Business Ethics: Assignment - 1

Ethical dilemmas and questions associated with Ikea Business

Submitted by:
Gaurav Singh Govardhan Yadav Jitheesh V Josyula Krishna PGP03021 PGP03022 PGP03023 PGP03024

Section A

IKEA - INTRODUCTION Ikea is a privately held multinational furniture manufacturer based in Sweden. It designs and sells ready-to-assemble furniture, appliances, and home accessories. Ikea was founded in 1943 by the 17-year-old Ingvar Kamprad, who later became one of the richest people in the world. As of October 2012, Bloomberg Billionaires Index listed Ingvar Kamprad as the 5th Wealthiest person in the world, with an estimated net worth of US $42.6 billion. The company is the worlds largest furniture retailer with 332 stores in 38 across the globe. In 2010, it sold $23.1 billion worth of goods, a 7.7 per cent increase over 2009. Ikea is famous for their low price and innovative design. Ikea is also known for emphasis given to cost control, operational details and continuous product development. This enables Ikea to lower its prices by an average of 2-3% over the decade. Ikea is not a listed company and it operates as a family business. When Sweden imposed higher taxes on family businesses, it left the country. Ikeas headquarters is located at Delft, Netherlands. Ikea is owned and operated by a few not-for-profit and for-profit corporations. The corporate structure consists of operations and franchising. INGKA Holding, a private, for-profit Dutch company oversees most of Ikeas operations, including the management of the majority of its stores, the design and manufacture of its furniture, and purchasing and supply functions. INGKA Holding runs 255 of the Ikeas stores in 36 countries. The remaining 30 stores are run by other franchisees. Of all its products, 31 per cent is produced in Asia, 66 per cent in Europe and 3 per cent in North America. IKEA IN INDIA In January 2013, Indias foreign investment agency has agreed to forward Ikeas $2 billion investment proposal to the cabinet. If cabinet clearance is obtained, Ikea would be allowed to invest on 25 wholly owned stores across the country over the next 15-20 years. Ikea is expected to get its go ahead from the Cabinet Committee on Economic Affairs. It is believed that Ikea would be able to transform India's $500 billion retail sector. The foreign-investment agency had already cleared Ikeas proposal in November subject to certain conditions. But Ikea refused to accept the terms that prevented it from selling products that it doesn't brand, including textiles, toys, books, second-hand furniture and consumer electronics, as well as food and beverages in its cafeterias. The company lobbied with the government and the government agreed to allow Ikea to use the same business model that it uses in other countries without any restrictions.

IKEAS BUSINESS MODEL

Low price but not at any price: IKEAs main value proposition is to provide housing furnishing and other goods at rates affordable by most of the consumers, and such that high standards of responsible business are met. The companys strong vision and social ambition has laid out a credible and profitable platform for spectacular growth over the years. In align with the vision, the corporate strategy has been social agenda based on diverse corporate culture, an environmental and social platform all with a customer focus, to deliver the best price. Low price but not at any price has been one of famous slogans of IKEAs. This refers to the code of conduct of their suppliers. IKEA has inspectors and special auditors stationed in most of the countries from where they outsource their products like China, Russia etc. They ensure that certain fundamental rules and regulatory measures are met in their entire value chain. All the suppliers are required to adopt a responsible attitude towards the environment. Emphasis is laid on the working conditions and zero tolerance towards child labour. Practical, minimalistic design, resource efficiency and environmental performance are the pillars on which the IKEAs business model has been built. Their business framework is similar to most of the low-cost retailers i.e., lowering the material usage in manufacturing to final product distribution. Their design process starts with the price of the product based on which the product designs, manufacturing process and supply chain management are conceived. Cost minimization through maximum resource utilization and business process optimization has allowed company to produce affordable products. IKEA has also been thriving upon the total vertical integration of their business; this has done wonders to their profit margins. The visit to any IKEA store is a delightful experience for any customer. The store is arranged in sections based on the functionality of the furniture like bedroom, kitchen, media etc. The showroom spread is very well designed with full of required accessories for every room. Its the responsibility of the customers to locate and load the furniture. Since all their items are unassembled in flat rectangular boxes, it is more of do-it-yourself model. Once the customers have taken their goods back home and unloaded, assembly of the furniture was very user friendly and required minimal effort. This clearly tells us that IKEA had perfected their design and manufacturing process in order to ensure guaranteed customer satisfaction.

