These institutions appear to be on the first steps of a path in the business world that is described by Christensen (1997) as a disruptive technology (or business model). They have identified a set of potential customers who were overserved by the existing providers - in this case, working adults who found little value in the socialization and research aspects of traditional higher education. They then provided an educational product having values that appealed to this set of potential customers – student-centric and focused on job-related education. From the perspective of the research university, these institutions provide an incomplete, inferior product. However, from the perspective of the students of the for-profit colleges, they provide an alternative value structure that nicely fills a real need. This is reflected in enrolment growth rates for the industry in the range of 10%-20% a year, and in the striking result that the University of Phoenix is now the largest private university in the United States in terms of enrolment. Quality of the approach has improved over time as the model is refined. The business history of other similarly defined situations would suggest that, over time, this continuing quality improvement and the alternative benefits and values that this approach brings will lead eventually to increased penetration into the markets of the traditional suppliers. That is, the for-profits increasingly will provide a viable option for all students to consider for some portion of their education. One should expect that an increasing number of students will consider this option in circumstances when they are uninterested in the social and research aspects of research universities, and weigh more heavily the quantifiable value measures and convenience of the for profits. As I discuss below, the advent of internet-mediated distance learning is likely to greatly increase the rate at which the for-profits enter into the traditional markets.
Even before they improve to a point that they can effectively enter the markets of the research universities, however, the for-profits can have a significant impact on the universities They provide an increasingly visible alternative metric that the public can use in evaluating educational approaches. The for-profits have a very different business model from the research universities at almost every level, and a radically different model of valuing education. The more successful and visible they become, the more the public may question the integrated model of the research universities with their associated high costs, and traditional arguments for valuing education.
One area in which the for-profits already are directly challenging the research universities is continuing education. Continuing education provides one of the important revenue flows that enables research universities to support their expensive integrated education. Loss of continuing education revenues could therefore have a significant impact on many research universities. It is obvious that many of the for-profits compete directly with traditional schools of continuing education in terms clientele, subject matter, and quality. That is, they provide recreational and skills enhancement courses and certificates to individual working adults. However, several also compete with continuing professional education programs in schools such as business and engineering in offering degree and certificate professional programs to employees of corporations. For example, the University of Phoenix has an “educational partnership with AT&T to provide graduate and undergraduate degree and certificated learning programs to 200,000 AT&T employees worldwide.” ( Apollo Group, 1995) Jones International has similar contracts with Ball Corp. and AT&T Broadband Internet Services ( Michaels and Smillie, 2000). DeVry lists on its website (www.devry.com) , among others, GTE, National Data, Nortel, and Sprint as companies for which it has provided professional development programs in management, electronics, and communications. Although many of these programs focus on lower level professionals that traditionally would not have been of interest to university programs in continuing professional education, others are increasingly moving to higher level professionals that once would have been the exclusive realm of universities It is also increasingly common in this dot.com world to hear of young graduates of the most prestigious universities turning to the for-profit sector for some just-in-time continuing education focused on job-related needs rather than returning to a university for a traditional postgraduate degree. Thus, strong and meaningful competition in the continuing education area is already a reality, and will only increase with time.
A different non-profit competitor: The Open University
The Open University in England provides an interesting alternative model that is in many ways intermediate between the for-profits and more traditional higher education (Blumenstyk, 1999: Palattella,1998). It is a highly successful non-profit university that now enrolls one of the largest number of students in the world -- over 160,000 in 1999. It has several hundred regional centers that serve as sites for tutoring and associated activities. Its curriculum is centrally designed, as are the multi-media course materials that are the core of the asynchronous instruction it provides. A relatively small core of quite traditional research faculty – about 900 – create this curriculum supported by numerous outside experts. Very significant resources – $2.5M-$3.3M per course – are committed to producing the highest quality educational programs.
While courses in the for-profits discussed above typically involve lectures given by adjunct faculty following scripts prepared centrally, the course material in the Open University is presented entirely through the centrally prepared multi-media materials that are accessible to the students asynchronously. This enables the Open University to focus its interaction time on tutorial sessions. Groups of roughly 20 students are assigned to tutors who both grade centrally defined assignments and provide tutorial sessions.
