, if IKEA only focuses on eliminating the use of child labor in IKEA’s supplier, IKEA will just waste a lot of money and a big amount of time and make its effort become useless because it is not a right decision to implement. As you know, the root causes of child labor not only caused by the hiring them to work, but also by the education and understanding of their parents and their financial situations that the parents have to force their kids to work for their families. However, it would lead to other problems, if IKEA decided to use this option to solve this issue such as, the conflict in its supplier which will make the relationship between its supply chains become worse and it would make IKEA lose its profitable suppliers. Especially, in its history, IKEA’s successes came from its good relationship in its partnership. Moreover, IKEA’s rivals may take a chance to cooperate with IKEA’s supply chain to compete against IKEA in either the local or international market. Hence, what should IKEA do with this issue? Basically, in order to make IKEA’s effort succeed, the first thing it has to do is not only eliminate the use of child labor, but also understand about the root cause of this problem. If we look at the statistical Data in 1991, there were more than 13 million children under 15 years old, who worked in every sector in India and there were about 200000 of them working in the carpet industry, (IKEA’s Global Sourcing Challenge). This large number was caused by the lake of education and understanding of the parents and it is not a easy task for IKEA to takeover.
Therefore, IKEA should participate with the UNICEF and ILO organization or other organization which relates to this problem and especially, the Indian government to engage and promote and especially, improve the education and the understanding of this issue to the children and their parents in order to eliminate and prevent the increase of the use of child labor more effectively and efficiently. Moreover, IKEA and its supply chain should establish an academic center which provides academies that necessary in its industry for local people, especially adults and train them to become potential employees or workers for IKEA’s supply chain. This plan would give the local people a chance to get a new job which gives them a salary to support their family and become the better people in either their families or their society. Otherwise, it will help IKEA not only gain more reputation and eliminate the rumor of child labour in its supply chain, but also benefit IKEA and Its supply chain because it will improve the productivity and reduce the cost of the production which are the comparative advantages that both companies need.
CHAPTER III: CONCLUSION & RECOMMENDATION
In order to make IKEA and its supply chain success and avoid the loss of the competitive advantage in our market, IKEA and its supplier should strongly cooperate together to solve this problem. However, let not forget that IKEA and its suppliers have made their successful history for long times ago and not just a month. We cannot just make the conflict with each other or cancel our contract because of this issue. On the other hand, in all decisions we made, we have to discus in the table and consider clearly about the advantage and disadvantage of our activity which would affect to both companies and society as the whole.
Child labor is an issue that rooted in some country especially in India. The fact that the low awareness of child worker make the situation become more complicated. So, we suggest that IKEA should work together with International Labor Organization, UNICEF, and other Non-governmental Organization to expand their knowledge about the child labor issue including the effect, reasons, and law. So, IKEA could decrease the number of child labor in the company itself and the partner. We suggest IKEA to join some awareness on child labor program.
IKEA should communicate to the suppliers and give them awareness and knowledge that child labor issue is important. As the main actor, IKEA should do monitoring every year with their suppliers and managers in every branches then update the information to their website in order to get suggestion and recommendation from the customers for the next action taken on the year ahead and they have to make a long-run strategy to avoid the child labor issue. After doing the monitoring with their branches, IKEA need ILO to help them revising, assessing, and monitoring the child labor because ILO has a lot of study about eliminating child labor and IKEA needs the knowledge from ILO because as we know that child labor has been rooted in some countries so it will be a little bit hard for IKEA to decrease the number easily in the short-term of time.
Child labor issue is not only about decreasing the number of child labor itself but also the company have to be responsible about the education of the labor because when the company fired the child labor, their family will loss some of the income. And the child will have no education due the family loss their income.
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Executive Summary — Gabrielle Audra
Chapter 1 :
1.1 What is Ikea — Heidy Aurelia
1.2 Summary of The Case — Ouk Sivkheng
Chapter 2 :
Question 2.1 — Atika Miranda
Question 2.2 — Gabrielle Audra
Question 2.3 — Zahwa Mariam
Question 2.4 :
Chapter 3 :
3.1 Conclusion — Ven Khouch
3.2 Recommendation — Atika Miranda