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Solution Manual for International Management: Managing Across Borders and Cultures, Text and Cases, 10th Edition

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    BENV/039 IBS Center for Management Research Teaching Note: IKEA’s Challenges in Russia This teaching note was written by Hadiya Faheem, under the direction of Debapratim Purkayastha, IBS Hyderabad.

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    1 BENV/039 IKEA’s Challenges in Russia TEACHING NOTE ABSTRACT This case is about Sweden-based furniture retail giant IKEA Group’s (IKEA) entry into and expansion in Russia. When IKEA entered this key emerging market as part of its international expansion strategy, it had to face several roadblocks when setting up stores, inaugurating them, and even while advertising them. According to the company, its strict adherence to its principle of non-tolerance for corruption did not go down well with Russian authorities who were largely believed to be corrupt. Since IKEA refused to pay bribes, it had to deal with the bureaucratic difficulties of getting permits for setting up its stores. While the bureaucratic system added to its troubles in Russia, there were also instances of support from authorities, whether local or federal, and of difficulties being smoothed out, which enabled the company to get things done faster than in any other country in the world. Over the years, the company expanded and experienced success with its stores in Russia. Some of them, in fact, became the top grossing stores in the world for IKEA. It was also in Russia that the company introduced its successful new business model, wherein its furniture stores were operated not as standalone stores but as part of large shopping and entertainment complexes. While IKEA tasted success in Russia, it was mired in several controversies: its executives were accused of taking kickbacks and engaging in corruption, while its ethical and environmentally sensitive image was also questioned as it was criticized for utilizing ill-defined Russian logging rules to cut down old growth forests. Despite several hurdles, IKEA planned to invest US$2.1 billion in the country since it sensed tremendous potential in the Russian market due to an increase in the disposable incomes of middle class consumers. However, the business environment in the country was fraught with risk for the company. POTENTIAL AUDIENCE This case is intended for use in the MBA/MS level programs as part of courses on Business Environment/ International Management/ Business Ethics course. TEACHING OBJECTIVES This case is designed to enable students to: • Understand the issues and challenges in entering and expanding operations in an emerging market • Analyze IKEA’s entry into Russia and how it tackled bureaucratic challenges while setting up its business in the country • Understand the trade-offs faced by companies like IKEA while operating in emerging markets like Russia • Develop strategies that could help IKEA to grow its business in an emerging market like Russia.

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    IKEA’s Challenges in Russia 2 IMMEDIATE ISSUES • Drive growth; Invest and expand in the Russian market • Comply with regulations in international markets • Maintain its ethical stance in emerging markets where taking bribes is the norm. SUGGESTED TEACHING APPROACH The moderator can start off this discussion by explaining what an emerging market is and asking students to name 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. Later, the students can be asked to discuss the issues facing multinationals in the emerging markets. Following that, the discussion can veer toward IKEA’s foray into Russia and the bureaucratic challenges it faced in the country while setting up its stores. He/she can then discuss how IKEA tried to bypass these challenges and how it made a mark in the Russian market. The groups can discuss the questions given to take the discussion further. The analysis of the discussion questions can be presented by one of the groups, and an interactive session can follow. The moderator can lead the discussions and then conclude with a summary of the highlights of the case. PROPOSED SESSION PLAN • Introduction of the case – 10 min • Class discussion for question 1 – 20 min • Class discussion for question 2 – 20 min • Class discussion for question 2 – 20 min • Summary – 10 min Total expected session time: 80 min SUGGESTED QUESTIONS FOR DISCUSSION 1. Critically analyze IKEA’s foray into Russia. In what ways was it successful? 2. Discuss the challenges faced by IKEA and how the company tackled these challenges and made a mark in the Russian market. 3. Since IKEA continued to face several bureaucratic challenges in Russia, the retailer planned to halt its expansion in the country. What should IKEA’s business strategy be in the future? ANALYSIS 1. Critically analyze IKEA’s foray into Russia. In what ways was it successful? Ingvar Kamprad (Kamprad), founder of the IKEA Group (IKEA), had been keen to do business in Russia since the 1960s, when it was still the Soviet Union. IKEA felt that Russia was a highly suitable market for the company as it was part of the BRIC (Brazil, Russia, India, and China), consisting of nations with the highest growth rates. The high economic growth in turn fuelled the demand for consumer goods. However, the company was unable to enter the country for quite a few decades for several reasons. In fact, the unstable economic scenario in Russia prevented many Western retailers from investing in that country. IKEA was forced to postpone its Russian entry plans, first due to the collapse of the Soviet Union in 1991 and then