This combination of a small cadre of research faculty creating advanced curricula, significant resources dedicated to producing effective asynchronous courses, and the intimacy of tutorials has made the Open University a very effective institution. A recent study of 77 English Universities by the Higher Education Funding Council ranked the Open University tenth in the quality of teaching (Palatella, 1998). As reported on the Open University web site (www.open.ac.uk), objective measures of research performance collected by the British government put the Open University in the top third of all UK universities, indicating that the research faculty does indeed fit traditional definitions. While not yet a competitor for Oxbridge or the other very top tier universities in England, the Open University has clearly become competitive on both teaching and research levels with a number of highly regarded universities in England. In doing so, it has demonstrated the potential for an alternative approach to higher education to create a recognizably high quality product.
The Open University has recently started the United States Open University This new enterprise will modify some existing Open University programs for an American clientele, and develop new programs specially designed for this market. It expects to pay particular attention to the executive education market. One should expect that this new entity will provide serious competition for many segments of American higher education in the coming years.
Institutions providing alternative credentialing
Credentialing has, in the past, been effectively defined through the awarding of a degree. Within the set of degree-granting institutions, those that are accredited have had by far the greatest credentialing power. New organs of credentialing are appearing, however, that focus on certifying that candidates posses a well defined set of skills (Adelman, 2000; Irby, 1999). Because they focus on certifying specific skills, these certifications have considerable value for employers.
These credentialing agencies, which do not seek traditional accreditation, can be of many types. Among them are: vendor corporations, such as Microsoft and Cisco; industry organizations, such as the International Information Systems Security Consortium and the Certified Financial Planners; and government agencies, such as NIH and the USDA. At present, most of these agencies work in the area of information technology, but the model has been, and probably will increasingly be, extended to other areas. These alternative credentialing agencies can work with all of the forms of new competition, and thus provide strong competition in certain areas to the more traditional credentialing of the research university.
Distance Learning: Enabler and Catalyst for Competition
“The next big killer application for the internet is going to be education”
John Chambers, CEO of Cisco Systems
The institutions discussed above have the potential to increase competitive pressure on traditional higher education through more vigorous application of well known approaches. Internet mediated distance learning, on the other hand, will bring a new and potentially explosive kind of competitive pressure to bear on traditional higher education. Through distance learning (DL) the traditional institutions will compete with each other in a manner in which many previous size and geographic limitations on competition will disappear. For-profit entities will enter the competition both as partners of individual institutions and as direct providers, and alternative forms of credentialing will take on a new power. All areas of the teaching function of universities will be impacted.
Distance learning becomes a new and powerful educational technique when combined with the communication power of the internet and the computing power of the desktop computer. Access to DL courses is no longer restricted to a location, as are traditional university classes, or to a time, as are traditional classes or televised DL courses. Instead, it becomes global and asynchronous to provide maximum flexibility and opportunity for the student. Traditional classroom lectures follow a linear learning approach in which the student follows the pace and path of the professor through the subject matter. The new DL allows nonlinear learning approaches based on cognitive learning theories, permitting the student to move at her tempo with an organizational structure that responds to her comprehension of the material. Flexibility to respond to different learning styles is increased dramatically compared to the traditional lecture.
The current model being used to create nonlinear approaches leads to a very different faculty role from that found in universities at present. Traditional teaching is “vertically integrated”, in that one individual chooses the material to be covered in the course, then teaches the material, and finally evaluates the learning of the students. Nonlinear DL courses more typically have one or more subject specialists who define the course material, experts in pedagogy who map that course material on to the nonlinear medium in the most effective manner, and testing experts who devise the evaluation materials. The “unbundling” of the faculty role in nonlinear DL is similar to that already found in many of the for-profit universities discussed above.
This new DL has the potential to be highly scalable, that is, to be extended to larger and larger numbers of students without significantly changing the basic approach. This removes the limitations on size that have mitigated competition between institutions of higher education. Most students still will not be able to go physically to one of the most prestigious colleges or universities, but they will be able to take courses and degree programs from them. The scalability also increases the potential for creating significant profit, thus making this a field of great interest to the for-profit world.
