Corruption In Russia Harvard Case Analysis PDF

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Maria Tyrina MGMT 309 Professor Daspro 15 September 2020 Corruption in Russia: IKEA’s expansion to the East The Corruption In Russia case study is about IKEA's expansion to the East and the ethical problems that the company has experienced while opening its first store in Russia. IKEA is a Swedish company and the largest furniture retailer founded in 1943 by Ingvar Kamprad. When IKEA first opened, it operated as a general mail-order company in a small village in the South part of Sweden. By 1955, IKEA had already successfully established its self-assembly innovative business model. IKEA's business model is based on producing and selling furniture that can be accessible to everyone because of its innovative idea of self-assembly by the customer and flat packaging that vastly reduces the costs. IKEA's business strategy is established around the low-cost structure in its operations. The company tries to cut costs on absolutely everything in order to deliver its customers functional home furnishing products at very low prices. IKEA's target market was primarily focused on young adults between the ages of 20 and 35 that value modernity and affordability. Showing its togetherness and caring values, IKEA introduced a customer card "Family Card" that provided cardholders with many perks. As an IKEA Family member, customers could enjoy many freebies and surprises such as discounts on products and free tea or coffee from Monday to Friday. After successfully introducing itself and establishing in the furniture industry, IKEA opened its first flagship store in Sweden, just outside of Stockholm. The grand opening of the first store was a success, which served as proof that IKEA's innovative idea of low-cost self-assembly furniture can prosper in large metropolitan markets. With the company's growth nationally and the increasing awareness about its affordable furniture, almost a decade after the opening of their first store, IKEA began its international expansion. The company first targeted its neighboring countries in the Scandinavian region, but in the following twenty years, IKEA penetrated many Western European markets. With its successful expansion into Europe, IKEA did not stop there, and in the mid-70s opened its stores in Canada and Australia. Although IKEA was rapidly acquiring markets worldwide, it did not take on the US market until 1985 when it opened its first store in Philadelphia. IKEA owes its growth and successful expansion into the international market to its founder Ingvar Kamprad. Although he stepped down as a CEO in the late 80s, he still chaired the two foundations that are the main elements of IKEA's business structure. Ingvar Kamprad created a business model for IKEA to ensure the company would outlive its founder in its present form. As an honorary chairman, Ingvar Kamprad was in control of the company's culture and strategy. IKEA's culture is an essential aspect of the company's operations and strongly reflects its Swedish roots. The company's fundamental values directly correlate with the collectivistic nature of Sweden. They include togetherness, caring for people, and cost-consciousness, ensuring that as many people as possible can afford a beautiful and functional home. IKEA's strategy

was mainly established around the idea of providing competitive prices due to very low production costs. Based on its strategy, many aspects drove IKEA's international expansion. Not only the company wanted to penetrate various markets and acquire a broader customer base but also pursue an opportunity of cutting production expenses by gaining a competitive cost advantage through internalization.

