Chapter Three
When Industries Change: Scenarios for Higher
Education
David Collis
C
ollis applies techniques developed within the field of business strategy to assess how higher
education may change in response to current pressures such as new technology, shifting
demographics, and rising costs. His approach begins with a structural analysis of the higher
education industry, which suggests strategies to improve performance and position. Collis recognizes
the traditional strategic prescription, which would be to focus on institutional strengths, but also notes the
great potential in embracing the new technologies, delivery systems, and customer needs being generated by the changing environment.
Introduction
normality, forces are at work that have the potential
to revolutionize higher education.
“It was the best of times. It was the worst of
times.” While this famous quote from the opening of
While perhaps not as dramatic as those present
Charles Dickens’s A Tale of Two Cities may seem
at the end of the 18th century, current pressures will
overwrought when applied to the state of higher edu-
nevertheless produce a fundamentally different
cation today, there is a disquieting sense among
landscape for higher education in the next millenni-
educators that it might not be far from the truth. The
um. This statement is even true for the traditional
late 1990s certainly are good times, particularly
research universities that, until now, have been
when compared to the bleak days of the ‘70s and
largely insulated from change. Indeed, at the risk of
‘80s. Enrollments are rising as the first echo of the
overextending the revolutionary analogy, these insti-
1
baby boom reaches college. The stock market is at
tutions might be seen as the elite of an archaic struc-
an all time high, boosting the value of endowments
ture, complacently unaware that their downfall at the
and increasing alumni donations. Research contin-
hands of inexorable societal forces (if not the guillo-
ues to advance our stock of knowledge at an expo-
tine) is just around the corner.
2
nential rate. Yet beneath the veneer of successful
3
47
Exactly how the higher education system will
no more than an informed observer applying my
evolve is, of course, unclear. Will it produce a “new
understanding of strategy to a specific industry. 4 As a
improved” university which, like similar changes to
result, the motto of all advertising campaigns—“half
many consumer packaged goods, is superficially
of what is spent is wasted, we just don’t know which
altered in appearance but barely touched in sub-
half”—applies here. Half of what I say will be wrong,
stance? Will it dramatically reconfigure the character
I just don't know which half!
and composition of degree-granting institutions in
Second, I do not intend to offend anyone by
ways last seen with the establishment of the land grant
treating higher education as a business. Clearly,
universities in the late 19th century and the communi-
education plays a more important role in society than
ty colleges (which now constitute over half the institu-
that of just another business. The notions of service,
tions of higher education in this country) in the 1950s?
academic freedom, and social responsibility alone
Or will it result in a paradigm shift in the whole mean-
set it apart from other industries. However, I do hope
ing and system of delivering “higher education”?
that applying tools and techniques that are com-
This paper cannot answer these questions.
monly employed in the private sector to the realm of
Rather, it hopes to throw some light on the issues by
higher education can produce valuable insights for
applying techniques developed within the field of
the audience, even if educators and administrators
business strategy to the higher education arena.
might be alarmed to see references to their “indus-
More specifically, after briefly listing some of the
try” or “business profitability.”
underlying forces driving change in higher educa-
Third, I do not attempt to draw any normative
tion, the paper will introduce a methodology for sys-
conclusions from the analysis. Whether the world
tematically analyzing how those trends may impact
will be better or worse off as a result of the changes
an industry; outline some possibly controversial
higher education may undergo is a judgment that I
future scenarios for higher education derived from
leave to the reader.
analogies to other industries; and suggest some
steps that forward-thinking higher education institu-
Drivers of Change
tions could take in response to those developments.
The journals of higher education are replete
The intent is to provoke the audience into crafting a
with articles highlighting the forces at work which, for
strategy for their institutions which recognizes that
better or worse, will shape the future of the industry.
the status quo may no longer suffice.
I cannot hope to list them all in this article, nor take
Three provisos are in order. First, I am in no way
the time to flesh out their details. Rather, the intent is
an expert on higher education. My knowledge of the
to note the ones that seem most salient, assume
subject is restricted to my current participation as a
that the reader is already reasonably well informed
professor, my past involvement as a student, and my
of their nature, and then move on to a discussion of
future parental role as a consumer. I am, therefore,
their impact.
48
My list, which is not meant to be exhaustive or
more indirect, but still important, impact on the
even mutually exclusive, includes (in no particular
future of higher education, it may be one with
order) the usual list of suspects:
which the audience is less familiar.
• new technologies, particularly the digital,
While no one believes that lifetime employ-
broadband, interactive, online technology
ment ever characterized more than a few major
known as the Internet
U.S. corporations (nor that Dilbert accurately por-
• demographics, notably the aging of the popu-
trays the attitude of today's executives), expecta-
lation and a concomitant increase in numbers
tions about the relationship between employee
of active retired people, and the increase in
and employer have undergone recent change. For
ethnic minorities and immigrants
our purposes, this can be summarized as a
decrease in loyalty and commitment on both sides
• a change in the nature of the employment
of the labor market. Employees can no longer
contract from lifetime employment with a sin-
expect to be rewarded for seniority alone.
gle company to “free agency” and regular
Employers must recognize that younger, better
transfers (both voluntary and involuntary)
trained workers will no longer accept compensa-
between companies
tion below their marginal contribution without
• cost increases that outstrip productivity
searching for a better paid position (preferably one
growth and so lead to a continuing rise in the
with stock options at a start up firm). In a world of
real price of education
rapidly advancing knowledge, this tighter link
• debate over the role of affirmative action and
between current individual contribution and com-
universal access in higher education
pensation requires lifelong learning by workers if
they are to continually improve, or even maintain,
• exponential increase in the rate of accumula-
their income level.
tion of knowledge and the consequent fragmentation and specialization of academia
Recognizing the revised employment contract,
companies have found that the ongoing provision
• globalization of academic and educational
of training is an effective way to retain valued
markets
employees. In the new economy, workers remain
• new competitors entering the business, both
with their employer not because of a job guaran-
as stand-alone institutions and as companies
tee, but because it provides the opportunity to con-
training their own employees
tinually upgrade skills and so remain attractive to
• changing societal norms.
other employers.5 Firms retain employees by max-
One of these bare bones bullet points—the
imizing the future attractiveness of those employ-
changing nature of the employment contract—
ees to other firms!
deserves further elucidation. Because this has a
49
These labor market changes are, of course,
Part of the problem in compiling a list like the
occurring even among the hallowed halls of acade-
one above is that many of the items are interrelated.
mia. Tenure no longer appears to represent the life-
It is hard to distinguish which are the truly independ-
long commitment on either side that it once did.
ent and underlying drivers of change and establish a
Superstar professors are regularly moving across
clear logic of cause and effect. As a result, it is diffi-
universities to maximize their income and research
cult to cleanly determine how each of these forces
6
support, while universities are reexamining the
will change higher education. We can hypothesize
whole notion of tenure—in one recent case gaining
about the effect of each individual force, but the
the support of the courts for redefining tenure as a
aggregate impact of the changes is hard to evaluate.
position without guarantee of any compensation.