Because of all of these attributes, the new DL itself is likely to be both a sustaining and a disruptive technology. It will be used by universities to better serve some of their existing constituencies, such as alumni and students, and to access constituencies currently served by other universities. The former application of DL is called sustaining by Christensen (1997), while the later is another application of a disruptive technology. In addition, DL will be used by alternative providers as a disruptive technology to accelerate their penetration into the marketplace of the traditional higher education providers.
The alternative providers discussed in the section above have already demonstrated that there is a large set of potential customers who feel overserved by the research universities with their bundled products. DL extends significantly the convenience factor highly valued by those students, and removes geographic and space constraints that even a multi-site for-profit experiences. It is not surprising, then, to find that the for-profit colleges discussed above are moving heavily into the new DL. For example, the University of Phoenix online courses are showing an annual increase in enrolment of almost 45% (Brainard, 2000), and its parent Apollo group has joined with Hughes Network Systems to form another DL company. DeVry has recently won accreditation for online Bachelor’s programs in business and information technology (Blumenstyk, 2000, August 16). Other established corporations in the education field such as Kaplan and Sylvan have also moved into DL. Kaplan recently has purchased Quest Education Corporation largely because of its presence in DL (Blumenstyk, 2000, June28), has started an online law school, Concord, and offers a wide variety of other on-line programs through kaplancollege.com. Sylvan provides online courses to businesses through its Caliber division. In addition, many new for-profit DL corporations such as Unext, notHarvard, Hungryminds, and University Access have appeared and many more will certainly be created. In many, if not most, cases these new corporations are hiring prominent university faculty as providers of course content. Many of these new for-profits are also striking up partnerships with universities directly. For example, a for-profit corporation and a business school may team up to provide executive education for corporations, with the for-profit providing the marketing and production support, and the business school providing the course content and desired level of credentialing.
Of course, DL is not yet of the quality that it is a significant competitor to the classroom experience offered by the research universities. However, the for-profit colleges are showing that there is a very considerable market for internet mediated DL among their students even at the current levels of quality, and many universities are experimenting with DL for targeted groups of their traditional student bodies. If the evolution of other new disruptive technologies is a guide, it is likely that within these growing markets the technology will be improved and elaborated until it becomes competitive as a learning experience with traditional forms of classroom teaching.
The Nature of the Threat from the New Competitors
All of these new forms of competition significantly increase options for students at all levels- certificate, undergraduate, graduate, and professional levels. They focus on a single aspect of the complex role of the research university – education as reflected in the teaching function. To the extent that some set of current students of universities who are primarily interested in that teaching function are “overserved” by the additional services offered to them via a bundled price, these competitors can make inroads into the current student base. They will do so by offering new benefits such as convenience, flexibility, ability to take courses from a more highly ranked institution, focus on job-related skills, and lower cost structure.
By focusing on a single component of the bundled structure of the research university, all of these modes of competition manage to bypass the barriers that have provided stability in the past. To the extent that they can funnel off some portion of the teaching revenues of the research university, they make unstable the bundled whole. The situation is potentially similar to what is occurring in medical schools. Missions of medical schools have traditionally bundled together teaching of medical students, research, and provision of health care. The revolution in health care has introduced a fierce competition into the health care part of the mission, and many for-profits have moved into markets once held by the faculty practices and university hospitals. (Not surprisingly, the HMO is identified as a disruptive technology by Christensen(1997).) The resulting decreasing cash flows into faculty medical practice have produced fewer revenues that can be transferred to the other functions of the schools, and have put great pressure on many faculty to increase their time devoted to the practice mission. Many faculty now must spend so much time on their practices that they can no longer devote sufficient time to their teaching and research functions. As a consequence, the clinician-scientist seems to be a disappearing model. At present, the pressures are so intense that it is not clear how the traditional vision of a medical school can be maintained. For the university as a whole, the tuition (teaching) revenues play a dominant budgetary role similar to that of clinical revenues for a medical school. Once those revenues come under attack, the entire integrated system risks collapse.
