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Business Officer Magazine
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Business Model Under Attack

Higher education is particularly vulnerable to market invasion by online providers, lower-cost options, and other competition. Stuart Butler, Brookings senior fellow and long-time economic adviser, offers some defensive strategies.

By Nancy Mann Jackson

Stuart Butler, a senior fellow at the Brookings Institution, Washington, D.C., spends his days studying how industries change over time, and making predictions for future changes. In a crowded Sunday afternoon session, he shared with attendees how his research shows that the future of higher education will be affected by disruptive innovation, a process that will present an existential threat to the current model.

"We usually see disruptive innovation in industries that are under financial pressure caused by upstart ideas or new business models," Butler said. "Higher education is dealing with customers' rising tuition and debt, along with the high costs of staying competitive. And only 42 percent of business officers believe the current model is sustainable."

In the first phase of disruptive innovation, new entrants to the market use new technology to aim at an ignored or underserved customer segment.

A Vulnerable Model

In higher education, new products are already countering the challenges of high cost and inconvenience. For instance, online universities have taken a share of the market, and new types of educational certifications have emerged.

"Usually, these new products are not very good when they are first introduced, but the new players steadily improve their products while keeping costs down," Butler said, referencing the original Apple computer in 1976, which was vastly improved by 1984. "Then there is a sudden, unexpected invasion of the main market and these new business models transform the industry."

Higher education is particularly vulnerable to such market invasion because of rapid improvements in online instruction, and traditional institutions' heavy physical investments in infrastructure must compete with the "lean, mean" online education providers.

Several new business models have appeared, including competency-based degree programs, which measure what students know versus how much time they have spent in the classroom. There are also low-cost degrees, such as College for America's $10,000 degrees, new partnerships between universities and massive open online course providers, and micro-degrees.

Deliberate Defenses

Colleges and universities that want to continue to compete in this new higher education environment can take several defensive steps, Butler said. For instance, they can absorb new technologies into their existing models, similar to the way that newspapers established fire walls requiring readers to pay to view online content.

They could use regulatory barriers such as accreditation to fight off new entrants to the market, but Butler predicts an increase in new types of accreditation and credentialing. 

The alternative is to change the highereducation business model by:

  • Embracing unbundling, by offering multiple products with various prices, rather than one degree program.
  • Focusing on competitive advantages and abandoning other activities. For example, some four-year universities are focusing on the final two years of higher-level courses and considering dropping the first two years of basics.
  • Implementing the general contractor model. Organize a suite of skills and sell the ability to assemble all the pieces into a less expensive degree.

Whatever the future for your college or university, Butler believes it will look way different than it does today. What can you do in the meantime? Butler suggests: "Accept that fact and begin to reinvent your product before it's too late."

NANCY MANN JACKSON, Madison, Ala., covers higher education business issues for Business Officer.

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