Figure 3-1
Elements of industry structure.
SUPPLIER POWER
THE DEGREE OF RIVALRY
Concentration and balance
Fixed (or storage) costs/value added
Intermittent overcapacity
Industry growth
Product differences
Brand identity
Switching costs
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or differentiation
Switching costs of suppliers and firms
in industry
Presence of substitute inputs
Threat of forward integration relative to
threat of backward integration by
firms
THE THREAT OF ENTRY (Entry
Barriers)
Absolute cost advantages
Proprietary learning curve
Access to necessary inputs
Proprietary low-cost product design
Government policy
Economies of scale
Capital requirements
Proprietary product differences
Brand identity
Switching costs
Access to distribution
INDUSTRY
COMPETITORS
THE THREATS OF SUBSTITUTES
Relative price performance of substitutes
Switching costs
BUYER POWER
Bargaining leverage
Buyer concentration vs. firm concentration
Buyer volume
Buyer information
Buyer switching costs relative to firm
switching costs
Pull-through
Substitute products
Source: Michael Porter
50
Ability to backward integrate
Price sensitivity
Price/total purchases
Impact on quality/performance
Product differences
Brand identity
Buyer profits
Decision maker’s incentives
Industry Analysis
Figure 3-2
One approach that moves beyond the previ-
Profitability by manufacturing subsector, 1971-
ous, somewhat ad hoc, listing of various drivers of
1990.
change in an industry involves a more systematic
Return
Return
Return
on Equity on Assets on
industry analysis. This approach, popularized by
Sales
Harvard Professor Michael Porter as the Five
Drugs
21.4%
11.8%
13.1%
Printing and Publishing
15.5
7.1
5.5
Food and kindred products
15.2
6.6
3.9
force,7 draws from a well established stream of
Chemicals and allied products
15.1
7.5
7.2
research in Indus-trial Organization economics on
Petroleum and coal products
13.1
6.5
6.5
Instruments and related products
12.9
7.2
6.9
Industrial chemicals and synthetics 12.9
6.2
6.1
Paper and allied products
12.5
6.0
5.1
Aircraft, guided missiles, and parts
12.4
4.1
3.7
Fabricated metal products
12.3
5.7
3.7
Forces but recently amended to include a sixth
the structural determinants of industry performance 8 (see figure 3-1).
Industry analysis begins from the premise that
all industries create value. The questions are what
Motor vehicles and equipment
11.6
5.6
3.7
caps the amount of value the industry can create
Rubber and misc. plastic products
11.6
5.1
3.4
(the size of the pie), and who captures the value
Electric and electronic equipment
11.5
5.4
4.4
that is created (the division of the pie)? Three
Machinery, except electrical
11.1
5.8
3.4
Stone, clay, and glass products
10.4
4.8
4.0
forces affect the size of the pie—threat of entry,
Textile mill products
9.3
4.3
2.5
threat of substitutes, and presence of comple-
Nonferrous metals
8.3
3.9
3.6
ments. Three forces determine the division of the
Iron and steel
3.9
1.5
1.3
pie—power of buyers, power of suppliers, and
In the words of Michael Porter, “all industries are
extent of rivalry. Together these six forces deter-
not created equal.” Some industries, like pharma-
mine the average profitability of an industry, and
ceuticals and soft drinks, are inherently more prof-
shape the conduct of competition within that indus-
itable than others, such as the domestic airline or
try.
steel industries, because of fundamental differThe value of this approach for strategy devel-
ences in structure.9 Understanding whether you
opment in the private sector, where it has been
are competing in an industry in which it is easy or
widely adopted as a basic building block of strate-
difficult to make good returns is obviously an
gic analysis, has been threefold.
important input into strategy development.
First, industry analysis can be used to predict
Second, industry analysis provides a systematic
the average level of profitability for an industry. It
framework for interpreting how underlying shifts in
has been empirically demonstrated that there are
technology, demand, regulation, etc., will affect the
systematic and durable differences in the average
nature of competition in an industry. Rather than
long term profitability of industries (see figure 3-2).
compiling a long list of drivers of change with no
51
conception of how those drivers will affect the indus-
Past Structure. I would argue that the structure
try, applying the methodology enables strategists to
of the higher education industry in the recent past
rigorously and systematically examine their effects.
has made it an attractive business in which to com-
A great virtue of Porter's framework is that it provides
pete. Entry barriers were high, primarily because of
a check list of all the things you need to consider that
the cost to build a physical campus and the time
may affect an industry's development, and a frame-
needed to create a reputation that attracted both stu-
work to interpret their effects.
dents and faculty and gave credibility to any degree
Last but not least, industry analysis suggests
offered. The only possible entrants were state insti-
strategic moves that incumbents can take to
tutions which received direct taxpayer funding and/or
improve their performance. In particular, the frame-
benefited from subsidies to in-state students. The
work allows executives to design strategies that
threat of substitutes was low in an era when college
capitalize on the forces that improve industry struc-
degrees replaced high school diplomas as the certifi-
ture and to mitigate the effects of those forces that
cate of employability, and other institutions could not
degrade industry structure. The three main strategic
offer legitimate degrees. Plentiful complements
moves of the major U.S. airlines since deregulation
included the growth of employment and cultural
in 1978, for example, have been designed to limit
opportunities for staff, students and faculty around
entry, constrain rivalry, and decrease buyer
universities, which increased their attractiveness as
power—the three forces that condemn the industry
locations to live. Thus there was little cap to the
to unattractive rates of return. The airlines have
value created by the industry.
introduced hub and spoke systems in an effort to
Buyer power was historically low as market
dominate routes out of hub cities and deter entry;
demand grew; the customer was the individual stu-
computer reservation systems and yield manage-
dent or parent who had no ability to negotiate tuition
ment software to limit the extent and duration of
rates; the high degree of differentiation by the pre-
price competition among airlines; and frequent flyer
mier institutions reduced student price sensitivity;
programs to increase customer loyalty and so
and the intangible quality of education led many to
reduce their price sensitivity.
positively correlate their evaluation of quality with
What does the application of this methodology
price.11 The exception was, again, state funded insti-
suggest about the “profitability” of the higher educa-
tutions whose chief buyer was also its chief source
tion industry as we have known it historically? (And
of funds—an increasingly powerful and active state
here let me concentrate on the high end of that
government. The power of suppliers, primarily of fac-
industry—the private institutions and research ori-
ulty, was low since they had few high paying alter-
ented state universities 1 0) How might that industry
native careers outside academia. Lastly, rivalry was
change in the future, and with what implications for
reduced by the social goals of the institutions and
university strategies?
the existence of fora and mechanisms to discuss
52
(and possibly also control) excessive competition.12
culties in the past. It certainly has not. But most of
Colleges and universities, therefore, should have
those issues have revolved around internal affairs
been able to capture most of the value they created
rather than external and competitive threats. The
in the provision of higher education.
question is, what will happen to this favorable industry structure in the future?
