January 14, 2023

If you were in Dahlgren’s place, would you pay the bribe or not? What would be your specific action? How would your actions impact the short-term or long-term future of IKEA in Ru

Biology

If you were in Dahlgren's place, would you pay the bribe or not?
What would be your specific action? How would your actions impact the short-term or long-term future of IKEA in Russia and IKEA in general?
What are the underlying reasons for your choice and proposed actions?

IKEA1.pdf

Corruption in Russia: IKEA’s expansion to the East (A)

introduction

In 2000, IKEA, the world’s largest furniture retailer entered the Russian market. The Swedish

retailer wanted to be part of the gold rush fueled by the emerging middle class in Russia after

the fall of the Iron Curtain. The company was preparing to open its first flagship store on the

outskirts of Moscow, only the first of several planned projects. After substantial investments in

infrastructure and logistics, IKEA focused on marketing, but quickly faced a sudden

complication. Its major ad campaign in the Moscow Metro with the slogan “[e]very 10th

European was made in one of our beds” was labeled “bad taste”. IKEA had to stop the

campaign because it “couldn’t prove” the claim.1 Soon Lennart Dahlgren, the first general

manager of IKEA in Russia must have realized that the unsuccessful ad campaign was going to

be the least of his problems: A few weeks before the planned opening, the local utility company

decided not to provide their services for the store if IKEA did not pay a special service fee.2

What should IKEA and Lennart Dahlgren do? Was there any alternative to playing the game the

Russian way, and paying?

This case study was prepared by Urs Müller of ESMT European School of Management and

Technology. Sole responsibility for the content rests with the author(s). It is intended to be used

as the basis for class discussion rather than to illustrate either effective or ineffective handling

Technology, Berlin, Germany, www.esmt.org. ESMT cases are distributed through Harvard

Business Publishing, http://hbsp.harvard.edu, The Case Centre, http://www.thecasecentre.org,

and Ivey Publishing, https://iveycases.com. Please contact them to request permission to

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

ESMT.

From a small company to a global player

IKEA was founded in 1943 as a general mail-order company in a small village in Southern

Sweden. By then end of 2000, the privately owned IKEA Group was operating 151 stores in 29

countries with a turnover of about €9.5 billion (see Exhibit 1 and 2).3 IKEA continued to carry

out its mission of providing quality furniture with an innovative design at an affordable price to

average income consumers, in particular to families. IKEA had described its vision and business

plan as such: At IKEA our vision is to create a better everyday life for the many people. Our

business idea supports this vision by offering a wide range of well-designed, functional home

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furnishing products at prices so low that as many people as possible will be able to afford

them.4 As early as 1955, IKEA established its innovative business model of self-assembly by the

customer and flat packaging for easier transport. IKEA founder and owner Ingvar Kamprad

described this as an optimal method “to avoid transporting and storing air.”5 IKEA opened its

first flagship store just outside of Stockholm in 1965. Opening a store close to Stockholm, IKEA

proved that the company’s new idea of producing and selling low-cost furniture could succeed

in a metropolitan market. With the innovative concept came the new idea of self-service in an

industry that had traditionally been dominated by large numbers of salespeople.6 In the mid-

1960s, IKEA began its international expansion, first to its Scandinavian neighbor Norway and

then moving into Denmark. In the next two following decades IKEA opened stores in much of

Western Europe, expanding into Germany in 1974 and France in 1981. Having opened stores in

Australia in 1975 and Canada in 1976, IKEA took on the US market almost ten years later,

opening its first store in Philadelphia, Pennsylvania in 1985.7 During its rapid expansion, IKEA

targeted young people between the ages of 20 and 35. Demonstrating its family-friendliness

and marketing savviness, IKEA launched the Family Card in 1984, a customer card giving

discounts and special deals to cardholders, including a free cup of coffee anytime one came into

the store.8 IKEA served the coffee in its own in-house restaurant, the first of which was opened

in Sweden in 1960.9 And of course, IKEA became famous for running small playgrounds and

offering child care while parents strolled through the exhibition halls. IKEA’s founder Ingvar

