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REV: NOVEMBER 14, 2006
IKEA’s Global Sourcing Challenge:
Indian Rugs and Child Labor (A)
In May 1995, Marianne Barner faced a tough decision. After just two years with IKEA, the world’s
largest furniture retailer, and less than a year into her job as business area manager for carpets, she
was faced with the decision of cutting off one of the company’s major suppliers of Indian rugs. While
such a move would disrupt supply and affect sales, she found the reasons to do so quite compelling.
A German TV station had just broadcast an investigative report naming the supplier as one that used
child labor in the production of rugs made for IKEA. What frustrated Barner was that, like all other
IKEA suppliers, this large, well-regarded company had recently signed an addendum to its supply
contract explicitly forbidding the use of child labor on pain of termination.
Even more difficult than this short-term decision was the long-term action Barner knew IKEA
must take on this issue. On one hand, she was being urged to sign up to an industry-wide response
to growing concerns about the use of child labor in the Indian carpet industry. A recently formed
partnership of manufacturers, importers, retailers, and Indian nongovernmental organizations
(NGOs) was proposing to issue and monitor the use of “Rugmark,” a label to be put on carpets
certifying that they were made without child labor. Simultaneously, Barner had been conversing
with people at the Swedish Save the Children organization who were urging IKEA to ensure that its
response to the situation was “in the best interest of the child”—whatever that might imply. Finally,
there were some who wondered if IKEA should not just leave this hornet’s nest. Indian rugs
accounted for a tiny part of IKEA’s turnover, and to these observers, the time, cost, and reputation
risk posed by continuing this product line seemed not worth the profit potential.
The Birth and Maturing of a Global Company1
To understand IKEA’s operations, one had to understand the philosophy and beliefs of its 70year-old founder, Ingvar Kamprad. Despite stepping down as CEO in 1986, almost a decade later,
Kamprad retained the title of honorary chairman and was still very involved in the company’s
activities. Yet perhaps even more powerful than his ongoing presence were his strongly held values
and beliefs, which long ago had been deeply embedded in IKEA’s culture.
Kamprad was 17 years old when he started the mail-order company he called IKEA, a name that
combined his initials with those of his family farm, Elmtaryd, and parish, Agunnaryd, located in the
Professor Christopher A. Bartlett, Executive Director of the HBS Europe Research Center Vincent Dessain, and Research Associate Anders
Sjöman prepared this case. HBS cases are developed solely as the basis for class discussion. Certain details have been disguised. Cases are not
intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
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IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)
forests of southern Sweden. Working out of the family kitchen, he sold goods such as fountain pens,
cigarette lighters, and binders he purchased from low-priced sources and then advertised in a
newsletter to local shopkeepers. When Kamprad matched his competitors by adding furniture to his
newsletter in 1948, the immediate success of the new line led him to give up the small items.
In 1951, to reduce product returns, he opened a display store in nearby Älmhult village to allow
customers to inspect products before buying. It was an immediate success, with customers traveling
seven hours from the capital Stockholm by train to visit. Based on the store’s success, IKEA stopped
accepting mail orders. Later Kamprad reflected, “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.”2
As Kamprad developed and refined his furniture retailing business model he became increasingly
frustrated with the way a tightly knit cartel of furniture manufacturers controlled the Swedish
industry to keep prices high. He began to view the situation not just as a business opportunity but
also as an unacceptable social problem that he wanted to correct. Foreshadowing a vision for IKEA
that would later be articulated as “creating a better life for the many people,” he wrote: “A
disproportionately large part of all resources is used to satisfy a small part of the population. . . .
IKEA’s aim is to change this situation. We shall offer a wide range of home furnishing items of good
design and function at prices so low that the majority of people can afford to buy them. . . . We have
great ambitions.”3
The small newsletter soon expanded into a full catalog. The 1953 issue introduced what would
become another key IKEA feature: self-assembled furniture. Instead of buying complete pieces of
furniture, customers bought them in flat packages and put them together themselves at home. Soon,
the “knockdown” concept was fully systemized, saving transport and storage costs. In typical
fashion, Kamprad turned the savings into still lower prices for his customers, gaining an even larger
following among young postwar householders looking for well-designed but inexpensive furniture.
Between 1953 and 1955, the company’s sales doubled from SEK 3 million to SEK 6 million.4
Managing Suppliers: Developing Sourcing Principles
As its sales took off in the late 1950s, IKEA’s radically new concepts began to encounter stiff
opposition from Sweden’s large furniture retailers. So threatened were they that when IKEA began
exhibiting at trade fairs, they colluded to stop the company from taking orders at the fairs and
eventually even from showing its prices. The cartel also pressured manufacturers not to sell to IKEA,
and the few that continued to do so often made their deliveries at night in unmarked vans.
Unable to meet demand with such constrained local supply, Kamprad was forced to look abroad
for new sources. In 1961, he contracted with several furniture factories in Poland, a country still in the
Communist eastern bloc. To assure quality output and reliable delivery, IKEA brought its knowhow, taught its processes, and even provided machinery to the new suppliers, revitalizing Poland’s
furniture industry as it did so. Poland soon became IKEA’s largest source and, to Kamprad’s delight,
at much lower costs—once again allowing him to reduce his prices.
