Corporate Social Responsibility 2012

IKEA Case Analysis

I. Analyze: Identify Issue and its Scope The primary CSR issue reflected in this case is the use of child labor by one of IKEAs Indian carpet supplier. The supplier was explicitly made to sign the contract which restricted the use of children below the age of 14 to be used as laborers. The practice of child labor is considered exploitative by many international organizations and is illegal in many countries. The fifth principle of UN Global Compact's Ten Principles specifies "Businesses should uphold the effective abolition of child labor." In addition to this principle, UN published Convention on the Rights

of the Child in December of 1989 stating that the right of a child to be protected from economic exploitation and from performing any work that is likely to be hazardous, interfering the child's education, or harmful to the child's health or physical, mental, spiritual, moral or social development. Nevertheless, in 1994, a Swedish television documentary broadcasted a film disclosed IKEA was one of the carpet importers from Pakistan where children worked at weaving looms. As a part of its response, IKEA sent a legal team to Geneva to seek input and advice from the International Labor Organization on how to deal with the problem. Following discussions with the ILO, IKEA added a clause to all its supply contracts a straightforward black-andwhite clause stating that if the supplier employed child labor under legal working age, the contract would be terminated immediately. The company also hired external agent to monitor child labor practices at its suppliers in India and Pakistan. After managing the initial response to crisis, in the spring of 1995, IKEA was preparing actions to address this issue but a well-known German documentary maker notified the company that a film was about to be broadcasted showing children working at looms at Rangan Exports, one of IKEAs major suppliers in India. While refusing to let the company preview the video, the producer invited IKEA to send someone to take part in a live discussion during the airing of the program. Beyond the immediate public relations issue, the company faced a tough decision as it sought to address the issue. Firstly, IKEA should solve the issue in order to secure major suppliers of Indian rugs in terms of short-term business strategy. Above all, IKEA has to protect its brand and its image since this issue could impact deeply on the future of its business by deteriorating its reputation. While the company was being urged to sign up with Rugmark, many were concerned that a very proactive stand could put IKEAs business at a significant cost disadvantage.

Some piece of information which would be really helpful to make a decision is the credibility of Rugmark and the specific metrics they use to filter suppliers. This information could help IKEA decide whether the company should sign up with Rugmark for monitoring the use of child labour in India. II. Stakeholder Analysis: Define Those Affected By or Who Can Affect the Outcome The table below outlines the stakeholders involved, their concerns, motivations and priority. Priority High Stakeholders Company Management Concerns - Impact on brand image - Impact on profits - Sustainability - Monitor suppliers worldwide - Decline of the companys value - Purchase of immoral products and what others would think. - Cost & Product Quality - Increased number of child labor worldwide - Increase in number of cases of child labor worldwide - Risk of declined credibility in the world Motivations - Sustainability of its brand image - Addressing their concerns - Improvement of companys value - Investments return Rate - Fair-trade without increase in the price of the products - Termination of child labor

High

Investor or Shareholder Consumer

Low

High

ILO or UNICEF

High

NGO

- Participation of IKEA to sign up with Rugmark - Abide by the Child Labor Act of 1986 - Help IKEA in maintaining contracts with Indian suppliers - Secure long-term relationship with IKEA - Profits -Education sponsored by IKEA. - Profit

High

Indian Government

High

Suppliers

- Termination of contract with IKEA - Loss of jobs which would affect their family income - Rights to broadcast the German documentary

Low High

Children Media

Each stakeholder has different concerns and motivations in response to the issue, resulting in arduous complexity and dilemma for IKEA to find an optimal way to align with all the stakeholders. Still, IKEA would somehow need to resolve the issue and create a win-win. Unquestionably, the priorities for IKEA are to sustain its brand image and save the children who have been working illegally. A possible solution could be that IKEA reinforce standards which prohibit child labor, forcing all the suppliers to meet the standard without fail. IKEA would have to hire internal and external monitoring agencies so that the message of Zero Tolerance to Child Labor is clearly communicated to all its suppliers. To handle the current scenario, IKEA should take the responsibility of funding the education of the children who have been found to be working in Rangan Exports and push Rangan Exports to contribute to the same extent. By doing so IKEA would be able to send a clear message to the rest of the suppliers while protecting its brand image from getting tarnished. The strict enforcement would further enable the Indian Government to secure long term benefits from IKEA as IKEA keeps the contract in place with the suppliers who meet the predefined standards. Other stakeholders such as UNICEF, ILO and NGO will be satisfied with increasing social awareness that the child labor should be abolished. Most of all, these approaches can be very effective for these children would not only be protected from the abuse, but receive sponsored education which will enhance their skills and competences to work for higher income jobs. III. Plan: Identify Possible Alternatives to Resolving the Issue Alternatively, IKEA could go through other processes to resolve the issue. For example, the company could investigate the suppliers child labor condition in order to determine the validity of the news. In addition to the

