Case Study #4: Ikea in Russia: Emerging Market Strategies and Ethical Dilemmas

The Case Study can be found in your textbook. The case is titled Ikea in Russia: Emerging Market Strategies and Ethical Dilemmas. lt can be found in section PC5-1. Please answer all questions .

PESTLE Analysis - Word Table Tools Jasbir Kaur Bhogal X File Home Insert Design Layout References Mailings Review View Help Table Design Layout Tell me what you want to do Share do Cut Times New Romar - 12 - A A Aa~ A AaB Find my Copy AaBbCcDd AaBbCcDd AaBbC( AaBbCc[ AaBbC AaBbCcDd AaBbCCD AaBbCcDd Bac Replace Paste Format Painter B I U~ abe X2 x AZA . 1 Normal 1 No Spac... Heading 1 Heading 2 Title Subtitle Subtle Em... Emphasis Intense E... Select Clipboard Font Paragraph Styles Editing . ..K. . . 2 . . I . . . 3 . . . . I . . 19 . . . . 10 . . . interviewee, in privately-owned or lent housing units). ("POF 2017-2018: about 1/4 of the disposable income of brazilian-households-is- Brazilian households ...") non-monetary Job growth unemployment https://www.statista.c om/statistics/263711/ umemployment-rate- Recent growth in the Brazilian economy was the cause of the considerable improvement of the country'sin-brazil unemployment rate. In a decade, the country's unemployment rate was halved and is expected to continue to annually decrease. Social The potential main social actors involved in and affected by the conservation and use of the Environmental https://link.springer.c Jom/article/10.1007/s1 Who are Social Stakeholders? Protection Area (EPA) of Engenho Piquero, in Rio de Janeiro State, Brazil, and discusses how environmental 0668-021-01989-7 education can be shaped to engage them in participatory, socially progressive, and environmentally sustainable management for that area. azilireaching-the- Brazil has one of the largest consumer market sizes, with an overall population of 214.7 million of 2022 (Data onsumersfurl de la pagem*2Fen2 Consumer attitudes and Report). However, since the recession and the Covid-19 pandemic, spending habits have changed. "Nowadays. markets'62Fbrazilx 2 Preaching.the- umers& & actualiser id banqueme opinions Brazilians tend to save as much as they can when they go shopping." ("Reaching the Brazilian consumer it id banque wd &memoriser choixwine Santandertrade.com") Economic conditions have resulted in the vast majority of Brazilians looking for ways to spend less. https://vegconomist.c In order to evaluate sensory expectations for plant-based burgers and cheese substitutes, Kerry polled moreom/studies-and- Consumer buying patterns than 1,500 customers in the US, UK, Australia, and Brazil in 2022. According to the study, flexitarians, thereve henumbersew-study qreveals-consumer- main consumer demographic promoting the rise of plant-based products, are less favorable toward them than preferences-for-plant- vegan and vegetarian customers. Consumers want items that taste as much like animal products as possible, based-products- even if sustainability is a crucial consideration. across-four-countries/ Lifestyle/Health Living On average in Brazil, girls outperformed boys by six points, slightly above the average OECD gap of fivehttps:/www.oecdbett standards points. "In terms of health, life expectancy at birth in Brazil is around 76 years, five years lower than the OECD ies/brazil/ Jerlifeindex.org/countr average of 81 years." ("Brazil - OECD Better Life Index") Life expectancy for women is 80 years, compared, with seventy-two for men. https://www.diversity abroad.com/articles/tr Page 4 of 8 1567 words English (United States) * Accessibility: Investigate 10% 19 LO O L 11:05 PM 77 w P 100%) 4 19.C Clear ~ 0 0 (() ENG IN 7/7/2022PESTLE Analysis - Word Table Tools Jasbir Kaur Bhogal X File Home Insert Design Layout References Mailings Review View Help Table Design Layout Tell me what you want to do Share do Cut Times New Romar - 12 - A A Aa~ A my Copy AaBbCcDd AaBbCcDd AaBbCc AaBbCc[ AaBbC AaBbCcDd AaB Find AaBbCCD AaBbCcDd Bac Replace Paste Format Painter BI U~ abe X2 X AZZA ~ 1 Normal 1 No Spac... Heading 1 Heading 2 Title Subtitle Subtle Em... Emphasis Intense E... Select Clipboard Font Paragraph Styles Editing 1. . . . . 1 .. . 1 . . I . . .2 ) . . I . . .3 . . 7 . . . 8 . . . | . . 9 . . . . W . . . Diversity in workforce javidau.Com allCies/ 4 White 47.7%, mixed white and black 43.1%, Black 7.6%, Asian 1.1%, Indigenous 0.4% (2010 est.) avel-guide/brazil ittps_/www.macrotrends.net/cou The current net migration rate for Brazil in 2022 is 0.043 per one thousand population, a 25.86% decline fromatries BRA/brazilinet- migration#.~.text=The%20curre 2021. The net migration rate for Brazil in 2021 was 0.058 per one thousand population, a 19.44% decline fromat620ner%20migration9620rate 4 Professor Tammy Bombardier Immigration/emigration trends 2020. The net migration rate for Brazil in 2020 was 0.072 per one thousand population, a 17.24% decline from 2017 24%%259620decline9620f From6202019. 2019. https://www.statista.c Jom/statistics/271042/ In 2019, 9.08 percent of the employees in Brazil were active in the agricultural sector, 19.99 percent in industry employment-by- Occupations & Earning" and 70.94 percent in the service sector. conomic-sector-in- brazil capacity The pandemic has halted Brazil's housing market recovery, with real house prices in Sao Paulo falling again by 5.51% during the year to Q3 2021, following a y-o-y increase of 0.21% last year. On a quarterly basis, Saohttps:/www.globalpr opertyguide.comew Housing trends Paulo prices fell by 1.99% during the latest quarter. (Dec 24, 2021) s-brazils-housing- market-struggles- continue-4275 hnologic Brazil has the fifth largest number of mobile phone and Internet users in the world. According to an article byhttps://cs.stanford.edu Competing technology Claudio nor Coelho in the EE Times, there are 189 million mobile phones, two hundred million tech-savvy 1/projects/2010- people/eroberts/cs18 development consumers, and an exploding demand for PCs, leading to an increase in Internet usage in Brazil. ("Technology 11/TechnologyTrends Trends in Latin America - Brazil") LatinAmerica/brazil.h tml https://www.dwih- saopaulo.org/en/research- Page 4 of 8 1567 words English (United States) * Accessibility: Investigate 10% 19 LO O L W P 100% 4 19.C Clear ~ 0 0 (1) ENG 11:05 PM IN 7/7/2022PESTLE Analysis - Word Table Tools Jasbir Kaur Bhogal X File Home Insert Design Layout References Mailings Review View Help Table Design Layout Tell me what you want to do Share do Cut Times New Romar - 12 - A A Aa~ A Find my Copy AaBbCcDd AaBbCcDd AaBbCc AaBbCc[ AaBbC AaBbCcDd AaB AaBbCCD AaBbCcDd Bac Replace Paste Format Painter B I U~ abe X2 x AZA . 