Following its success in Poland, IKEA adopted a general procurement principle that it should not
own its means of production but should seek to develop close ties by supporting its suppliers in a
This document is authorized for use only by songwei hu in MGT 400 – Cross Cultural Management – Spring 2019 taught by Rivadavia C Drummond Alvarenga Neto, Arizona State University
from Jan 2019 to Apr 2019.
For the exclusive use of s. hu, 2019.
IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)
long-term relationship.a Beyond supply contracts and technology transfer, the relationship led IKEA
to make loans to its suppliers at reasonable rates, repayable through future shipments. “Our
objective is to develop long-term business partners,” explained a senior purchasing manager. “We
commit to doing all we can to keep them competitive—as long as they remain equally committed to
us. We are in this for the long run.”
Although the relationship between IKEA and its suppliers was often described as one of mutual
dependency, suppliers also knew that they had to remain competitive to keep their contract. From
the outset they understood that if a more cost-effective alternative appeared, IKEA would try to help
them respond, but if they could not do so, it would move production.
In its constant quest to lower prices, the company developed an unusual way of identifying new
sources. As a veteran IKEA manager explained: “We do not buy products from our suppliers. We
buy unused production capacity.” It was a philosophy that often led its purchasing managers to seek
out seasonal manufacturers with spare off-season capacity. There were many classic examples of how
IKEA matched products to supplier capabilities: they had sail makers make seat cushions, window
factories produce table frames, and ski manufacturers build chairs in their off-season. The manager
added, “We’ve always worried more about finding the right management at our suppliers than
finding high-tech facilities. We will always help good management to develop their capacity.”
Growing Retail: Expanding Abroad
Building on the success of his first store, Kamprad self-financed a store in Stockholm in 1965.
Recognizing a growing use of automobiles in Sweden, he bucked the practice of having a downtown
showroom and opted for a suburban location with ample parking space. When customers drove
home with their furniture in flat packed boxes, they assumed two of the costliest parts of traditional
furniture retailing—home delivery and assembly.
In 1963, even before the Stockholm store had opened, IKEA had expanded into Oslo, Norway. A
decade later, Switzerland became its first non-Scandinavian market, and in 1974 IKEA entered
Germany, which soon became its largest market. (See Exhibit 1 for IKEA’s worldwide expansion.) At
each new store the same simple Scandinavian-design products were backed up with a catalog and
offbeat advertising, presenting the company as “those impossible Swedes with strange ideas.” And
reflecting the company’s conservative values, each new entry was financed by previous successes.b
During this expansion, the IKEA concept evolved and became increasingly formalized. (Exhibit 2
summarizes important events in IKEA’s corporate history.) It still built large, suburban stores with
knockdown furniture in flat packages the customers brought home to assemble themselves. But as
the concept was refined, the company required that each store follow a predetermined design, set up
to maximize customers’ exposure to the product range. The concept mandated, for instance, that the
living room interiors should follow immediately after the entrance. IKEA also serviced customers
with features such as a playroom for children, a low-priced restaurant, and a “Sweden Shop” for
groceries that had made IKEA Sweden’s leading food exporter. At the same time, the range gradually
aThis policy was modified after a number of East European suppliers broke their contracts with IKEA after the fall of the Berlin
Wall opened new markets for them. IKEA’s subsequent supply chain problems and loss of substantial investments led
management to develop an internal production company, Swedwood, to ensure delivery stability. However, it was decided
that only a limited amount of IKEA’s purchases (perhaps 10%) should be sourced from Swedwood.
b By 2005, company lore had it that IKEA had only taken one bank loan in its corporate history—which it had paid back as
soon as the cash flow allowed.
This document is authorized for use only by songwei hu in MGT 400 – Cross Cultural Management – Spring 2019 taught by Rivadavia C Drummond Alvarenga Neto, Arizona State University
from Jan 2019 to Apr 2019.
For the exclusive use of s. hu, 2019.
IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)
expanded beyond furniture to include a full line of home furnishing products such as textiles, kitchen
utensils, flooring, rugs and carpets, lamps, and plants.
The Emerging Culture and Values5
As Kamprad’s evolving business philosophy was formalized into the IKEA vision statement, “To
create a better everyday life for the many people,” it became the foundation of the company’s
strategy of selling affordable, good-quality furniture to mass-market consumers around the world.
The cultural norms and values that developed to support the strategy’s implementation were also, in
many ways, an extension of Kamprad’s personal beliefs and style. “The true IKEA spirit,” he
remarked, “is founded on our enthusiasm, our constant will to renew, on our cost-consciousness, on
our willingness to assume responsibility and to help, on our humbleness before the task, and on the
simplicity of our behavior.” As well as a summary of his aspiration for the company’s behavioral
norms, it was also a good statement of Kamprad’s own personal management style.