CLEAN AND GREEN BUSINESS MODEL IKEA's business model is based on a minimalistic design philosophy with environmental performance. IKEA has a strong focus on cost-minimisation through maximum resource utilisation and business process optimisation. It facilitates innovation, social and environmental causes. Company has taken additional steps to systematise and formalise it into social and environmental standards. It integrated social and environmental concerns into its operations to make its products affordable, of good quality and at the same time has minimum impact on the environment. This initiative is called IWAY and it works to drive the company toward better social and environmental performance without compromising with its low price model. The development of IWAY has benefitted from cooperative efforts from partnerships with various organisations. Around 70 % of IKEA's raw materials are comprises of wood due to which environmental issues related to forestry is among the organization's major concerns, to address this major issue IKEA has collaborations with Global Forest Watch, Greenpeace, a Swedish university, and the WWF. IKEA also continues to work on establishing strong relationships with its suppliers that supports the company in the continuous development of new products. Benefits Numerous associated and unfortunate events for IKEA in the 80s and 90s, has increased the company's focus on the importance of systemizing its corporate social responsibility. IKEA has integrated its CSR objectives more systematically into its business operations. As a result of this IKEA has taken many reactive and proactive actions. To prevent the introduction of non-native biological species into environment from shipping, the company uses specific and approved chemicals in their treatment of shipping containers. Company only uses heat/cold or vacuum treatments of their containers. Because no chemicals are used, related bad health concerns are prevented, and potential chemical residues are absorbed by IKEA's products. IKEA's shifted from Euro pallets to cardboard pallets (recyclable pallets) for product transportation. Contrary to Euro pallets, which are made of wood and take up a lot of space, the new cardboard pallets take less space, are lighter, and do not involve return transportation making the shipping more efficient. IKEA is also involved and provided huge funds to map ancient forest with the help of Global Forest watch.

Millions of IKEA catalogs are printed on chlorine free papers, these catalogs contains information about various IKEA products with its impact on environment. IKEAS IMPACT ON LABOUR RELATIONS Ikeas labour strategies and employment practices have been subject to intense controversies. Ikea boasts of having very elaborate programs in collaboration with UNICEF and WWF to eradicate child labour. But Washington Post and the BBC exposed Ikeas hypocrisy over their ethical policies. The company has now admitted that some of their suppliers in the developing nations used exploitative child labour. It was reported that children working in their factories in the Philippines and Vietnam were under the minimum age set in international agreements. But the company defended saying that it has suspended the contract with the supplier in the Philippines when it noticed the use of child labour. They also argued that preventing child labour is difficult as the children were employed by the local suppliers and not directly by Ikea. Even after the child labour was exposed, Ikea refused to sign up to the industry standard international Rugmark which guarantees that child labour has not been used in manufacturing its products. Ikea justifies this by saying that if rugs are produced in countries like India, it cannot be guaranteed that child labour is not used since many of these are produced in the homes of the individuals. Ikea has also admitted that it used forced labour in the 80s. The company used political prisoners in the former East Germany which helped to keep its prices so low. Even now Ikeas employment practices are highly criticized. The company is facing many racial discrimination complaints, battle with employees over union organizing and high employee turnover. Labour conditions often did not adhere to the stated principles and the workers were not informed about their rights. Workers constantly complain about wage cuts, a frenzied pace and mandatory overtime. Ikea is accused to exploit labour laws and discriminate employees of different nationalities. While European workers enjoy a minimum wage of about $19 an hour and a governmentmandated five weeks of paid vacation, Ikea exploits the weaker protection provided to the US workers, paying them $8 per hour. Recently, Ikea was quoted in the media for its attempts to prevent the formation of union in Danville. However, the company has created huge employment opportunities across the globe. IKEAS ENVIRONMENTAL IMPACT The impact that IKEA has created to our environment is quite staggering. It is quite interesting to observe that the criticisms that IKEA has faced in the past due to its actions that damaged our environment and the corrective measures that it has taken to rectify them.

