Saturday, June 16, 2012

Contrarian Advice for Businesses Serving the Poor

C.K. Prahalad argued in his classic HBR article that companies trying to serve the bottom of the economic pyramid must be high volume, low price and low margin operations.  Cornell prof and HBR blogger Erik Simanis questions this widely accepted wisdom.  Noting that operating costs in low income overseas markets often run well above expectations and that getting to scale takes much longer, Simanis argues that higher profit margins are absolutely necessary to build up the capital needed to take on the challenge.
Companies and those that criticize their efforts are not doing D and E consumers any favors by clinging to the low-margin philosophy, which is unable to generate economic returns that are competitive with alternative uses of a company's capital — the true benchmark of business success. Precious few of the ventures that failed to generate such profit levels have survived, leaving low-income consumers without access to products and services that could have improved their lives and stimulated economic activity in poor areas.


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