Grasping the opportunity of creating shared value, when entering emerging markets
This short blog post combines some insights from the article of Khanna, Palepu, and Sinha (2006) on ‘Strategies That Fit Emerging Markets’, with the article of Porter and Kramer (2011) on ‘Creating Shared Value’.
Khanna, Palepu and Sinha (2006) discuss in their article what is needed for companies to extend to emerging markets, often in different countries or even continents. What they state is that there is often a lack of ‘soft’ infrastructures from the point of view of the company. These soft infrastructures are mainly composed of services like market research providers, end-to-end logistics or human resource firms. These services are crucial for the success of any company and would thus need to be in place for companies to become successful in the emerging markets. But because of the emerging nature of the markets, these services are inherently not yet in place, or not large scale enough to incorporate the new business.
Khanna et al. (2006) also state that, when companies are looking at an expansion to emerging markets, after assessing the benefits of expansion and the costs of extra coordination, three distinct strategic choices are available:
1) Adapting the business model, whilst keeping the core value propositions constant,
2) Attempt to change the context
3) Stay out of countries where adaptation of strategies is not profitable or is impractical
The second strategic choice brings the possibility of creating ‘shared value’, as discussed in Porter and Kramer (2011). Shared value is posed in this article as value that is created on both the corporate side, in the form of higher efficiency or profitability, as well as on the societal side, in the broadest sense of increased societal wealth and wellbeing, and environmental sustainability.
In case a successful company attempts to enter an emerging market, where there are no or not enough soft infrastructures in place for efficient functioning of the company, this company will have the opportunity to attempt to change this ‘soft’ context. By stimulating the service industries needed by the company, it may create a cluster of business around itself, affecting not only its own wellbeing, but also that of the community around it. This community will be able to benefit from the created cluster, as it brings both opportunities for employment, as well as use of the new services.
When implementing this cluster strategy correctly, a company that is seeking opportunities in emerging markets, might find themselves on a springboard into profitability, as synergies with three things: 1) the community provides them with increasing productivity 2) it provides them an increasing client base as the cluster grows, and 3) increasing benefits for the community and environment around the company.