Evidence for the historic attractiveness of the
higher education industry includes the ability of pri-
Future Structure. The great merit of industry
vate institutions to raise tuition costs substantially
analysis is that we can determine how all the various
faster than the rate of inflation. Few other industries
drivers of change identified earlier will affect the
have been able to consistently increase real prices.13
higher education industry through their influence on
Other evidence would include the increase in net
the six forces. Rather than considering the impact of
14
individual drivers, such as the Internet, demograph-
(although balance sheet accounting for higher edu-
ics, and changes in the employment contract on the
cation institutions clearly differs from the private sec-
higher education industry, the framework allows us
tor, net worth remains one indicator of value
to consider what collective changes they will bring to
increase), and the rarity of exits from the industry.
each of the six forces, and how the resulting
Competitive industries, even profitable fast growing
changes in structure may reconfigure the higher
industries, experience turnover rates of at least 3
education industry.
worth of private universities over the last decades
percent per year, 15 yet there have been practically no
Collectively, the exogenous changes facing the
exits from, or even bankruptcies among major uni-
industry will facilitate entry into the higher education
versities in recent years.
business; increase the availability of, and demand
You may find it difficult to accept that you have
for, substitutes for higher education; and increase
been competing in an attractive and profitable indus-
buyer and supplier power. All of these changes are
try in the past. But the fact that few of you would
likely to be detrimental to the long-term structure of
even use the word competition to describe the
the industry.
nature of the interaction among institutions probably
Entry Barriers
best illustrates how accommodating the industry
structure has been historically. Those of you with pri-
Technology promises to be the vehicle for
vate sector experience would probably recognize
easier entry into the higher education arena. In
that pressures to increase productivity, grow rev-
particular, the Internet facilitates distance learning
enues, and continuously innovate are substantially
by allowing access to materials and interaction
higher there than in higher education.
with faculty without the physical proximity of the
I do not wish to imply that managing a college
student and his or her institution of higher educa-
or university has been without challenges and diffi-
tion. As bandwidth and speed of transmission
53
Substitutes
increases, it also becomes possible to stream
video in real time. The end result may well be the
Changes are also increasing the availability of,
replication of the classroom experience in cyber-
and the demand for, substitutes for higher education.
space without the physical collocation of students.
With respect to availability, the same technology that
This implies that the university of the future need
allows for new entrants into higher education also
not have a physical location, and need not be con-
creates the opportunity to develop educational pro-
strained in pedagogy the way that correspondence
grams that provide alternatives for parts of the tradi-
schools, or even the Open University in the U.K.,
tional higher educational experience. Rather than
have been. Students online in their own homes can
providing an entire four-year residential degree,
get a formal education experience similar in many
entrants can pick off the most attractive parts of the
respects to the one they currently receive at a col-
market with educational products that are not the
lege or university.
typical undergraduate or postgraduate degree.
Moreover, technology allows for the replication
On the demand side, employers no longer
of much of the educational experience at very low
regard the one time provision of an undergraduate
marginal cost. One professor can make his or her
(or postgraduate) education as sufficient for the life-
entire course available to an almost infinite number
time learning needs of their workforce. Increasingly
of students for the initial fixed cost of preparing the
they are meeting these ongoing training needs in-
traditional class. The lectures, class notes, and read-
house or with third party suppliers. In the market I
ing lists can all be transmitted at close to zero cost.
know best, it is estimated that the total revenue from
The net result is that entry barriers have been
executive education at universities today, including
substantially reduced. A virtual institution without
MBA and in-career education, is perhaps $6 billion.
having incurred the capital cost of constructing a
In contrast, the in-house company education market
campus, in principle, can offer the educational expe-
is estimated to be about three times that size, or $18
rience of the best teachers around the world. The
billion in the United States.17 GE's Crotonville training
economics of such an entry strategy into the cur-
center, for example, is renowned for its leadership
rently very attractive educational market suggests
training, which has made GE the source for many
that it will not be long before such an enterprise is
CEOs of major industrial companies. 18
pursued. As Eli Noam pointed out at the Forum’s
Employees are also responding to the appeal of
conference last year, with tuition rates of $50 per stu-
alternative educational programs that will upgrade
dent per hour being more expensive than a
and update their occupational skills, such as com-
Broadway show, can it be long before entrepre-
puter literacy. However much universities may dis-
neurs, like Chris Whittle, or corporations, like Time
parage the provision of courses like computer
Warner, enter a business with such a potentially
programming or video film-making as merely the
lucrative payoff?1 6
output of trade schools, the fact is that such courses
54
are increasingly demanded as alternatives to, as
ate degree, education will be provided in smaller
well as supplements for, the basic liberal arts under-
chunks as required. If this occurs, then to ignore
graduate education because of the need for contin-
such courses is to act as the railroads did in the early
uing training in contemporary skills.
20th century when faced with the threat of substitu-
Other substitutes for traditional higher educa-
tion from automobiles and airplanes. Sticking to a
tion will also become increasingly popular. For the
narrow definition of their business as railroads, and
increasing share of the population with wealth and
failing to define their domain as “transportation,” cost
leisure and/or the retirement time to pursue a specif-
the railroads their dominant position in the economy.
19
ic interest or hobby, there are a profusion of new
Failing to recognize short nontraditional courses
courses and initiatives available in addition to the tra-
as a viable substitute for higher education might
ditional extension school programs or adult educa-
spell the demise of the traditional institutions of high-
tion programs that have been offered by universities.
er education.
One example of this kind of nontraditional learning is
Complements
the Disney Institute, which offers everything from
Less change is occurring among complements
Cordon Bleu cooking to fly fishing and literary criti-
for higher education, although the importance of the
cism.
higher education to many of its complementors,
It might be argued that these nontraditional
programs represent incremental demand for new
such as personal computers and local industry, is
forms of education, rather than substitutes for tra-
declining.
ditional higher education. If that is the case, they
The potential changes to the structure of the
represent an opportunity for growth and not a
industry outlined above reduce the amount of value
threat. The risk with this argument is twofold. First,
that higher education can add. But universities and
the credibility providers of such programs can build
colleges also face threats to their ability to appropri-
over time might allow them to extend their product
ate the diminishing value that they do create.
offerings and become more direct competitors of
Supplier Power
higher education. Imagine if, after ten years of providing a set of very high quality English literature
Most obviously the power of faculty as a suppli-
courses, Disney offers a degree in English. How
er has shifted. The advent of technologies that allow
“Mickey Mouse” would that degree be perceived by
one professor to leverage his or her ideas through
society?
