Matthew Norton Corporations Memorandum

11/14/07

IKEA: The Environmental Concern

Background IKEA was established in 1948 by Ingvar Kamprad as a small mail- order

company. Working out of his parent’s kitchen Kamprad offered a range of small products

including ballpoint pens, cigarette lighters and binders. As his business grew Kamprad

began offering furniture to his customers and immediate success caused him to stop

offering smaller items. He continued to operate through his catalogue but soon gave up

this method after his first store flourished. Customers traveled for hours to visit the store

and place orders with Kamprad. “The basis of the modern IKEA concept was created [at

this time] and in principle it still applies. First and foremost, we use a catalog to tempt

people to visit an exhibition, which today is our store. . . . Then, catalog in hand,

customers can see simple interiors for themselves, touch the furniture they want to buy

and then write out an order.” 1

Kamprad soon faced problems with local furniture cartels that feared IKEA’s

success. These cartels pressured manufacturers to stop supplying to IKEA as they became

a growing threat to the cartel. This constrained supply forced Kamprad to look abroad for

new manufacturers. This is when Kamprad identified the importance of supplier relations

which lead to the IKEA principle of fostering close supplier relations through

technology- transfer, large supply contracts and even low interest loans.

IKEA soon gained a competitive advantage over its competitors: they were able to

offer affordable furniture through cost-cutting and close supplier relations while placing

an emphasis on the design process. They also added customer value though display stores

that offered amenities such as restaurants, child playrooms and grocery stores. Each store

also offered a wide range of home furnishing products to complement their furniture

product lines. IKEA has since grown to be a large multinational company that can boast

to be the largest seller of specialized furniture seller in the world.

An Environmental Issue

The IKEA vision is to “To create a better everyday life for the many people.” 1

This corporate value was challenged when IKEA was confronted with environmental

concerns that surfaced in the late 1980’s into the mid 1990’s. These issues were made

more complicated because of their procurement strategy that involved many intricate

relationships with suppliers. IKEA worked with more than 2,300 suppliers in 70

countries.

The issue arose from increased environmental awareness by the Danish

government. They began their initiative by limiting the use of formaldehyde in building

products. IKEA’s problem’s stemmed from the use of formaldehyde in the production of

particle board for their furniture. Particle board is an essential tool from IKEA’s cost

cutting strategy and the problem needed to be resolved. IKEA was fined by the

government and they also took the opportunity to use the high profile company to

publicize the new regulations. This publicity hurt IKEA and sales dropped significantly

following the incident. It is reported that sales dropped 20% in Denmark. 3

IKEA quickly put into place requirements limiting the use of formaldehyde by its

suppliers. But IKEA’s suppliers were scattered across nations and many had not

established environmental restrictions such as these. Despite imposed restrictions their

suppliers continued to use formaldehyde. IKEA traced this problem back to the glue

companies who sold the binding agent to their suppliers. At this point IKEA needed to

use their influence and work directly with these glue companies in order to fix this

problem. Meanwhile IKEA had to reassure stake holders that their investment was safe

and also concentrate on rebuilding their company’s positive public image. But in 1992 a

German newspaper independently tested IKEA products and found that formaldehyde

was still used in a lacquer that exceeded legal limits.

After this second environmental incident IKEA decided it needed to address

wider environmental issues. Strategically this would allow them to rebuild customer trust

and credibility while also promoting social responsibility. After a decade of issues IKEA

also wanted to avoid any further environmental issues which have already cost them

millions of dollars. They worked closely with groups such as Greenpeace, World Wildlife

Fund (WWF) and Forest Stewardship Council. These additional interest groups put a lot

of pressure on IKEA to stay active in the campaign for environmental awareness. Forest

Stewardship Council put forth standards that IKEA followed. Their forestry policy states

that IKEA would not accept any timber, veneer, plywood, or layer-glued wood from

intact natural forests or from forests with a high conservation value. 3 This meant that

IKEA had to be willing to trace all wood used in their products back to its source to

ensure compliance from suppliers. IKEA still continues partnerships with Greenpeace

and WWF; together they jointly funded a global forest watch program that maps intact

natural forests worldwide. 2

Interest Groups:

IKEA Corporation

There are many considerations that IKEA must make in order to effectively

manage this situation: public opinion, the effect on supplier relations, stakeholder

response and even possible legal action linked to effects from the products treated with

formaldehyde. Because profit is ultimately the main concern, IKEA has to ensure that

they can maintain their low cost strategy after a situation like this occurs.

The first priority would be to reinforce relationships with suppliers by thoroughly

discussing plans for implementing the necessary changes to their manufacturing

processes. By letting their suppliers know that they are also trying to protect their

interests and want to help facilitate the change there is a greater opportunity for a

successful long term relationship.

Next, attention has to be given to recreating the trust and social responsibility that

was associated with IKEA. They essentially have to re brand themselves. By creating

relationships with organizations like WWF and Greenpeace they can improve public

appearance while also turning these engagements into competitive advantage. If they are

at the forefront of an environmental movement through ventures with these groups they

can have direct channels to information regarding future environmental regulation and

technology. This could allow IKEA to facilitate changes in their supply chain before

competitors.