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    IKEA’s Challenges in Russia 3 because of the breakout of the Russian constitutional crisis in 1993. Moreover, the company faced a crisis even after its decision to set up business in Russia, namely, the ‘Russian Financial Crisis’ or the ‘Ruble Crisis’. This crisis of 1998 caused many foreign investors to encounter heavy losses. After facing several setbacks, in 1998, Lennart Dahlgren (Dahlgren), a prominent IKEA employee, was asked to oversee the setting up of IKEA’s operations in Russia. Dahlgren stated that he, like many others in the West, had harbored several negative opinions about Russia, including the thought that the country was teeming with poor people. He quickly abandoned this view and came to realize that there was a large retail opportunity waiting to be tapped. In the early 2000s, a market report from AT 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 also had comparatively developed infrastructure, which reduced the problems associated with product distribution and supply chain management. In March 2000, IKEA’s first store in Russia was opened at Khimki, a city in the Moscow region. The inaugural day drew a large crowd of 40,000 shoppers and two weeks later the stocks in the store had been emptied by avid customers. People waited for an hour to get into the store and all the roads leading to it were backed up with traffic for miles around. Analysts believed that by the time IKEA opened its first store there was a lot of pent up demand in Russia, especially from the middle class. It was a time of transition in the country, with the rising middle class looking to abandon the old world Soviet-era furniture in favor of the modern Scandinavian furniture showcased by IKEA. The factors that contributed to the success of IKEA in Russia included the following: • Its offering of simple, sturdy furniture at affordable rates in Russia encouraged consumers to buy furniture as buying furniture in the country otherwise required them to save several months of their salary. • The internal layout at IKEA worked in favor for the retailer as customers could ‘walk around’ unimpeded by shop assistants, in addition to handling the merchandise. They were even encouraged to try out the mattresses and sofas for themselves – something the consumers had never seen before in Russia. • Its logistics expertise, business model (Mega malls), vertical integration, and ability to leverage economies of scale were other reasons. • IKEA also emphasized on providing efficient customer service. Through its stores, IKEA offered several amenities such as a free shuttle service from select places, a playroom for children, and coffee to customers who came in early. In the first year of its operations, IKEA reported sales of more than US$100 million in Russia, three times more than the company had expected. IKEA’s Khimki store became one of its top 10 grossing stores in the whole world. The rousing response to the store’s opening encouraged IKEA to formulate ambitious plans for expansion. The Russian consumers seem to like IKEA products. At times, the company also made unusual gains in the market. For instance, in 2014, IKEA’s high sales in Russia were attributed to the economic slowdown in the country as consumers swarmed IKEA stores and other Western retailers in anticipation that the prices would rise sharply. Faced with the prospect of losing savings and of possible future high price increases, they started purchasing durable products. 2. Discuss the challenges faced by IKEA and how the company tackled these challenges and made a mark in the Russian market. IKEA, with its roots in Sweden, which is considered to be one of the least corrupt nations in the world, struggled hard to traverse the corruption-laden Russian economy. Russia had corrupt systems at both the regional and national levels, with the country being placed in the 135 th position in Transparency International’s 2017 Corruption Perceptions Index. Bribery was