The fact that IKEA overstepped its ethical standards came out open in the public around 1981 when a public campaign in Denmark exposed the high levels of Formaldehyde in its particleboards. IKEA was sued by Denmarks law and lost 20% sales there. To add fuel to its foes, a similar issue arose at Germany, two times, one in late 80s regarding PVC plastic usage in packaging wastes and the other in 1992, when the Billy Bookshelf incident happened, that led to recall that cost $6.5 million and $10 million in all to IKEA and suppliers. Recently during 1998 -1999, a lack of clarity and transparency is underlined especially over wood procurements issues in Russia and Indonesia by Greenpeace. But it is important to note the efforts put in by IKEA to resolve these issues and be more environments friendly. Its ethical standards are really worthy to be mentioned. Since 1981, IKEA has taken steps during each of these critical situations and has stood as an example to various companies of US that have superficially adopted CSR practices in paper and have done otherwise in reality. IKEA has developed a testing laboratory to test new products before releasing in market in 1981. They also held discussions with BASF and ICI in Germany to reduce formaldehyde exposure in their products. In 1991, they adopted first environmental policy. To establish authenticity, they joined with Greenpeace and printed IKEA catalogues on chlorine free paper. In 1992, they cooperated with Save the Children campaign to resolve the child labour issues they were facing in India and Pakistan. In 1994, Barner fired the Indian company that was alleged in child labour, and requested assistance from international organizations like ILO and UNICEF to resolve these issues. Since then, IKEA has involved in various activities Malaysian foundation in 1998 -99, contribution of $500,000 in UNICEF programs in India (2000), vaccination projects with WHO, engagement with Global Forest Watch to identify forests and funding with $2.5 million, 2 year marketing operation with UNICEF in Uganda and Ankola in 2003, and even joining in UNs Global Compact. CONCLUSION In the analysis, it is observed that Ikea has been involved in some unethical practices. While in certain cases like child labour, the company did not have any direct control, it could have avoided many of the other issues. Ikeas argument on child labour in India falls under the lower levels of the Kohlbergs CMD model. However, from a larger perspective of the various stakeholders, Ikeas business model is beneficial. IKEA has been named in Fortunes Best Companies to Work for' List multiple times. It has undertaken CSR initiatives seriously and it has consistently maintained high level of employee and customer satisfaction barring a few issues. Therefore Ikea can be considered ethical from a utilitarian point of view. The unethical practices followed by the company cannot be justified by any means. But still it would be unfair to consider Ikea as unethical based on a few isolated incidents.

REFERENCES:
1. http://en.wikipedia.org/wiki/Ikea 2. http://www.peoplesworld.org/ikea-union-busting-is-how-american-system-works/ 3. http://online.wsj.com/article/SB10001424127887324624404578255602358295758.html

4. http://www.the-latest.com/ikea-slammed-over-child-labour-and-green-issues 5. http://www.winnipegfreepress.com/arts-and-life/entertainment/books/ikeas-businessmodel-includes-social-responsibility-allen-wrench-142175283.html 6. http://heizerrenderom.wordpress.com/2012/11/20/teaching-tip-ethical-issues-facingikea-and-darden/

7. Corporate Social Responsibility at IKEA: commitment and communication, Francois Maon, 2007 8. Green Business Model Innovation: Business Case Study Compendium, Kristian Henriksen, 2012