Creative Destruction: The New Economic Reality in Higher Education

How is Higher Education Changing? Metaphor - Image of a Ship in Foggy Water

How is higher education changing, and can institutions rise to the challenge of their at-risk status? The answer hinges on how college and university leaders choose to respond.

by Marcel J. Dumestre

U.S. higher education is now a business enterprise. No longer is it universally considered a unique social institution dedicated to the common good. The recent Great Recession accelerated this transition process, which has been ongoing for at least the past two decades. Complacency will do nothing more than accelerate a troubling change in culture and society, and a call to action is needed in order for higher education to address this new reality.

This paper will briefly:

  1. Define the new economic reality facing higher education.
  2. Take a closer look at the forces shaping our sector, applying both a macro view ("creative destruction") and a micro view ("disruptive innovation") perspective.
  3. Review some of the prototypical responses of institutional leaders to the crisis facing our sector.
  4. Review two examples of transformational responses, by contrast.
  5. Issue a call to action, offering a four-phrase framework for the type of strategic thinking needed to navigate this future and take our institutions forward.

I hope this paper will provoke thought and conversation on your campus. Please read and share it with your colleagues.

A New Economic Reality

Change is constant, both individually and organizationally. But radical change can disrupt an entire economic sector in a relatively short period of time. There are 4 primary reasons that colleges and universities are now being perceived as a commercial industry.

1. Cost-Push Inflation
The cost of attending a university has risen by almost 260% since 1980, while the consumer price index increased by only 120%. Compounding the problem is that real average wages (accounting for inflation) only have the same purchasing power as they did 40 years ago. According to Donald Heller, these large increases in the price of a college degree have been the result of cost-push inflation, which occurs when there are a limited number of suppliers and the demand continually exceeds the supply. Therefore, the price of services increases at an inflationary rate. Higher education has had three cost-push drivers: (1) inelastic demand (increasing enrollments over the past 20 years despite higher tuition rates), (2) a relative monopoly (the difficulty of starting a regionally accredited college), (3) governmental support and the availability of student financial aid.

Students and their families are now forced to be educational consumers shopping for the best value—the gateway to a successful career at the lowest cost. The traditional college residential coming of age experience is affordable for fewer and fewer families.

2. From Common Good To Private Good
The transition from higher education being considered a common good to that of a private good explains why students have to bear the burden of escalating tuition costs. According to conservative governmental policymakers, students should pay for college. And many Americans agree with them. A recent survey found that conservative voters think that students should pay for the entire cost of their education; liberals want higher education to be supported by government funding. That impasse is not likely to change in the near future.

3. Decreased Funding For Public Institutions
Public universities are not spared from business efficiency expectations. No longer can they expect public funding to support their institutions at the same level as in past decades. According to an American Council of Education report, state funding may approach 0 in the next 40 years. Many state legislators view reductions in funding as a way to force state universities into a more efficient operational model.

4. Introduction of the Large Scale For-Profit Model
The for-profit higher education business model has deepened suspicion about the viability of the way traditional universities operate. Small, privately owned, for-profit education has been around for centuries. But, in the 1970s, investor funded and regionally accredited for-profit universities emerged. These institutions disrupted traditional degree granting higher education. Despite fundamental academic and operational problems, lawmakers consider some version of the for-profit model as a viable alternative to university out-of-control costs. The irony is that the for-profit sector is experiencing a high rate of closures. But this reality doesn’t deter higher education’s critics.

The turn to the business model has consequences. The reality is that U.S. higher education is now viewed as a capitalist enterprise subject to market cycles.

What's Ahead? The Macro View and the Micro View

Creative Destruction: A Macro View
Joseph Schumpeter, a heterodox economist, offered a macro view of what makes capitalism dynamic. In his influential book Capitalism, Socialism and Democracy (1942), he utilized the term Creative Destruction to describe the cyclical nature of capitalism. Business enterprises, and some entire industries, self-destruct on a regular basis because of inattention to the need for innovative change. The threat tends to be internal. Many businesses implode from within because of complacency. Companies that emerge in the wake of destruction create new jobs. According to Schumpeter, this cycle of destruction and creation keeps the capitalist system vibrant.

Schumpeter’s analysis now applies to higher education. Too many colleges and universities have been slow or unwilling to innovate, despite the obvious need to do so. Will only a few institutions close or will the industry be devastated? Workers who lose jobs and cannot find employment in new industries are the victims of the capitalist system. It is likely that faculty members will increasingly be viewed as workers, not as the intellectual heart of the university.