Over the years a very distinct organizational culture and management style emerged in IKEA
reflecting these values. For example, the company operated very informally as evidenced by the
open-plan office landscape, where even the CEO did not have a separate office, and the familiar and
personal way all employees addressed one another. But that informality often masked an intensity
that derived from the organization’s high self-imposed standards. As one senior executive explained,
“Because there is no security available behind status or closed doors, this environment actually puts
pressure on people to perform.”
The IKEA management process also stressed simplicity and attention to detail. “Complicated
rules paralyze!” said Kamprad. The company organized “anti-bureaucrat week” every year,
requiring all managers to spend time working in a store to reestablish contact with the front line and
the consumer. The workpace was such that executives joked that IKEA believed in “management by
running around.”
Cost consciousness was another strong part of the management culture. “Waste of resources,”
said Kamprad, “is a mortal sin at IKEA. Expensive solutions are often signs of mediocrity, and an
idea without a price tag is never acceptable.” Although cost consciousness extended into all aspects
of the operation, travel and entertainment expenses were particularly sensitive. “We do not set any
price on time,” remarked an executive, recalling that he had once phoned Kamprad to get approval to
fly first class. He explained that economy class was full and that he had an urgent appointment to
keep. “There is no first class in IKEA,” Kamprad had replied. “Perhaps you should go by car.” The
executive completed the 350-mile trip by taxi.
The search for creative solutions was also highly prized with IKEA. Kamprad had written, “Only
while sleeping one makes no mistakes. The fear of making mistakes is the root of bureaucracy and
the enemy of all evolution.” Though planning for the future was encouraged, overanalysis was not.
“Exaggerated planning can be fatal,” Kamprad advised his executives. “Let simplicity and common
sense characterize your planning.”
In 1976, Kamprad felt the need to commit to paper the values that had developed in IKEA during
the previous decades. His thesis, Testament of a Furniture Dealer, became an important means for
spreading the IKEA philosophy, particularly during its period of rapid international expansion.
(Extracts of the Testament are given in Exhibit 3.) Specially trained “IKEA ambassadors” were
assigned to key positions in all units to spread the company’s philosophy and values by educating
their subordinates and by acting as role models.
This document is authorized for use only by songwei hu in MGT 400 – Cross Cultural Management – Spring 2019 taught by Rivadavia C Drummond Alvarenga Neto, Arizona State University
from Jan 2019 to Apr 2019.
For the exclusive use of s. hu, 2019.
IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A)
In 1986, when Kamprad stepped down, Anders Moberg, a company veteran who had once been
Kamprad’s personal assistant, took over as president and CEO. But Kamprad remained intimately
involved as chairman, and his influence extended well beyond the ongoing daily operations: he was
the self-appointed guardian of IKEA’s deeply embedded culture and values.
Waking up to Environmental and Social Issues
By the mid-1990s, IKEA was the world’s largest specialized furniture retailer. Sales for the IKEA
Group for the financial year ending August 1994 totaled SEK 35 billion (about $4.5 billion). In the
previous year, more than 116 million people had visited one of the 98 IKEA stores in 17 countries,
most of them drawn there by the company’s product catalog, which was printed yearly in 72 million
copies in 34 languages. The privately held company did not report profit levels, but one estimate put
its net margin at 8.4% in 1994, yielding a net profit of SEK 2.9 billion (about $375 million).6
After decades of seeking new sources, in the mid-1990s IKEA worked with almost 2,300 suppliers
in 70 countries, sourcing a range of around 11,200 products. Its relationship with its suppliers was
dominated by commercial issues, and its 24 trading service offices in 19 countries primarily
monitored production, tested new product ideas, negotiated prices, and checked quality. (See
Exhibit 4 for selected IKEA figures in 1994.) That relationship began to change during the 1980s,
however, when environmental problems emerged with some of its products. And it was even more
severely challenged in the mid-1990s when accusations of IKEA suppliers using child labor surfaced.
The Environmental Wake-Up: Formaldehyde
In the early 1980s, Danish authorities passed regulations to define limits for formaldehyde
emissions permissible in building products. The chemical compound was used as binding glue in
materials such as plywood and particleboard and often seeped out as gas. At concentrations above
0.1 mg/kg in air, it could cause watery eyes, headaches, a burning sensation in the throat, and
difficulty breathing. With IKEA’s profile as a leading local furniture retailer using particleboard in
many of its products, it became a prime target for regulators wanting to publicize the new standards.
So when tests showed that some IKEA products emitted more formaldehyde than was allowed by
legislation, the case was widely publicized and the company was fined. More significantly—and the
real lesson for IKEA—was that due to the publicity, its sales dropped 20% in Denmark.
In response to this situation, the company quickly established stringent requirements regarding
formaldehyde emissions but soon found that suppliers were failing to meet its standards. The
problem was that most of its suppliers bought from subsuppliers, who in turn bought the binding
materials from glue manufacturers. Eventually, IKEA decided it would have to work directly with
the glue-producing chemical companies and, with the collaboration of companies such as ICI and
BASF, soon found ways to reduce the formaldehyde off-gassing in its products.7
A decade later, however, the formaldehyde problem returned. In 1992, an investigat …
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