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    IKEA’s Challenges in Russia 4 like another taxation system in the country, which benefited the political elite, including the police and the Federal Security Service (FSB), the primary domestic security agency of the Russian Federation. Some of the challenges faced by IKEA in Russia were: • IKEA realized that Russia had a highly corrupt bureaucracy, which demanded bribes for getting anything done. However, in accordance with IKEA’s policy of zero tolerance for corruption, the company decided that it would not give in to the corrupt system. Time and again it refused to bow to pressure from officials demanding bribes. In this context, it was ready to put up with delays in store openings, put a stop to its expansion plans, and even incur other additional costs. • The business environment in Russia dictated that IKEA constantly faced problems from government officials in the fire, health and safety, electricity, tax, customs, and other related departments with regard to its stores. In one instance, IKEA was asked to pay bribes for getting an electricity connection. It got past this problem by deciding to hire large diesel generators to power its stores. This became the standard practice for the company for most of its stores in Russia. • When IKEA opened its first store in Moscow, the city authorities did not give it permission to advertise the store in the Moscow metro. IKEA was required to secure 300 permits to construct a mall in Russia, which left plenty of room for the officials to demand bribes. In 2009, IKEA announced that it would not expand further in the country until it got permission to set up two stores in Ufa and Samara. Officials refused to give approval in Samara stating that the walls of the store were not in a condition to withstand hurricane-force winds, notwithstanding the fact that such weather conditions had never been experienced in that region. According to Kirill Kabanov, Head of the NGO National Anti-Corruption Committee in Moscow, the reason for the non-opening of the stores was IKEA’s refusal to give bribes to safety inspectors. In addition to these challenges, the company’s employees became embroiled in several controversies. The company found that some of the IKEA officials were bowing down to the all-encompassing corruption in Russia, which weakened the company’s stance against corruption. It discovered that the key executives responsible for renting the diesel generators had hyped up the rental charges in collaboration with the generator rental company, causing the company a loss of several million dollars. Though they had not committed any personal indiscretion, their decision their decision to overlook a corrupt transaction between a subcontractor of IKEA and an electricity company official to resolve a power supply issue at IKEA’s St. Petersburg mall, did dent its reputation for non-tolerance of corruption. While the company set high ethical standards, it appeared as if many of its officials were ready to bend the rules to get things done. IKEA’s image took a further beating when reports on its alleged unethical logging practices surfaced. In early 2012, a Swedish public service television came out with an investigative report that claimed that IKEA’s subsidiary Swedwood was cutting down several hundred acres of old growth forests every year. This revelation caused several global conservation groups to condemn IKEA’s logging practices. IKEA refuted the allegations and claimed that it was logging wood according to local guidelines. It is important for companies like IKEA, that are operating in international markets, to not only adhere to the laws and regulations of the host country, but also to adhere to the same set of ethics they propound in developed markets. IKEA should show greater responsibility in sourcing wood without taking advantage of defunct environmental guidelines in countries such as Russia and China, in which it mostly logs wood.

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    IKEA’s Challenges in Russia 5 Overcoming challenges In its early days, IKEA preferred to keep a low profile, avoiding any direct confrontation over the corruption issues dogging its every move. As in the case, Alexei Slesar said, “ In the early days when they entered the market they took the expression ‘do as the Romans do’ too literally”. Its officials gave 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 had taken three times longer than expected. 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. However, as the situation deteriorated, IKEA started taking a stronger stance against corruption and was quite vocal in its criticism of the corrupt system in the country. This included going to the press, inaugurating a store in direct defiance of the authority, and finally threatening to put a freeze on its business expansion in Russia more than once. It also took strict action against its own officials who had succumbed to corruption, which communicated to all its stakeholders that IKEA had zero tolerance for corruption. It is difficult in ensure adherence to the corporate culture in diverse geographical markets, but if a company has clear policies that are communicated well, it can be achieved. For this to succeed, it is also important to “walk the talk”, as actions speak louder than words. IKEA being a private company and its unique ownership structure that stood for independence, long-term approach, and continuity also helped the retailer take a strong ethical stance against corruption in Russia. According to Kamprad, the complex structure “would survive wars, political upheaval, or just plain old executive incompetence.” (See Case Exhibit III). 3. Since IKEA continued to face several bureaucratic challenges in Russia, the retailer planned to halt its expansion in the country. What should IKEA’s business strategy be in the future? Despite facing several challenges in Russia, in 2015, IKEA reported that its global sales for the year ended August 2014 stood at €29 billion. According to IKEA, the growth was fueled by China and Russia as they were the company’s fastest growing markets. IKEA had 8 of its 10 largest stores in the world in China whereas in Russia it had a chain of 14 complexes, which accounted for 7% of the company’s turnover for the year ended August 2014. While the retailer had ambitious plans to expand in Russia, another problem surfaced at IKEA in December 2016 when the Russian court ordered the retailer to pay US$7.8 million to Russian businessman and former contractor of IKEA, Konstantin Ponomaryov, in a decade- long legal dispute over supply of power to stores in the city of St. Petersburg. Before this ruling was given in favor of Ponomaryov, IKEA in August 2016 had announced plans to invest US$2.1 billion in Russia. However, after the court’s order, IKEA warned that it would delay the investment as it wanted to work in a “fair and transparent business climate” and accused the authorities of attempting “to use illegal methods to extract further money from the company.” Future Strategy While IKEA was likely to face more problems in future as the corrupt system tried to make the company ‘like everybody else’, the fact that Russia was part of the BRIC (Bangladesh, Russia, India, and China) could not be ignored since it was seen as the engine of growth for Europe, being far ahead of its closest Central and Eastern European competitors, Turkey and Poland. Russia rated highly in terms of drawing foreign direct investment (FDI), with foreign investors

