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

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BENV/039IBS Center for Management ResearchTeaching Note:IKEA’s Challenges in RussiaThis teaching note was written byHadiya Faheem,under the direction ofDebapratim Purkayastha,IBS Hyderabad.

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1BENV/039IKEA’s Challenges in RussiaTEACHING NOTEABSTRACTThis case is about Sweden-based furniture retail giant IKEA Group’s (IKEA) entry into andexpansion in Russia. When IKEA entered this key emerging market as part of its internationalexpansion 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 ofnon-tolerance for corruption did not go down well with Russian authorities who were largelybelieved to be corrupt. Since IKEA refused to pay bribes, it had to deal with the bureaucraticdifficulties of getting permits for setting up its stores.While the bureaucratic system added to its troubles in Russia, there were also instances of supportfrom authorities, whether local or federal, and of difficulties being smoothed out, which enabledthe company to get things done faster than in any other country in the world. Over the years, thecompany 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 companyintroduced its successful new business model, wherein its furniture stores were operated not asstandalone stores but as part of large shopping and entertainment complexes.While IKEA tasted success in Russia, it was mired in several controversies: its executives wereaccused of taking kickbacks and engaging in corruption, while its ethical and environmentallysensitive image was also questioned as it was criticized for utilizing ill-defined Russian loggingrules to cut down old growth forests. Despite several hurdles, IKEA planned to invest US$2.1billion in the country since it sensed tremendous potential in the Russian market due to an increasein the disposable incomes of middle class consumers. However, the business environment in thecountry was fraught with risk for the company.POTENTIAL AUDIENCEThis case is intended for use in the MBA/MS level programs as part of courses on BusinessEnvironment/ International Management/ Business Ethics course.TEACHING OBJECTIVESThis case is designed to enable students to:•Understand the issues and challenges in entering and expanding operations in an emergingmarket•Analyze IKEA’s entry into Russia and how it tackled bureaucratic challenges while setting upits business in the country•Understand the trade-offs faced by companies like IKEA while operating in emerging marketslike Russia•Develop strategies that could help IKEA to grow its business in an emerging market likeRussia.

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IKEA’s Challenges in Russia2IMMEDIATE 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 APPROACHThe moderator can start off this discussion by explaining what an emerging market is and askingstudents to name markets that they think can be called emerging markets. Later, they can discussthe unique business conditions of these markets and how they can turn into an opportunity or athreat for a market entrant. Later, the students can be asked to discuss the issues facingmultinationals in the emerging markets.Following that, the discussion can veer toward IKEA’s foray into Russia and the bureaucraticchallenges it faced in the country while setting up its stores. He/she can then discuss how IKEAtried to bypass these challenges and how it made a mark in the Russian market. The groups candiscuss the questions given to take the discussion further. The analysis of the discussion questionscan be presented by one of the groups, and an interactive session can follow. The moderator canlead 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 minTotal expected session time: 80 minSUGGESTED QUESTIONS FOR DISCUSSION1.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 andmade a mark in the Russian market.3.Since IKEA continued to face several bureaucratic challenges in Russia, the retailer plannedto halt its expansion in the country. What should IKEA’s business strategy be in the future?ANALYSIS1.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 dobusiness in Russia since the 1960s, when it was still the Soviet Union. IKEA felt that Russiawas 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 inturn fuelled the demand for consumer goods. However, the company was unable to enter thecountry for quite a few decades for several reasons. In fact, the unstable economic scenario inRussia prevented many Western retailers from investing in that country. IKEA was forced topostpone 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 Russia3because of the breakout of the Russian constitutional crisis in 1993. Moreover, the companyfaced a crisis even after its decision to set up business in Russia, namely, the ‘RussianFinancial Crisis’ or the ‘Ruble Crisis’. This crisis of 1998 caused many foreign investors toencounter heavy losses.After facing several setbacks, in 1998, Lennart Dahlgren (Dahlgren), a prominent IKEAemployee, was asked to oversee the setting up of IKEA’s operations in Russia. Dahlgren statedthat 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 abandonedthis view and came to realize that there was a large retail opportunity waiting to be tapped. Inthe early 2000s, a market report from AT Kearney, a global market consulting firm, stated thatin terms of retail expansion, Russia was the top country in the world. Russia, being a part ofthe erstwhile USSR also had comparatively developed infrastructure, which reduced theproblems 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 Moscowregion. The inaugural day drew a large crowd of 40,000 shoppers and two weeks later thestocks in the store had been emptied by avid customers. People waited for an hour to get intothe 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 updemand 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 ofthe 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 consumersto buy furniture as buying furniture in the country otherwise required them to save severalmonths of their salary.•The internal layout at IKEA worked in favor for the retailer as customers could ‘walkaround’ unimpeded by shop assistants, in addition to handling the merchandise. They wereeven encouraged to try out the mattresses and sofas for themselves – something theconsumers had never seen before in Russia.•Its logistics expertise, business model (Mega malls), vertical integration, and ability toleverage economies of scale were other reasons.•IKEA also emphasized on providing efficient customer service. Through its stores, IKEAoffered several amenities such as a free shuttle service from select places, a playroom forchildren, 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 top10 grossing stores in the whole world. The rousing response to the store’s opening encouragedIKEA to formulate ambitious plans for expansion.The Russian consumers seem to like IKEA products. At times, the company also made unusualgains in the market. For instance, in 2014, IKEA’s high sales in Russia were attributed to theeconomic slowdown in the country as consumers swarmed IKEA stores and other Westernretailers in anticipation that the prices would rise sharply. Faced with the prospect of losingsavings 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 andmade a mark in the Russian market.IKEA, with its roots in Sweden, which is considered to be one of the least corrupt nations inthe world, struggled hard to traverse the corruption-laden Russian economy. Russia hadcorrupt systems at both the regional and national levels, with the country being placed in the135thposition in Transparency International’s 2017 Corruption Perceptions Index. Bribery was