1 Normal 1 No Spac... Heading 1 Heading 2 Title Subtitle Subtle Em... Emphasis Intense E... Select Clipboard Font Paragraph Styles Editing . . .. . .I ..1 . . . I . . . 2 ] . . I . . . 3 . . 7 . . . I . . . 8 . . . 1 . .9 . . . W . . . nd-innovation-landscape- Research funding 'The funding of research in Brazil occurs through various different fostering systems and institutions, which in-brazil/research-and- innovation-in-br are linked directly or indirectly to the Ministries of the Brazilian government." ("Research and Innovation in support-and-funding Information Brazil: Support and Funding") Awww.privacyshield.soviarticle mications-Technologies communications The Brazilian Information Technologies (IT) market grew 9.8 percent in 2018, reaching $47 billion. It 120Technologies surpassed previous forecasts of 4.1 percent growth for the period and will continue to grow in 2019 accordinghttps://freedomhouse. Technology legislation to a study prepared by IDC in partnership with the Brazilian Software Association (ABES). org/country/brazil/fre edom-net/2021 Internet freedom in Brazil improved slightly during the coverage period, bolstered by increasing levels of access and a reprieve from murders in suspected retaliation for online activities, which was a prominent issuehttps://www.wipo.int/ in past years. edocs/pubdocs/en/wip o pub gii 2021/br.po Innovation potential The statistical confidence interval for the ranking of Brazil in the GII 2021 is between ranks 53 and 59. Brazilf performs better in innovation inputs than innovation outputs in 2021. This year Brazil ranks 56th in innovation https://www.ic.gc.ca/ inputs, higher than both 2020 and 2019. As for innovation outputs, Brazil ranks 59th. ("BRAZIL - WIPO") eic/site/cipointernet- Professor Tammy Bombardier Intellectual property issues Enforcement of your IP rights is your responsibility. The Department of Federal Revenue of may provide you internetopic.nsf/eng (protection vs enforcement) with some assistance in enforcing your IP rights in Brazil, as they help prevent counterfeit goods from entering wr04862.html Brazil. https://www.ela.gov/i international/analysis/ country/BRA Ethanol is used for fuel in Brazil. Sugarcane is the main source of feedstock for ethanol production in Brazil, https://agenciabrasil.e Energy uses/sources/fuels followed by corn. ("Country Analysis Executive Summary: Brazil") bc.com.br/en/econom aoticia/2020- Internet access/use The data show that the percentage of Brazilians with internet access increased between 2017 and 2018 from 04/one-every-four- 69.8 to 74.7 percent. Still, in rural areas, the proportion of people with no access to the web stands at 53.5brazilians-has-no- internet-access percent, compared to 20.6 percent in urban areas. APR 29, 2020 Page 5 of 8 1567 words English (United States) Accessibility: Investigate 10% 19 LO O L w P 100% 19C Clear ~0 07(1) ENG 11:05 PM IN 7/7/2022D M 14 new vi X Urgent! P X Q www.goo x G Google X WhatsAp X mySt.Clai X Home X Content X Q www.goo x *Dashboar X Dor Internation X + X C File | C:/Users/Angad%20Bhogal/Downloads/International%20Management%20Managing%20Across%20Borders%20And%20Cultures,%20Text%20A... Q to . . . 478 of 501 Q + | Page view A Read aloud | T) Add text | V Draw ~ Highlight v Erase www.downloadslide.net ICMIK Case 10 IKEA in Russia: Emerging Market Strategies and Ethical Dilemmas "IKEA consistently combats corruption. All of our divisions operate completely transparently. The company has adopted a strict code of conduct and its provisions are hinding not only for rank-and-file employees and executives, hurt also for business partners. These regulations are uniform throughout the world ana out the world and Russia is no exclusion." - IKEA'S PRESS RELEASE FOLLOWING INVESTIGATION OF BRIBERY CASE AGAINST FORMER EMPLOYEES OF IKEA RUSSIA, JULY 2012 "People in the West know astonishingly little about Russia. Those who call themselves Russia experts usually don't understand the first thing about it. People who say they don't know much about Russia come much closer to understanding it."- - LENNART DAHLGREN, Former Russia Country Manager for IKEA. FEBRUARY 201 1 Introduction It was in the late 1990s that IKEA decided to enter the In July 2012, a Turkish national, Okan Yunalan (Yunalan). Russian market as part of its global expansion strategy. From who acted as an intermediary for Carl Ola Ingvaldsson its early days, the company had displayed a non-tolerance for (Ingvaldsson), former Head of the Leasing Department in corruption. This standpoint meant that it had to face several IKEA's Russian subsidiary (IKEA MOS), to extract a bribe setbacks when setting up stores, inaugurating them, and even was sentenced to five years in a high-security pris while advertising for them. However, there were also instance was found guilty of large-scale extortion after he demanded 6.5 million ruble (US$ 225,000) from a company that sought difficulties being smoothed out, which enabled the company to to lease two premises at IKEA's Mega shopp get things done faster than in any other country in the world. Tyoply Stan, a suburb in Moscow. Ingvaldsson Over the years, the comp ny expanded and experienced suc- complice managed to leave the country and Russia was s cess with its st heir extradition. top grossers in the world for IKEA. It was also in Russia that the IKEA stated that it welcomed the investigation by Russian company introduced its successful new business model, wherein authorities into the incident and would co-oper its furniture stores were operated not as standalone stores but as part of large shop them. This was not the first instance of corruption seeping into ment complexes. its Russian operations negating its tough stance against the all- Though the company continuously faced and overcame pervasive corrupt business environment in Russia. IKEA was the serious hurdles caused by the corrupt bur known for its uncompromising attitude toward corruption but i it finally decided to halt all expansion in Russia in 2009. The had not always been successful in ensuring that its employees decision came in the wake of permission being denied to setup adhered to its ethical standards. two if its stores, allegedly after it refused to pay bribes to safety The same year, the company came under the scanner of inspectors. However, the top Russian ministry officials con- lobal environmental agencies when an investigative report vinced the company to go ahead with its expansion in 201 1. 