Chapter 11 Homework The case starts out with the efforts made by Lennart

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IKEA in Russia – Ethical Dilemmas

TEACHING NOTE

The case “IKEA in Russia – Ethical Dilemmas” describes the efforts and tribulations of

international furniture retail giant, IKEA while setting up and doing business in the emerging

market of Russia. The case starts out with the efforts made by Lennart Dahlgren to set up IKEA’s

first store in Russia. It details the challenges faced by him in this process. Later, the case talks

about the way IKEA went about positioning its stores, in addition to the new business model it

came up with considering the unique circumstances of Russia. Apart from that, the case primarily

details IKEA’s struggles with a corrupt bureaucracy in Russia and the way the system always went

against its business plans. It also mentions the company’s struggle to adhere to its own ethical

standards, both in Russia and other global markets.

The teaching objectives of the case can be:

• To analyze the economic conditions of an emerging market before devising a market entry

strategy

TEACHING STRATEGY AND METHODOLOGY

The suggested class time for this case is around 60 minutes. The moderator can start off this

discussion by explaining what an emerging market is and asking students to point out markets that

they think can be called emerging markets. Later, they can discuss the unique business conditions

of these markets and how they can turn into an opportunity or a threat for a market entrant.

Afterwards, the students can be asked to discuss the issues facing multinationals in the emerging

markets.

1. What are the various external factors which a company must take into account while devising

a market entry strategy for a new country? Discuss these factors in the Russian context and in

the actions taken by IKEA.

!IKEA in Russia – Ethical Dilemmas

2. What is the impact of strong and co–operative political machinery on the business prospects of

an emerging market? In this context, discuss IKEA’s Russian sojourn. What should IKEA’s

business strategy be in the future?

3. What are the strategies that a company should use to grow its business in an emerging market?

How do you establish a strong market presence in an underserved market? Discuss IKEA’s

strategy of establishing large shopping complexes instead of standalone shopping centers.

Topic

Suggested Discussion Time

Nature of Emerging Markets

10 minutes

Question 1

Question 2

In, the concluding stages of the discussion, the moderator can ask students to mention the lessons

which IKEA had gained from the Russian market which it can apply in devising strategies for

more–or–less similar markets, especially India.

The answers for the questions are:

1. What are the various external factors which a company must take into account while

devising a market entry strategy for a new country? Discuss these factors in the Russian

context and in the actions taken by IKEA.

Multinational Companies (MNCs), especially large retailers, have little scope for growing in

the saturated western markets. Therefore, they often look toward the emerging markets for

future growth.

The key factors that an MNC should consider before entering an emerging market are:

• Attractiveness of the Market: The primary factors include GDP growth over the years,

population growth trends, amount of disposable income and its distribution, availability of

proper infrastructure, and similarity to other markets in which the company already has a

presence.

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There was also a large retail opportunity waiting to be tapped. In the early 2000s, a market

report from A.T. Kearney, a global market consulting firm, stated that in terms of retail

expansion, Russia was the top country in the world. Russia, being a part of the erstwhile USSR

Nonetheless, there were other factors as in any other emerging market, which could hamper

any MNCs prospects. They were:

• Unpredictable changes in economy

• Rules and regulations for market entry

On the other hand, these crises provide a competitive advantage to companies that have the

wherewithal to withstand these adverse situations and take advantage of the opportunities. It is

not every company that has the strategic flexibility to survive and grow in crisis situations.

IKEA did not face any major competition from other major retailers due to this factor.

MNCs also need to be aware of specific regulations in countries that curb ownership of local

assets or those that place other restrictions on local operations by foreign companies. In this

context, Russia was quite flexible, as IKEA did not have to resort to any Joint Ventures or

Partnerships, in order to gain market entry.

IKEA, a global player with experience in varied global markets, was highly capable of

entering the Russian market on its own. Moreover, there were no other large Russian retailers

who could have partnered with it to set up its business operations. However, it did enter into a

partnership with Turkish retail giant, Ramstore hypermarket, when it set up its first large

regional shopping mall. IKEA was also able to formulate a strong corporate policy based on

the business ethics it followed the world over.

