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.

Making a better World: an economic view

Last week, our former colleague, Dianne Hofenk defended her PhD-thesis at the Open University. The thesis is titled “Making a Better World” and is a research into the contribution of a special carrier towards the greening of urban distribution. Large carriers deliver goods towards the borders of the city, where smaller distributors collect these goods, combine the parties in efficient batches and deliver the goods in the city, causing the pollution to decrease and give less congestion of the roads.

Besides several complex tests on factors which influence the participation of carriers, retailers and consumers, Dr Hofenk asked the question what determines the “ Willingness to pay more” of consumers for goods which have less impact on the environment? She stated that this was an especially relevant question as it influenced the sustainability of the business model, as policy makers had stated that they were prepared to subsidize the starting costs, but that the initiative has to be self-sufficient in time. The following discussion was on how the local distributors should be financed, through an increase of prices (by the costumers) or by transferring the profits of the carriers (more efficiency) and retailers (time saving) towards the distributors.

This seemed me an intriguing question, as from the point of view of welfare economics, there appears a straightforward role for the government. The government can maximize collective welfare if the negative effect of the taxes, necessary to subsidize this initiative is below the negative effects of the congestion and the pollution. Ideally, the government should divide the tax burden over both the three stakeholders, in ratio to the perceived weight or decreased costs.

However, an anonymous reviewer made a similar remark reviewing a piece on business models, sustainability and OER. In his opinion, the task of the government in providing education, and so also Open Educational Resources, is so clearly defined. It is therefore not done to ask the question how OER-initiatives can become self-providing, or less dependent on subsidizers. As stated above, the welfare economic view is that the government should redistribute income within society as long as the positive effects of more education outweigh the costs of more education.

Open Educational Resources are assumed to have a positive influence on the national level of education and so on economic growth, as on the quality and efficiency of education as a sector. Subsidizing OER is increasing social welfare as long as the added costs of this subsidy (including disturbance costs) are lower than the added benefits of more education.

However, more and more politicians see education as an individual choice; involving a trade off between individual costs and individual benefits. The student makes a choice of when, where and what he or she will study; financing this study by himself. The choice is assumed to be a rational one, based on the earnings after finishing the study versus the costs of financing it, using the family capital, bank loans or state loans (see the UK and the Netherlands). Rationality does require full information and the absence of (monetary) restrictions. Individuals have to make an estimation of the length of the study, the possibility of work after the study, income and future changes.

In this view are state subsidies for OER-courses unadvisable. Individuals will benefit of the offered courses (increase in income), but do not pay for them (Open ER). OER-systems should be self sustainable.

So it becomes more important to show how and where OER will have positive effects on quality and accessibility of education, on economic growth and on social cohesion. The individual approach to education is flawed and underestimates the positive contribution of free education by ignoring the national effects. Only by providing corroboration to this proposition, the state can be convinced to provide a continuous financial support to OER.