Kamprad stepped down as CEO in 1986, but as owner and honorary chairman, he maintained

significant influence on the company’s strategy and culture. The company culture and strategy

was often described as highly cost-cautious, sometimes even as stingy. 10 IKEA always sought

out the lowest possible production cost to provide the most competitive price.11 Accordingly,

the company’s internationalization was not only driven by the desire to sell more products to a

broader customer base but also the search for low-cost production opportunities and

capacities. IKEA turned into an international business early on.

Behind and after the fall of the Iron Curtain

Long before 1989, IKEA recognized that buying supplies from countries behind the Iron Curtain

would give them a competitive cost advantage, the Swedish retailer was already holding

contracts with factories in East Germany, Poland, and Yugoslavia. In the 1970s, supplies from

Eastern European contractors made up for around 20 percent to 25 percent of the company’s

total needs, even during the political turmoil and changes in 1989, around 15 percent of the

supply came from Eastern Europe.12 After the dissolution of the Soviet Union, IKEA quickly

seized the opportunity to expand its concept into Eastern Europe, first opening a store in

Budapest, Hungary, in 1990, and then moving into the Czech Republic and Poland the following

year.13 IKEA’s immediate success in these markets demonstrated that Eastern European

average income consumers really had a demand for stylish and budget-friendly furniture.

Between 1990 and 2000, IKEA opened a total of five stores in Poland, two stores in Hungary

and Czech Republic respectively, and one store in Slovakia. A move further eastwards to Russia

seemed like a logical next step. In 2000, IKEA planned to open its first store in Moscow. By

entering Russia, IKEA wanted to tap into a huge and potentially highly attractive market of

around 146 million consumers.14 Between its foundation in 1943 and 2000 IKEA had already

entered (and conquered) most of the established, developed economies and had even started

to move into emerging markets such as Malaysia (1996) and China (1998). Additional growth

was seemingly only possible by capturing market share in additional emerging markets – and

given its size Russia appeared to be an obvious choice, especially since IKEA had already

sourced raw-material and finished products from Russia before. In 2000 Russia was still

perceived as the Wild Wild East. In the decade after the fall of the wall, the country had been

going through political and economic turmoil including a slight decrease in its overall

population (from 148.3 to 146.6 million inhabitants from 1990 to 2000) and periods of

extremely high inflation and negative GDP growth.15 Only in the last few years before 2000 the

situation had gotten more stable even though inflation was still at 20.1%.16 But the economic

indicators seemed to point into the right direction and the country was still far behind the

European average consumption for furniture, with the expenditure rate estimated at €7 per

person in 2000. Compared to up to €300 spent annually per person in Germany, there was

certainly the prospect of a large and growing market, especially if a company could successfully

reach out to the emerging middle class.17 A Russian emerging middle class was eager to

improve its standard of living, including making changes to the interior design of its homes.

Little improvements had been done to apartments since Soviet times, with old-fashioned

cupboards and tables often being mixed with homemade essentials. Sovietmade furniture was

large and heavy and often filled almost all of the little space in small Russian apartments.18

According to the New York Times, Russian households seemed to be “a goldmine of need” for

durable goods.19 Russia, indeed, seemed to be a must for international retail chains in general.

Problems before opening the mall in Khimki

Soon after the decision to enter Russia, IKEA learned that doing business in this country

required some adjustment. The company had some initial successes, for instance in resolving

the issue of the calculation of import duties on furniture.20 However, IKEA soon struggled to

get hold of a prime location at the necessary low cost to fit into the business model. After an

unsuccessful search within Moscow, IKEA decided to open the first store three miles outside of

the city in a place called Khimki.21 Scouting the site, development, and construction took two

and a half years, but new issues came to light. After IKEA’s disastrous ad campaign, the city of

