Educating the bottom of the pyramid or of the market: the difference between Prahalad and Christensen

On first sight, the approaches of Prahalad (bottom of the pyramid) and Christensen (disruptive innovation) seem very similar. New firms offer products with less functionality at lower prices, making the products affordable for more customers, especially those with lower incomes.

It is even so that firms who aim for the bottom of the pyramid will be disruptive in their market in the sense that their new offerings will replace the old products and so the old firms.

 However, at a more fundamental level both approaches differ substantially from each other. Prahalad tries to combine social responsibility, capitalism and social welfare in a sustainable way. By producing for the millions, a small profit rate can generate enough absolute profits for a sustainable development of the firm.

Christensen describes a situation in which small firms are able to offer a product of a lesser quality for a lower price to both existing and new customers. By offering less functionalities and a lower technological quality they attack the lower end of the market, where the profit rates for the existing firms is lowest. Yet, when the last of the high-cost high-price firms has left this segment, competition will drive the price towards its zero-profit level. This will induce the low-cost firms to innovate their products, adding quality and functionalities, and attacking the new bottom of the market. This process will be continuing until the top of the market has become the new bottom.

[For non-economists: Profits is often used in several ways; here Prahalad uses the word profits for the income of the firms; at the zero-profit level of Christensen, firms have a 'normal' level of income; so not to worry, no people starve because of this kind of competition]

I see the same fundamental difference in the approach to Open Education. People and institutes involved in the production, distribution and research of Open Educational Resources do this because they see a linkage between social responsibility, welfare and offering education towards people whose access is financially or otherwise restricted.

Business models for OER are conducted in line with the approach of Prahalad. Given the need for free education for the bottom of the pyramid, how can this be organized in a sustainable way? This concentrates not only on the kind of earning models, but especially on efficient ways of production and organization.

 

Other initiatives, as Moocs and the online offerings of for-profit educational institutes, have explicit earning models. For example, most Mooc-platforms have contracts which contain regulations about the usage of the courses in commercial settings, about the usage of learning data or about future income selling student data to prospecting employers. For-profit institutions see students as customers, stripping all academic overheads, making the student an offering which is inferior in the eyes of the traditional educational sector, but sufficient in the eyes of the potential student.

This could induce a disruptive development, in which the Moocs and for-profit institutions move upmarket; each time segmenting the market more by offering the lowest quality at the lowest price, adding to this with an increasing price until they replace the traditional institutions.

 

Problem is that once offerings move from the not-for-profit towards the for-profit sector, the price mechanism will not automatically take negative externalities into account. Political agencies which set the goals for not-for profit institutions often take into account other goals. In the case of educational institutions, not only the direct effect on the carrier of the students, but also on social welfare and the relationship between research, education and economic and social growth.

One actual effect can be seen: for-profit institutions which concentrate solely on education can offer educational programs at fees which are below the fees of traditional institutions. One of the reasons for this is the fact that they have lower cost as they have not to pay for the investment in new knowledge (research). Often they work with part-time teachers, who gather their knowledge elsewhere. By acting in this way, for-profit institutions forego both direct research costs and indirect coordination costs.

Assuming education has major positive external effects on general welfare. Most functions associated with these effects will be removed as part of the reduction in quality which is part of the disruptive tendency as described by Christensen and others. In this sense, disruption of education is one of the worse things which could happen to a creative competitive society.

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Creative Innovation thanks to the wisdom of crowds

In this blog I would like to return to one of my earlier central themes: business models, co-creation and collaboration. As the Business Canvas of Osterwalder shows, there are two linkages between the value proposition and the customers: the customer relationships and distribution channels.

One of my students, Rick op den Brouw, wrote a Msc-thesis on critical success factors of co-creation. Based on nine case studies, he concluded that -among others- the chosen strategy of co-creation and the actual business model not always coincide (4 of 9). However, most of the theoretical expected results of co-creation, as an increase in sales and a reduction in risks, were realized.

©Business Model Generation by Alex Osterwalder & Yves Pigneur

Romero en Molina (2011) try to describe co-creation on a more concrete level. The role of the customers changes in this approach. No longer are they seen as the destroyers of the value produced by the firms. Instead, the act of consumption is seen as the ultimate contribution to the creation of value. A product or service not consumed is without value.