books, videos, seminars, and Web pages has creat-
Second, and more speculatively, it is possible
ed the superstar phenomenon and the enormous
that short courses that support lifelong learning rep-
incomes of celebrity “gurus. ” 20 The commercial value
resent the future of higher education. Rather than
of academic knowledge and ideas has also
learn everything at once in a four-year undergradu-
increased, along with a recognition that faculty them-
55
selves should earn a share of the rents produced by
The price sensitivity of consumers is height-
their ideas.
ened by the absolute size of the purchase. As tuition
When a colleague recently won the Nobel Prize
rates, after years of rising faster than inflation,
and was asked what he would do with the money, he
exceed $100,000 for four years, a degree becomes
looked embarrassed and did not reply. The media
the second largest purchase an individual makes in
interpreted this as a penurious academic over-
his or her life. No wonder customers are exceeding-
whelmed by the size of the prize. The truth was that
ly careful and increasingly price sensitive in their pur-
to him the money was spare change! The value of
chase decision.
his share in a hedge fund partnership that utilized
Buyer power also increases as the degree of
the financial techniques for which he was winning
backward integration by customers rises. To the
the prize far outweighed his half million dollar share
extent that firms become suppliers of higher educa-
of the prize.
tion themselves as they introduce lifelong learning
Competitive bidding among universities for tal-
programs for employees, they reduce the ability of
ent ratchets salaries upwards. This does not imply
higher education institutions to capture value. Even
that all academics will become millionaires. Supply
if they do not enter the education business them-
and demand will still equilibrate salaries at low lev-
selves, companies are inherently more powerful and
els. However, it does limit any rents that universities
price conscious than individuals. Several of the
can earn from their faculty. It also encourages the
major management consulting firms, for example,
use of part-time faculty who are a cheaper source of
are no longer asking new employees to independ-
labor because they are only compensated for their
ently earn an MBA. Rather, they are contracting
teaching time.
directly with business schools to provide a short
(several week) course to serve in lieu of the MBA.
Instead of receiving two years’ tuition per student,
Buyer Power
the business school receives a hard bargained few
The power of buyers increases as the options
weeks of revenue.
the customer has to choose from increases. As
substitutes and new entrants appear, the monop-
Rivalry
oly that traditional institutions have had on the
provision of higher education erodes. This will at
Rivalry is also set to increase in the future.
some stage start to limit the ability of colleges
While the entry of new low cost providers into the
and universities to push through tuition price
industry will increase rivalry, it is also likely that cur-
increases at will, particularly because many of
rent incumbents will become more competitive.
the new providers will use new low cost delivery
Regulatory changes may directly contribute to this
mechanisms.
since mechanisms developed over the years to limit
competition, such as financial aid agreements,
56
appear to be under threat. If antitrust legislation is
observed, “when an industry with a reputation for dif-
rigorously applied to colleges and universities, not
ficult economics meets a manager with a reputation
only will price competition for students increase, but
for excellence, it is usually the industry that keeps its
also supply-side agreements, such as on faculty
reputation intact.” 22
compensation, could be examined.
What can you do about this sorry state of
Moreover, distance learning removes the
affairs? What are the strategic implications from this
capacity constraint that a single institution has tradi-
analysis? What are pointers for institutions to follow
tionally operated under. The physical facilities of a
in developing their strategies?
single campus need no longer limit the size of the
The first recommendation is to recognize and
student body. Since education has become largely a
accept that it will be more difficult to compete in the
fixed cost business (and the new technology will only
higher education business in the future. While this
hasten the shift from variable to fixed costs), there
acceptance will not by itself solve any problems,
will be enormous pressure on every institution to
plans that realistically reflect the future have a better
leverage its investments by expanding class sizes.
chance of succeeding than those that merely project
This will increase the competitive overlap between
the past.
institutions, particularly as geography becomes less
The second observation is that just as the air-
of a constraint. Cambridge and Harvard have histor-
lines developed strategies to mitigate the worst
ically not competed for undergraduates, but with
effects of their industry structure, it would be valu-
increasing globalization facilitated by the new tech-
able for universities to develop strategies that
nologies, they probably will do so in the future.
address the threat of entry, substitutes, rivalry, and
Finally, the secular drop in enrollments after the
buyer power—the four main drivers of deteriorating
echo of the baby boom graduates will create spare
industry structure.
capacity and so will exacerbate competition.21 The
only light on the horizon for the industry is the poten-
Raising Entry Barriers and Deterring
Substitutes
tial growth in demand for higher education, broadly
There are three constraints on entrants into
defined, as lifelong learning increases the consump-
and substitutes for higher education, and colleges
tion of education.
and universities will need to utilize these con-
Strategic Implications
straints in mitigating the deterioration of their
industry structure.
The result of the impending changes will be a
profound deterioration in the structure of the higher
The first constraint is that the higher educa-
education industry. This implies that things will get
tional experience involves more than just the
tougher for participants. That means you! This is par-
classroom or paper writing components. To the
ticularly troubling because as Warren Buffet has
extent that the formal educational experience
57
involves group activity, mentoring, role models,
accorded the holders of a certificate from the institu-
and other difficult to standardize and replicate
tion. While certification processes and reputation in
activities, the threat of new technologies is
general are only built over time, to the extent that
reduced. What cannot be costlessly scaled up on
those who are seeking alternatives to higher educa-
the Internet is one-on-one student-faculty interac-
tion sponsor their own certification bodies (as pro-
tion. Differentiating the product offering of uni-
fessional bodies like CPAs, lawyers, and doctors
versities around these aspects of education,
have in the past), this constraint is eroded. If major
therefore, can potentially deter new entrants.
companies, for example, created a body that certi-
More specifically, it means that huge freshman lec-
fied the quality of a degree from their in-house train-
ture classes run by a well known professor who
ing centers, higher education would lose control of
never meets a student but leaves the teaching to
one of its major barriers to entry. Clearly, strategies
graduate student TAs, will leave universities very
that require high standards for certification, and that
vulnerable to competitors exploiting low cost
reinforce the value of brand names should be adopt-
Internet delivery systems. In contrast, the English
ed to deter entry.
tutorial system will probably be the last bastion of
traditional higher education.