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IKEA with its roots in Sweden, which is considered to be one of the least corrupt nations in the

world, struggled very hard to traverse the corruption–laden Russian economy. Russia had

corrupt systems at both the regional and national levels, with the country being placed at 143rd

position in Transparency International’s 2011 Corruption Perceptions Index. As per the cables

published by Wikileaks, it was estimated that the bribery in Russia was worth US$ 300 billion

per annum. Analysts opined that bribery was like another taxation system in the country,

which benefited the political elite, including the police and the Federal Security Service (FSB).

2. What is the impact of strong and co–operative political machinery on the business

prospects of an emerging market? In this context, discuss IKEA’s Russian sojourn. What

should IKEA’s business strategy be in the future?

Russia remains the most prosperous of the BRIC (Brazil, Russia, India and China). It is seen as

the engine of growth for Europe, as it is far ahead of its closest Central and Eastern European

competitors, Turkey and Poland. Russia rates highly in terms of drawing foreign direct

investment (FDI), with foreign investors being attracted to its rich natural resources, growing

domestic market, and a rising middle class with large disposable incomes. However, they are

highly wary of the country’s political stability, the quagmire of bureaucracy, and the risks of

corruption.

Both Putin and Medvedev had repeatedly vowed to eradicate corruption. But the experience of

IKEA in Russia proves that there has hardly been a difference at the ground level. As long as

the local government in–charge was favorable toward IKEA, things went smoothly for the

company, sometimes happening in record time. Once a change in political leadership occurred,

things became very unpredictable for the company with permissions being withdrawn, fresh

demands being made, and new regulations being framed.

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In its early days, IKEA preferred to keep a low profile, avoiding any direct confrontation over

the corruption issues dogging its every move. It preferred to give in to the dubious schemes

concocted by the local authorities to trick it of its money. In the case of the off–ramp, the

company agreed to pay US$ 5 million more than the estimated cost, even though the

construction took three times longer than necessary. IKEA donated US$ 30 million to aid

elderly people and hired a contractor endorsed by the regional government when permission to

construct a warehouse was withdrawn. Kamprad later claimed that IKEA had been swindled to

the tune of US$ 190 million because of the failure of Russian authorities to keep their word to

provide electricity to its stores.

IKEA’s decision to halt expansion finally seemed to have spurred action from the Russian

Federal Government, with the Ministry of Economic Development of Russia persuading the

company to continue with its expansion plans. Currently, IKEA seems to have adopted a

strategy of building relationships with authorities at the federal, rather than the local level.

3. What are the strategies to be undertaken by a company to grow its business in an

emerging market? How do you establish a strong market presence in an underserved

market? Discuss IKEA’s strategy of establishing large shopping complexes, instead of

standalone shopping centers?

As MNCs enter new emerging markets, they must tailor their strategies to the local

circumstances, apart from positioning their product and brand portfolios to cater to the

particular market’s needs. MNCs also need to position their products in such a way as to reach

the appropriate segment. In this regard, IKEA’s furniture with its simple designs and

affordable prices was highly appropriate for the needs of the hugely underserved Russian

middle class.

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MNCs needed to develop the required operational capabilities to function capably in the local

market, which requires them to develop complementary resources that are typically controlled

by local firms. Moreover, the local firms are often resourceless and needed technological up

gradation, for which additional investment needs to be provided by the MNCs. Companies also

have to meticulously design their supply chain, manufacturing facilities, and distribution

centers.

These initiatives helped the company improve its local sourcing capability and enabled it to

take advantage of Russia’s extensive boreal or taiga forest belt that was a source of high–

quality timber. This in turn further developed its global sourcing facilities, thereby causing

Russia to emerge as a major global supplier of furniture for IKEA.

In addition, it could be necessary to provide training to local staff, starting from the basic level

in some emerging market countries. Over the long term, most MNCs need to develop talent

development programs that enable transfer of local management to other regions, in order to

expand their business outlook.

Lennart Dahlgren who was appointed by IKEA to set up its Russian operations was quite

deficient in his knowledge of local Russian culture and on several aspects of the Russian

economy. Though he overcame his initial inadequacies and later became quite a Russia expert

(he wrote a memoir: Despite Absurdity: How I Conquered Russia While It Conquered Me,

wherein he gave several pointers for businesses entering Russia), his initial lack of market

knowledge could have raised several problems for the company.

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The company observed that the land value of the areas surrounding its new stores greatly

appreciated in value over a period of time. It decided to take advantage of this by trying to

develop the areas around its stores into commercial complexes.

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