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    IKEA’s Challenges in Russia 6 being attracted to its rich natural resources, growing domestic market, and rising middle class with large disposable incomes. Going forward, IKEA planned to boost its local online business. By the end of FY August 2019, the retailer planned to open 100 pick-up points in Russia. The company also planned to enter other international markets. In August 2018, it entered the Indian market by launching its first store in Hyderabad, capital city of the southern Indian state, Telangana. The company planned to rent out its furniture offerings in Japan for customers who were not ready to purchase those items. In November 2018, IKEA announced plans to open its first and largest store in the Philippines by 2020 with an investment of US$133 million. The retailer aimed to set up its first store in Greater Manila with 5 million households to cash in on an economic boom and rising incomes. While there are other international opportunities, IKEA is expected to increase its investments in Russia in the future despite the risks in the business environment.

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    IKEA’s Challenges in Russia 7 Suggested Readings: 1. Graham H.J. Roberts, “Consumer Culture, Branding and Identity in the New Russia: From Five-year Plan to 4x4,” Routledge , 2016. 2. Christiane Prange, “Market Entry in China: Case Studies on Strategy, Marketing, and Branding,” Springer International , 2016. 3. William B Gamble, “Investing in Emerging Markets: The Rules of the Game,” Springer Science +Business Media LLC , 2011. 4. Michael Czinkota, Ilkka Ronkainen, “International Marketing,” Cengage Learning , 2007. 5. Brad Kleindi, “International Marketing,” Cengage Learning , 2006. References: 1. Cliff Venzon, “World’s Largest Ikea to open in the Philippines,” https://asia.nikkei. com, November 20, 2018. 2. “IKEA Looking for Partnerships with Russian Companies,” www.pymnts.com, October 11, 2018. 3. “Corruption Perceptions Index 2017,” www.transparency.org, February 21, 2018. 4. “Ingka Holding B.V and its Controlled Entities Yearly Summary FY17,” www.ikea. com, 2017. 5. “ÏKEA Centres Russia – MEGA,” https://mega.ru, 2017. 6. “IKEA launches Online Sales and builds Giant Distribution Center in Russia,” www.ewdn.com, May 18, 2017. 7. Sergei Porter, “IKEA to Slash Russian Prices amid Economic Crisis,” https://themosco wtimes.co, January 26, 2017. 8. Natalia Ischenko, “IKEA Reduces Prices in Russia,” www.vedomosti.ru, January 25, 2017. 9. Anna Ringstorm, “Record Sales for IKEA Group as Online Investment Pays off,” www.reuters.com, September 13, 2016. 10. “IKEA May Delay Investment In Russia after Court Ruling,” www.rferl.org, August 31, 2016 11. “Ikea Threatens to cut Investments in Russia after Losing Court Battle,” https://retail. economictimes.indiatimes.com, August 31, 2016. 12. Ivana Kottasova, “IKEA is making Loads of Money in Russia. Wait, what?,” https://money.cnn.com, September 10, 2015. 13. Jennifer Rankin, “Ikea Marches on as Sales Rise to €32bn,” www.theguardian.com, September 10, 2015. 14. Hiroko Tabuchi, “As Profit Slows, Ikea Notes Need to Move Online,” www.nytimes.com, January 28, 2015. 15. Jennifer Rankin, “Ikea Sales Driven up by Growing Chinese Middle Class,” www.theguardian.com, September 9, 2014. 16. Adam Sherwin, “Ikea Faces Boycott after it Removes Lesbian Couple from Russian Magazine to Comply with Putin Laws,” www.independent.co.uk, November 21, 2013.