4 existing stores (See Exhibit I for revealed that it was utilizing ill-defined Russian logging rules t down old growth forests." This raised questions abou more Information about Russia's IKEA Stores), the com its claims of being an ecologically sensitive company that be- pany's expansion plan in Russia was on track, and it had plans ieved in sustainable logging practices. to open several new stores and even a retail bank. Background Note This case was written by Namratha V Prasad, under the direction G V Muralidhara, IBS Hyderabad. It was compiled from published source IKEA. founded in Sweden was the most successful entrepreneurial effective or ineffective topalin fusion rather than to illustrate venture of its founder Ingvar Kamprad (Kamprad). Kamprad was 2013, IBS Center for Management Research. All rights reserved. just a boy in the 1920s, when he began selling matches. He later graduated to selling flower scods, greeting cards, Christmas tree decorations, pencils, and then ball-point pens. Hyderabad 501 504, Andhra Pradesh, India or email: info@ icmrindia.org www.icmrindia.org In 1943, Kamprad set up a business with money given by his father. He called it IKEA (representing his own initials "IKEA Cooperates with Investigation in Cases against Executives," www (1.K.), in addition to the first letter of his farm, Elmtaryd (E), and the village where he spent his childhood Agunnaryd (A)). Svetlana Smetanina, "Addicted to Russia," http:/rbth.ru, February 23, 201 1. ugusto Come, "Corruption, Corruption, Corruption," IKEA started out selling products such as pens, wallets, picture . November 29. 2012 Corruption," www.opendemocracy frames, table runners, watches, jewelry, and nylon stockings, at Old growth forests are those that have been left undisturbed for about 300 to discounted prices. In 1948, furniture made by local manufac 600 years, resulting in then calibrating unique coulogical features. turers was also sold through the business. 477 www.downloadslide.net 478 PART 5 . INTEGRATIVE CASE A L UW P 58% 19.C Clear ~9 0 1x ENG 10:59 PM IN 7/9/2022D M 14 new vi X Urgent! P X Q www.goo x G Google X WhatsAp X mySt.Clai X Home X Content X Q www.goo x *Dashboar X Dor Internation X + X -> C File | C:/Users/Angad%20Bhogal/Downloads/International%20Management%20Managing%20Across%20Borders%20And%20Cultures,%20Text%20A... Q to . . . 479 of 501 Q + Page view A Read aloud | (T) Add text | \\ Draw ~ Highlight v Erase www.downloadslide.net 478 PART 5 . INTEGRATIVE CASE EXHIBIT | Russia's IKEA Store into several partnerships to execute numerous social and envi- ronmental projects. Store Location Opened The company's business concept in all its markets was to Moscow Khimki offer furniture of simple designs at affordable prices. Though 2000 Moscow Teply Stan 200 the company designed its own furniture and other items, it St Petersburg Dybenko 2003 were made through a global network of contract manufacturers Kazan 2004 (a significant quota of these were located in emerging markets). Moscow Belaya Dacha 2005 The company's business strategy could be summed up as cheap Nizhniy Novgorod 2006 labor, combined with expedient retail pricing. St Petersburg Parnas 2006 With regard to human resources, IKEA claimed that it Yekaterinburg 2006 gave precedence to values and beliefs over skills, academ Novosibirsk 2007 cs, or work experience in all of its standard jobs interviews. Rostov-on-Don 2007 Prospective AdygeaAdygea-Kuban 2008 quiz to determine if they fit in with the corporate culture. Omsk 200 IKEA strove hard to project itself as an environmentally Samara 2009 conscious, ethical company. It took measures to ensure that Ufa 2010 it employed met international labor regulations. By 2012, it Source: www.ikea.com hoped to fully implement the "IKEA Way", a roster of rules Over the years, the company took to advertising its products and regulations for its suppliers. It was also against child labor by various methods, including through catalogs. In 1953, the first IKEA furniture showroom was opened in Almhult, Sweden. rules was to provide the world with a clear picture on the ori- In 1956, the company took to designing its own furniture, adopt- gin, volume, and kind of wood used in IKEA's products. ing flat packaging and enabling Over the years, IKEA won several awards for its ethical In the early 1960s, the "IKEA Concepts's of form, function, and practices. As of 2010, it been recognized by the Ethisphere price were created, with furniture designed accordingly. Institute" as one of the "World's Most Ethical Companies" in Over the next three decades, the company launched some specialty retail for four consecutive years. highly successful products such as the FOANG annchair, As of 2012, IKEA had 338 stores in 40 countries. Of SKOPA chair, the OGLA chair, the BILLY Bookcases, th IKEA's Level caune from Europe and the company KLIPPAN sofa, the LACK table, the MOMENT, sofa and had future plans to expand into Asian markets, especially India the STOCKHOLM furnishings. IKEA gradually expanded its By the end of the decade, IKEA expected to increase the num- footprint across Europe and ber of its stores by 50% (to 500 stores) and to double its sales in Norway (1963), Denmark (1969), Switzerland (1973). r numbers. IKEA was judged the "2012 Germany (1974), Australia (1975), Canada (1976), Austria World Retail Congress International Retailer of the Year" (1977), the Netherlands (1979), France (1981), Belgium because of its superiority as compared to its peers in global (1984), the US (1985), the UK (1987), and Italy (1989). profitability, branding, and strategizing. In 1989, the Stitchting INGiKA Foundation, haced in the Netherlands, became the owner of the newly formed The IKEA Foray into Russia Group'. In 1984, the customer club, "IKEA Family', was launched. Kamprad had been quite keen to do business in Russia since In 1991, the company started the indust he 1960's, when it was still The Soviet Union. However, he produce wood-based furniture and wooden components. In addi- was unable to do so for quite a few decades for several reasons. tion, IKEA purchased several sawmills and production plants. IKEA's first attempt to begin Russian operations was stalled In 1997, IKEA launched its website, www.ikea.com. The due to the collapse of the Soviet Union in 1991. A later attempt same year, the company also launched Children's failed due to the 'Russian constitutional crisis of 1993" and the the focus on providing home furnishing solutions to cater country's subsequent unfavorable economic scen to families having young children. In 2000, IKEA launched