Provost and Senior Vice President for Academic Affairs



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A New Game in Town: Competitive Higher Education
Lloyd Armstrong

Provost and Senior Vice President for Academic Affairs


University of Southern California

November 2000




A New Game in Town: Competitive Higher Education

Competition

“Competition” in higher education has traditionally had rather genteel connotations. We compete with other similar instititutions on the athletic field, and for faculty, students, donors and grants. While some of these competitions can be longstanding and quite passionate (Notre Dame and USC in football, for example), they are not designed to force fundamental changes in the institutions involved. Indeed, much of the structure of higher education is designed to prevent these types of ordinary competition from forcing any significant structural changes. However, the sheltered status of institutions of higher education is changing. New types of for-profit and non-profit organizations are beginning to provide competition in targeted segments of higher education. I will argue below that this competition, although rather minimal at the moment, will be ultimately more pernicious from the standpoint of traditional higher education than generally understood. In addition, the hitherto rather slow evolution of this competition will be speeded up immensely by the arrival of internet mediated distance learning (DL). Internet mediated distance learning will enable these new competitors to access easily many of the traditional constituencies of higher education. Equally disruptive, it will allow the institutions of higher education to access each others constituencies in new ways, leading to new kinds of competition among the traditional institutions. Intense competition as it is known on the broader economic scene is coming to higher education.

It is important to recognize that competition can produce results that are both good and bad, both desirable and undesirable. Increased competition will provide more options for students, and students will respond by maximizing benefits to themselves as individuals. The sum of these individual decisions will not always lead to global changes that are positive. Simply saying that certain consequences of competition are negative will not stop them from occurring, however. Many of these negative consequences can be mitigated by appropriate responses by higher education, but the face of higher education ultimately will be altered by this new competition in multiple ways.

Most of what is discussed here will have applications broadly across the many segments of higher education. The impact of the new competition will not be uniform across the diverse face of traditional higher education, however. Many of the new competitive forces are aimed initially at students of the type currently served primarily by community colleges and colleges and universities that are not generally classified as “prestigious”. For those institutions, the challenges will be immediate and serious, but relatively direct and obvious. For the more prestigious colleges and universities, on the other hand, the impacts will not be obvious so rapidly, but are likely to be more subtle, more complicated , and in the end, perhaps more revolutionary.

I will focus on the impact of this new competition on a very small but highly influential component of higher education, the research university. During most of the 20th century, the face of higher education was influenced in a major way by practices and values of the research universities. Faculty reward structures, disciplinary frameworks, and belief in the value of research spread from the research universities into universities and colleges of all types. This spread was perhaps inevitable, since the research universities produce almost all of the future faculty in almost all of the components of higher education. It is contended by many that this group of research universities will be relatively immune to the new competitive forces because of its prestige and great success in carrying out its multiple missions. I will argue, to the contrary, that research universities have perhaps the most complex challenges to face in this new environment.

Institutions of higher education collectively value highly their stability and their ability to survive for long periods of time without revolutionary change. The value structure that has evolved for research universities is one that creates very high barriers to entry for new players, and numerous barriers to rapid change. These barriers are primarily related to cost, but there are other types of barriers as well. Paradoxically, many of the structures and practices that serve to provide stability in the current competitive climate will be those that put the research universities at greatest risk in the coming competitive era.

Because of this critical paradox, it is important to begin by reviewing some of the organization and structure of research universities and how those aspects provide stability. I will follow this with a discussion of some of the “external” competitive forces now facing traditional higher education and their importance. I will then show how the new DL can both strengthen these external forces and introduce new types of competition within the university community itself. I shall then consider ways in which these new competitive forces can work to destroy the stability of research universities. Finally, I will propose ways in which universities might respond to this new competitive situation

Stability in the Research Universities

Research universities have succeeded to a remarkable degree in integrating several functions that in many other countries are not considered necessarily to be organically linked. Research, broad and varied educational opportunities at both undergraduate and graduate levels, credentialing, and a highly evolved social infrastructure are melded together into a distinctive offering. The research component itself plays a complex role, since it serves both the educational mission of the institutions and the needs of the broader society. This highly integrated structure is very expensive and involves considerable cost shifting and sharing between the components. I will discuss three elements of this structure that serve to provide considerable protection against traditional forms of competition: quality and the cost of producing it, credentialing, and physically imposed size limitations.



