Creating Social Value in the Context of Institutional Failure

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This post by Addisu Lashitew, Rob van Tulder and Lukas Muche is based on their article, “Social Value Creation in Institutional Voids: A Business Model Perspective,” in the journal Business & Society.

This study was part of a larger project at Rotterdam School of Management that sought to understand how businesses create social value – i.e. advance social and economic development through their commercial operations. The expansive literature on corporate sustainability and “Base of the Pyramid” strategies suggests that multi-stakeholder collaborations are the preferred way. Multinational enterprises are advised to collaborate with local actors to acquire context-specific knowhow, resources and connections, and local enterprises are told to work with corporate sustainability officers to boost their understanding of social issues.

But developing countries lack formal institutions that can underpin complex multi-stakeholder governance mechanisms. Although reliance on social networks could supplement some of the deficiencies in formal institutions, they are unlikely to entirely supplant the need for contractual governance mechanisms. We thus sought to understand how multi-stakeholder collaborations can create social value in contexts of institutional failure – or “institutional voids” in international business jargon.

We started by laying out a new business model framework for conceptualizing social value. The framework helped us identify the loci of social value creation and the stakeholders that partake in creating and capturing this value. We subsequently spelled out four categories of social value: consumer value, producer value, shareholder value and other stakeholder value. The empirical parts of the paper exploit the analytical properties of the framework to unpack the drivers of social value creation in a real-world multi-stakeholder social value creation initiative. 

Our analysis drew on primary qualitative data collected through two rounds of fieldwork. The object of our case study was the business model of M-Pesa — a leading mobile money innovation that has extended financial inclusion among tens of millions of users in Kenya and the East African region. The success of M-Pesa has enabled its operators – Safaricom, Kenya’s largest telecom firm, and Vodafone, its British partial owner – to top Fortune’s “Change The World” list of companies in 2015.

Our analysis revealed how a focus on social value creation can help corporations translate social problems (in this case financial exclusion) into profitable commercial operations. In line with much of the literature, multi-stakeholder collaborations were key for creating unique value offerings that reached previously excluded social segments as consumers. M-Pesa is a unique business model that blends the technological knowhow of Vodafone, the brand recognition of Safaricom and the risk management expertise of partner banks. The juxtaposition of these diverse competences underpinned a highly functional mobile payment platform that was attuned to local market needs.

The alliance-based or hybrid business model of M-Pesa was made possible through effective use of ICT that helped reduce the costs of coordinating and monitoring transactions across organizational boundaries. Technology also enabled M-Pesa to be more accessible and affordable than alternative services such as agency banking and micro-finance. Importantly, it enabled greater value chain integration and formalization that increased producer value. For example, the M-Pesa ecosystem relies on 130,000 small and micro enterprises as agents who collect and dispense cash in exchange for commission income. The business model, therefore, created social value by boosting the productivity of tens of thousands of small enterprises.

Finally, the study uncovered major contradictions within social value creation initiatives. Just like in other platforms such as social networks, the lead firm in mobile money systems like M-Pesa has a significant network advantage that can serve as an entry barrier. This advantage of the lead firm did not come out of the blue: it is a result of heavy initial investments that enabled the development of the platform and all the services that depend on it. Ex post, however, this first-mover advantage can be used to lock-in customers and reinforce monopoly power. This create a dilemma for regulation on balancing tradeoffs between nurturing innovation and curtailing market power.

The emergence of undesirable distributional outcomes is perhaps common in many other self-governing economic systems that give disproportionate bargaining power to the lead firm. What we found intriguing is that the same business model that increases total social value by raising the incomes of the vast majority of its stakeholders could still end up increasing inequalities among them.

The implication is that the perennial question of what constitutes an appropriate balance between efficiency and fairness will remain a pressing issue even in business models that focus on advancing social value. Overall, the study answers some important questions on how businesses create social value, but also spells out important dilemmas and gaps that can be addressed by future research.

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Addisu Lashitew, Rob van Tulder and Lukas Muche

Addisu Lashitew is a research fellow at Brookings Institution. He tweets @AddisuLashitew. Rob van Tulder is a professor of international business-society management at Rotterdam School of Management, Erasmus University Rotterdam. Lukas Muche is a researcher at Rotterdam School of Management, Erasmus University Rotterdam.

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