Limiting Rivalry
The second and related constraint on entry is
A number of strategies can be employed to
that much of the undergraduate experience involves
restrain rivalry within higher education, the first of
more than formal learning, particularly the socializa-
which is to lobby strenuously for antitrust exemption.
tion process that occurs when teenagers live away
The looming threat of competition from new delivery
from home among peers for four years, and the
systems can be used as an argument for relief, in
development of work habits for lifelong learning.
addition to arguments about the special nature of the
Again, the more universities can do to reinforce the
education business.
traditional liberal arts notion of educating the whole
The second is to embrace mergers and acqui-
person, the lower will be the threat of entry and sub-
sitions. This might be anathema to alumni, but it
stitutes because they cannot replicate those compo-
makes perfect economic sense. The big eight
nents of the higher educational experience.
accounting firms are now down to the big five, with
The third constraint on the success of new
further consolidation likely, in part because it reduces
entrants and substitutes is the credibility of their cer-
price competition for the limited number of desirable
tification process. Because education is an intangi-
large multinational clients. Hospitals are merging to
ble product, there has to be some external
reduce excess beds and share facilities for expen-
legitimacy accorded every successful institution.
sive surgical specialties. Whenever organizations
That legitimacy centers around the recognition
have complementary assets, it is rational to consid-
58
er a merger. In any other business, Harvard and
If companies can raise the cost to customers of
Stanford would not compete with each other but
switching their purchases, they reduce the bargain-
would merge to offer students the option of (and
ing power of those customers. Dedicated Apple
here I reflect my past affiliation) Harvard East and
users have paid price premia for years because of
West Coast (“same great education, but now you
their unwillingness to incur the perceived expense of
have the choice of two great locations!”).
switching to the Wintel platform. Universities already
If you do not wish to be that ambitious, why
employ devices to raise switching costs—for exam-
should every university in the Boston area have an
ple, by limiting transfers of credits between schools
engineering department, or the facilities for empirical
to ensure that once students begin degree courses
research in astrophysics? Why not collaborate to
they cannot readily switch to another school, or by
share expensive activities and specialized depart-
implementing early admissions procedures that
ments? What opportunities are there for cooperation
commit a student to accept a place if offered. But
and alliances among institutions that will both
more could be done. Offering tuition reductions if a
improve cost efficiency and reduce rivalry?23
student had signed up at birth would lock them into
an even earlier purchase decision.
Rivalry is reduced the more differentiated the
strategies of industry participants. In the U.K.,
Trying to make the choice of institution less
particular universities are known for their strength
price sensitive by reducing the initial cost of a degree
in particular subjects. Why do not U.S. universi-
would also help offset buyer power. Rather than
ties specialize, so that a high school graduate
charging $25,000 for a four-year degree, the expan-
who wanted to attend an Ivy League school
sion of lifelong learning, in principle, would allow uni-
would know that Yale was best for one subject,
versities to charge, say, $3,000 per annum for life in
Brown for another, and Columbia for a third. To
return for free access to courses at any time after the
some extent there is a geographic segmentation
initial degree. A 3 percent price increase seems far
in the United States. There is also what econo-
more justifiable, and much less worth bargaining
mists call vertical differentiation 24 —a tiering in the
over when it is $90 and not $750! (By the way, such
perceived quality of universities. But with the
a pricing policy would have the additional bene-
exception of institutes of technology and small
fit of creating lifelong switching costs.)
liberal arts colleges, the industry has not, by and
Alternatively, strategies can be devised to shift
large, pursued horizontal differentiation by spe-
the buyer to one who is inherently less price sensi-
cializing in different product offerings. 25 Yet, the
tive. Cereal is sold primarily to children because they
more segmented the products institutions offer,
do not respond to price promotions. In the educa-
the less direct the competition.
tional arena, this suggests selling to the student and
Offsetting Buyer Power
not the parent (assuming that it is parents that nor-
59
mally foot the bill). The more guilt a parent can be
The impending degree of change to the struc-
made to feel when they do not fulfill their child’s
ture of higher education can be likened to that facing
desire to attend a particular college or university, the
industries
less price sensitive the customer becomes.
(telecommunications, energy), new technologies
suddenly
opened
to
deregulation
But perhaps the best strategy for reducing
(pharmaceuticals, computers), and foreign competi-
buyer power is branding the product. I know that
tion (steel, autos). Andy Grove, CEO of Intel, calls
when companies receive the Harvard insignia on an
such junctures strategic inflection points.27 These
executive education course, they pay a premium
occur when exogenous influences lead to a funda-
over the exact same course offered privately by the
mental reconfiguration of industry structure. In the
exact same faculty of up to 150 percent! Not many
computer industry, the introduction of the PC and
products or services enjoy this kind of brand value.
then the emergence of the Internet represented
Indeed, it is equivalent to the premium received by
strategic inflection points that disrupted the indus-
Coca Cola—the most valuable brand in the world—
try's trajectory and overthrew previously dominant
and it sells just sugar and water! With an experience
competitors in a gale of “creative destruction” initiat-
product, whose worth is apparent only after you
ed by entrepreneurial innovators.
have used the product, brand names are extraordi-
We can, therefore, look to other industries that
narily valuable as signals of quality. Clearly, all institu-
have experienced such strategic inflection points to
tions cannot be above average quality, but a strategy
help predict the future evolution of the higher educa-
of specialization allows for the creation of brands as
tion industry. While less precise and theoretically
the “best premed course” in the country, the “best
valid, the strategy field is beginning to understand
Italian language program” in the country, etc.
industry dynamics by developing typologies of transitions from the use of analogy (or pattern recognition).
Industry Dynamics
Specialization and Vertical Disintegration
But how will the system of higher education
itself evolve under these pressures? In this paper I
One of the most relevant transformations of
cannot hope to describe all the feasible scenarios for
industries facing extensive change (particularly entry
the future of higher education, even if contemporary
and substitution) is to become more specialized and
theory allowed me to be that intellectually exhaus-
less vertically integrated. At the extreme, an industry
tive. What I will do is suggest one scenario that
reconfigures itself from a limited number of vertically
seems likely to me, and then suggest appropriate
integrated entities into horizontal layers of firms that
strategic responses for colleges and universities by
specialize in one specific activity. More generally, an
referring to successful examples from other indus-
industry alters from exploiting vertical scope to
tries that faced similar changes.
exploiting horizontal scope.
26
60
Historically, for example, electric utilities were
only the most profitable segment of the industry.
responsible for the generation, transmission, and
Second, specialist providers emerge to meet
distribution of electricity to every customer in their
the needs of the different functionalities within the
region. They also provided the full range of customer
industry because each functionality requires a differ-
services—marketing, billing, repair, and often even
ent set of skills and capabilities. In the electric utility
the sale and installation of electric appliances.
industry, for example, the skills required to safely
Deregulation and the consequent flood of new
and efficiently run nuclear power generating facilities
entrants has led to the reconfiguration of the indus-
are very different to those required to trade electrici-
try. Utilities are now spinning off their generating
ty futures, or market electricity to residential cus-
units to specialist companies with a track record of
tomers. Under the traditional regulatory regime, one
efficient plant operations. They are outsourcing
firm undertook all these activities. In the new dereg-
billing to companies, like credit card processors, that
ulated and competitive world, companies are spe-
have billing experience. They are concentrating mar-
cializing on one or other of these competencies,28
keting efforts on particular segments of the business,
and exiting businesses that do not draw from their
while allowing new entrants that specialize in whole-
particular competence. To compensate they are
sale electricity trading to establish long-term con-
leveraging that competence across industries.
tracts with major industrial users. And most utilities
Enron, for example, began as a trader in the oil and
have now exited the appliance sales and service
gas market, but has recently leveraged its unique
business.
