IKEAs Global Renovations - Case Study Example

IKEA’s Global Renovations Name Institution Abstract IKEA’s vision of expanding globally has met with several setbacks, hence triggering a need for the company to reconsider its current operations. IKEA engages two key approaches to international expansion: franchising and joint ventures. It significant successes include maintaining consistency of core values and brand image hence ensuring greater profitability in the United States and Russia. It has also built a positive reputation, social responsibility and sustainability globally. However, significant challenges to its international expansion include cross-cultural challenges with Chinese and Russian populations and stiff competition from Chinese retailers who also sold at low prices. IKEA should diversify its investment in other countries with friendly economic regimes. The macro-political risks that IKEA faced in Russia include devaluation of the Russian currency. The micro-political risks include problems in upholding IKEA’s HR policies in Russia due to cross-cultural differences. IKEA should, therefore, diversify its investment in less risky countries and initiate diversity and equality policies across its subsidiaries respectively. IKEA has been involved in several scandals. A key response would be rebuilding its reputation as a trustworthy company through ethical training of employees and constantly auditing its suppliers. Overall, IKEA has traditionally relied on transformational leadership to attain its successes. However, as a shift in leadership is expected, IKEA will need to engage succession planning to fill up the imminent leadership vacuums. Table of Contents Abstract 2 Table of Contents 3 1.0 Introduction 4 2.0 Issue 1 5 2.1 IKEA’s approach to expansion internationally 5 2.2 Significant successes 6 2.2.1 Consistency of core values and brand image 6 2.2.2 Positive reputation social responsibility and sustainability 6 2.3 Significant challenges to international expansion 7 2.3.1 Cross-cultural challenges 7 2.3.2 Competition 8 3.0 Issue 2 9 3.1 Macro- and micro-political risks that IKEA faced in Russia 9 3.1.1 Macro-political risks 9 3.1.1 Pre-emptive strategies 10 3.2 Micro-political risks 10 3.2.1 Pre-emptive and proactive strategies 10 4.0 Issue 3 11 4.1 How IKEA should respond to recent scandals 11 5.0 Issue 4 13 5.1 IKEA’s motivation, leadership and international
HR approaches 13 5.1.1 Leadership and motivation approaches 13 5.1.2 HR approaches 14 5.2 Change in leadership 16 6.0 Conclusion 16 7.0 References 18 1.0 Introduction IKEA is renowned Swedish multinational home furnishings company (Harapiak, 2013). In addition to its expansion strategies in emerging markets, such as China and Russia, and development markets, such as the United States, the company has focused on controlling costs and continuous development of its products to provide quality furniture to all people, whether poor or rich. This has made the company’s products to be highly affordable. As a result, the company has been highly profitable since it was launched in 1935. In January 2013, the company announced it had realized a peak in revenue of $36 billion, indicating an 8-percent increase in profit between 2011 and 2012. However, less than a month later, the company was mixed up in the horsemeat scandal. This, among many other setbacks to its expansionist strategies, triggered a need for the company to reconsider its current operations. This report describes IKEA’s approaches to international expansion, and the successes and challenges it has undergone. It also examines the macro- and micro-political risks the company faces on entering Russia and the possible strategies. Third, it suggests recommendations on how IKEA should respond to the recent scandals. Lastly, it examines the motivation, leadership, and international human resource management approaches the company has pursued to attain its international success before recommending additional steps to consider because of an imminent change in leadership. 2.0 Issue 1 2.1 IKEA’s approach to expansion internationally IKEA engages two key approaches to international expansion: franchising and joint ventures. Twarowska and Kakol (2013) describe a franchising system as a system that allows semi-independent business owners known as franchisees to pay royalties and fees to the franchiser, or the parent company, for rights to sell its products and services, use its trademark and other business formats. The franchisor provides broad range of resources such as managerial systems, staff training, equipment, and site approval. Through
