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The Inevitable Change Ahead

The Inevitable Change Ahead

July 14, 2011

In most industries, technology-enabled competition is deemed healthy and vital. Accustomed to a hyper-competitive modern world, we expect even the largest and most prestigious companies to be continually challenged by nimbler, more creative upstarts. Economists teach that disruptive innovation by newcomers and creative destruction of entrenched incumbents leads to better products and services. When a century-old auto company, airline, investment bank, or newspaper files for bankruptcy or disappears altogether, we regret the attendant human suffering but count the loss as the price of progress, knowing that without competitive innovation and destruction we would enjoy a standard of living no better than our great-grandparents did.

Higher education, though, has been different. Large universities rarely cease to operate. Nor are the prestigious ones quickly overtaken. Part of the reason is a dearth of disruptive competition. The most innovative would-be competitors, for-profit education companies, find great success among working adults, many of whom care more about the content and convenience of their education than the label on it.

But many young college students still seek the assurance of traditional university names and the benefits of campus life. Because of loyal support from this large group of higher education customers, the incumbents have felt little pressure from the for-profits’ use of potentially disruptive online technology.

Meanwhile, the terms of competition among traditional institutions, the public and private not-for-profit universities, have been set primarily by those at the top. The strategy of most schools is one of imitation, not innovation. Little-known and smaller institutions try to move up in the ranks by adding students, majors, and graduate programs, so as to look more like the large universities. They also task their faculty with research responsibilities. In the process the emulators incur new costs and thus must raise tuition. This blunts the price advantage that they began with. They are stuck in a dangerous competitive middle ground, neither highest in quality nor lowest in cost. The great schools, rather than being discomfited by the imitation, seem all the more desirable because of it.

In their defense, the institutions that emulate Harvard and strive to climb the Carnegie ladder are doing just as conventional business logic dictates -- trying to give customers what they want. The great universities such as Harvard inspire not just administrators, faculty, and alumni at other schools. They also excite the most elite prospective students, who want to win admission to the most Harvard-like institution they can. Thus, less prestigious schools emulate Harvard’s essential features, such as graduate programs and expert faculty researchers and research facilities. They also give students costly non-educational amenities such as intercollegiate athletic teams, which Harvard no longer supports at the level of the most competitive schools.

The result of this competition-by-imitation is to solidify past educational practice among traditional universities, making them increasingly more expensive but not fundamentally better from a learning standpoint. The great-grandparents of today’s students would easily recognize the essential elements of modern higher education. Though the students are more diverse, the shape of classrooms, the style of instruction, and the subjects of study are all remarkably true to their century-old antecedents.

Great-Grandpa and Grandma would likewise recognize the three schools atop U.S. News’s 2010 college rankings: Harvard, Princeton, and Yale. In fact, asked to guess, they’d probably have picked just those three.

Only the costs of a higher education, one can argue, have kept pace with the times. In the 10 years after 1997, the inflation-adjusted price of a year of college at the average public university rose by 30 percent, while the earning power of a bachelor’s degree remained roughly the same. Cost increases derive partly from higher faculty salaries, but more from activities unrelated to classroom instruction. Scientific research, competitive athletics, and student amenities require both large operating outlays and the construction of high-tech laboratories, football stadiums, and activity centers. As a result, the cost of higher education grows faster than faculty salaries or other instruction-related costs.

The problem is not unique to higher education. In fact, in products ranging from computers to breakfast cereals, history reveals a pattern of innovation that ultimately exceeds customers’ needs. Hoping to get an edge on their competitors, companies offer new features, such as faster processing speeds in a computer or increased vitamin fortification in cereals. These enhancements are sustaining innovations rather than reinventions: the product becomes better while its basic design and uses remain the same.

The catch, as Clayton Christensen has shown in The Innovator’s Dilemma, is that these performance enhancements at some point exceed even the most demanding customers’ performance needs. The producer is incurring greater costs and thus must raise prices. That leaves the typical purchaser of a $5,000 laptop or a $5 box of cereal paying more than they want to, given what they actually need.

Much of what universities are doing is standard management practice: improve the product; give customers more of what they want; watch the competition. But it leads even great enterprises to fail, as detailed in The Innovator’s Dilemma. Inevitably, while the industry leaders focus on better serving their most prized customers and matching their toughest competitors, they overlook what is happening beneath them. Two things are likely to be occurring there. One is growth in the number of would-be consumers -- students, in the case of higher education -- who cannot afford the continuously enhanced offerings and thus become non-consumers. The other is the emergence of technologies that will, in the right hands, allow new competitors to serve this disenfranchised group of non-consumers.

Until the relatively recent emergence of the Internet and online learning, the higher education industry enjoyed an anomalously long run of disruption-free growth. In times of economic downturn, there were cries of alarm and calls for reform. But for the elite, well-endowed private schools, a bit of budget tightening sufficed until the financial markets recovered. The demand for the elite schools confer far exceeds the supply, allowing them to cover rising costs with tuition increases and fund-raising campaigns.

Even many less-prestigious universities benefit from accreditation, which has elevated them over unaccredited institutions. Public universities also enjoy the long-term commitment of taxpayers. In the absence of a disruptive new technology, the combination of prestige and loyal support from donors and legislators has allowed traditional universities to weather occasional storms. Fundamental change has been unnecessary.

That is no longer true, though, for any but a relative handful of institutions. Costs have risen to unprecedented heights, and new competitors are emerging. A disruptive technology, online learning, is at work in higher education, allowing both for-profit and traditional not-for-profit institutions to rethink the entire traditional higher education model. Private universities without national recognition and large endowments are at great financial risk. So are public universities, even prestigious ones such as the University of California at Berkeley.

Price-sensitive students and fiscally beleaguered legislatures have begun to resist costs that consistently rise faster than those of other goods and services. With the advent of high-quality online learning, there are new, less expensive institutional alternatives to traditional universities, their standing enhanced by changes in accreditation standards that play to their strengths in demonstrating student learning outcomes. These institutions are poised to respond cost-effectively to the national need for increased college participation and completion.

For the vast majority of universities change is inevitable. The main questions are when it will occur and what forces will bring it about.

Bio

Clayton M. Christensen is the Robert and Jane Cizik Professor of Business Administration at Harvard Business School. Henry Eyring is advancement vice president at Brigham Young University-Idaho. Reprinted by permission of the publisher, John Wiley & Sons, Inc., adapted from The Innovative University: Changing the DNA of Higher Education from the Inside Out, Copyright © 2011 by Clayton M. Christensen and Henry J. Eyring.

 

 

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