c-shopping in Sweden and Denmark. Over a period of time, it earch-based Ethisphere Institute based in New York is concerned with began providing this facility in several other Best pro business ethics. The company continued its global expansion endeavor, responsibility. anti-corruption, and sustainability. It publishes opening stores in Hungary (1990), the Czech Republic, and terly called the "Ethisphere Magazine"- Poland (1991), Spain (1996), China (1998), Russia (2000), Soviet Union or USSR (Union of Soviet Socialist Republics) was in stence between 1922 and 1991. It constituted 15 socialist states, which Portugal (2004), and Japan (2006). The company also entered were ruled collectively by the Communist Party. "The Russian constitutional crisis of 1993 occurred when a war erupted 'IKEA believed in the practice of providing its products at prices which made etween the Russian President, Boris Yeltsin, and the Russian Parliament them affordable to everyone. It was this belief that dictated the way it sourced The conflict that was spread over a period of 10 days gave rise to the deadliest its raw materials (maximizing their use), its production processes (cost effiec- treet battle ever witnessed in Moscow. The issue was later resolved through live and innovative) and its sciail pra lives (icaxumable pricing). dre use of military fine. www.downloadslide.net CASE 10 . IKEA IN RUSSIA: EMERGING MARKET STRATEGIES AND ETHICAL DILEMMAS 479 P 10:59 PM 58% 19.C Clear ~9 0 4x ENG IN 7/9/2022D M 14 new vi X Urgent! P X Q www.goo x G Google X WhatsAp X mySt.Clai X Home X Content X Q www.goo x *Dashboar X Dor Internation X + X -> C File | C:/Users/Angad%20Bhogal/Downloads/International%20Management%20Managing%20Across%20Borders%20And%20Cultures,%20Text%20A... Q to . . . 480 of 501 Q + Page view | A Read aloud | (T) Add text | Draw v Highlight v Erase www.downloadslide.net CASE 10 . . IKEA IN RUSSIA: EMERGING MARKET STRATEGIES AND ETHICAL DILEMMAS 479 In 1996, Lennart Dahlgren (Dahlgren), a prominent IKEA Opening of the Stores employee, who was on the verge of retirement, was asked to oversee the setting up of IKEA's operations in Russia. In March 2000, IKEA's first store in Russia was opened at Dahlgren stated that he, like many others in the West, ha Khimki The inaugural day drew a large crowd of 40,000 harbored several negative opinions about Russia, including shoppers. People waited for an hour to get into the store and the thought that the country was teeming with poor people all the roads leading to it were backed up with traffic for He quickly abandoned this view and came to realize that there miles around. was a large retail opportunity waiting to be tapped. In the early Analysts believed that by the time IKEA opened its first 2000s, a market report from A. T. Kearney, a global market store there was a lot of pent up demand in Russia, especially consulting firm, stated that in terms of retail expansion, Russi was the top country in the world. The report further said, "With with the rising middle class looking to abandon the old world a growth rate of 30 percent for retail sales from 1999 to 2003 Soviet-era furniture in favor of the modern Scandinavian furni- and a relatively sparse retail network to serve its growing mar- ture showcased by IKEA. ket, Russia is full of promise." At a time when furniture stores in Russia offered only two In time, Dahlgren also realized that Russia had a highly extreme choices, pricey furniture for the affluent and cheap corrupt bureaucracy, which demanded bribes for getting any- stuff for the other classes, IKEA's offering of simple, sturdy thing done. However, in concurrence with IKEA's policy of furniture at affordable rates created quite a stir. Many of the zero tolerance of corruption, Dahlgren decided that he would the pricing of IKEA's items, not give in to the corrupt system On the issue with some of them even wondering whether they were priced dealing with corruption in Russia, Dahlgren said, "Companie in US dollars rather than Russian Rubles. Speaking on this interested in Russia should be absolutely up-front and honest in issue, Dahlgren said, "We spent the first weekend writing the their dealings. When a foreign company pays bribes, there is no word "ruble' on all the price tags." end to demands for bribes. In turn In contrast to other stores in Russia, IKEA laid emphasis feel an urgency to report corruption." on customer service. It had a highly selective process of re- Dahlgren entered into discussions with the Mayor of cruitment, with its initial 440 employees picked from a total of Moscow, Yuri Luzhkov (Luzhkov), with regard to the opening of the first IKEA store in that city. However, IKEA's endeavor termed the "Core Employees", were provided training at IKEA to open a store in Moscow's prosperous Kutuzovsky Prospekt" stores in other countries. Through its stores, IKEA also offered fell through when it became a victim of vicious slander. Later, several other amenities such as free shuttle services from select Luzhkov suggested that IKEA set u store in a recently places, a playroom for children and coffee to customer ers who constructed building complex. But IKEA found the came in early. impractical for setting up its store. The store continued to be popular, with 100,000 visiting it After some deliberation, IKEA came across a site it found even after a month. Within a year, IKEA opened another store suitable for setting up the store and approached Luzhkov to region. The Russian IKEA stores were sit get a lease on the site. But the city authorities asked for sky in size, structure, and style to their counterparts in other parts high land lease rates that the company deemed to be economi- of the world. In the first year of operations, IKEA reported cally unfeasible Dahlgren said, "Ruying land on these terms sales of more than USS 100 million in Russia, three times more could make it impossible to keep low p than what the co Consequently, IKEA decided to move the project to a sub became one of its top 10 grossing stores in the whole world. urb 12 miles north of Moscow called Khimki, whose Mayor The rousing response to the store's opening encouraged IKEA displayed a friendlier demeanor toward the setting up of the to formulate ambitious plans of expan store. As soon as the const In addition, IKEA tested its new business model for the the "Russian Financial Crisis' or the 'Ruble Crisis', broke out. first time in Russia. The company observed that the land value The crisis was the result of the Russian Government's default of the areas surrounding its new stores