trading capabilities to enter the electricity business,
offering a full product line.2 9
Two related trends drive the emergence of specialists and the consequent vertical disaggregation
For universities, any similar pattern of evolution
of industries. First, specialists enter those stages of
toward a more disaggregated and specialized set of
the value chain and those segments of the product
providers will challenge the tradition of the integrat-
line which offer the highest profit potential. They pur-
ed provision of higher education. Universities will
sue what is called the “cherry picking” strategy,
then need to reconsider the rationales for being ver-
ignoring the less profitable products that incumbents
tically integrated into every activity that must take
offer, in order to pick off those parts generating the
place to deliver the educational product, and for
highest return. MCI began the breakup of the tele-
offering a full product line.
phone industry when it entered the long distance
To help them do so we must identify the func-
telephone market, because AT&T was required to
tionalities—the set of different and potentially dis-
use profits from its long distance business to subsi-
crete needs 3 0 —that higher education currently
dize “universal” service. Not being subject to any
offers, and see how alternative institutions and new
legal constraints, MCI sensibly chose to compete in
entrants might provide these same functionalities
61
using different technologies and skills to create com-
First, the library need no longer exist as a service
petitive advantage.
offered by the university. Online access to written
Again, I cannot hope to derive a complete list of
(and other forms) of material can replace the stacks
the products and services that colleges and univer-
and hard copy books we all know and love.3 1 If that
sities offer. What I can do is note the more obvious
happens, why should the online library be provided
categories, illustrate how each category would be
by the university? A more likely provider would be a
affected by specialist competitors, and let you
Bill Gates (who is already buying up the electronic
extend or amend the list at your leisure.
rights to famous works of art), who would own the
copyright of all important materials and could charge
It seems to me that colleges and universities
a low per use fee for every book or article accessed.
offer (again in no particular order):
Colleges and universities have no great skills in elec• socialization through the experience of living
tronic access, and they surely would appreciate not
among peers away from home for four years
having a library's operating and acquisition costs in
• liberal arts education as a renaissance man
the annual budget!
(or woman) appreciating the value of learning
Second, universities are already competitors in
and being capable of pursuing independently
the hotel and conference center business, renting
guided learning throughout life
out housing and classroom facilities to third parties
• professional certification and specific skills
during periods of low capacity utilization (notably in
training for particular careers
the summer). Unfortunately, they are not particularly
cost efficient providers of such facilities. We are
• academic research
already seeing a trend to the outsourcing of restau-
• postgraduate training of the next generation
rant services by universities 3 2—why not outsource
of researchers and university teachers
the management of other physical facilities to a
• signaling to the labor market the intrinsic qual-
Marriott? The logical extension would then be to sell
ity of the individual by the granting of a degree
off the building and real estate to partnerships that
• library
can exploit a tax break, just as most hotel and con-
• sports teams
ference center chains lease the underlying assets
• physical facilities for large and small group
from REITs. If universities have no competitive
advantage in the provision of housing and confer-
gatherings and living accommodations.
ence facilities, why not let firms that do so gradually
Physical Facilities. Let's start by examining the
take over the business?
physical facilities that have traditionally been
required for universities and which have been one of
Currently university sports teams are either for
the major barriers to entry into higher education.
the physical education of the average student, or are
62
feeder teams for the professional leagues. The latter
provision of full time professional courses. In the
is an unsustainable role for universities because of
U.S., the consulting firm Arthur D. Little offers an
the goal conflict it produces among student athletes.
open enrollment MBA course. In the U.K., a number
NCAA violations, low graduation rates, bribery and
of private sector institutions, including Cranfield and
corruption, are all results of the quasi professional
Ashridge, flourish as providers of many residential
nature of major college sports. The resolution would
business courses. Some of these institutions even
seem to be the separation of education from profes-
use teaching faculty from universities, paying out
sional sports by the establishment of farm teams
some of the profits as higher per diem compensation
which are independent of any academic institution,
than the university offers. Long term, it is hard to see
as occurs today in baseball in the U.S., or soccer in
how universities can hold onto a share of the
the U.K..
expanding market for teaching technical skills, if they
continue to price them to subsidize other parts of the
Educational Products. Turning to the various
institution.
educational products that universities offer, I would
argue that there could be a dramatic unbundling as
The second most vulnerable university product
focused and specialist competitors enter each of the
offering would seem to be those courses that enrich
fields in turn.
and educate individuals throughout their life. The
The most vulnerable educational product of uni-
ready availability of distance learning and nontradi-
versities is professional skills training. I suspect, on
tional educational institutions, such as the Disney
the evidence of the size of endowments and my
Institute, will allow individuals to educate themselves
business school experience, that professional
whenever, and on whatever topics they choose. The
schools are the most profitable part of the university.
potential cost advantage of the new methods of
They, therefore, represent the most attractive market
learning will lead them to displace the traditional uni-
for “cherry picking” entrants. Unfortunately, profes-
versity delivery system. As a result, a more econom-
sional skills are also the easiest part of the educa-
ically rational consumption pattern of continuous
tional market for firms to enter as they can readily
part-time education might emerge to replace the full-
backward integrate into the internal provision of
time four-year undergraduate degree.
training. Short computer courses are offered by
What would remain as the core product and dif-
thousands of private sector companies. More exten-
ferentiating feature of universities, because it is diffi-
sive professional skills training and certification is
cult for alternative providers to offer, would be as the
already provided by other institutions (e.g., account-
initial provider of the skills needed for lifelong learn-
ants, realtors, investment advisors), and many firms
ing. Everyone needs to be taught how to learn and
provide their own campus-like training centers.
how to independently guide themselves through a
Some companies are even entering into the external
process of continuing personal development. This
63
can only be provided with the methodologies and
which is not related to training in specific professions
mechanisms of a traditional university, which can
or trades, but to the training of the next generation of
influence behavior and motivate students. Whether
academics as researchers and teachers. I suspect
fulfilling this role requires the traditional four-year
that this is the least profitable university product—if
undergraduate education is another question.
not actually a money losing proposition. I am certain
Perhaps a two-year (or as in the U.K., three-year)
that the apprenticeship nature of the educational
undergraduate degree would suffice.
process cannot be provided by alternative technolo-
Similarly, universities may be the best providers
gies or distribution systems. New academics have to
of the socialization skills we expect young adults to
learn at the feet of existing academics, and there can
acquire. However, that need not necessarily be the
be no replacement for that education.
case since there are now many institutions like the
Research. Academic research has always been
military, Peace Corps, Outward Bound, boot camps
somewhat ungainly paired with education within uni-
for juvenile offenders, and residential counseling
versities. Debates about faculty promotion criteria
programs of various sorts that can be seen as pro-
and the quality (and interest) of top researchers in
viding an environment where young people can
teaching are all too familiar. While some institutions,
learn life skills that family and high school have not
notably the professional schools, have to some
exposed them to. Moreover, universities have never
extent solved the problem by employing effective
made it their primary purpose to teach these skills,
teachers with practical experience but no research
rather they have always been a byproduct of the “in
track record as adjunct or clinical professors, the ten-
loco parentis” role they play during the undergradu-
sion remains. We are all familiar with the arguments
ate experience. In the future, unless colleges and
of the symbiotic relationship between the two activi-
universities consciously provide this training, they
ties, but for many faculty, and the arguments of com-
may be attacked by specialists who focus their atten-
parative advantage, suggest that, if not a separation,
tion on this function alone.
at least far more specialization of activities is
required.