In this process of co-creation of value are several possible partnerships of the consumers.

  • Co-designers, in which customers are used as partners to generate, develop and test new ideas.
  • Innovators, where organizations give so-called toolkits to make their own products and services; the knowledge gathered in this process is used to improve the original product or service.
  • Marketeer/Branders, customers become marketeers, for example for event marketing or lifestyle marketing. Viral marketing, on-line word-of-mouth commercials is mentioned as one of the most effective instruments.
  • Social Corporate Responsibility, by entering a dialog with the customers as stakeholders, the organization can reach a common perspective with respect to the effects of a product or service on the environment. Customers are not only involved with the CSR of an organization as passive clients, they participate actively by using the products or services.

Technical and social developments facilitate collaborative networked environments, in which organizations collaborate with so-called con-colleagues. Romero en Molina (2011) call these networks collaborative network organizations (CNO). Although these play a central role in Prahalad and Krishnan’s co-creation, Romero en Molina (2011) do not go into the role of the CNO’s in co-creation.

Next to the organizations do customers organize themselves in on-line communities; Romero en Molina (2011) call these Virtual Customer Communities (VCC’s). The VCC’s are aimed at discussing shared experiences with products and services.

These communities can be used to realize eight different kinds of co-creation:

1. Adjusting Products (IKEA);
2. developing new products (Procter & Gamble);
3. Feedback and evaluation (Microsoft Knowledge Base);
4. Mass-customisation (NIKE);
5. Using customer creativity (LEGO);
6. Developing new services using old services (TeliaSonera);
7. Real-time marketing and adjustments to services (FEDEX);
8. Personified value and knowledge creation (IPod/Itunes).

The examples above require new core-competences. To realize the diversity of demands, to react to the increase agility and the increasing complexity, an organization has to be flexible, agible and adaptive.

In the contacts with (potential) customers and co-creators, the Virtual Consumers Communities play a central role. To stimulate the creation of the VCC around your products or services, Romero and Molina (2011) give ten tips:

  1. Invite the right customers, keep the community private and be familiar with the essential characteristics of the customers (which is more than the geographic or demographic facts).
  2. See members of the community as advisers, not as simple marketing instruments.
  3. Focus on the interests of the members, not necessary on those of the organization.
  4. Create common activities and rituals.
  5. Be open and honest, even as the facilitator of the community.
  6. If you want information, ask for it.
  7. Listening is better than talking.
  8. Don’t ignore the negative, learn from these comments.
  9. Don’t ask to much.
  10. Communities are about people, not about technics.

Romero en Molina (2011) concentrate their analyze at the customer side of the organization by describing the success factors of the VCC’s, giving less attention to the collaborative network organizations (CNO).

The research of Bengtsson en Kock (2000) concentrates on collaboration, especially on those firms which are both competitors as collaborators. They analyzed several companies in three different industries. For example, Skega Ltd. and Trellex Ltd. worked together developing new materials, whereas they are competitors in the field of lining materials. In the deary industry, companies work together in developing means of transport, but simultaneously protecting their geographical markets. In the beer industry, bottles are standardized so the collection of empty bottles can be done in cooperation  whereas they compete through lifestyle – marketing and brand loyalty.

The conclusions of Bengtsson en Kock (2000) are:

  • heterogeneity of resources stimulates collaboration;
  • firms collaborate on the input side of the organisation, whereas they compete on the output side;
  • – the decision to collaborate or compete is a strategic decision, it involves the position of the organization within the network;
  • individuals can not be responsible for both collaboration and competition;
  • the combination of collaboration and competition within the same organization will give rise to internal conflicts and stress, which should be addressed by the top management.

Combining Bengtsson and Kock (2000) with Romero and Molina (2011) we can state that with respect to the development of a N=1/R=G strategy, involving co-creation and networks, organisations have developed good practices with respect to the consumer side  but the development of virtual network-organizations lags behind. The rise of the Organization 3.0 (Marco Derksen) might be predicted, but not yet realized.

Literature:

Cover of "Business Model Generation: A Ha...