IKEA Suppliers

IKEA positioned themselves around complex ties with suppliers. This causes

interdependent relationships with these manufacturers that force them to work through

the changes needed. First and foremost these suppliers are concerned with the current and

potential contracts with IKEA and by not meeting demands they would be risking large

orders that could greatly impact their bottom line.

Secondly, concerns would be raised about how their competitors are dealing with

environmental regulation and if IKEA has approached them as potential future suppliers.

If so what are some of the implementations made at these plants that have helped them

gain an advantage.

Many changes also need to be weighed against short/long term objectives and

whether catering to these regulations will affect future business from companies who

don’t have to abide by strict environmental standards. They may have to consider an

increase in capital investment, revamping line processes or finding new suppliers for glue

and binding agents.

Stakeholders

The stock market is strictly based on profit and return on investment. When

companies are losing those potential profits for their stakeholders the security of IKEA as

an investment will be questioned. It is also important for major stakeholders to know

whether the company is prone to such mistakes in the future. Full disclosure of the plan

for action regarding this issue also needs to be available to major stakeholders so they can

submit ideas or problems with the company strategy in dealing with the issue at hand

Current and Potential Customers

Consumers want to relate to the companies they purchase products from. The

products and brands you use in your daily life partially create your identity in today’s

society. For some customers that connection is essential when choosing a brand and they

would demand change be brought on by IKEA before they set foot in a store again. On

the other hand there are as many customers who may not consider these issues slightly

when buying a product.

Environmental Agencies

Environmental agencies are non profit organizations that are mainly concerned

with policy and regulation that promote the environment. These agencies rely on

donations through fund raising efforts, government funding and corporate allies such as

IKEA. Gaining these corporate allies for joint initiatives is the perfect way to spread the

message for environmental awareness. A lot of time and resources are invested into

creating these allies.

Government Agencies

The government’s only interest lies in ensuring that these regulations are enforced

to the extent of the law. By being given the opportunity to publicize the IKEA incident

they are able to further communicate their message to the public and the rest of the

corporate world.

Recommendations

When it comes to corporate issues that involve ethical and moral consideration

there are immediately a wide range of concerns coming from many groups. In this case

IKEA was required to follow regulations set forth by government. Being lawful as a

corporation is necessary so it is implied that IKEA must give in to government interest

and comply.

IKEA needs to also assess the situation from an ethical standpoint. By using

formaldehyde in products you are exposing all of your customers to potential short term,

long term or even unknown health risks. When a company has a philosophy that infers

social responsibility like IKEA’s does, it is important to remain consistent through your

actions as a company. IKEA needs to stay true to that philosophy and fix the problem in

order to appease all interested parties. The customer’s are the people who have been

most affected and this needs to be recognized. Every customer who purchased furniture

with formaldehyde lacquer or particle board should be given a refund or have the

opportunity to exchange the product. This would allow them to start rebuilding their

customer base that they had established over the years while also showing social

responsibility to their customers.

Because investors are a large opportunity for growth keeping them at ease should

be a major concern. Stakeholders though do need to realize the necessity for

environmental change within the company. If IKEA effectively presents their

implementation plan to investors they should be able to gain their support. Emphasis is

needed on the positive effect that environmental regulation has on our planet, our

population and the IKEA Company. By investing money in global environmental

initiatives and advertising of these endeavors they should be able to effectively win back

their customers while also bringing in new environmentally concerned patrons. The

promise for future high rates of return that are directly related to the environmental

regulation would help stakeholders and the IKEA Corporation put their issues aside and

together move towards the future.

Next IKEA must encourage their suppliers to cater to the changes they need

made. It is essential that IKEA can guarantee long term success for their suppliers by

pushing them ahead of the curve on global environmental issues. By helping foster these

changes through technology transfer and process improvement IKEA will be seen as a

long term loyal partner.

Government agencies and customers need to be convinced that IKEA will take

full responsibility for their actions; this can be done through environmental agencies.

WWF and Greenpeace may even be more proactive than IKEA to create such

relationships because it is important for them to spread their environmental message. For

this reason it is essential that IKEA be proactive in long term relationship with these

organizations. This will help protect the interests of Greenpeace and WWF while

enhancing IKEA’s public image by being on the front lines of environmental movements.

By successfully managing the concerns and interests of each group IKEA will be

able to successfully transition into a socially responsible future. It is important to fully

consider the position of each group and the impact their position may have on company

interest. These criteria then need to be weighed against corporate goals and an

appropriate plan of action needs to be established.

Sources

1) Ingvar Kamprad, as quoted in Torekull, “Leading by Design—The IKEA Story,” p. 25. 2) “IKEA—Social and Environmental Responsibility Report 2004,” p. 33, http://www.ikeagroup.ikea.com/corporate/PDF/IKEA_SaER.pdf, Nov 2, 2007. 3) “IKEA’s Global Sourcing Challenge” harvardbusinessonline.harvard.edu, Nov 2, 2007