Dissing Prahalad

25 August 2006 at 9:17 am 6 comments

| Peter Klein |

Management theory superstar C.K. Prahalad, having conquered the corporation in Competing for the Future, then turned his attention to global poverty. His plan urged firms to tap into the purchasing power of the world’s poorest consumers, creating large gains for both buyers and sellers. But there are doubters.

C.K. Prahalad’s theory on the purchasing power at the “bottom of the pyramid” (BOP) has a legion of enthusiastic supporters. The BOP argument that savvy multinationals will enrich themselves and the poor by selling to this market is “at best a harmless illusion and potentially a dangerous delusion,” according to Michigan professor Aneel Karnani. His new working paper, Fortune at the bottom of the pyramid: a mirage, is the strongest criticism I’ve seen of Prahalad and his devotees.

This is from Christine Bowers at the World Bank’s PSD Blog. Karani’s paper calls the BOP argument “seductively appealing, [but] riddled with fallacies.” Says Karani:

Not only is the BOP market quite small, it is unlikely to be very profitable, especially for a large company. The costs of serving the markets at the bottom of the pyramid are very high. The poor are often geographically dispersed (except for the urban poor concentrated into slums) and culturally heterogeneous. This increases distribution and marketing costs and makes it difficult to exploit economies of scale. Weak infrastructure (transportation, communication, media, and legal) further increases cost of doing business. Another factor leading to high costs is the small size of each transaction.

Read the paper here.

Entry filed under: - Klein -, Entrepreneurship, Management Theory, Strategic Management.

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6 Comments Add your own

  • 1. Joe Mahoney  |  25 August 2006 at 9:57 am

    I would take the Karnani–Prahalad debate in a whole different direction. Prahalad is actually looking at the middle of the pyramid, and that those in greatest need at the actual bottom of the income pyramid are neglected.

  • 2. Jung-Chin Shen  |  25 August 2006 at 10:54 am

    CK’s argument, in my view, delivers one important message to western multinational enterprises (MNE): Pay attention to the uniqueness of the BOP market. I have seen some extremely successfully MNE, which own incredible resources and capabilities that RBV scholars appreciate, failed in some Chinese local markets because they failed to adjust to some unique characteristics of the BOP markets.

  • 3. Anita McGahan  |  27 August 2006 at 5:49 pm

    The core of Karnani’s critique is that development depends on conceiving of the poor as *potential* producers instead of consumers. I couldn’t agree more with Joe’s comment that the target consumers analyzed by Prahalad should be considered as the “middle of the pyramid.” Those living on less than $2 per day — and especially those living on less than $1 per day — typically suffer from malnutrition, inadequate basic health care, and insufficient basic education. The good news is that we now know how to provide for people at this basic level inexpensively. Once the poor receive basic care, the next step is to enfranchise them in the productive system.

  • 4. The Filter^  |  29 August 2006 at 6:14 am

    Worth a look…

    Peter Klein on the bottom of the pyramid argument Peter Boettke on being a stipendiary ideologue There is an emotional appeal of the argument for the free society against the planned society of totalitarianism that I must admit to being

  • 5. sumedha  |  12 October 2006 at 9:18 am

    i am an mba student from IIPM ,doing my project on THE BOTTOM OF THE PYRAMID..require suggestions ,as i am against this concept in my project….

  • 6. Nancy Landrum  |  13 October 2006 at 8:31 am

    I, too, and writing against Prahalad’s suggestions and would be interested in exchanging ideas. nelandrum@ualr.edu

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