investigation, the company could cooperate with internal and external stakeholders to develop a commonly favorable solution, which would also be accredited by the public. Next, the company could set up a monitoring system to make sure the suppliers will always be complied with future standards. In addition, all solutions implemented should be amplified by the power of media in shaping a favorable brand image, including an onscreen follow-up of the entire story to reinforce publics positive opinion on IKEAs response. From the CSRs perspective, the company could consider three alternatives to improve and sustain its brand image. First, IKEA could offer education sponsorship in India. According to UNICEFs statistics, 20 per cent of the children in India are not in school due to poverty and lack of resources, which is one of the major factors contributing to the countrys largest number of child laborers in the world. By building a school and providing furniture and classroom equipments (which should not be too hard for IKEA) to children who cannot afford to attend a school, the company will not only spread its positive brand image worldwide, but more importantly, improve the futures of numerous Indian children, which is somewhat in accordance with IKEAs business vision of creating a better life for the many people. On the other hand, the local suppliers can secure the business partnership with IKEA by abolishing the use of child labor. Furthermore, IKEA might sign up Rugmark treaty to prohibit their suppliers from employing child labor again. Third, IKEA could make donation to UNICEF or ILO who are striving to protect children from abuse. With this action, the company may lessen the tension and criticism against their carpet production using child labor. Below is a summary table of the pros and cons of each proposal for addressing the issue:

Proposals Education Sponsorship In India

Pros - Boost up brand image - GDP : 1) protecting suppliers ; 2) better jobs & higher salary for educated children in long term

Cons - Financial issue: huge monetary investments

Signing up Rugmark to attach the mark for its carpets Financial support for UNICEF or ILO

- Avoid criticism from the organization - Enhance its brand image

- Take whole responsibility for the mark( burden to the company) ?? - Unstable relationship with suppliers - Financial issue: huge monetary investments - Difficulty to substantiate its efforts

- Disperse the responsibility for the issue

Likewise, these proposals might cause unintended consequences or externalities as follows:

Proposals Education Sponsorship In India Signing up Rugmark to attach the mark for its carpets Financial support for UNICEF or ILO

Unintended consequences or externalities - Growing demand for additional financial supports to build more schools - if any violation occurs, IKEA could be a deceptive company unintentionally

- IKEA could be forced to donate unexpected funds

IV. Recommend: Make Decision and Implement Among our proposals, we would like to recommend the sponsorship of free education to poor children in India. Based on an Indian government report, absence of compulsory education at the primary level, parental ignorance, non-availability and non- accessibility of schools, and boring and unpractical school curriculum have been the

critical factors fostering the phenomenon of child labor. Inadequate schools, lack of resources, and the expense of schooling leave some children with little else to do but work. Irresponsible attitudes of parents also contribute to child labor, as some parents feel strongly that children should work in order to increase family income and develop skills useful in the job market, instead of taking advantage of a formal education. Under these circumstances, IKEA has a chance to enhance its brand image drastically by supporting a more adequate education system that would promote the general acceptance of education in India. Even though this measure might not be a direct action to prohibit child labor, this sponsorship could be an effective way to reduce child labor, and even improve the countrys future economic status in a long term perspective. After all, lack of proper education is the root cause of this persistent issue. V. Evaluate: Identify Measures of Success Ultimately, this issue should be resolved in the best interest of children, without much damage to its profit and brand equity for IKEA, while securing a sustainable business relationship with India. The current managements handling of the situation is leaning towards the right direction. In fact, the size of carpets sales is relatively trivial that the company should withdraw their business from India if the problem is getting even worse. However, once the trust for a company is destroyed, it is extremely difficult to build the trust again. Therefore, sustaining brand value is more crucial than any other financial perspective in this issue. To evaluate the effectiveness of our recommendation, we can evaluate both quantitative and qualitative outcomes across different aspects. Some measures that can be apply include:

Type of Measure Social

Examples - The change in awareness for IKEAs education support in India

Environmental Financial

- The shift of preference for IKEA brand - The number of children who attend a school sponsored by IKEA - The decrease rate of child labor in India - The growth rate of revenue - The growth rate of stock price - The amount of sponsorship funds

In conclusion, one most valuable lesson we can take away from this case is the importance to find a well-balanced, integrated solution that would take into consideration of every stakeholders concern. Moreover, the managements decision should always be aligned with the long term brand value of the firm, as the positives of long-term business decisions always outweigh short term tradeoffs. Beyond reshaping a philanthropic and socially responsible corporate image, IKEA can also benefit from long-term relationships with suppliers and other stakeholders, building a lasting, sustainable, and prosperous business empire into the future.

REFERENCES
Bhukuth, Augendra. Defining child labor: a controversial debate. Development in Practice (2008) 18, 385394. UNICEF. 2008. India-The Big Picture. http://www.unicef.org/infobycountry/india_background.html Retrieved February 21, 2012. Office of the United Nations High Commissioner for Human Rights. Convention on the Rights of the Child. http://www2.ohchr.org/english/law/crc.htm.Retrieved February 21, 2012 (originally published on November 20, 1989). United Nations Global Compact, The Ten Principles.
http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html. Retrieved February 18, 2012.

Child Labor (2008). http://www.childlabor.in/causes-of-child-labour.htm. Retrieved February 22, 2012. AZAD India Foundation. Child Labor in India. http://www.azadindia.org/social-issues/child-labour-inindia.html. Retrieved February 22, 2012. Child Rights and You. Ensuring Lasting Chang for Children. http://www.cry.org/whoweare/whowearelp.html. Retrieved February 22, 2012.