greatly appreciated in on domestic debt and devaluation of the Ruble. The crisis value over a period of time. It decided to take advantage of this period caused a jump in food prices and a break-out of mass by trying to develop the areas around its stores into commercial protests. Millions lost their life savings. In spite of the setback complexes. it faced as a result of the crisis, the company continued with the The company had a land lease for its store's sites extending construction of the store. for a period of 98 years, with the option to purchase it, if Russia ever allowed it. This gave it sufficient leeway to make us the excess land to increase its business prospects. IKEA invited "Curt Hazlett. "Russia is an alluring other stores selling electronics, hardware, and clothes, most of hbrarz. October 25, 2010 "http:/blogs whom were leading international brands, to set up operations in its store sites. It also set up areas for leisure such as movie Kutuzowsky Pro expensive residential areas 12Maria Antonova, "Ex-IKEA Boss Bares Russia's "Chaotic Reality"!" www Colin McMahon, "Russians Flock to Ikea as Store Battles Moscow," http:/ sptimes.ru, March 26, 2010. atitlechicagouilexams, May 16, 2060. www.downloadslide.net 480 PART 5 . INTEGRATIVE CASE P 58% 19.C Clear ~9 0 1x ENG 10:59 PM IN 7/9/2022D M 14 new vi X Urgent! P X Q www.goo x G Google X WhatsAp X & mySt.Clai X Home X Content X Q www.goo x *Dashboar X Dor Internation X + X -> C File | C:/Users/Angad%20Bhogal/Downloads/International%20Management%20Managing%20Across%20Borders%20And%20Cultures,%20Text%20A... Q to . . . 481 of 501 Q + 2 0 Page view | A Read aloud | (T) Add text | V Draw v Highlight v Erase www.downloadslide.net 480 PART 5 . INTEGRATIVE CASE theaters, ice rinks, and play areas in these complexes. Apart obstacles in its way. IKEA had not realized that the Leningrad from that, the company created comfort zones which housed Highway was controlled by Moscow City, rather than Khimki. cafes, restaurants, childcare facilities, and baby care rooms. Though IKEA had completed all formalities necessary to gain This initiative enabled certain IKEA stores in Russia to be the necessary construction permits, once the construction be- operated as enormous shopping and entertainment complexes, gan, the proceedings were halted by Luzhkov and his team. unlike in other countries where they were standalone furniture They refused to grant permission for construction of the off- stores. Over the years, IKEA's ramp stating that Mall', which was set up to manage these complexes, called the Tank Trap monument, which depicted the place more money than the standalone retail business. where the Red Army's obstructed the march of the German However, the company did struggle to make profits in Nazi forces during World War II. 15 Russia until the mid-2000s. The main reasons for this were up stood half-constructed for about a year, caus- the high startup costs and the steep 25% tariff imposed or ing hardship to customers and traffic snarls on the Leningrad imported furniture. IKEA got only 13% of the furniture it Highway. Later, the company received permission to build the at its stores locally made. Dahlgren was of the opinion that the bridge after Kamprad appealed to Vladimir Putin and the company needed to produce 30% cally in or 200 d against au- der to make its operations profitable. thorities on the issu Accordingly in April 2002, IKEA started production at its However, IKEA did make certain compromises with first Russian factory, in the vicinity of St. Petersburg. Built at a regard to the construction. It agreed to get the off-ramp built cost of US$ 15 million, the facility employed 250 people. Apart by the company endorsed by the municipal authorities of from opening a production facility, the company provi Moscow. This cost the company in terms of cost and time, local suppliers with c to purchase as it had to pay USS 5 million more than the estimated cost equipment and arrange for credit. Russia had about 25% of the Besides, the off-ramp's construction took three times longer world's hardwood supply and the company's efforts to develop its production facilities there were expected to make Russia a In 2003, the company planned to build a US$ 40 million major supplier fo warehouse in the Solnechnygorsky district of the Moscow region. Things worked out smoothly for the company as long A Growth Story Marred by Problems as Deputy Governor Mikhail Men, who was well-disposed toward the company, was in office. Once he was discharged, However, it was not all smooth sailing for IKEA in its expan- the company began facing problems with authorities. Dahlgren sion plans. The business environment in Russia dictated that accused Vladimir Popov, who was District Head at that time, of IKEA constantly faced problems with regard to its stores from as given government officials in the fire, health and safety, electricity, the go-ahead to continue work only after it donated US$ 30 tax, customs, and other related departments. These officials million as aid to elderly people and hired a contractor endorsed reportedly discovered problems with IKEA stores, especially by the regional government. during critical times such as store openings. Ana ecember 2004, IKEA was all set to inaugurate its next that IKEA would then be provided pointers by the same au store at Chimki, just outside of Moscow. The USS 250 million thorities to overcome these serious issues by way of some store was one of the biggest in Europe with large boutiques, monetary payment or engaging a party recon nded by them ice halls, children's play area, and cinema multiplex. The con- to rectify the problem. A few weeks before the opening of its first store, IKEA himki. However, when he was replaced with Vladimir was asked by the local utility department officials to pay a Strelchenko (Strelchenko), an ex-military officer who showed bribe to get an electricity connection for its stores. In order to marked indifference toward Western investors, the store's inau- counter this demand, IKEA decided to hire large diesel genera- uration faced a major setback. tors to power its stores. This became a standard practice for the Officials stalled the store's opening saying that the company for most of its stores in Russia. road to the store ran over a gaspipe, making it dangerous. IKEA's earlier decision to move out of Moscow didn't Therefore, the company was ordered to build a new madway go down well with the city auth sing them to hold It was another matter that the pipeline in question also passed a grudge against