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IKEA’s Challenges in Russia4like another taxation system in the country, which benefited the political elite, including thepolice and the Federal Security Service (FSB), the primary domestic security agency of theRussian Federation.Some of the challenges faced by IKEA in Russia were:•IKEA realized that Russia had a highly corrupt bureaucracy, which demanded bribes forgetting anything done. However, in accordance with IKEA’s policy of zero tolerance forcorruption, the company decided that it would not give in to the corrupt system. Time andagain it refused to bow to pressure from officials demanding bribes. In this context, it wasready to put up with delays in store openings, put a stop to its expansion plans, and evenincur other additional costs.•The business environment in Russia dictated that IKEA constantly faced problems fromgovernment officials in the fire, health and safety, electricity, tax, customs, and otherrelated departments with regard to its stores. In one instance, IKEA was asked to paybribes for getting an electricity connection. It got past this problem by deciding to hirelarge diesel generators to power its stores. This became the standard practice for thecompany for most of its stores in Russia.•When IKEA opened its first store in Moscow, the city authorities did not give itpermission to advertise the store in the Moscow metro. IKEA was required to secure 300permits to construct a mall in Russia, which left plenty of room for the officials to demandbribes.In 2009, IKEA announced that it would not expand further in the country until it gotpermission to set up two stores in Ufa and Samara. Officials refused to give approval inSamara stating that the walls of the store were not in a condition to withstand hurricane-forcewinds, notwithstanding the fact that such weather conditions had never been experienced inthat region. According to Kirill Kabanov, Head of the NGO National Anti-CorruptionCommittee in Moscow, the reason for the non-opening of the stores was IKEA’s refusal togive bribes to safety inspectors.In addition to these challenges, the company’s employees became embroiled in severalcontroversies. The company found that some of the IKEA officials were bowing down to theall-encompassingcorruptioninRussia,whichweakenedthecompany’sstanceagainstcorruption. It discovered that the key executives responsible for renting the diesel generatorshad hyped up the rental charges in collaboration with the generator rental company, causingthe company a loss of several million dollars. Though they had not committed any personalindiscretion,theirdecisiontheirdecisiontooverlookacorrupttransactionbetweenasubcontractor of IKEA and an electricity company official to resolve a power supply issue atIKEA’s St. Petersburg mall, did dent its reputation for non-tolerance of corruption. While thecompany set high ethical standards, it appeared as if many of its officials were ready to bendthe rules to get things done.IKEA’s image took a further beating when reports on its alleged unethical logging practicessurfaced. In early 2012, a Swedish public service television came out with an investigativereport that claimed that IKEA’s subsidiary Swedwood was cutting down several hundred acresof old growth forests every year. This revelation caused several global conservation groups tocondemn IKEA’s logging practices. IKEA refuted the allegations and claimed that it waslogging wood according to local guidelines. It is important for companies like IKEA, that areoperating in international markets, to not only adhere to the laws and regulations of the hostcountry, 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 ofdefunct environmental guidelines in countries such as Russia and China, in which it mostlylogs wood.