the franchise approach, IKEA was able to expand to more than 41 countries, as of 2013. IKEA was able to maintain full control over its operations using different “business format franchises” in which they provided the local entrepreneurs with capital investment, managerial expertise, while marketing and merchandising was left to IKEA. For instance, Inter IKEA Systems BV, which is based in the Netherlands, owns the franchise, while Inka holding company operated some over 300 stores globally. Another separate company also owned different other stores that belonged to IKEA in its own right. IKEA also made its entry into China through joint venture with the government of China. Later in 2004 when the Chinese government joined the World Trade Organization and, IKEA’s wholly owned its third location in Quangzhou, and made further expansions across China. In a joint venture approach, an international firm creates a partnership with the host-country firm leading to the creation of a third firm. A joint venture agreement provides an international company with greater control over the operation of the third firm, in addition right of entry to the local market (Twarowska & Kakol, 2013). 2.2 Significant successes 2.2.1 Consistency of core values and brand image Among the underlying reasons for the success of IKEA in its expansion strategies includes the capacity to enter new international frontiers yet manage to maintain its brand image and core values consistently. In this way, the company has been able to replicate its competence areas and corporate image throughout its global operations. For instance, when IKEA expanded into Russia, its underlying strategy was building a local supplier base by actively cooperating with other stakeholders in the Russian wood industry. At this rate, the company’s proactive strategy proved difficult to implement. One reason for this is that IKEA based its approach for long-term commitments on trust. However, this was unusual for Russians who have traditionally tended to run their businesses under uncertainty. As a result, Russians tend to be disinclined to make long-term commitments. Having been aware of this, IKEA concentrated on understanding the Russian’s cultures and attitudes and instead invested in changing their behaviours and attitudes. 2.2.2 Positive reputation social responsibility and sustainability While IKEA’s global expansion endeavours has undergone various difficulties, the company established an approach for balancing customers’ experiences, as a result attaining a high standing for sustainability and social responsibility. Among the high-flying effects has been on the environment. For instance in 1997, the company increased the effectiveness of transportation when it published a report called “IKEA, transport and the environment. The purpose of the report was to minimised pollution emanating from travel in order to position tactically its entire stakeholders geographically. Indeed, a subsequent study by the University of Bari revealed that some 60% of stakeholders lived within 20 kilometres the store. From the report, IKEA managed to formalize an ethical code, which was practical in the area of encouraging sustainable production, as well as emblematic of the capacity of corporation to apply IKEA’s brand as an instrument for ensuring social responsibility and sustainability by limiting manpower and trips through the use of flat- packs, as well as eventually limiting carbon dioxide emissions by decreasing travel. Statistics have demonstrated the company’s successes in this area. For instance, as of 2001, IKEA demanded that its suppliers had to upgrade their transportation vehicles to modern models, which were energy efficient and less polluting. As of 2010, the suppliers in Italy had indicated a reduction in carbon dioxide emission and transport to 65% from 75%. 2.3 Significant challenges to international expansion 2.3.1 Cross-cultural challenges IKEA’s global expansion has encountered several challenges associated with cross-cultural differences. For instance, when the company entered into Russia, attaining success was tricky as the country’s cultures were tremendously different from the Swedish culture, as a result transforming a culture without transforming the IKEA brand values became tricky. It is particularly for this reason why when hiring, the company demands that its employees should possess a personality, which relates to the IKEA business model instead of merely flaunting a good resume. However, Russians tended to prefer education and experience. At the same time, training was also applied for the Russian employees that valued academic training therefore possessed a negative attitude towards “shop floor training” that IKEA trainers provided. Despite this, the IKEA trainers adhered to the IKEA model. Hence, they ran the risk of greater negative attitudes from Russian employee and stakeholders. Similar cross-cultural challenges were experienced when IKEA entered China through a joint venture with the government of China. The Asian market is cited as having been increasingly tricky for IKEA due to the contrasting cultural differences between Europe and Asia. For instance, China has significantly different Eastern held perspectives compared to Sweden’s Western held perspectives that prevail in the western markets, such as tastes, preferences and cultures. Aware of this, the company was compelled to change its marketing strategies to address the demands. 