This suggests that the traditional liberal arts
education will be the last bastion of universities.
Moreover, student fees are currently subsidiz-
Teaching young adults life skills and the appreciation
ing research. This is unsustainable in a competitive
and ability to pursue lifelong learning, rather than
market. Entrants who compete only in the market
transmitting any particular body of knowledge or
from which the subsidy is derived can undercut
content, may well be the greatest strength of the tra-
incumbents and gain share. An entrant that paid fac-
ditional institutions of higher education.
ulty just for their teaching and did not compensate
for their research activities would have a substantial
Finally, the educational product that is perhaps
cost advantage.
least threatened is postgraduate education—that
64
The result of teasing apart the research and
improving utilization of the university's fixed assets. It
educational functions of the faculty could result in
will also match private sector entrants who are not
substantially less research being performed at uni-
constrained by the old agriculturally determined
versities. Already today, the vast majority of scientif-
timetable that higher education still operates under.
ic research is not done in universities but in
Benchmarking against other organizations, within
companies. The pharmaceutical companies alone
education and in industry at large, will facilitate the
spent $20 billion on R&D last year—a number that is
adoption of best demonstrated practices in all the
greater than the entire budgets of the Ivy League
universities activities. The list of steps that will
schools. Moreover, universities are looking to make
strengthen the current way of doing business goes
their research budgets pay off by commercializing
on.
discoveries and inventions. Given this commercial-
However valuable all these initiatives may be,
ization of research, why not go the whole way and
none is strategic. They may all improve the opera-
establish for-profit research entities, which could bid
tional effectiveness of the organization—they enable
for government funds, and establish them in
you to “do things right”—but none addresses the crit-
research parks alongside their existing commercial
ical strategic question of what is “the right thing to
brothers?
do?” As Michael Porter has suggested, strategy
involves choice. Choosing what to do, and choosing
Strategic Implications
what not to do is the essence of strategy. 3 3 This is
The underlying driver of all these potential
particularly true when facing, as you do, the potential
changes, of course, is competition. Whether it is
disaggregation of your business.
introduced by deregulation, technological innova-
It seems to me that the fundamental strategic
tion, or foreign competition, whenever competition
choice that universities face is whether or not to
increases because of reduced entry barriers or the
embrace the new technologies, new modes of dis-
improved appeal of substitutes, or when a more eco-
tribution, and new product offerings and remain a
nomic way can be found to provide a similar service,
full service provider, or whether to retrench to the
industries tend to fragment.
core by sloughing off activities and products until
Universities therefore need to take the new
all that remains is something like a small liberal
competitive threats seriously and become more
arts college (with postgraduates), in which tradi-
competitive themselves. How can you achieve this?
tional universities will continue to retain a compet-
One way is just to improve the cost efficiency of
itive advantage.
everything you do. Part time, teaching-only faculty
The traditional strategic prescription for firms in
reduces costs and matches new entrants who com-
your situation would indeed be to identify your cur-
pete in only a few educational programs. Introducing
rent competitive advantages and to participate only
a year-round academic calendar will reduce cost by
in markets that require those strengths. This would
65
lead you to concede entire market segments to new
Conclusion
entrants and retreat to the core product that cannot
In conclusion, I would argue that the leading
readily be imitated or substituted.
institutions of higher education are today faced
It is also the prescription that the U.K. motorbike industry pursued in the 1970s. Faced with
with a deteriorating industry structure and the
Japanese competition in mopeds and small
need to make a fundamental strategic choice.
With respect to the deteriorating structure, I out-
(<100cc) motorbikes, the British producers—BSA,
Norton, and Triumph—chose to concentrate on
lined a few steps that might be considered. I also
bikes above 250cc where they believed they had a
suggested that attempts to improve the cost efficiency of current operations will become increas-
competitive advantage. When the Japanese
entered those markets, the U.K. producers retreat-
ingly valuable in holding off the attacks from
ed to the superbike segment…. until the Japanese
lower cost entrants.
successfully invaded that market, thus ensuring
However, universities must also make a deci-
that no U.K. motorbike industry exists today. This
sion as to who they want to be in the future. They
sad example illustrates the risk to universities of a
can either choose to hunker down and retrench to
strategy that concedes markets to new entrants
the segment of the industry in which they retain
and substitutes.
the strongest competitive advantage, or they can
The alternative strategy is to aggressively adopt
broaden their scope and embrace the new deliv-
the new technologies and distribution mechanisms
ery systems and customer needs that the changing environment are generating. This is a dramatic
in order to compete head on with new rivals. While
choice.
extremely challenging, both in developing the skills
required to be successful in the new markets and in
The benefit of retreating to a core is that it is
managing profound change within the organization,
the most defensible and most profitable part of the
the payoff can be large. Rather than acting like the
current industry, and it is the one most compatible
railroads under the threat of trucking and airlines,
with the traditions of higher education. The risk is
confining themselves to a shrinking market segment,
that, like the U.K. motorbike industry, the retreat is
a strategy to expand and embrace the new tech-
to an untenably small and unsustainable part of
nologies can ensure the survival and growth of the
the market—that the broad sweep of competitors
traditional institutions of higher education. This sur-
ultimately overwhelms an institution that clings to
vival and growth may come in a very different form,
the past.
perhaps as a host of discrete entities, each offering
If, instead, colleges and universities expand
a unique product and employing a unique technolo-
their domain and enter the emerging parts of the
gy.
higher education market, they can potentially
66
retain their leadership position even as the face of
comes from outside the institution. Unfortunately,
education changes. The risk of that strategy is that
the first usually happens too late to save the com-
the institution may be unable to make the transi-
pany. The second is atypical of colleges and uni-
tion to the new industry and unable to build the
versities, and the third will run foul of their
capabilities to compete successfully in the new
governance structure.
world. In the attempt to do so, it loses the distinc-
A contorted governance structure that con-
tive competence and the heritage that supported
strains a university president's freedom of action
its past success and role.
may be the ultimate barrier to dramatic strategic
There are no easy answers to strategic choic-
change in higher education. Lacking a recognized
es like this. These are the domain of managerial
crisis, driving through the sort of farsighted strate-
judgement, of leadership, and of broader concepts
gic changes to universities that may well be
like mission and heritage.
required to succeed in the next millennium, may
Whatever the choice made to address the
well be impossible, even for the most able leaders.
coming changes in higher education, nothing will
Unlike the private sector, there are multiple con-
happen until those strategies are implemented.
stituencies represented in the various levels of
This paper focuses on what colleges and universi-
governing bodies—faculty, administrators, alumni,
ties might do to meet the challenges ahead, but as
state governments, federal government—all have
a last word I should also comment on the process
representation on the councils of governance.
of implementing strategic change.