As the teaching function is partially stripped away from the university of matriculation and moved to alternative providers, pressures will be transmitted to the other components of the functional bundle. Students who spend less time at the university will contribute fewer dollars to the fixed costs of the social infrastructure. Some marginal costs will disappear, but the fixed costs will be hard to decrease in a timely fashion. The football team costs the same no matter how many students watch the game; dormitories are difficult to convert into other uses when the student body shrinks. The cost of expensive research faculty, previously carried roughly equally by the research and teaching functions, will be moved further on to the research function. Should this happen, in all but the very best endowed institutions, faculty in areas where research grants are plentiful will be forced to move more of their time and salary to the soft money that such grants provide. Research in areas where grant support is very scarce will likely decline.
It is also likely that as the teaching and research functions separate, the research activities of the faculty will play a decreasing role as a surrogate for quality in the pricing of education. As students take more courses from alternate providers, they will take a smaller fraction of their courses from research-active faculty, thus weakening the perceived relationship between teaching quality and research. As a result, salaries that relatively highly paid research faculty are paid for their teaching activities will appear to the public to be too high.
Attention by the general public to the price/value relationship will be increased by continuing growth of the for-profits with their very clear, one-dimensional value equation - immediate placement in appropriate jobs. Universities should therefore expect to see growing attention paid to the success of their graduates in their first jobs. Although not an inappropriate concern, this will put pressure on the universities to readjust the balance between long and short term goals of their education.
The effective legal credentialing monopoly of traditional higher education has already been broken by the for-profits that have achieved accreditation and the alternative credentialers that have created valuable certification without accreditation. Further serious inroads into the credentialing monopoly of universities will probably occur as more for-profits are drawn into this area, and as yet unimagined business plans are unveiled.
Over the somewhat longer term, the possibility of truly revolutionary change exists. Higher education in the United States is a $240B per year market (Merrill Lynch, 1999), and the world higher education market is estimated to be about $400B per year. The entire market is very highly fragmented, with no single provider having any significant portion of the market. In many dimensions, the market is similar to those that existed in health care and banking not so long ago - markets that now have consolidated into only a relatively few major players. This new DL, because it is scalable, greatly increases opportunities for significant consolidation in the education market. Truly well done DL courses will be expensive to produce, and it will be necessary to spread initial costs over as broad a student base as possible. However, scalability provides opportunities for large profits once the initial costs are covered if a sufficiently large student base can be reached. In addition, as English becomes increasingly the language of commerce and technology, English language DL courses will increasingly find a world-wide market ( Bollag, 2000, September 8), thus increasing the possibility of consolidation on a global scale. American for-profit educational corporations are already moving to establish themselves in this new world market (Blumenstyk, 2000, August 11; Lively and Blumenstyk, 1999 ). If the educational market moves significantly towards worldwide consolidation, universities will have to devise rather radical strategies to compete.
At present, most of these threats are not serious for the research university. DL is not yet of a quality that it can compete with the classroom experience in most cases. The for- profit colleges cannot now attract many students who would be considered prime candidates for matriculation at a research university. Corporations still look to the major business schools for their upper level professional education, not to the for-profits. However, evidence on every front indicates that DL is improving in quality; that the for-profit colleges are moving into greater curricular and demographic overlap with traditional institutions; and that corporations are hiring the for-profits to do much of their in-house training. Thus, it is likely that these new modes of competition will become much more intense in the near future. DL, in particular, is moving very rapidly, and the competition between universities in this arena is likely to increase dramatically in the near term. Thus far, these new forms of competition seem to be following quite closely the evolution predicted for a disruptive technology.
Responding to the Competition
Universities will not be impacted uniformly by this new competitive environment. At both the undergraduate and the graduate and professional levels, universities with lower reputation for traditional quality will be effected first, but the impact will rise over time to more highly ranked universities. Within individual universities, all academic areas will not be impacted equally due to variations in such parameters as student demographics (e.g. age, academic achievement), importance of facilities (lab versus lecture courses) and relative economic value of a name-brand degree ( e.g. lower for education than for biology). Similarly, responses will vary by field, as universities prioritize within the framework of their own particular situations. In order to compete successfully in this new environment, universities will have to react in many areas. I will discuss four of these areas: mission focus, excellence, organizational change, and distance learning. Mission will need to be well understood and implemented by individual institutions, and its value clearly articulated to the public. An increased focus on excellence will be necessary, as will organizational changes that lead to greater efficiencies. Distance learning will be sufficiently transformational that special responses will be needed.