“No social program can rival the business sector when it comes to creating jobs, wealth, and innovation that improve standards of living and social conditions over time. Any business that pursues its ends at the expense of society will find its success to be illusory and ultimately temporary.” ~ Michael Porter, Strategy & Society, Harvard Business Review, December 2006.
The idea that a company can profit on a platform of “doing good” is not new to the U.S. marketplace. Whether it is Patagonia’s ability to incorporate sustainability into their entire product line, Starbucks’s stance to support fair trade for coffee farmers, or Whole Foods’s strategy to offer a truly organic experience, select companies, these three in particular, have been extremely successful in positioning themselves as companies with a conscience. Although the U.S. market consists of many consumers who have the time, energy and resources to pay attention to a company’s social impact, can companies count on similar outcomes in emerging markets where resources are infinitely more limited?
Over the past decade, I have had the fortunate opportunity to work with several multinationals on their expansion into the emerging markets of Central and Eastern Europe (CEE). A virtual learning laboratory consisting of several countries with vastly different cultures, histories and business practices, recent history has shown that more companies failed than succeeded in their market entry in the region for a multitude of reasons. Looking at the companies that truly prospered, the one common element in their approach was the innate ability to adapt their business to specifically cater to the needs of the local culture and community. Whether that was promoting a product abroad that was being ignored domestically or repositioning the company’s brand to attract new consumer segments, businesses that localized effectively and efficiently not only had the most chances for long-term success but also were able to re-define their strategies in other emerging markets as well.
On a personal note, it was truly fascinating to be engaged in the respective market entries of Subway in Hungary, Starbucks in Romania, and IKEA in the former Yugoslavia; however, the most complex and enriching experience was leading the expansion of Hungary’s largest specialty book retailer, Libri, into Romania. Though not of the same magnitude as other specialty book retailers such as Barnes & Noble, Waterstones or W. H. Smith, at the time Libri was one of the largest specialty book retailers in the CEE region and had lofty global ambitions.
What made this market entry truly unique was that Libri’s expansion established a precedent for an international book retailer of successfully moving from one publishing language to another by expanding from the Hungarian to Romanian marketplace. In the past, other specialty book retailers have operated in different countries, but only distributed books primarily in their native language, never in the language of their destination country.
What made Libri’s market entry enriching was its overall complexity. In 2007, fresh off European Union accession, Romania was the new golden child of the CEE region. With a population of more than 20 million (including a large Hungarian minority population), strong growth projections and a passion for western brands, it seemed like the logical place to expand operations. However, there were many barriers that presented a huge challenge to Libri’s business model that made it extremely difficult to position itself effectively. Please consider:
- Libri’s largest competitor had 71 stores and was completely engrained in the publishing community.
- Only 17 percent of the public bought at least one book in 2006 compared with 54 percent in the United States and 82 percent in Hungary.
- Hungary and Romania have a long history of border disputes in relation to Transylvania.
To overcome these challenging obstacles and truly differentiate itself in the Romanian marketplace, Libri had to develop an outside-the-box strategy that would truly engage all of its stakeholders, while convincing the Romanian majority and the Hungarian minority to be true brand ambassadors.
The unique outside-the-box approach: strategic corporate social responsibility.
Addressing the fact that in 2006 Romania ranked last of all EU countries in transparency, having serious corruption issues, a value platform of transparency was engrained throughout the entire organization to evoke trust among all of its stakeholders, and the business model was adapted to target social issues that had a direct link to the selling and distribution of books. Let’s take a detailed look at how operating on a value platform of transparency allowed Libri a defendable competitive advantage with its market entry via key stakeholders:
As mentioned above, trust and transparency are not common values in Romanian business society. Also, there is a strong disconnect in the publishing community between retailers and publishers. A common occurrence among retailers (in many industries) is to purchase goods on terms and then find a way to sell them without receipt to avoid reporting it to the tax authorities. This common practice caused publishers to spend an enormous amount of time and resources taking inventory at the retailer’s store and warehouse, leading to a great deal of frustration
To develop immediate trust and credibility with the Romanian publishing community, Libri highlighted their long-term relationships with Hungarian publishers as well as their transparent IT software (SAP), which offered the publishers a 24-7 platform to view their stock, becoming the first on the Romanian market to adopt such an open approach. These two important factors allowed Libri to obtain 100 percent consignment contracts, another first in the Romanian book market, as well as achieve the highest margins among all book retailers.
Lack of transparency toward employees is another issue in Romania. For example, it is common practice for companies to declare minimum wage for all their employees and then pay the outstanding balance “under the table” to avoid extra payroll taxes. Additionally, management structure in Romania is typically vertical, with the employees having a limited voice and role in shaping the company. To bring an internal transparency to the business model, Libri took the opposite mindset and gave the employees a voice if they truly became “passionate about books and passionate about people,” while having a clear and transparent wage policy. These two measures translated to only a 17 percent employee turnover rate per annum and gave the staff a company that they could be proud to work for.
Customers and community
The customer and community puzzle was the most difficult to solve. In general, Romanian consumers are extremely complex and do not trust easily, whereas in the West, many companies can operate on a platform of Public Relations Corporate Social Responsibility (PR CSR). To truly connect to the locals, Libri had to walk their talk and truly embed themselves in the community.
To deliver transparency and community-building to the local population in the most effective manner, two specific “Community-Transparent” programs were initiated with the D.E.A.R. program highlighted below.
The D.E.A.R. Program (drop everything and read)
Many companies encourage their employees to volunteer for a social cause that they are passionate about. Libri took volunteering a step further and embedded it into their core business strategy, compensating every Libri employee to “sponsor” a school two hours a week by reading to children. Why would Libri pay their employees to volunteer? While improving employee morale and building buzz in the community were wonderful byproducts of the program, the real benefit was a positive impact on the bottom line.
In 2007, Romania lacked the funds necessary to provide an ample stock of books in public schools. To help, the Romanian government gave teachers a 100 Euro equivalent voucher to redeem for books and lesson plans. As teachers directly accounted for 33 percent of the entire value of the Romanian book market, Libri initiated and developed a Scholastic Loyalty Card, which was given to every teacher at the public schools where Libri employees volunteered. For every teacher who spent their 100 Euro voucher at Libri, they would then receive a 10 percent discount along with a complimentary lesson plan in English.
The program was very successful. In the span of one year, Libri had more than 3,300 teachers in their database and a 97,000 Euro equivalent revenue increase, creating a true win-win for community and business alike
Libri’s transparency with stakeholders had a positive effect on the bottom line, and the company quickly developed a reputation as a company that could “walk the talk,” earning acceptance from both the Romanian majority and the Hungarian minority population. While Libri Romania was sold in 2009 to the largest competitor due to the economic crisis, their shared value approach of doing business is a popular trend that many companies and academic institutions are engaging in.
Today, the companies that do not engage in building strategy around social issues that directly impact their business will soon be at a competitive disadvantage, whereas the companies that strive to innovate on their social platforms might undercover an opportunity to truly create value for both profit and community.