Moscow blocked the construction of an overpass that was supposed to ease the traffic to the

new store. The region’s officials were reported to order IKEA to build the overpass, but after

already investing $4.5 million, and with only two pillars left to build before the structure was

complete, the city of Moscow stopped construction. The city had control over a street that also

had to be passed, as the day of the opening came closer and closer, the traffic issue remained

unresolved. Finally, a few weeks before the grand opening of the first IKEA in Russia in 2000,

the local utility company reportedly approached the company’s management and gave an

ultimatum: Lennart Dahlgren, general manager of IKEA in Russia, could either pay a special

service fee or proceed without electricity.22 Already under pressure from the previous

challenges associated with the grand opening, Dahlgren had to act fast. Could IKEA afford to

postpone or even completely cancel the opening in Khimki? Or should he just pay whatever was

required?

Corruption in Russia: IKEA’s expansion to the East (B)

Introduction

In line with IKEA’s image as innovative company, the organization came up with a creative

solution vis-à-vis the local utility company’s demand for a special service fee. Instead of paying

a bribe the global furniture retailer simply bypassed the utility company by renting diesel

generators to power the outlet.1 But IKEA will soon have learned that corruption in Russia was

systemic and could not be easily defeated through innovation or creativity alone.

IKEA’s successful grand opening in Khimki

The opening of IKEA’s first store in Russia was an enormous success. When the diesel

generators started operating in the morning to provide the necessary electricity for the lights,

computers, and cash registers, customers were already lining up outside to get in. About 37,000

people crowded the 31,000-square-meter store on the first day. But due to the unresolved

issues with the city of Moscow, the planned overpass to the store was still missing its last two

pillars. Consequently, the line of cars that were trying to exit the highway to IKEA was close to

five km long by noon. And even though 70.

This case study was prepared by Urs Müller of ESMT European School of Management and

Technology. Sole responsibility for the content rests with the author(s). It is intended to be used

as the basis for class discussion rather than to illustrate either effective or ineffective handling

Technology, Berlin, Germany, www.esmt.org. ESMT cases are distributed through Harvard

Business Publishing, http://hbsp.harvard.edu, The Case Centre, http://www.thecasecentre.org,

http://hbsp.harvard.edu/

http://www.thecasecentre.org/

and Ivey Publishing, https://iveycases.com. Please contact them to request permission to

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

ESMT. percent of the 265,000 people entering the outlet during the first weeks were only there

to take a gander, the remaining 30 percent of visitors (i.e. almost 80,000 people, which is more

than 6,500 per day) had already started adapting to the IKEA way of living. The company’s

assessment of the market proved to be correct: Most Russians were in need to upgrade the

interior of their apartments. Only three percent of all purchases were paid by credit card, and

the large number of middle-class cars in the parking lot demonstrated that it was not just the

upper class that could afford to buy IKEA.2 Hopes and plans for more IKEA stores on the base of

a huge potential market demand across the country were high. And things even looked

brighter: After realizing that IKEA was not going to play the corruption game, the utility

company caved in and started providing the necessary electricity. Nevertheless significant

challenges remained during the opening of the next spate of stores. During subsequent new

openings in Russia over the following years, IKEA reportedly faced similar bribing attempts from

utility companies. Then the retailer followed the established pattern of renting diesel

generators to provide enough electricity for the large shopping malls in which the IKEA stores

were located. And IKEA executives took pride in having found a creative solution to the

demands for bribes. In a newspaper interview, Lennart Dahlgren commented: “We Swedes are

poorly educated in corruption. Whoever complains about corruption should know one thing:

Without anybody giving, there is nobody to receive.”3

Plans for expansion in Russia

As of the end of 2008, IKEA had opened eleven giant shopping malls, called MEGA malls, in

Russia. MEGA malls housed not only IKEA stores, but also other retailers, restaurants, and

entertainment facilities like skating rings.4 Three IKEA outlets were located in Moscow, where

the first two stores were opened in 2000 and 2001. St. Petersburg followed in 2003 and

received another store in 2006. In 2006, IKEA opened a total of three stores, the most in any

single year, and then slowed down its expansion, opening just two stores in 2007 and one in

