Finding the Fortune

First Published in Busnet on 22 April 2010

One of the great business thinkers of our time, C.K. Prahalad, passed away in the last week, aged 68, following a brief illness.

Together with Gary Hamel, he authored “Competing for the Future”, a strategic framework for industry leadership. They advocated that the key to market dominance is to visualise the benefits that your customers will demand in the future, and to put in place the core capabilities that will allow you to excel in delivering those benefits. A good example of this is Apple, who foresaw the importance of lifestyle media and accordingly built a dominant position in devices (the iPhone and now the iPad) and online distribution channels (iTunes and the App Store).

Yet it is likely that C. K. Prahalad’s second contribution to competition strategy will turn out to be his lasting legacy. In “The Fortune at the Bottom of the Pyramid” he reveals the immense profit potential from serving the needs of the vast populations who live on less than $2 per day. He makes the case for changing the way we do business in order to meet the needs of this market, and presents 12 ‘value-centred’ principles for innovation to help companies achieve the ambition of ‘eradicating poverty through profits’.

This thinking contradicts much of the received wisdom of business management. After all, if 80% of a company’s sales revenue tends to come from 20% of its offerings, surely we should concentrate on the key 20%. In this respect, the Bottom of the Pyramid has many similarities with the Internet concept of the Long Tail* as both approaches appear to concentrate on the unprofitable 80%.

The web ecosystem has demonstrated that a company like Amazon, with its vast catalogue, can produce as much collective revenue from its Long Tail of low selling books than it does from its relatively few current bestsellers. As an Amazon employee put it: “We sold more books today that didn’t sell at all yesterday than we sold today of all the books that did sell yesterday”. Strange, but true!

Harnessing the Long Tail is possible on the web, were inventory and distribution costs are negligible, yet it causes a serious rethink of real world economics too. If I’m in the movie business, do I produce a typical Motion Picture Association film ($96.2m to make and market) or do I follow the model of the Blair Witch Project ($35,000). Fortunes are no longer the preserve of the fortunate.

The clairvoyance of C.K. Prahalad continues to drive business innovation, and hopefully the richness of his thinking will continue to change the face of poverty.

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James writes lifestyle books and blog articles as a hobby. In his principal role, he is as a specialist in business modelling as a process for empowering business decision-makers and unlocking business value.

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