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    IKEA’s Challenges in Russia 8 17. Annie Kelly, “Ikea to go ‘Forest Positive’– But Serious Challenges Lie Ahead,” www.guardian.co.uk, December 14, 2012. 18. Augusto Come, “Corruption, Corruption, Corruption,” www.opendemocracy.net, November 29, 2012. 19. “IKEA Cooperates with Investigation in Cases against Executives,” www.rapsinews.com, July 18, 2012. 20. “IKEA’s Freeze Curtails Medvedev’s Goal,” www.themoscowtimes.com, March 15, 2011. 21. Svetlana Smetanina, “Addicted to Russia,” http://rbth.ru, February 23, 2011. 22. “Ikea Owner ‘Distressed’ over Russian Expansion,” www.thelocal.se, December 11, 2010. 23. Lennart Dahlgren, “The Basics of Doing Business in Russia,” http://blogs.hbr.org, October 25, 2010. 24. Maria Antonova, “Ex-IKEA Boss Bares Russia’s ‘Chaotic Reality’”, www.sptimes.ru, March 26, 2010. 25. Andrew E Kramer, “Ikea Fires 2 Officials in Russia Bribe Case,” www.nytimes.com, February 15, 2010. 26. “Why IKEA is Fed up with Russia,” www.businessweek.com, July 2, 2009. 27. Jason Bush, “IKEA Turns Sour on Russia,” http://www.spiegel.de , June 25, 2009. 28. Curt Hazlett, “Russia is an Alluring but sometimes Scary Place for Western Retailers,” www.icsc.org, May 2005. 29. Andrew Osborn, “In Fear of His Life: Ikea’s Man in Moscow Tells of Threats and Bribes,” www.independent.co.uk, December 15, 2004. 30. James Schofield, “Ikea Wows the Russians,” http://news.bbc.co.uk, February 22, 2002. 31. Colin McMahon, “Russians Flock to Ikea as Store Battles Moscow,” http://articles.chicagotribune.com, May 16, 2000. 32. “Milestones in our History,” http://inter.ikea.com.

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    BECG/159 IBS Center for Management Research Teaching Note: Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way? This teaching note was written by Syeda Maseeha Qumer and Debapratim Purkayastha, IBS Hyderabad. This case won the First Prize in the 2018 oikos Case Writing Competition (Corporate Sustainability track), organized by oikos International, Switzerland.  2018, IBS Center for Management Research. To order copies, call +91 9640901313 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally, Sankarapally Road, Hyderabad 501 203, Telangana, India or email: casehelpdesk@ibsindia.org www.icmrindia.org