Disruptive Innovation: A Micro View
Clayton Christensen recently doubled down on his prediction that half of U.S. colleges and universities will close or merge in the next ten to fifteen years. This bold forecast stems from his theory of disruptive innovation. According to Christensen, the university’s bulwark of cultural importance is eroding. The coin of the realm has been reputation, which is based upon the quality of inputs, e.g., peer institution assessment, retention/graduation rates, student selectivity, and faculty resources. But the shift to a more practical, outcomes approach makes the industry ripe for disruption.

Based upon the average national six-year graduation rate, higher education has just under a 65% customer success rate. And this is for a credential that is advertised as a four-year degree. Other industries would be accused of a bait and switch mode of operation.

Christensen critiques the structure of the traditional university model as an inefficient way of operating three different businesses he terms as—the solution shop (research), the value adding process (teaching), and facilitated user networks (student socialization and networking). Lower cost alternatives, in all three businesses, are gaining ground with more efficient technologies and operations.

Having been born nearly 70 years apart, Schumpeter and Christensen both understand innovation and entrepreneurship as the driving force for disruptive change. Can higher education rise to the challenge of its at-risk status? The answer hinges on how institutions respond.

Examples of Prototypical Responses

Many traditional colleges and universities are addressing their at-risk status. And there have been successes. But all too often initiatives fall short of addressing fundamental problems. The following are three such prototypical responses.

1. Political Advocacy
Public universities lobby state legislatures for increased funding, but they have not had much success. On average, states have spent 16% less on higher education after the Great Recession, while the number of students has increased by 8%. And funding is down as much as 30% to 50% in some states. Lobbying efforts on the federal level also have not been effective. Policymakers are reticent to increase Pell grant and federal financial aid funding.

2. Ineffectual Attempts At Innovation
Innovation is the current axiom in higher education. But new initiatives tend to be incremental change, enhancements of the current model, rather than substantive change. For example, traditional universities are entering the adult student market with online degree programs. The problem is that such initiatives are not innovative. They are following the playbook of for-profit universities. But non-profit institutions tend not to invest in the amount of marketing and recruitment that make large-scale online programs successful. Likewise, the many strategies to increase enrollment, retention and graduation rates ignore deficiencies in the underlying business model. True innovation breaks up the current model in order to educate in more efficient and effective ways.

3. Inaction
The heavy weight of tradition impedes transformational change. A “This too shall pass” attitude is an easy way out. Inaction makes closure all the more likely. In 2016-17, over 400 institutions lost Title IV financial aid eligibility, a harbinger for reorganization or closure. Over 90% of the institutions were for-profit, a continued discrediting of their business model. But 33 of the colleges were not-for-profits. These figures do not support Christensen’s dire prediction, but they also don’t disprove it.

Examples of Transformational Responses

Even Christensen doesn’t believe that all colleges and universities will close. Indeed, the well-endowed elite institutions will remain untouched. But others will find ways of reorganizing their operational model. Two very different types of universities have successfully responded to the current challenge:

Arizona State University
University president Michael Crow has led the transformation of ASU from an “undifferentiated regional university” into what he terms as a New American Research University. This new model has three foundational design components: (1) an extensive academic platform committed to discovery and knowledge production, linking pedagogy with research; (2) broad accessibility and diversity, especially for underserved populations; (3) maximizing societal impact on a national scale. This new model equally focuses on teaching and research through programmatically focused extension campuses; robust, well-financed online degree programs; as well as enhanced out-of-state and international recruiting.

Well over a decade into this new model, university enrollments have increased by over 40%, sponsored research has soared, without the addition of research faculty. Over 40 academic departments were eliminated by restructuring them into larger trans-disciplinary units, saving millions of dollars in administrative costs. The 4-year graduation rate (50%) reflects a 20% increase. Net revenue from online programs is significant, with enrollments now amounting to well over 10,000. And online enrollment will increase with ASU’s partnership with Starbucks, which pays for their employees’ full tuition toward an ASU online bachelor’s degree. The university remains highly ranked as a Research Intensive institution, and has Nobel Laureates and Pulitzer Prize winners on its faculty. Minority enrollment is now at almost 35%, a large increase over the past decade.

All of this has been accomplished while Arizona state funding for higher education has dropped by 47% since 2008. Despite Michael Crow's advocacy for increased state funding, he continues to lead the university’s innovative efforts to make its own way in this new higher education reality.

Southern New Hampshire University
In 2003, Paul LeBlanc became president of Southern New Hampshire University, a private, not-for-profit institution. It had reached university status only two years earlier. Enrollments were flat, with about 2,500 students, despite its entrance into the online market. LeBlanc could see the potential of online learning, if it was done with the same marketing investment and recruiting sophistication that for-profit universities utilize. The difference would be SNHU’s non-profit identity, reputation, and attention to academic quality.