IKEA for a long time. When the company finally opened its first store, the Moscow City authorities did not give it permission to advertise the store in the Moscow s' and Peasants' Re metro. Dahlgren stated that the municipal authorities refused mon's communist wor group, who were derive during the time of the to citing certain scientific studies which showed that people who 's World War II occurred during the period 1939-1945. Several major na used the underground had damaged psyches, thereby making ions participated in it and it was considered to be the deadliest war in human IKEA's ads potentially harmful. history, due to the large number of human causalities and the use of nuclear Later, when the company wanted to build an off-ramp 16 vladimir Putin has been the President of Russia since May 7, 2012. Previ- over Leningrad Highway to case traffic and enable custom- ously, he had served as President from 2000 to 2008. He had also served as ers to reach the Khimki store without hardship, Moscow put Prime Minister of Russia for the periods 1999-2000 and 2008-2012. www.downloadslide.net @ ML UW P 58% 19.C Clear ~0 61x ENG 10:59 PM IN 7/9/2022D M 14 new vi X Urgent! P X Q www.goo x G Google X WhatsAp X mySt.Clai X Home X Content X Q www.goo x Dashboar X Dor Internation X + X -> C File | C:/Users/Angad%20Bhogal/Downloads/International%20Management%20Managing%20Across%20Borders%20And%20Cultures,%20Text%20A... Q to . . . 482 of 501 Q Page view | A Read aloud | T) Add text | Draw Highlight v Erase www.downloadslide.net CASE 10 . IKEA IN RUSSIA: EMERGING MARKET STRATEGIES AND ETHICAL DILEMMAS 481 underneath a heavily used six-lane highway and a crucial rail- Over a period of time, IKEA became the largest foreign road. Dahlgren stated that the company had agreed to construct retailer in Russia. The company invested US$ 4 billion in Russia a number of pressure reducers over the gas pipes, but the real over a period of 10 years, making it the country's sole largest reason the opening was stopped was because they had refused foreign investor. It opened 14 stores and three manufacturing to pay bribes. facilities, along with one distribution center. Company officials Dahlgren described the prevention of the store opening as stated that IKEA's success was attracting other world retailers to "sabotage against Russia" and raised his voice about the cor- set up their operations in Russia. The popularity of IKEA and its ruption dogging Russia, something which had never been done impact on the y west Russia's yuppies earlier by any official of a company doing business in Russia. be named the "IKEA Generation'. IKEA's Managing Director, He said, "Like all Western companies in Russia we're subject Per Wendschlag said, "We are one of the top-selling IKEA coun- to blackmail, sabotage, and pressure for bribes. In many cases tries in the world. The potential with 141 million people who are we're totally in the hands of local chieftains. IKEA is big in mishing their home tussia and doesn't pay bribes."18 However, despite its runaway success, IKEA put a freeze Dahlgren announced that the inauguration on December on its expansion in June 2009, after officials refused to give 10, 2004, would go ahead as scheduled. Though police forces it permission to open two of its stores in the central cities of blocked the store, Dahlgren and his team, ding to K d of the Swedish Ambassador to Russia held a grand opening cer- NGO National Anti-Corruption Committee in Moscow, the emony. This incident drew the attention of the worldwide me- reason for the non-opening of the stores was IKEA's refusal dia and IKEA's plight gained it a lot of sympathy. At the same to give bribes to safety inspectors. Officials refused to give ap- time, the Chimko municipal auth proval in Samar ating that the walls of the store were not Strelchenko's superiors were worried about the incident and its condition to withstand hurricane-force winds, notwithstanding possible ill-effects on Russia's reputation. They then put pres- the fact that such weather conditions had never been experi- sure on him to give the go-ahead for the mall's opening enced in that region. Even though Kamprad made several attempts to meet the A company official stated that the municipal authorities political leadership of Russia, he was not able to meet either had recommended that IKEA use the services of a local con- Putin or his successor Dmitry Medvedev." In one such attempt struction company to "quickly help" fix the construction defi- in 2005 in which Dahlgren strove to arrange a meeting between ciencies. Gigibulla Khasacy, Economic Development Minister Kamprad and Putin, he was told by a senior government for the Samara region, however, stated that the company's official that it would cost US$ 5-10 million. Dahlgren said, allegations were untrue and that IKEA was publicizing its com- "I sensed that it would be better not to get into that discussion plaints to divert attention from its substandard construction. He any deeper."20 added, "To say the government is creating artificial barriers is an invention." A Stop to Everything! IKEA stated that it was tired of being conned out of its Fortunately for IKEA, it did not face only problems in Russia. money and was halting expansion. Kamprad claimed that the There were instances when support from the authorities made ompany had been swindled to the tune of US$ 190 million things smoother. In 2003, IKKA opened another store called the because of the failure of Russian authorities to provide electric- "Mega Kazan' in the Kazan region, 500 miles east of Moscow ity to its stores as promised. However, some incidents seemed The store was built in partnership with Ramstore hypermarket." to indicate that certain IKEA officials were bowing down to the Mega Kazan went on to become the largest regional mall in all-encompa g corruption in Russia. Russia. Dahlgren said that the authorities in Kazan were very In 2009, IKEA discovered that the key executive respon co-operative, which caused the store to be opened in record time. sible for renting the diesel generators had hyped up the rental He said, "It took less than a year between the first m charges in collaboration with the generator rental company, Kazan's mayor and the store's opening - a record impossible to causing the company a loss of several million dollars. break anywhere in the world,"??' In February 2010, IKEA fired two of its executives Per Kaufmann, a Director for IKEA in Eastern Europe, and Stefan Gross, a Director for IKEA's shopping mall business in Russia, for turning a blind eye to corruption. 