2008.5 IKEA had planned to expand more quickly in Russia; the declining rate of openings

reflected an increasing level of problems, most of which had to do with administration and an

opaque Russian bureaucracy. Like the issue with the half-finished overpass, IKEA repeatedly

encountered more bureaucratic challenges. A classic example was the planned construction of

a MEGA mall in Samara. The construction began in 2007, but local officials repeatedly

prohibited IKEA from opening the Samara store due to the violation of “numerous safety

regulations and other rules”.6 Apparent problems like this continued to put a damper on IKEA’s

rapid expansion plans. Despite the slowdown in opening new stores, Russia already accounted

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for almost five percent of IKEA’s global business at the end of 2008. The company initially grew

at a rate of 20 percent per year in Russia and enjoyed an increasing popularity with the general

public, making it necessary for emergency vehicles to be on the scene of grand openings of new

stores.7 IKEA clearly wanted to be in Russia, and to grow even faster than their current rate.

Russian customers, in turn, wanted IKEA products. But external circumstances seemed to

hinder the company to grow.

A growing concern within IKEA

After several years of business in Russia, the focus moved from external to internal issues.

Refusing to give in to the seemingly systemic corruption in Russia, IKEA continued to rent diesel

generators whenever a local utility company tried to solicit bribes to provide electricity. This

tried-and-true method worked for years and seemed to be the ideal solution for getting around

the bribes. The company once again rented diesel generators when confronted with the

request to pay bribes from utility companies before the opening of two malls with IKEA stores

at the end of 2006. The stores opened on schedule and just in time for the year-end shopping.

But still at the end of 2008, generators were still supplying electricity for both malls, because

the companies asking for special fees proved to be stubborn.8 At the beginning, IKEA did not

notice the skyrocketing rental costs for the diesel generators but over time, the first signs of an

underlying issue surfaced. In 2008, when IKEA became aware of the high costs, the board hired

a private investigation company based in London. After examining the Russian operation, the

investigators identified a former employee who testified that a Russian IKEA executive in charge

of renting and managing the generators was responsible. Apparently, the manager was taking

substantial kickbacks in the form of weekly cash payments from the diesel generator rental

company. Allegedly, the generator company charged IKEA a much higher than normal rental

price. This suspected fraud might have been occurring for more than two years, and IKEA

estimated the damage to be around €135 million. When confronted with the allegations, the

IKEA executive denied any wrongdoing, and the owner of the generator rental company argued

that the high costs were due to the fact that the generator had been rented as standby power

source, but had supplied the two MEGA malls continuously for years.9 While the diesel

generators were still buzzing after two years in operation, and while the customers were still

rushing into the 11 Russian stores, IKEA had to turn its attention inside its own organization.

After findings of alleged corruption within the organization, IKEA faced a new issue: internal

corruption. Which next steps should the company have taken in the short and long run to

address those problems?

Corruption in Russia: IKEA’s expansion to the East (C)

Introduction IKEA decided to follow through its no-corruption policy, after the discovery of

signs of corruption within the organization. IKEA terminated the contracts with the diesel

generator company and with the purchasing manager, even though both insisted on their

innocence. The former IKEA employee accused of accepting kickbacks denied any wrongdoing,

and claimed instead that IKEA’s country managers were trying to cover up their own expensive

incompetence by blaming Russian subordinates. He also argued that the Russian police

investigated and cleared all IKEA’s allegations1 .

The blindfolded Justitia in Russia

Once so proud of their innovative solution to bribery attempts in Russia, IKEA executives were

forced to recognize that the systemic problem had not been solved. Christer Thordson, an IKEA

board member and global director of legal affairs, publicly admitted that IKEA was slow in

recognizing the soaring rental costs for generators. He blamed IKEA’s “pell-mell rush to expand