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IKEA’s Challenges in Russia5Overcoming challengesIn its early days, IKEA preferred to keep a low profile, avoiding any direct confrontation overthe corruption issues dogging its every move. As in the case, Alexei Slesar said, “In the earlydays when they entered the market they took the expression ‘do as the Romans do’ tooliterally”.Its officials gave in to the dubious schemes concocted by the local authorities totrick it of its money. In the case of the off-ramp, the company agreed to pay US$5 millionmore than the estimated cost, even though the construction had taken three times longer thanexpected. IKEA donated US$30 million to aid elderly people and hired a contractor endorsedby 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 ofthe failure of Russian authorities to keep their word to provide electricity to its stores.However,asthesituationdeteriorated,IKEAstartedtakingastrongerstanceagainstcorruption and was quite vocal in its criticism of the corrupt system in the country. Thisincluded going to the press, inaugurating a store in direct defiance of the authority, and finallythreatening 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, whichcommunicated to all its stakeholders that IKEA had zero tolerance for corruption. It is difficultin ensure adherence to the corporate culture in diverse geographical markets, but if a companyhas clear policies that are communicated well, it can be achieved. For this to succeed, it is alsoimportant to “walk the talk”, as actions speak louder than words.IKEAbeingaprivatecompanyanditsuniqueownershipstructurethatstoodforindependence, long-term approach, and continuity also helped the retailer take a strong ethicalstance against corruption in Russia. According to Kamprad, the complex structure “wouldsurvive wars, political upheaval, or just plain old executive incompetence.” (See Case ExhibitIII).3.Since IKEA continued to face several bureaucratic challenges in Russia, the retailer plannedto 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 theyear ended August 2014 stood at €29 billion. According to IKEA, the growth was fueled byChina and Russia as they were the company’s fastest growing markets. IKEA had 8 of its 10largest stores in the world in China whereas in Russia it had a chain of 14 complexes, whichaccounted 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 IKEAin December 2016 when the Russian court ordered the retailer to pay US$7.8 million toRussian 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 thisruling was given in favor of Ponomaryov, IKEA in August 2016 had announced plans toinvest US$2.1 billion in Russia. However, after the court’s order, IKEA warned that it woulddelay the investment as it wanted to work in a “fair and transparent business climate” andaccused the authorities of attempting “to use illegal methods to extract further money from thecompany.”Future StrategyWhile IKEA was likely to face more problems in future as the corrupt system tried to make thecompany ‘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 Russia6being attracted to its rich natural resources, growing domestic market, and rising middle classwith large disposable incomes.Going forward, IKEA planned to boost its local online business. By the end of FY August2019, 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 theIndian market by launching its first store in Hyderabad, capital city of the southern Indianstate, Telangana. The company planned to rent out its furniture offerings in Japan forcustomers who were not ready to purchase those items. In November 2018, IKEA announcedplans to open its first and largest store in the Philippines by 2020 with an investment ofUS$133 million. The retailer aimed to set up its first store in Greater Manila with 5 millionhouseholds to cash in on an economic boom and rising incomes.While there are other international opportunities, IKEA is expected to increase its investmentsin Russia in the future despite the risks in the business environment.