17Curt Hazlett, "Russia is an alluring but so imes scary place for Western had not committed any personal indis- retailers," www.icsc.org. May 2005. cretion, their decision to overlook a corrupt transaction Andrew Osborn, "In Fear of His Life: Ikea's Man in Moscow Tells o Threats and Bribes," www.independent.co.uk, December 15, 2004. between a subcontractor of IKEA and an electricity company "Dmitry Medvedev has been the Prime Minister of Russia since May 8, 2012. Previously, he had been President of Russia from 2008 to 2012. "Yuppie stands for *young urban professional" or "young upwardly-mobile "Maria Antonova, "Ex-IKEA Boss Bares Russia's "Chaotic Reality" ," www professional" and generally refers to the earning members of the up sptimes.rui, March 26, 2010. class or upper class, in their 20s and 30s. armed by Turkish retail giant, Migros Turk "IKEA's Freeze Curtail Medvedev's Goal," ww Ticaret A.$. There are about a dozen Ramstore hypermarkets in Russia. March 15, 201 1. "Maria Antonova, "Ex-IKEA Boss Bares Russia's "Chaotic Reality", www "Why IKEA Is Fed Up with Russia," www.businessweek.com, July 2, 2009. sptimes.ru, March 26, 2010. 26.Why IKEA Is Fed Up with Russia," www.businessweek.com, July 2, 20109. www downloadslide net A L UW P 58% 19.C Clear 0 0 1x ENG 10:59 PM IN 7/9/2022D M 14 new vi X Urgent! P X Q www.goo x G Google X WhatsAp X mySt.Clai X Home X Content X Q www.goo x *Dashboar X Dor Internation X + X -> C File | C:/Users/Angad%20Bhogal/Downloads/International%20Management%20Managing%20Across%20Borders%20And%20Cultures,%20Text%20A... Q to . . . 483 of 501 Q Page view | A Read aloud | T) Add text | Draw v Highlight v Erase www.downloadslide.net 482 PARTS . INTEGRATIVE CASE official in order to resolve a power-supply issue at IKEA's IKEA's journey reflected the fact that even though Russia St. Petersburg mall, did somewhat dent IKEA's reputation for was one of the fastest emerging markets of the world, and a non-tolerance of corruption. Speaking on this issue, Kamprad part of the BRIC (Brazil, Russia, India and China), it was one said, "The documented mess in our Russian shopping center of the toughest in which to do business. company is completely unacceptable. I have been too opti- Analysts said that the major stumbling block for busi- mistic. It is shocking and deplorable that we have wandered ness was the country's corrupt systems at both the regional off course."27 and national levels. In Transparency International's" 2011 In April 2011, the Ministry of Economic Developme issia was placed at 143"d posi- of Russia got in touch with IKEA's senior leadership and per tion, on par with notorious nations such as Nigeria and Belarus. suaded them to carry on with their expansion plans in the coun As per the cables published by Wikileaks,? it was estimated try. Minister Elvira Nabiullina who met company ex that bribery in Russia was worth US$ 300 billion per annum. claimed that IKEA had agreed not only to open new ibery was like another taxation system also to enhance its local manufacturing capability. Analysts felt in the country, which benefited the political elite including the that the company's meeting with the Russian senior ministry police and the Federal Security Service (FSB). 32 demonstrated a strategy of building relationships with authori- Over the years, IKEA's clash with government officials ties at the federal, rather than local level. n continued, Apart from the rising cases of corruption being detected prompting the Russian Government to come out with several among its ranks, IKEA's image took a further beating when promises that it would eradicate corruption. Speaking on this reports on its alleged unethical logging practices surfaced. In sue, Dahlgren said, "Officials regularly make public state- early 2012, a Swedish public service television came the war on corruption, bureaucracy, an investigative report that proclaimed that IKEA's subsidiary and abuse of office. But we did not notice any positive changes Swedwood cut down several hundred acres of old growth over all this time. While some legislation has change forests every year. This revelation caused various global con- better, the authorities have not."33 servation groups to condemn IKEA's logging practices. IKEA Political of were of the opinion that unless Russia refuted the allegations and claimed that it was logging wood brought about major changes in its political system such as according to local guidelines. permitting the formation of a free press and allow However, analysts pointed out that IKEA was adhering to ine opposition to exist, which could then criticize government local guidelines that were highly questionable. Viktor Safve, drafts, corruption and bribery would remain omnip Chairman of Swedish NGO "Protect the Forest', said, "This all Speaking on this issue, Evgeny Kovrov, a Researcher at Retail comes down to a question of credibility and we believe that they Consultancy Magazin Magazinov, said, "Investors need dozens are cheating their customers by claiming that the wood they and dozens of approvals from an incredible number of ag use is sustainably sourced. The wood the Russia is from a high conservation area and we have the evi- On the other hand, analysts felt that corruption was an ove it. They are hiding behind flawed and criticized institutional problem and not a transactional issue. They agreed FSC accreditation." Analysts felt that IKEA should show that multinationals took measures to ensure compliance of greater responsibility in sourcing wood without taking advan their Code of Conduct, regulations preva- tage of defunct environmental guidelines in countries such as lent in their home country, and internationally relevant rules Russia and China, in which it mos which it mostly logged wood. and regulations. However, they felt that this was not enough o address a systemic problem like corruption, particularly in The Road Ahead ng nations. They were of the opinion that companies As of 2012, Russia was IKEA's primary target for expansion. through 'Business Associations' and 'Chambers of Commerce' Out of its three top globally performing stores, two were lo- should develop a collective voice and strive for concrete steps cated in Russia. Apart from that, the country's extensive bore to eradicate corruption. or taiga forest belt was a source of high-quality timber. The As in Russia, IKEA passed through ethical minefields company was also in the process of executing new business in certain other countries in which it had operations. In May plans, such as the initiative