Quality of the educational experience and its cost

Because undergraduate education is the largest part of the educational component of universities, it plays a key role in the form the integration of functions takes. Following the highest aspirations of education, universities focus much of their rhetoric and efforts on providing an undergraduate education that will prepare the student for a lifetime of achievement and successful adaptation to change. That is, much of the focus is not on skill development for the first job, but on aspects of a liberal education such as critical thinking, love of learning, curiosity, judgement, etc that prepare the student to be a lifelong learner. As valuable as these attributes are, they are very hard to measure. Consequently, a undergraduate university education becomes somewhat of a credence good in economic terms (Darby and Karnia, 1973). That is, a good whose value is very difficult to quantify by analysis of data or even by experiencing it. In such cases, various surrogates are used to value the product. Using a somewhat circular argument, the cost of the product is often one of those surrogates – the more it costs, the higher its quality must be. This phenomena is well known in higher education. A university that increases its tuition by an amount large compared to the increases of its peers will almost always see a significant increase in student applications. The existence of this response has a great effect on the price and cost structures of universities, and acts against many efforts to hold down price.

Another surrogate for the quality of an undergraduate university education is the quality of the faculty. In the research university, it is the research productivity and visibility of the faculty that primarily defines faculty quality to the general public. The importance of having the people who are actively creating knowledge teach students has been widely propounded by the research universities for decades, and is now widely accepted by the public. Thus assembling a star research faculty is imperative for the university that wishes to ascend to, or remain in, the first ranks.

Research, however, is a very expensive enterprise. It requires very costly facilities – libraries for the humanists, laboratories for the scientists, computers and networks for everyone. It requires a large infrastructure of accountants, grants specialists, compliance officers, and technicians. The direct external cash flow to cover the research function of the university comes primarily from grants and contracts from government, foundations, and corporations. However, most of these grants and contracts will not cover the complete cost of the research, and implicitly or explicitly require the university to share costs. In addition, competition for the faculty who do the best research is quite intense, and they are expensive to hire. Thus the revenues attributable to the research component of the university are not so great as its costs. As a consequence, the research component of the university requires considerable internal subsidization.

Ph.D. programs are a perfect example of the integration of the research and educational functions of a research university. However, educating a Ph.D. student is among the most expensive forms of education ever invented. It requires an immense amount of faculty involvement and university infrastructure. The value system in place generally dictates that the Ph.D. student should not pay for this education, and indeed, should receive some support from the university to defray costs during his or her studies. Although some portion of the cost of educating some of the Ph.D. students is covered by grants, most of the total cost must be covered by internal subsidization.

The social infrastructure of the contemporary university has become highly evolved, and this too has become a surrogate for quality of the undergraduate educational experience. For students who come to the university immediately after high school, the university is a place of great social growth. Students are exposed to new situations, different ideas, and people from widely different backgrounds and social classes. Universities have created a complex infrastructure to help channel these potentially disruptive experiences into productive outcomes. Residential colleges, social organizations, intercollegiate and intramural athletic teams, cultural events, student counselors and student unions are all components of these infrastructures. This, too, is a very expensive infrastructure. It is, however, of greatest importance for the traditional undergraduate, and of significantly lower importance for non-traditional undergraduates, and graduate and professional students.

The breadth of offerings is yet another surrogate for the quality of the undergraduate educational experience. This leads most universities to sustain numerous majors that attract very few students, yet require a significant investment in faculty and departmental infrastructure. Similarly, excellent academic physical plant – classrooms, teaching laboratories – and state of the art electronic infrastructure are yet more surrogates for quality. All of these components, taken with the relatively high cost of the excellent quality faculty found in most research universities, mean that the undergraduate educational function itself must also be internally subsidized.

To create and sustain a research university that is of high quality, then, is a very costly enterprise. Student tuition and research funding do not cover these costs, and so a variety of other major sources of income are required. Among the most important are endowments and gifts, and, for public institutions, taxpayer support. In addition, continuing education in its many forms is a very important source of revenue for many institutions, and commercialization of intellectual property is rapidly becoming more important. Without these multiple sources of income, the research university would be unable to maintain its multiple interlocking activities.

