The Leader's Guide to Radical Management: Disruptive innovation: the case of college education in the US

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The cost of a US college education is ridiculous. The Economist points out: “College fees have for decades risen faster than Americans’ ability to pay them. Median household income has grown by a factor of 6.5 in the past 40 years, but the cost of attending a state college has increased by a factor of 15 for in-state students and 24 for out-of-state students. The cost of attending a private college has increased by a factor of more than 13 (a year in the Ivy League will set you back $38,000, excluding bed and board). Academic inflation makes medical inflation look modest by comparison.”

US News & World Report says in its annual survey of American colleges that: “If colleges were businesses, they would be ripe for hostile takeovers, complete with serious cost-cutting and painful reorganisations.”

The Economist compares US universities to Detroit of 50 years ago.

Fifty years ago, in the glorious age of three-martini lunches and all-smoking offices, America’s car companies were universally admired. Everybody wanted to know the secrets of their success. How did they churn out dazzling new models every year? How did they manage so many people so successfully (General Motors was then the biggest private-sector employer in the world)? And how did they keep their customers so happy?

Today the world is equally in awe of American universities. They dominate global rankings: on the Shanghai Ranking Consultancy’s list of the world’s best universities, 17 of the top 20 are American, and 35 of the top 50. They employ 70% of living Nobel prizewinners in science and economics and produce a disproportionate share of the world’s most-cited articles in academic journals. Everyone wants to know their secret recipe.

Which raises a mischievous question. Could America’s universities go the way of its car companies? …

What do the presidents of elite US colleges say about the matter?

The Economist organized a conference in NY this week and invited a distinguished panel Shirley Tilghman, President of Princeton University, John Sexton, President of New York University, and Jeff Lehman, Chancellor, Peking University School of Transnational Law to discuss the future of higher education.

The session began with the university presidents recounting their positive embrace of globalism with expanding global enrollment and funding, reflecting a confident belief that US universities are the best in the world.

The discussion became more animated when the moderator, Adrian Wooldridge, Management Editor of The Economist, raised the pointed questions about the costs of US universities that are spiraling out of control in a manner even worse than health care, and making education essentially unaffordable to the average family. Wooldridge wondered, provocatively, whether the universities were not becoming the General Motors of the education sector—with their bloated costs and an inability to compete. Were US universities not likely to become victims of disruptive innovation?

What is disruptive innovation?

Disruptive innovation is a phenomenon discussed by Christensen and Raynor in The Innovator’s Solution. It concerns the emergence of new business models that transform the business landscape. They involve a way of doing business that is simpler, more convenient, and less expensive, and with appeal to new types of customers. In this way, digital photography disrupted print photography. Desktop publishing disrupted traditional publishing. Minicomputers disrupted mainframe computers and in due course personal computers disrupted minicomputers. Disruptive innovations introduce products and services that initially may not be as good as currently available models but that end up taking over the market. Managers don’t see the danger of the competition because they believe their products or services are superior.

The responses of the US college presidents

The responses from the elite universities were similar to the way managers always respond to phenomenon of disruptive innovation: “Our products or services are so superior that it’s not fair to compare us.”

Tilghman argued that Princeton’s costs are rising, because there are new fields like genome research, which hadn’t existed just a few years ago. Rising costs are the inevitable accompaniment of expanding knowledge. The elite universities are obliged to do such research in order to remain elite universities. They are also teaching students not just how to do a job, but how to think. She suggested that perhaps other lesser universities might do less research and so keep costs down. Princeton had made progress in providing aid to students so that a year’s education would cost as “little” as $16,000 a year.

Sexton was indignant and explained that NYU was providing “a Mercedes education” and “you couldn’t expect to get that for the price of a Kia.” When the presidents were challenged to provide data that would show in what respects rising costs had generated a better educational value, no clear answers were given at this session.

The risk of disruptive innovation for the elite universities was underlined by Jeff Lehman’s account of the Peking University School of Transnational Law. It will shortly be accredited with the American Bar Association and would provide a legal education for one quarter of the cost of a US law school.

Alan Murray has pointed out in the Wall Street Journal[i] that the failure of managers to deal effectively with disruptive innovation is not "bad" management. These managers are following the dictates of "good" management. They listen to their customers. They study market trends. They allocate capital to fields that offer large returns. And in the process, they miss disruptive innovations that opened up new customers and markets for lower-margin, market-changing products. In the field of higher education, unless there is change of heart, the drama of disruptive innovation seems set to play out yet again.

To learn how the universities could have a different brighter future, by providing better value at lower cost, go to:
http://www.stevedenning.com/Books/radical-management.aspx

[i] Alan Murray, “The End of Management”, Wall Street Journal, August 21, 2010. http://online.wsj.com/article/SB10001424052748704476104575439723695579664.html

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