to open a bank. 2012, it came to light that IKEA France had been spying on staff and disgruntled customers in that country over a long listing of corruption worldwide. ks is a non-profit organ in which has been publishing secret and 27"Ikea Owner "Distressed" Over Russian Ex the launched in 2006. Ducendas 11, 2010. - Federal Security Service of the Russian Federation (FED) is the "FSC (Forest Stewardship Council) includes some of teladas some of the world's leading or to Soviet Committee of State Security tube of State Security (KGB). It is the primary domestic NGOS who develop "Principles and Criteria' . the highest stan cunty agency of the Russian Federation federation whose responsibilities include en- dards of forest management which are emironmentally appropriate, socially curing security and gathering Intelligence. beneficial and economically viable. Maria Antonova, "Ex-IKEA Boss Bares Russia's "Chaotic Reality"," www "Annie Kelly, "Ikea to go 'Forest Positive"- But Serious Challenges Lie sptimes.ru, March 26, 2010. Ahead," www guardian en uk. December 14 2017 Fed Up with Rus A L UW P 58% 19.C Clear ~9 61x ENG 10:59 PM IN 7/9/2022D M 14 new vi X Urgent! P X Q www.goo x G Google e x WhatsAp X mySt.Clai X Home x Content X Q www.goo x Dashboar X Dor Internation X + X -> C File | C:/Users/Angad%20Bhogal/Downloads/International%20Management%20Managing%20Across%20Borders%20And%20Cultures,%20Text%20A... Q o . . . 484 of 501 Q + Q | Page view | A Read aloud T Add text Draw Highlight v Erase an international organization that measure as been publishing secret and 17"Ikea Owner "Distressed" Over Russi unched in 2006. Bursts 11, 2010. rise of the Russian Federation (PED) is the sum "FSC (Forest Stewardship Council) includes same of the world's leading sor to Soviet Committee of State Security (KGB ). It is the primary domestic environmental NGOs who develop "Principles and Criteria' . the highest stan by agency of the Kussian Federation whose responsibilities include en- dards of forest management which ar beneficial and economically viable. "Maria Antonova, "Ex-IKEA Boss Bares Russia's "Chaotic Reality"," www "Annie Kelly, "Ikea to go 'Forest Positive"- But Serious Challenges Lic sptimes.ru, March 26. 2010. Ahead," www guardian conk. December 14, 2019 Why IKEA be Fed Ilp with Russia," w cavek com, July 2, 2009 www.downloadslide.net CASE 10 . IKEA IN RUSSIA: EMERGING MARKET STRATEGIES AND ETHICAL DILEMMAS 483 period of time. The company had reportedly employed private 4. Mark Bergen, "IKEA in India: Heading into Untapped detectives and gained access to police files illegally to gain Retail Terrain," www.forbes.com, November 21, 2012. information about them. To make amends, IKEA fired several 5. Fiona Briggs, "IKEA's Mega Shopping Malls Are key executives, including the country head. Gateway for Western Retailers to Enter Russia," http:/ In September 2012, a report released by research company, iltimes.co.uk, November 20, 2012. Emst & Young claimed that East German political prisoners 6. Ben Quinn, "IKEA Apologizes over Removal of Women had been forced to manufacture products for an IKLA sup- from Saudi Arabia Catalogue," Catalogue," www.guardian.co.uk, plier for a period of 30 years. Speaking on this issue, Jeanette October 2, 2012. Skjelmose, IKEA's Sustainability Manager, 7. Mark J. Miller, "IKEA Looks to Asia for Growth, as regret that this could happen. At the time, we did not yet have Russia's Old Growth (Trees) Cause Concerns," www the well-organized control system we have today and clearly brandchannel.com, June 12, 2012. did not do enough to prevent this type of production method."35 B. Matt Hickman, "IKEA under Fire for Clearing Ancient It was obvious that IKEA's var Russian Forest com, June 6, 2012 were floundering in their attempts to adhere to its own ethi- "IKEA Sacks Four French Managers over Spying cal standards. Speaking about the difficulty in maintaining the Scandal," www.telegraph.co.uk, May 18, 2012. unique corporate culture and ethical stance across geographics, 10. "IKEA to Open Bank in Russia," http://cn.rian.ru, April Christopher Bartlett, an emeritus professor at Harvard 27, 2012. School said, "In any company that is as large and diverse as 11. Svetlana Smetanina, "Living in Russia as a Foreigner: oes become a challenge The Memoirs of Former IKEA Boss Reveal an Unusual There is often a tension between the corporate culture and a Truth," www.telegraph.co.uk, April 27, 2011. national culture."36 12. on Halts IKEA in Russia," www .theage.com.au, March 7, 2011. Case Questions 13. Henry Meyer, "Russia Repels Retailers as Ikea Halt Curtails Medvedev Goal," www.bloomberg.com, March 2, 2011. 1. What are the various external factors which a company 14. "The Secret of IKEA's Success," www.economist.com, must take into account while devising a market entry February 24, 2011. strategy for a new country? Discuss these factors in the 15. Vivian Tse, "IKEA Owner 'Distressed" Over Russian Russian context and in the actions taken by IKEA. Expansion," www.thelocal.se, December 11, 2010. 2. What is the impact of strong and co-operative politi- 6. Jesse Heath, "IKEA in Russia: Now 'Everything I cal machinery on the busine cts of an emerging Possible' ... For A Price,"www.opendemocracy.net, market? In this context, discuss IKEA's Russian sojourn February 22, 2010. What should IKEA's business strategy be in the fut 17. "Growing IKEA Russia Corruption Scandal - Two Execs 3. What are the strategies that a company should use to grow Fired," http://therussiamonitor.com, February 15, 2010. its business in an emerging market? How do you estab 18. Andrew E. Kramer, "IKEA Tries to Build Public Case lish a strong market presence in an underserved market? against Kussian Corruption," www.nytimes.com, rategy of establ September 1 1, 2009. complexes instead of standalone shopping centers. 19. "What IKEA's Decision to Halt Expansion in Russia Says about Corruption," www.goodhonestdollar.com, July 6, 2009. Suggested Readings and References 20. Nataliya Vasilyeva, "Red Tape Stalls IKEA Russian . Anna Ringstrom, "One Size Doesn't Fit All: IKEA Goes Expansion," www.thestar.com, June 12, 2009. Local for India, China," hup:/An.reuters.com, March 7, 2013. l. www.ikea.com/ruf "Ikea Announces Global Expansion Plans," www 22. eng.megamall.ru/company/Russia .oregonlive.com, January 23, 2013. 23. www.ikea.com 3. "IKEA Shopping Shopping Malls as Expansion Opportunity for 24. www.retailbusinessrus Retailers," www.property-magazine.cu, November 22, 2012. 25. www.pwc.com P 58% 19 Clear ~ @ @ 1x ENG 11:00 PM IN 7/9/2022