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IKEA’s Challenges in Russia7Suggested Readings:1.Graham H.J. Roberts, “Consumer Culture, Branding and Identity in the New Russia: FromFive-year Plan to 4x4,”Routledge, 2016.2.Christiane Prange, “Market Entry in China: Case Studies on Strategy, Marketing, andBranding,”Springer International, 2016.3.William B Gamble, “Investing in Emerging Markets: The Rules of the Game,”SpringerScience +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.“IKEALookingforPartnershipswithRussianCompanies,”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://themoscowtimes.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, August31, 201611.“Ikea Threatens to cut Investments in Russia after Losing Court Battle,”https://retail.economictimes.indiatimes.com, August 31, 2016.12.IvanaKottasova,“IKEAismakingLoadsofMoneyinRussia.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.HirokoTabuchi,“AsProfitSlows,IkeaNotesNeedtoMoveOnline,”www.nytimes.com, January 28, 2015.15.JenniferRankin,“IkeaSalesDrivenupbyGrowingChineseMiddleClass,”www.theguardian.com, September 9, 2014.16.Adam Sherwin,“Ikea Faces Boycott after it Removes Lesbian Couple from RussianMagazine to Comply with Putin Laws,”www.independent.co.uk, November 21, 2013.

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IKEA’s Challenges in Russia817.Annie Kelly,“Ikea to go ‘Forest Positive’– But Serious Challenges Lie Ahead,”www.guardian.co.uk, December 14, 2012.18.AugustoCome,“Corruption,Corruption,Corruption,”www.opendemocracy.net,November 29, 2012.19.“IKEACooperateswithInvestigationinCasesagainstExecutives,”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.LennartDahlgren,“TheBasicsofDoingBusinessinRussia,”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 andBribes,”www.independent.co.uk, December 15, 2004.30.James Schofield,“Ikea Wows the Russians,”http://news.bbc.co.uk, February 22, 2002.31.ColinMcMahon,“RussiansFlocktoIkeaasStoreBattlesMoscow,”http://articles.chicagotribune.com, May 16, 2000.32.“Milestones in our History,”http://inter.ikea.com.

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BECG/159IBS Center for Management ResearchTeaching Note:Eliminating Modern Slavery from Supply Chains: Can NestléLead the Way?This teaching note was written bySyeda Maseeha QumerandDebapratim Purkayastha,IBS Hyderabad.This casewon the First Prize in the 2018 oikos Case Writing Competition (Corporate Sustainability track),organized byoikos 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.orgwww.icmrindia.org