2.3.2 Competition Among the prominent challenges, include the viable competition and threat of new entrants in the furniture industry who offered similar products. This made it difficult for IKEA to establish an exceptional brand name in the areas it expands into. For instance, when the company launched in China, it met with stiff competition from numerous other home furnishings companies. Although its core strategy has been in offering low cost home furnishings, many other companies also offered low cost home furnishings. Therefore, the company had to ensure that its costs had to be relatively low while simultaneously making sure that it offered high quality products. Indeed, the businesses in China had traditionally tended to provide low cost alternatives. This implied that IKEA met head on with tremendous competition as well as copycat who imitated its quality home furnishings. Therefore, IKEA was forced to change its market segment to the high-income population that viewed high-end furniture as luxury items. The threat of price war in the furniture industry, particularly because of retailers who import cheap furniture from China also made it difficult for IKEA to expand. 3.0 Issue 2 3.1 Macro- and micro-political risks that IKEA faced in Russia 3.1.1 Macro-political risks According to Hamel (2016), business expansion internationally has inherent risks outside merely the likelihood of unprofitability. This includes the likelihood of facing political risks that the domestic firms may not have to contend with. The risks may be "macro" and "micro" political risks. Sottilotta (2013) considers political risks to be unnecessary government interference with the operation of businesses in ways that disrupt business operations of multinational companies in foreign countries. Hamel (2016) describes macro-political risks political risks that affecting all businesses operating in a foreign country. These include the likelihood of high taxation and currency devaluation. When IKEA considered expanding into Russia, it opened up to a host of risks by becoming subject to the legislations and the country’s political climate. In particularly, currency devaluation was a significant risk. On its initial entry into Russia, IKEA has to contend with the devaluation of the Russian currency and the country’s economic recession in 1998. Apart from IKEA, many other multinational companies that operated in Russia left when the country faced significant currency devaluation. During the time, the country’s economy was also under recession. However, the IKEA was adamant it was not abandoning the market as it had significantly invested into entering the country. Despite the symbolic perseverance that appealed to the people of Russia, the company’s challenge in adjusting to the failing economy, as catapulted by the currency devaluation. 3.1.1 Pre-emptive strategies To mitigate the macro-political risks, the businesses managers at IKEA should be knowledgeable of Russia’s legislations and stability. When a market appears to have significant risks, including the likelihood of passing that can damage the company’s long-term plans and sustainability, unfavourable legislations, IKEA should expand operations into other foreign countries other than just in Russia in order to mitigate risks. 3.2 Micro-political risks The micro-political risk that IKEA faces is within the organisation. The company faces problems in upholding its HR policies in Russia due to cross-cultural differences. On entering Russia, attaining success was tricky as the country’s cultures were different from the Swedish culture, as a result transforming a culture without transforming the IKEA brand values contrasted the company’s policies for recruitment. Traditionally, IKEA demands that its employees should possess a personality that relates to the IKEA business model instead of merely flaunting a good resume. However, Russians tend to prefer education and experience. 3.2.1 Pre-emptive and proactive strategies A possible pre-emptive strategy is that when hiring in Russia, IKEA should focus on eliminating the cultural misfit between its Swedish and Russian staff through rigorous organisational culture change and diversity management strategies (Belias & Koustos, 2014; Shahzad et al, 2012). This may include initiating diversity and equality policies that encourage cross-cultural interaction and training in the organization to enable the employees to form diverse teams, promote equality in hiring and recruitment, and ensure conflict management (Mazur, 2010). 4.0 Issue 3 4.1 How IKEA should respond to recent scandals As showed in the case study, in early 2013 IKEA was entangled in the horsemeat scandal, after a clear use of horsemeat in its iconic meatballs. IKEA was also accused of taking bribes during the Russian economic downturn. Earlier in 2012, IKEA has also been accused publicly of using political prisoners in East Germany almost 2 to 3 decades ago to manufacture its home furnishing products. However, IKEA alleged that its suppliers might have used prisoners. There are several ways IKEA can use to respond to these recent scandals relating to product contamination, sourcing, and working conditions.