Bengtsson, M., S. Kock (2000), “Coopetition” in Business Networks—to Cooperate and Compete Simultaneously, Industrial Marketing Management, Volume 29, Issue 5, September, Pages 411-426

Romero, D., A. Molina (2011), Collaborative networked organisations and customer communities: value co-creation and co-innovation in the network era, Production Planning and Control: The Management of Operations, 22: 5-6, 447 -472

Moocs and the Bottom of the Pyramid

Moocs, Massive Open Online Courses, are provided for free to large amount of participants. Tuition and assessment are peer based. They are not really Open Educational Resources as they are only offered in certain periods and the materials are not available for (re)use in different educational situations.

As a economist, I realize that what irritates me is the way these courses are labeled massive by those who offer them. A course becomes massive because a lot of people participate in the open version, not because the teacher decides to offer a massive course as Steve Downs says in the introduction to the Change Mooc. Some course have a proven track record, Artificial Intelligence of Stanford has been a success, so have the courses of George Siemens and Stephan Downes on Higher Education. Perhaps other open online courses have been less successful (in numbers of students), but also less prominent in the publicity. Of course, Moocs and other online courses will be criticized for offering a Tata Nano versus the classroom BMW (Amanda Ripley in Time US).

George Siemens’ interview on MOOCs and Open Education by Andreia Inamorato

The free offering of courses from outstanding universities as MIT, Stanford and others make good quality education available in places where otherwise no education would be accessible. Furthermore, the massive character of these courses open the possibility of applying a “Bottom of the Pyramid” kind of financing for education.

One of the more interesting business models of Moocs is the supply of a paid-for degree course, together with a free non-degree version without expert tuition. Adding to this the possibility of asking a small fee for a certificate stating that the person has participated in the program, and the possibility to sell the program to third parties, these opportunities broaden the global participation, educating the bottom of the pyramid. For example, Sui Fai John Mak shows on his blog a figure consisting of three kind of markets he expects to emerge from the present Moocs (see below).

Yet another way the philosophy of the Moocs can be combined with the philosophy of Prahalad is by asking yourself what kind of education these people need. Is it possible to rework online distance courses in such a way that institutes in the neighborhood can build programs around these ODL’s so students can take formal assignments and get formal degrees. The combination in thinking about delivering to the point courses at affordable fee, compensating the costs through the amount of students and working together with local organizations for the formal recognition of the degree.

Of course such a development has the danger of unification of education in it, the McDonaldization; “MOOC’s may provide access to a world-class education, but the product is prepackaged and standardized. And, because it is readily available, it risks diminishing both the diversification of the higher-education sector and the advancement of globally engaged students and institutions”. If Moocs become the baseline in education in developing countries, the content of education will become the same everywhere.

When there are a large amount of people interested in participating in these kind of courses, the development costs per student will be very low, whereas other institutions can use the course to offer a degree based on the Mooc, tutoring and local assessment. Again, this makes education available for people who cannot afford regular education. Another observation of Amanda Ripley, based on her experiences in Pakistan was that “ at this stage, most MOOCs work well for students who are self-motivated and already fairly well educated. Worldwide, the poorest students still don’t have the background (or the Internet bandwidth) to participate in a major way” . In the TimesHangout, Amanda Ripley remarks that it are only the higher income students in developing countries can afford to participate in Moocs.

Concluding, in themselves Moocs will not solve the differences in education level around the world. There are too much problems concerning these online courses, associated with the low success rates of students, the lack of formal degrees. But also problems with the potential participants, as a lack of money for broadband internet and other income related problems and institutional problems, for example when Pakistan closed down YouTube blocking an anti-Muslim movie, they also blocked the access of 217 students to the massive, open online physics course (again according to Ripley).

However, I think that Moocs and other ODL-courses can be instrumental in providing education in places where otherwise no good quality education is available (whether in developing or developed countries). If it will be a success depends on the conditions which will be created locally. If other institutions adopt the Moocs, if governments are supportive of these kind of educational materials it is possible that this kind of education can provide a stimulus to better education. On the side of the Moocs, they could be made available around the year as open educational resources instead of just an additional outlet for existing education.