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1BECG/159Eliminating Modern Slavery from Supply Chains: CanNestlé Lead the Way?TEACHING NOTEABSTRACTThe case discusses the global food processing giant Nestlé’s problems relating to modern slaveryin its cocoa supply chain. The company faced allegations of using child labor in its cocoa supplychain in Ivory Coast and was also accused of failing to disclose this to customers at the point ofsale. Some critics argued that Nestlé was not doing enough and was not being transparent enoughin its efforts to eliminate child labor within its global cocoa supply chain. However, in a raredisclosure, Nestlé reported in 2015 that it had uncovered forced labor in its seafood supply chain inThailand. Magdi Batato (Batato) Executive Vice President and Head of Operations at Nestlé saidthat the company was committed to preventing and eliminating child labor in its supply chain.Analysts wondered whether Nestlé’sadmission of slavery was honest or was just an attempt tofend 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 needsto be addressed. Though Nestlé had implemented an action plan to combat slavery within itssupply chain, the obnoxious practice still permeated West African cocoa farms, and was in fact onthe rise. Nestlé had tried to maintain ethical and environmental standards within its supply chainbut how well these initiatives matched up to the challenges of modern slavery was still questionedby its critics. According to them child labor in Nestlé‘s cocoa supply chain was a complex issueand 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 rolein eliminating slavery from the global cocoa supply chain? Can Batato lead the company’songoing commitment to tackle slavery? Can its commitment go far enough to enact change and putan end to modern slavery in the global cocoa industry? How?TEACHING OBJECTIVES AND TARGET AUDIENCEThis case is designed to enable students to:•Understand the concept of modern slavery, its various forms, and the need for companies toaddress this issue•Understand the relationship between modern slavery, CSR and Corporate Sustainability•Identify the barriers to eliminating modern slavery•Evaluatethe actions taken by Nestlé’s to combat slavery in its supply chains and identify thechallenges faced by the company in dealing with the issue•Explore ways through which Nestlé can eliminate modern slavery from its cocoa supply chainThis case is meant for MBA students as a part of their Corporate Sustainability/ Corporate SocialResponsibility/ 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?2LINKAGES TO THEORY•Modern Slavery; Theoretical framework of modern slavery; Modern slavery and CorporateSocial 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 auditTEACHING THE CASEIdeally, the case may be distributed 2-5 days before the class. In the classroom, the case instructorcan initiate the discussion by giving a brief introduction about the case and how companiesare facing the heat related to modern slavery(5minutes). This can be followed up with adiscussion regarding Nestlé battling allegations of abetting child slavery in cocoa plantations inIvory Coast while at the same time admitting to forced labor in its seafood supply chains inThailand. The ethical dilemma facing Nestlé over the existence of slavery in its cocoa supplychains and the steps taken to combat it can also be touched upon. The instructor can take thediscussion 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 addressthe issue.(15 minutes)5.Discuss the key challenges Nestlé faced while addressing modern slavery in its cocoa supplychain.(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).ANALYSIS1.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 SlaveryConvention, which defined slavery as “the status or condition of a person over whom any orall of the powers attaching to the right of ownership are exercised” (Allain, 2009). Modernslavery can take several forms including forced labor, debt-bondage, child labor, wageexploitation, human trafficking, forced marriage, involuntary domestic servitude, or any otherpracticewhereinvictimsarecoercedthroughphysicalormentalthreattoengageinunreasonable work. Increasing globalization means that nearly every corporation is exposed tothe risk of forced labor and human trafficking in its supply chain.Modern slavery affectsvirtually all industries and can occur at any stage in the supply chain. It exists because it isprofitable. 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 ofmodern slavery that has been addressed the least. The ILO predicts that out of the 20.9 millionvictims 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?3The external factors that influence slavery can be broken down into conditions related to theindustry context and to the broader institutional context (Scott, 2001). The institutional contextcaptures socioeconomic, geographic, cultural, and regulatory factors. A theoretical frameworkproposed by Crane (2013) identifies the economic and institutional conditions that give rise tomodern slavery(See TN Exhibit I).Modern Slavery, CSR and Corporate SustainabilityCSR refers to ‘the integration of social, environmental, and economic concerns into businessoperations’. It is distinctive from, though related to, the business and human rights agenda. Inresponse to increased concerns about the social environmental impact of their supply chain andto the growing importance of CSR, several companies have adopted codes of conduct thatextend to their suppliers. In terms of CSR, modern slavery is one among a number of socialrisks to be taken into account by corporations when assessing what is in the best financialinterests of shareholders.A business is expected to operate in an ethical manner and an obligation that it will do what isright, just, and fair and to avoid or minimize harm to all the stakeholders with whom itinteracts. Business is expected to be a good corporate citizen, that is, to give back and tocontribute 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 isimportant to tackle the issue of modern slavery for a company like Nestle. The UniversalModel of CSR (2014) proposed by Nalband and Al Kelabi explains how and why CSR willbecome part of the business and sustainability; and its applicability universally(See TNExhibit II). Tackling modern slavery can be seen as an ethical responsibility wherein acompany has a duty to protect the human rights of its workers. However, there are potentlimitations of CSR on modern slavery. According toNew (2015), the standard initiatives ofanti-modern slavery CSR are themselves, in some sense, part of the enabling mechanisms formodern slavery to persist:•the right hand (the CSR activity, the policy statements) gives the appearance of working toreduce the problem; and•the left hand (the brutal exercise of commercial power, hard negotiation on prices andtrading 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 ofmodern slavery. CS is about “...meeting the needs of a firm’s direct and indirect stakeholders(suchasshareholders,employees,clients,pressuregroups,communities,etc.),withoutcompromising 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; andchampions.•External:Nationalgovernment;raisingstudentawareness;accesstoresources;environmentalcrises;regulationsandlegislation;raisingsocietyawareness;andcollaboration with external organisations.

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

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Eliminating Modern Slavery from Supply Chains: Can Nestlé Lead the Way?5TN Exhibit III:Corporate Sustainability Driver ModelSource: Lozano, R. (2015). A holistic perspective on corporate sustainability drivers. Corporate SocialResponsibility 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 theyfail to disclose to consumers the use of slavery in their supply chains, they are deceiving theminto buying products they would not have otherwise purchased. For tackling the challengesposed by modern slavery, CS offer the potential to be more encompassing, both in terms of thecompany system (including operations, strategy, organisational systems, etc.), and in terms ofstakeholders (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 capturedfurther downstream by larger and more powerful tier I suppliers. Tier II suppliers mightthen 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 coupledwith low elasticity of supply.

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