Under LeBlanc’s leadership, that small online unit became SNHU’s College of Online and Continuing Education (COCE). It now offers over 200 degree programs, with over 80,000 students enrolled. On-campus college enrollments remain steady with about 3,000 students studying in traditional classroom environments.

SHHU’s latest innovation is the development of a competency-based education (CBE) program through its new College for America (CfA). Bachelor’s degree programs in communications and management are offered, along with associate degrees and certificates. CfA gained approval from the U.S. Department of Education and their regional accrediting association to offer the CBE delivery format. Another unique feature of the program is its marketing and recruiting model. At the current time, CfA only offers its programs through corporate and community organization partnerships. They have 30 partnerships (including McDonalds and Anthem) delivering CfA’s academic programs on-site. LeBlanc believes that this blend of academic and workforce education will help forge a new future for U.S. post-secondary education.

Both Crowe and LeBlanc have been nationally recognized as transformational leaders who not only forged a more secure future for their institutions, but also serve as models for how U.S. education, as a whole, can prosper. Great leaders are not sole practitioners. They know how to inspire leadership throughout an organization. But choosing the correct path to pursue requires strategic thinking.

A Call to Action: The Strategic Thinking Needed to Take Us Forward

These two transformational responses to the impending disruption in higher education did not come about by charisma or sheer force of will. Institutional survival requires strategic thinking as opposed to simply determining how to compete in the marketplace. The following four-phase process can help universities to identify and implement the transformational change that is right for them. But, as noted above, any change process requires the correct type of leadership.

Philosopher Bernard Lonergan describes community as “the attainment of common meaning.” In higher education, this means a shared commitment to institutional mission and vision. Leaders who fundamentally foster a shared sense of purpose among a university’s various constituencies are likely to gain trust during troubled times. Administrators who come into an institution as a “turn around artist” will likely have a hard time gaining support. Institutional self-reflection and strategic thinking depend upon leaders who are respected for their dedication to the institution. They are viewed as community leaders, not just as administrators.

Let's take a close look at the four phases of institutional strategic thinking:

1. Embracing Reality (What Is)
Facts matter; what they mean is even more important. If an institution’s constituencies (students, trustees, faculty, staff, alums) are not aware of financial difficulties, there cannot be a call to action. Transparency is difficult, but crucial, if substantive change is required.

The first step in a strategic thinking process is to do the hard work of laying out the institution’s financial reality. True leaders clearly expose “what is” the current situation, and what it means for long-term sustainability. This insight becomes a springboard for doing something about it.

2. Imagining a New Future (What Could Be)
Once the proper leadership is in place, and the current financial situation is clearly articulated, the hard work of innovation begins. The types of work groups and processes vary by institution, but substantive change comes from a combination of accurate information and creativity. While mission and vision remain forefront, the current structure (the traditional campus) and consumers (teaching/learning, credentialing, research endeavors, and civic engagement) need to be questioned. Who should the institution serve, for what purposes, with what resources, and with what structure? The result of this phase in the process is a determination of scenarios of “what could be” the future of the institution.

3. Determining a Correct Path Forward (What Should Be)
Once work groups identify opportunities for innovation, each new endeavor must be reality tested. The stakes are high. Urgency is a good motivator, but careful consideration is paramount. A phased approach to transformational change allows for proper resourcing to be put in place. It also provides opportunities for community updates. Also, getting feedback from university constituencies engenders confidence about what its future “should be.”

4. Implementation (What Will Be)
Once a dynamic path forward is chosen, communication and planning become crucial. The message should not be how the university can be saved. Rather, it should be an exciting statement about how the institution is forging a transformational path for the future. As a result of a thorough self-examination, the university should announce “what will be” a new organizational structure that benefits students and society as a whole.

It would be wise for U.S. higher education to not let “Schumpeter’s gale” of creative destruction determine its future. But steadfast resistance will likely not be effective. The halls of academia are home to some of the nation’s most creative and gifted minds. This time of transition provides the impetus for developing new models of research institutions and affordable post-secondary education that insures the nation’s vitality in this new century.

This moment requires an active and strategic response.

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About the Author: Marcel J. Dumestre, Ed.D.
Marcel is a retired academic administrator who writes about higher education strategy and philosophy of education. He held positions for nearly 30 years as a tenured professor, academic dean, and academic vice president at Saint Mary's University of Minnesota, Regis University, and Loyola University New Orleans. Marcel is recognized as an innovator in distance education, administrative strategy, and academic leadership development. Marcel’s latest book is Financial Sustainability in US Higher Education: Transformational Strategy in Troubled Times (Palgrave Macmillan, 2016).

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Photo above by Joel Bengs on Unsplash.