With years of successful international operations within multiple regions, including Eastern Europe, in 2000, IKEA decided to take on the opportunity of the fall of the Soviet Union and expand its operations into Russia to capture a vast and potentially highly attractive market. At that time, the Russian market was composed of nearly 146 million consumers who desired to improve their living standards after decades of isolation from the rest of the world. Although Russia presented attractive opportunities for IKEA, after the fall of the Soviet Union, it was going through economic and political chaos, which resulted in extremely high inflation and negative GDP growth. Despite the harsh situation for the Russian people, the country presented a prospect of a growing large market and an arising middle class that IKEA desired to capitalize on. Russia seemed like a perfect area for IKEA's expansion because of the lack of modern and functional furniture in its households. In the Soviet Union, everything was the same. Every apartment was practically identical. That is why IKEA believed that people would be eager to replace their large and heavy furniture that took most of the apartment's space with the modernlooking affordable products from IKEA. Although the Russian market presented attractive opportunities, it also raised problems. Soon after the decision to enter Russia, IKEA was faced with many challenges. It first encountered difficulties with the import duties, which were later successfully resolved. Then IKEA struggled with acquiring the desired location because of its low-cost strategy. The company also faces a major fail with the Ad Campaign in the Moscow subway due to the cultural differences and misunderstandings. After multiple attempts to find a perfect neighborhood for the company's store in Moscow, IKEA took a flexible approach and decided to open their store just outside of the capital city. After all these challenges that IKEA encountered, it seemed like the company finally got a green light, but unfortunately, this was just the beginning. The location that IKEA chose for the opening of their store was situated in the area with horrible traffic conditions, which presented a problem for people getting to and from the store. IKEA faced many problems during its process of expanding to Russia, but the main problem that the general manager encountered was an ethical one. A couple of weeks before the grand opening of the first store, a Russian local utility company that provided electricity for IKEA's renting space gave Lennart Dahlgren, the general manager of IKEA in Russia, an ultimatum. They presented their conditions very clearly and specified that IKEA either pays a special fee or stops providing the electricity. The Russian utility company was basically pressuring IKEA to get involved in bribery if they wanted to continue with their planned operations. This was a significant problem for IKEA because it had to act fast and possibly even against ethical norms. It was a very substantial issue for Lennart Dahlgren and its stakeholders that could be endangered based on the decision to be made.

From the standpoint of IKEA, a company with Swedish roots, bribery was a huge ethical misconduct. It was something that contradicted all the key values of the company and would neglect its culture. On the other hand, in Russia, especially right after the Soviet Union's fall, Corruption was booming, and bribery was almost a standard everyday practice in the commerce field. People finally got an opportunity to change the years of their low living standards and thus were desperate to capitalize on anything available to them, with ethical norms being completely disregarded. For IKEA, this problem did not only present a moral concern, but the company could be legally charged for bribery based on the anti-corruption laws of Sweden. Because of all these factors, Lennart Dahlgren was faced with an incredibly tough decision to make. He either had to postpone the opening, which would not solve much because even if he found a different utility company, he would probably face the same situation. The other potential option was to cancel the project altogether. Although IKEA would most likely be able to afford such a loss, it would endanger any stakeholders such as investors, new workers at IKEA's prospective store in Russia, and many more. The last and most controversial option was to pay whatever was required. From a cultural relativism standpoint, this situation was not as severe and unethical as it seemed. In cultural relativism, ethical and moral concepts are genuine and consistent to the extent that they portray a particular culture's habits and biases. What is considered unethical in one culture might be complete normality in the other. The driving decision-making principle for IKEA in this situation would be the general manager's cognitive moral development. Based on his level of moral maturity and all the outside factors that can potentially influence the decisionmaking process, Lennart Dahlgreen would lean towards one of the options. I think in this situation, the worst possible outcome for IKEA would be to cancel the opening of the store entirely. Not only because it can put many stakeholders in danger but also because the enormous losses that would hit strongly affect the company's economic stability. Dealing with such a significant problem within a different country and culture is crucial to understanding cultural relativism and how it explains different ethical and moral norms in different cultures. For example, something that is an absolute taboo for Swedish Culture might be totally appropriate for Russian. Understanding this concept can aid in the decision-making process. Taking into consideration all the pros and cons and adapting to the Russian culture and their acceptable moral norms, the general manager may look at the situation and decide to pay whatever is required if this decision would result in the least losses for IKEA. Another alternative solution that I see that could be acceptable for IKEA is negotiating a potential community contribution after the opening of their store. Although this solution also presents giving into the Russians' conditions, this course of action might be more ethical for the Swedish company. Last but not least, IKEA could potentially choose to postpone the opening of its store and either wait for the change in the economic and political situation within the country or try to find a different utility company. Although postponing seems like a fair option, being a Russian and knowing how things are done back in my home country, I would really doubt that taking this route would lead IKEA to a successful outcome....