The high cost of research universities presents a tremendous barrier to entry for any new competitors seeking to compete on the same basis, thus providing stability against new competition. In addition, most of the sources of revenue that support this cost change only slowly, thus providing stability to the competition between existing research universities. For example, increasing total tuition revenue by increasing the number of students requires first increasing the costly social infrastructure, and increasing research significantly first requires major investments in facilities and new faculty. Increasing donations typically requires years of cultivation of potential donors. Thus the cost structure of research universities has provided a high barrier to entry by new institutions with a similar mission, and a brake on rapid change in competitive position among existing players.

Credentialing

The credentialing function of higher education has also created barriers to entry and thus provided stability. A component of credentialing resulting from accreditation has legal ramifications. Accreditation by a recognized regional accrediting agency or professional accrediting group is required in order to receive many types of federal funding, and for the licensing of graduates in many professional areas. Accreditation is also an important part of the credentialing power of institutions of higher education, for it provides external evidence that they are of sufficient quality that they can in turn attest to the quality of their graduates. However, accrediting standards have also been used to frustrate, or at least delay, new forms of competition. For example, the Western Association of Schools and Colleges refused to accredit an upstart non-traditional California institution, eventually forcing it to move to Phoenix, where it was accredited by the North Central Association of Colleges and Schools under the name of University of Phoenix. The American Bar Association currently refuses to accredit J.D. degree programs taken through distance learning. Consequently, it has refused to accredit the Concord School of Law, an on-line venture of the Kaplan Corporation, thus saving law schools from competition from a non-traditional source – for the moment.

An even more important component of the credentialing power of universities, however, is reputational. The degree or the certificate from a highly-ranked prestigious university is a statement that the holder met very high entrance standards and was able to pass the rigorous courses required by the program. This form of certification that the holder of the credential is among the best of her generation and has learned some useful skills is of great value to employers, which in turn makes it of great value to prospective students and their parents. As more very highly qualified students want to go to the highly ranked university in order to gain the desirable credential, this further increases the value of the credential. This non-linear system is an example of a winner-take-all situation (Frank and Cook, 1996). The reputation required to provide credentialing of value takes decades (or centuries) to build, however. This means that a new entrant to the university market holds a very weak credentialing power, and a has a correspondingly weak attraction for the best students. This clearly discourages new entrants into the market.

Geographic limitations

One final but quite important stability-providing component must be mentioned. Traditional research universities exist primarily in one physical location, with perhaps a few professional schools (e.g. the medical or agricultural school) located at other sites. There are limitations to the number of students who can be enrolled in this single primary location while still maintaining the image of quality education. These considerations provide a physical limitation on the number of students who can be served by a single university. This limitation mitigates competition between universities of comparable quality for good students. There is not the physical capacity in a single university (or a small number of universities) for the winner to really take all, even though many characteristics of the competition (e.g. as discussed in the Credentialing section) would otherwise favor this result.


The New Competition

Within the shadow of these stability-providing barriers, American research universities have reached levels of excellence admired around the world. Research critical to the economic, social, and political well-being of the country is produced by a cadre of faculty of international visibility. Graduates of these universities are disproportionately represented in positions of visibility and influence. However, new forms of competition are appearing that can circumvent the barriers that have thus far provided stability. In this section, I will describe several of these that are completely external to the research universities – for-profit colleges, non-traditional non-profit colleges such as the Open University, and new alternative credentialing agents.

Although the direct impact of these organizations is as yet minimal on traditional institutions, I will argue that they have the characteristics of disruptive technologies (Christensen, 1997), and have the potential to grow to have major direct and indirect impact on the research universities. A disruptive technology (or business model) is defined by Christensen as one that initially provides a product that is inferior to the mainstream product, but that brings a new and desirable set of values. The new product appeals initially to a set of “fringe” customers who are offered more than they need or are willing to pay for by the existing mainstream product. Over time, improvements in the new technology (or the new business model) lead to significant increases in product quality. This improved quality in conjunction with the desirable values of the new product then enables the new product to displace the mainstream product. In the following section on DL, I will attempt to show how DL will increase the disruptive potential of these organizations.