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    1 BECG/159 Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way? TEACHING NOTE ABSTRACT The case discusses the global food processing giant Nestlé’s problems relating to modern slavery in its cocoa supply chain. The company faced allegations of using child labor in its cocoa supply chain in Ivory Coast and was also accused of failing to disclose this to customers at the point of sale. Some critics argued that Nestlé was not doing enough and was not being transparent enough in its efforts to eliminate child labor within its global cocoa supply chain. However, in a rare disclosure, Nestlé reported in 2015 that it had uncovered forced labor in its seafood supply chain in Thailand. Magdi Batato (Batato) Executive Vice President and Head of Operations at Nestlé said that the company was committed to preventing and eliminating child labor in its supply chain. Analysts wondered whether Nestlé’s admission of slavery was honest or was just an attempt to fend off child labor allegations in other parts of its business and bring consumers onside. The case explores how modern slavery is a complex supply chain issue for Nestlé and why it needs to be addressed. Though Nestlé had implemented an action plan to combat slavery within its supply chain, the obnoxious practice still permeated West African cocoa farms, and was in fact on the rise. Nestlé had tried to maintain ethical and environmental standards within its supply chain but how well these initiatives matched up to the challenges of modern slavery was still questioned by its critics. According to them child labor in Nestlé‘s cocoa supply chain was a complex issue and gathering reliable evidence about what was happening on the ground would not only be vital, but also challenging for Batato. Given its global scale and influence, can Nestlé play a crucial role in eliminating slavery from the global cocoa supply chain? Can Batato lead the company’s ongoing commitment to tackle slavery? Can its commitment go far enough to enact change and put an end to modern slavery in the global cocoa industry? How? TEACHING OBJECTIVES AND TARGET AUDIENCE This case is designed to enable students to: • Understand the concept of modern slavery, its various forms, and the need for companies to address this issue • Understand the relationship between modern slavery, CSR and Corporate Sustainability • Identify the barriers to eliminating modern slavery • Evaluate the actions taken by Nestlé’s to combat slavery in its supply chains and identify the challenges faced by the company in dealing with the issue • Explore ways through which Nestlé can eliminate modern slavery from its cocoa supply chain This case is meant for MBA students as a part of their Corporate Sustainability/ Corporate Social Responsibility/ Business Ethics curriculum. It can also be used in the Operations Management/ Supply Chain Management curriculum.

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    Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way? 2 LINKAGES TO THEORY • Modern Slavery; Theoretical framework of modern slavery; Modern slavery and Corporate Social Responsibility; Human rights as a Management issue; Human rights and sustainability; Businesses as human rights advocates; • Carroll’s Pyramid of CSR; Managing change • Ethical supply chain; Supply chain mapping; Supply chain audit TEACHING THE CASE Ideally, the case may be distributed 2-5 days before the class. In the classroom, the case instructor can initiate the discussion by giving a brief introduction about the case and how companies are facing the heat related to modern slavery (5 minutes) . This can be followed up with a discussion regarding Nestlé battling allegations of abetting child slavery in cocoa plantations in Ivory Coast while at the same time admitting to forced labor in its seafood supply chains in Thailand. The ethical dilemma facing Nestlé over the existence of slavery in its cocoa supply chains and the steps taken to combat it can also be touched upon. The instructor can take the discussion further with the help of the following questions. 1. What is modern slavery? Where does it fit in with a company’s CSR strategy? (10 minutes) 2. What are the conditions enabling slavery in cocoa supply chains in Ivory Coast? (10 minutes) 3. Why is tackling the issue of modern slavery so important for a company like Nestlé? (10 minutes) 4. Investigate the existence of modern slavery in Nestlé’s supply chains and its efforts to address the issue. (15 minutes) 5. Discuss the key challenges Nestlé faced while addressing modern slavery in its cocoa supply chain. (10 minutes) 6. What more should Nestlé do to mitigate the risk of modern slavery in its cocoa supply chain? (15 minutes) The learning from the case may be summarized at the end of the class (5 minutes) . ANALYSIS 1. What is modern slavery? Where does it fit in with a company’s CSR strategy? The first modern definition of slavery appeared in the 1926 League of Nations Slavery Convention, which defined slavery as “the status or condition of a person over whom any or all of the powers attaching to the right of ownership are exercised” (Allain, 2009). Modern slavery can take several forms including forced labor, debt-bondage, child labor, wage exploitation, human trafficking, forced marriage, involuntary domestic servitude, or any other practice wherein victims are coerced through physical or mental threat to engage in unreasonable work. Increasing globalization means that nearly every corporation is exposed to the risk of forced labor and human trafficking in its supply chain. Modern slavery affects virtually all industries and can occur at any stage in the supply chain. It exists because it is profitable. Companies benefit hugely from cost savings through use of modern slavery (Crane, 2013). Forced labor within corporate global supply chains is a particularly elusive form of modern slavery that has been addressed the least. The ILO predicts that out of the 20.9 million victims of modern slavery globally, 14.2 million are victims of forced labor (See case exhibit).