Reacting to industry changes in time to preserve
the vital role of colleges and universities may
One of the invidious aspects of the sort of
require as much change in governance as in the
industry changes potentially facing higher educa-
strategies of universities themselves.
tion is that they will come slowly and haltingly. It
will be possible at times to argue that dramatic
strategic responses are not necessary. The threat
will be interpreted as a temporary disruption or a
cyclical downturn, not a long term trend.
Incumbent leaders often face this problem of interpretation, and many fail to make strategic adjustments in time.
What triggers fundamental change in such
institutions is either a crisis that compels action; an
acquisition or other major organizational disruption; or a new transformational leader who often
67
8
Endnotes
1
The research, carried out within the Structure—
Conduct—Performance framework, began with
U.S. Department of Education, Digest of
the work of Bain and Mason in the 1950s and has
Education Statistics (1997).
been continued and extended since then. For a
2
fairly recent summary of the findings see F. M.
College endowments rose between two and
Scherer Industrial Market Structure and Economic
three times from 1990-1997, according to a study
Performance (Boston: Houghton Mifflin, 1989) and
by the National Association of College and
R. Schmalensee and R. Willig, Handbook of
University Business Officers (NACUBO).
Industrial Organisation, (Amsterdam: Elsevier,
3
1989): chapter 10.
Eli Noam, “Electronics and the Dim Future of
Academic Publishers,” Forum for the Future of
9
Higher Education, 1997. Noam quotes numbers
One study measured the seven-year average
return on equity for the pharmaceutical industry as
on articles written in Chemical Abstracts. It took
nearly 30 percent, the soft drink industry as over
thirty years for the first million articles, but only
25 percent, the domestic airline industry as 8 per-
1.75 years for the last million.
cent, and the steel industry as 4 percent. Study
4
conducted by Monitor Consulting Co., 1992,
This is, however, a role I comfortably adopt
Cambridge, MA.
whenever I begin a consulting assignment with a
new client.
10
5
Defining an industry's boundaries requires a
book unto itself. Are luxury cars, for example, a
Sumantra Ghoshal and Christopher Bartlett,
discrete industry or part of the broader automobile
The Individual Corporation, (New York: Harper
market? The essential issue is the cross price
Collins, 1997)
elasticity of demand and supply between products.
6
See
Of the many recent cases that of a famous econ-
Derek
Able,
Defining
the
Business,
(Englewood Cliffs, N.J.: Prentice Hall, 1980).
omist who ultimately rejected a move to Columbia
University stands out.
11 So-called
7
experience goods, like consulting serv-
ices, whose value can only be determined after their
Adam Brandenburger and Barry Nalebuff,
consumption, often produce markets where price
Coopetition, (New York: Doubleday, 1986). The
and perceived quality are positively related.
“sixth force” introduced by Brandenburger and
Nalebuff is that of complements to the industry.
12
Obvious examples include the recently chal-
lenged Ivy League agreement on financial aid and
68
the NCAA athletic rules, which in other contexts
from their position as the largest firms in the United
might be considered restraints of trade.
States. See A. Chandler, Scale and Scope,
(Cambridge, Mass: Harvard University Press, 1990).
13
Williams classifies industries into three types
according to their underlying rate of price. See
20 No
Jeffrey Williams, “How Sustainable Is Your
ing academics, but certain superstar business
Competitive Advantage,” California Management
school professors regularly earn incomes in the
Review, Spring 1992: 29-51.
high seven figures.
14
21
See, for example, the numbers on college “sav-
one has yet compiled the list of highest earn-
Offsetting this is the trend toward virtual uni-
ings” from Gordon Winston, “Do Private Colleges
versities with low fixed costs where the pressure
Make Big Profits?” in Forum Futures, 1998 Papers,
to cut price and fill capacity is reduced.
ed.
Maureen
Devlin
and
Joel
Meyerson
22
(Washington, D.C.: Forum Publishing, 1999) ch. 2.
W. Buffet, Letter to Shareholders, (Omaha:
Berkshire Hathaway, 1992).
15
T. Dunne, M.J. Roberts, and L. Samuelson,
“Patterns of Exit and Entry into U.S. Manufacturing
23
Industries,” Rand Journal of Economics, 1998.
Seeking Solutions to Common Problems,” in Forum
See Will Reed, “Higher Education Consortia:
Futures, 1998 Papers, ed. Maureen Devlin and Joel
16
Eli Noam, “Electronics and the Decline of Books:
Meyerson (Washington, D.C.: Forum Publishing,
The Transformation of the Classroom,” in Forum
1999) ch. 3.
Futures, 1998 Papers, ed. Maureen Devlin and Joel
Meyerson (Washington, D.C.: Forum Publishing,
24
1999) ch. 7.
Willig, Handbook of Industrial Organisation:
For a discussion see R. Schmalensee and R.
chapter 16
17
P. Ghemawat, “The Market for Strategy Ideas,”
Harvard Business School Working Paper 1998.
25
Estimates are from a study by McKinsey and Co.
colleges, which aim to provide a different educa-
for the Harvard Business School.
tional experience than large state or private insti-
The exception might be the small liberal arts
tutions.
18
The best known recent example is Ralph
Bossidy who left GE to successfully turn around
26
Allied Signal.
of industry dynamics. See A. Slywotzky, D.
19
Morrison, T. Moser, K. Mund, J. Quella, Profit
A. Chandler documents the decline of railroads
69
The best attempt at this is Rumelt’s list of types
Patterns (New York: Random House, 1999).
27
Business Review 74 (1996): 61-78.
A. Grove, Only the Paranoid Survive (New York:
Doubleday, 1997).
28
The notion of core competence, what a company
does distinctively well, has become popular in the
strategy field recently. See C.K. Prahalad and G.
Hamel “The Core Competence of the Corporation,”
Harvard Business Review 68 (1990): 79-91.
29
The strict economic conditions that facilitate ver-
tical disaggregation and specialization are that
focused competitors are able to achieve a minimum economic scale within a single niche, and
that the transaction costs involved in purchasing
items separately or contracting for their provision
from outside suppliers are minimal.
30
G. Hamel and C.K. Prahalad, Competing for the
Future, (Cambridge, Mass.: Harvard Business
School Press, 1994). Hamel and Prahalad argue
that when industry boundaries blur, they reemerge
based around products that meet underlying customer needs.
31
Noam, “Electronics and the Decline of Books.”
32
Sharon Oster, “Privatizing University Services,”
in Forum Futures, 1998 Papers, ed. Maureen
Devlin and Joel Meyerson (Washington, D.C.:
Forum Publishing, 1999) ch. 1.
33
M.E. Porter, “What Is Strategy?” Harvard
70