 It is possible that IKEA suffered significant reputational damages after a number of scandals involving its employees. A key response would be rebuilding its reputation as a trustworthy company. As Breitsohl (2009) argues, while responding to scandals, organizations should focus on rebuilding positive organisational cultures and practices capable of upholding trust. An example includes public relations strategies, which are enforced to encourage reconstructing a positive image through aggressive media and advertising. Coombs (2007) also suggests that in order to rebuild a positive image after incidences of scandal, companies should aim to address stakeholder expectations by rebuilding their trust on the organisation. This may include developing ethical practices and codes of conduct that become replicated in the organisation’s culture. To encourage the culture of trust across the organization, IKEA’s management should ensure the executive management to the frontline employees are committed to ethical values. Williams et al (2012) explain that double standards of the executive management can destroy trust. Therefore, the executive management will need to lead by example by first showing they are upholding ethical practices and honest standards. IKEA has linked its suppliers to scandals. However, a critical problem IKEA faces is fully monitoring its suppliers. In a response, IKEA should strengthen its relationship with its international and local suppliers. In turn, this is likely to strengthen knowledge sharing and sharing intelligence on the authenticity of the supplies, including its iconic meat balls (Vark et al., 2013). IKEA is also likely to know the type of labour (whether children or prisoners) that has been used to manufacture its merchandise. IKEA should also constantly audit its suppliers to determine their legitimacy, as well as whether their methods of production are indeed ethical. This would assist IKEA to understand properly the quality of its supply chains and the risk factors to fraud. In turn, it should eliminate substandard suppliers (Vaughn, 2014). IKEA should also encourage its suppliers to engage in corporate social responsibility (CSR). In turn, its suppliers would shift focus from just concentrating on making profits to making sure that they guarantee social good (Maimunah, 2009; Otchere et al., 2013). As an alternative, IKEA should make it a requirement that its suppliers engage in CSR programmes. An earlier study by Azim et al. (2014) linked CSR and effective leadership to worker engagement and greater stakeholder engagement. In doing this, IKEA would make sure that even as its suppliers attempt to cut the cost of production, they do not compromise ethical and moral standards (Pollitt 2014). IKEA should implement a system that detects unethical or illegal conducts in the organisation. An example of this system includes establishing whistle-blower policies to encourage reporting of unethical conducts in the organization. The company should as well create a culture that encourages employees to discern unethical patterns of behaviour. IKEA should achieve this by establishing stricter rules and practices that are targeted at curbing corruption and adherence to the rules across the company’s subsidiaries. For instance, it may consider initiating a compliance programme anchored in a three-pillar approach: ‘detection, prevention, and response.’ Similarly, it should initiate compliance help desks and hotlines with an outside Ombudsman. Additionally, the company should consider hiring consults who can impart the desired ethical behaviours through training. In which case, the company needs to engage in ethical training of its employees across its subsidiaries. Additional possible strategies include initiating voluntary suspension programs and internal disciplinary actions, including dismissal of errant IKEA members of staff. 5.0 Issue 4 5.1 IKEA’s motivation, leadership and international
HR approaches 5.1.1 Leadership and motivation approaches IKEA has used an effective transformational leadership to engage its employees globally lead by Mikael Ohlsson and founder Ingvar Kamprad. IKEA successes, as a global leader in home furnishings, are direct outcomes of Kamprad’s vision, values, and culture that he struggled to incorporate into the organization through the years. As Batool (2013) shows, transformational leadership styles motivate interest among employees to pursue organizational goals. At IKEA, the need to transform the organization into a global enterprise by facilitating higher work ratings of satisfaction and training the employees in the subsidiary to conform to encourage the company’s core values and brand values has been facilitated from the top management. Transformational leadership has in turn encourages employee engagement across the organization (Lopez, 2014). Current studies have indeed linked transformational leadership to employee engagement, motivation and organizational commitment (Quang et al., 2015; Albrecht et al., 2015; Sibanda et al., 2014). 5.1.2 HR approaches Training As demonstrated in the case study, the IKEA employees are essentially the ambassadors of the IKEA brand values, and therefore sell the firm to the outsiders. IKEA has succeeded in this endeavour through effective human resource development strategies such as training and organizational learning, where it brings in its experienced employees, who tend to be Swedish by origin, to train the fresh breed of employees and mould the organizational culture in the new markets where it has newly entered into. As illustrated in the case study, IKEA trains its new employees on the organisation’s core competencies, the brand values, and vision. As reiterated, IKEA’s successes lie in effective training and recruitment. Additionally, when the company enters into a new market, it selects and trains the local suppliers on its competence areas and core values. It also trains them on the processes that IKEA uses to hire and