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    Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way? 3 The external factors that influence slavery can be broken down into conditions related to the industry context and to the broader institutional context (Scott, 2001). The institutional context captures socioeconomic, geographic, cultural, and regulatory factors. A theoretical framework proposed by Crane (2013) identifies the economic and institutional conditions that give rise to modern slavery (See TN Exhibit I). Modern Slavery, CSR and Corporate Sustainability CSR refers to ‘the integration of social, environmental, and economic concerns into business operations’. It is distinctive from, though related to, the business and human rights agenda. In response to increased concerns about the social environmental impact of their supply chain and to the growing importance of CSR, several companies have adopted codes of conduct that extend to their suppliers. In terms of CSR, modern slavery is one among a number of social risks to be taken into account by corporations when assessing what is in the best financial interests of shareholders. A business is expected to operate in an ethical manner and an obligation that it will do what is right, just, and fair and to avoid or minimize harm to all the stakeholders with whom it interacts. Business is expected to be a good corporate citizen, that is, to give back and to contribute financial, physical, and human resources to the communities of which it is a part. Application of popular CSR models like the Carroll’s pyramid (Carroll, 1991) show that it is important to tackle the issue of modern slavery for a company like Nestle. The Universal Model of CSR (2014) proposed by Nalband and Al Kelabi explains how and why CSR will become part of the business and sustainability; and its applicability universally (See TN Exhibit II) . Tackling modern slavery can be seen as an ethical responsibility wherein a company has a duty to protect the human rights of its workers. However, there are potent limitations of CSR on modern slavery. According to New (2015), the standard initiatives of anti-modern slavery CSR are themselves, in some sense, part of the enabling mechanisms for modern slavery to persist: • the right hand (the CSR activity, the policy statements) gives the appearance of working to reduce the problem; and • the left hand (the brutal exercise of commercial power, hard negotiation on prices and trading terms) generates the conditions in which forced labour emerges. The corporate sustainability (CS) approach that aims for the transformation of markets, consumer patterns, life styles, etc. can prove to be a better alternative to tackle the issue of modern slavery. CS is about “...meeting the needs of a firm’s direct and indirect stakeholders (such as shareholders, employees, clients, pressure groups, communities, etc.), without compromising its ability to meet the needs of future stakeholders as well“ (Dyllick & Hockerts, 2002). Lozano (2015) has identified various CS drivers (See TN Exhibit III) : • Internal: Shared values, resources and cost saving, company culture; sustainability reports; customer demands and expectations; moral and ethical obligations to contribute to CS; and champions. • External: National government; raising student awareness; access to resources; environmental crises; regulations and legislation; raising society awareness; and collaboration with external organisations.

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    Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way? 4 TN Exhibit I: A Theoretical Framework of Modern Slavery Source: Crane, A. (2013). Modern slavery as a management practice: Exploring the conditions and capabilities for human exploitation. Academy of Management Review, 38(1), 49-69. TN Exhibit II: The Universal Model of CSR Source: Nalband, N. A., & Kelabi, S. A. (2014). Redesigning Carroll’s CSR pyramid model. Journal of Advanced Management Science, 2(3).

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    Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way? 5 TN Exhibit III: Corporate Sustainability Driver Model Source: Lozano, R. (2015). A holistic perspective on corporate sustainability drivers. Corporate Social Responsibility and Environmental Management, 22(1), 32-44. Global companies have a moral and ethical obligation to combat slavery in their supply chains. Modern slavery is inconsistent with company values and a big threat to their reputation. If they fail to disclose to consumers the use of slavery in their supply chains, they are deceiving them into buying products they would not have otherwise purchased. For tackling the challenges posed by modern slavery, CS offer the potential to be more encompassing, both in terms of the company system (including operations, strategy, organisational systems, etc.), and in terms of stakeholders (internal and external, as well as social and environmental). 2. What are the conditions enabling slavery in cocoa supply chains in Ivory Coast? The condition can be analyzed using the theoritical framework of modern slavery (TN Exhibit I) . Industry context: • Labor intensity: Cocoa production is labor intensive and requires mostly unskilled labor. This contributes to the widespread use of child labor. • Value distribution: In the cocoa supply chain, margins are narrow and value is captured further downstream by larger and more powerful tier I suppliers. Tier II suppliers might then perceive the necessity for coerced labor to accrue lower costs and drive profitability. • Elasticity of demand: The global cocoa suppliers face high elasticity of demand coupled with low elasticity of supply.

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