For-profit educational institutions

For-profit publicly traded colleges have been around for many years. Among the largest and best known of these are the University of Phoenix, the DeVry Institute, ITT, and Argosy. Traditional higher education has generally given this sector little consideration, considering it to be a provider of lower level skills to a non-traditional set of students, primarily working adults. If these institutions have been viewed as providing competition, it has been with two-year colleges and the lower end of the four year colleges where there is some overlap in mission and student demographics.

While this view still has considerable reality, these colleges are now moving aggressively into some of the areas normally thought of as belonging to the traditional non-profit sector. Many are now regionally accredited and offer bachelors degrees, with some offering master’s and doctor’s degrees as well. Among the students enroled in four-year undergraduate programs in for-profit universities, more than 47% are now “traditional” in the sense that they entered the programs directly from high school (Phipps, Harrison, and Merisotis, 1999). Part of this motion reflects evolution in mission, part increased quality as the model is elaborated. Most important from the standpoint of the research universities, these colleges use strategies that are quite different from those used by most of the non-profit sector, and correspondingly offer students a distinctly different value structure.

The most obvious difference in the approach followed by these for profits is that they focus on only the educational component of the mission of higher education (Niklin, 1995; Strosnider, 1997; Kartus, 2000). The expensive components of research and social infrastructure are almost non-existent, leading to a very different cost structure. Facilities are often rented rather than owned, and generally contain nothing other than faculty offices, teaching laboratories, and classrooms. Student facilities such as dormitories, athletic facilities, and elaborate student unions are nonexistent. Capital costs are correspondingly quite low in comparison to those of a traditional institution of higher education.

There are, however, other equally important differences. Convenience for the student is a major emphasis. Most for-profits offer their classes in multiple accessible locations, and classes are offered at times appropriate for working students. They also emphasize an education that is career focused, meeting the needs of employers. Advisory boards and focus groups of business people give constant input into an ongoing and rapid (by normal university standards) process of curriculum development. Many have introduced general education into their curricula in response to input from these groups (Kartus, 2000), thus moving their product more out of the “trade school” model and into greater overlap with the model of traditional higher education . However, while the research university emphasizes at the undergraduate level learning that will be a basis for future intellectual growth, these for-profits primarily focus on preparation for the next job. In effect, they have embraced an alternative concept of lifelong learning – students are simply expected to return for additional courses as job opportunities evolve. As a consequence of the close coupling between curriculum and job opportunities, the graduates of these institutions have a very high probability of finding work in the area of their training (Merrill Lynch, 1999; Strosnider 1998; Kartus, 2000).

Curriculum in the multiple campus for-profit colleges is usually centrally controlled so that the educational experience will be very similar from campus to campus, and from semester to semester. Course materials are prepared by experts in specific areas, and generally taught by faculty who have had practical experience in the area. Significant financial resources are put into the development of new curricula. Evaluation of the faculty is quite rigorous, and focuses primarily on one dimension – teaching effectiveness. Most institutions spend heavily on skill training for faculty in order to build and maintain that effectiveness in the presence of rapid curricular change. The predictability of course quality level and coverage possible in such a system is impossible in the research universities with their traditions of academic freedom in teaching, and their necessity to evaluate faculty on a multidimensional grid.

This predictability of quality level, focus on near term benefits to students (jobs in area of study), and relatively low requirements for capital investment provide marked contrast with the situation in research universities. These characteristics make this approach highly scalable. These institutions can expand enrollment in a region, or enter a new geographic market with relative ease. In addition, the emphasis on near term educational benefits makes it much easier to quantify the value of a degree or certificate from one of these for-profits than for the research universities. Value surrogates are not required when value is defined by the quality of the first job after graduation.

Although not major players overall in the graduate arena, there are some areas where the non-profits already have a significant presence. For example, almost 10% of the doctorates in clinical psychology awarded in the US are awarded by the Argosy Education Group (Kartus, 2000; Blumenstyk, 2000). Many of the for-profits are quite active in the MBA arena. Only about 4% of the Masters level business degrees were awarded by for profit-universities in 1997, but the percentage is growing. The University of Phoenix accounted for almost 2/3 of that number (Mangan, 1999).

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