recruit employees. A case in point is when IKEA entered Russia and used the strategies of building a local supplier base by actively cooperating with the suppliers in Russia’s wood industry. For instance, when IKEA expanded into Russia, its underlying strategy was building a local supplier base by actively cooperating with other stakeholders in the Russian wood industry. At this rate, the company’s proactive strategy proved difficult to implement. One reason for this is that IKEA based its approach for long-term commitments on trust. However, this was unusual for Russians who have traditionally tended to run their businesses under uncertainty. As a result, Russian supplies and employees tend to be disinclined to make long-term commitments. Aware of this, IKEA concentrated on understanding the Russian’s cultures and attitudes and instead invested in training with focus on changing supplier and employee behaviours and attitudes. Recruitment IKEA has also made use of effective recruitment strategies, in order to select candidates who can fast interpret the company’s core values. As illustrated in the case study, one of the company’s human resource managers was quoted as stating that the company’s goal is to employ workers who can understand and put into force the company’s core values, as well as reflect and reinforce them. Because of concentrating significantly on ensuring an effective recruitment process, the company ensures that its hires the right kind of employee with the capability to change the company’s traditional values, as well as become an advocate of the company, and salesman of the brand. IKEA’s global expansion has encountered several challenges associated with cross-cultural differences. For instance, when the company entered into Russia, attaining success was tricky as the country’s cultures were tremendously different from the Swedish culture, as a result transforming a culture without transforming the IKEA brand values became tricky. It is particularly for this reason why when hiring, the company demands that its employees should possess a personality, which relates to the IKEA business model instead of merely flaunting a good resume. However, Russians tended to prefer education and experience. At the same time, training was also applied for the Russian employees that valued academic training therefore possessed a negative attitude towards “shop floor training” that IKEA trainers provided. Despite this, the IKEA trainers adhered to the IKEA model to change employees’ previous views. 5.2 Change in leadership As showed in the case study, a shift in leadership is expected at IKEA as CEO Mikael Ohlsson is expected to leave, while Ingvar Kamprad also plans to stay in the company for only a year. The company will soon be faced with a leadership vacuum. Given that the company is still considering extending its global reach, it needs to engage in effective succession planning. According to Adewale et al. (2011), succession planning is refers to manpower planning activities through employee recruitment and human resource development activities to prepare candidates who can fill the key strategic or managerial positions in an organisation. 6.0 Conclusion IKEA engages two key approaches to international expansion: franchising and joint ventures. Through franchising, IKEA has maintained full control over its operations using different “business format franchises” in Russia. IKEA also made its entry into China through joint venture with the government of China. IKEA’s significant successes include maintaining consistency of core values and brand image hence ensuring greater profitability in the United States and Russia. It has also built a positive reputation social responsibility and sustainability globally. However, significant challenges to its international expansion include cross-cultural challenges with Chinese and Russian populations and stiff competition from Chinese retailers who also sold at low prices. IKEA should diversify its investment in other countries with friendly economic regimes. The macro-political risks that IKEA faced in Russia include devaluation of the Russian currency. The micro-political risks include problems in upholding IKEA’s HR policies in Russia due to cross-cultural differences. IKEA should, therefore, diversify its investment in less risky countries and initiate diversity and equality policies across its subsidiaries respectively. IKEA suffered significant reputational damages after a number of scandals involving its employees. A key response would be rebuilding its reputation as a trustworthy company through ethical training of employees. It should also establish whistle-blower policies to encourage reporting of unethical conducts in the organization. IKEA should also constantly audit its suppliers and encourage them to engage in corporate social responsibility (CSR). Overall, IKEA has used an effective transformational leadership to motivate its employees globally led by Mikael Ohlsson and founder Ingvar Kamprad. However, as a shift in leadership is expected at IKEA as Ohlsson is expected to leave, while I Kamprad also plans to stay in the company for only a year, IKEA will need to engage succession planning to fill up the imminent leadership vacuums. 7.0 References Adewale, O., Abolaji. A. & Kolade, O. (2011). "Succession planning and organizational survival: Empirical study on Nigerian private tertiary institutions." Serbian Journal of Management, 6(2), 231 – 246 Ahmad, A. & Aldakhil, A. (2012). Employee engagement and strategic communication in Saudi Arabian Banks. IBIMA Business Review, 1(1), 1-45 Albrecht, S. Bakker, A., Gruman, J., & Saks, M. (2015). Employee engagement, human resource management practices and competitive advantage. Journal of Organizational Effectiveness: People and Performance, 2(1), 7 - 35 Azim, M., Diyab. A. & Al-Sabaan, S. (2014). CSR, employee job attitude and behaviour: Saudi bank experience. 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