By all other measures, however, the 4,500 institutions currently serving more than 21 million students in the U.S., and the 6,500 other institutions around the world, collectively deserve failing grades.

1. strategy+business
issue 69 WINTER 2012
The University’s Dilemma
In the face of disruptive change, higher education
needs a new, more innovative business model.
by TIM LASETER
reprint 00147

2. GLOBAL PERSPECTIVE
essay global perspective
healthcare — and total U.S. student
debt now stands at more than US$1
trillion. Worse still, one out of two
recent college graduates is unem-
ployed or working in a job that does
not require a degree.
Third, institutions of higher
education fail to meet the needs of
another critical constituency: em-
ployers. Even as the U.S. unem-
ployment rate remains stubbornly
high, employment forecasts predict
a shortage of educated, medium- to
1 high-skilled employees in the fields
of science, technology, engineer-
ing, and math (known collectively
The University’s as STEM). There are simply not
enough mathematically capable
Dilemma
young people in the pipeline. De-
spite the prospect of millions of un-
filled jobs, many institutions contin-
ue to allocate their scarce resources
In the face of disruptive change, higher education to the softer fields — the humanities
needs a new, more innovative business model. and social sciences — while under-
funding the investment in science
education that would enable and
by Tim Laseter First, they fail to help students encourage students to pursue these
B
fulfill their goals. Even in the U.S., high-demand positions.
y one, and only one, mea- which has 60 percent of the top- In the business world, such poor
sure, the institutions of ranked universities in the world, performance typically leads to in-
higher education around the overall metrics on successful dustry restructuring fueled by new
the world are remarkably success- matriculation are dismal. Less than entrants, as well as innovation by a
ful: They reach far more people to- two-thirds of students enrolled in a subset of incumbents. Those mov-
day than ever before. About a third four-year institution attain the tar- ing too slowly or in the wrong di-
of Americans over the age of 18 geted degree. Of students entering rection don’t survive. Higher educa-
have attained a bachelor’s degree or a community college, less than half tion might seem immune from such
higher — up from less than 20 per- graduate or transfer to a four-year dynamics. And it probably would be
cent 30 years ago. In the rest of the school within six years. Although immune if it weren’t for one factor:
world, far more people than in the not every aspirant will be destined the technological disruption of the
past are seeking higher education, for success in higher education, Internet and online learning.
especially in emerging economies, these statistics suggest a systemic For years, experts have pre-
where immense numbers of young institutional problem. dicted that online learning would
Illustration by Lars Leetaru
people yearn for professional careers. Second, the cost of a college or change the basic operating model of
By all other measures, however, the university degree is out of control. higher education. Now, this trans-
4,500 institutions currently serving Despite their questionable perfor- formation finally seems poised to
more than 21 million students in the mance, tuition at four-year univer- happen. Nascent competitors ap-
U.S., and the 6,500 other institu- sities has tripled in constant dollars pear eager to disrupt the existing,
tions around the world, collectively over the past 30 years — a faster rate complacent enterprise structure of
deserve failing grades. of increase than much-maligned universities. Students seem similarly

3. essay global perspective
eager for change; according to the ruptive forces, the vast majority of 1990s, more may be learned by their
Sloan Consortium, in the U.S., more institutions of higher education face failures than their successes. Gradu-
than 6 million students took at least disintermediation in their existing ation rates are a dismal 14 percent,
one online course during the fall of relationships among employers and and loan defaults run rampant as
2011; that’s more than 30 percent of students. Pressure from new en- graduates fail to find employment.
all higher education students. In one trants as well as the leaders among None of the online universities seem
to have developed any breakthrough
technology for delivering educa-
Videotaped lectures fall short of tion; they have simply avoided the
solving the fundamental problems capital investment in facilities while
extending their reach to a larger
of effectiveness and cost. target market. That’s a classic “vir-
tual model.” Although profitable for
some investors and executives, these 2
recent experiment, Stanford Univer- existing players could squeeze out institutions seem to have exploited a
sity attracted the interest of 356,000 weaker institutions, repeating the niche but have not truly innovated.
people from 190 countries by offer- pattern of so many other industries. There are also sources of in-
ing three free online computer sci- To navigate through these novation within universities them-
ence courses. Forty-three thousand forces, universities need to follow selves. Some neurologists, cogni-
people received a certificate of com- the example of their business coun- tive psychologists, and education
pletion of at least one course. terparts and fundamentally rethink researchers have just recently begun
The distribution of free video- what they do. They need to foster to collaborate in a multidisciplinary
taped lectures by renowned profes- new capabilities, reconsider their field dubbed “mind, brain, and
sors spreads knowledge for social means of attracting revenues, and education.” They are employing in-
good; however, it falls far short of allocate costs more closely to their creasingly sophisticated equipment
solving the fundamental problems value proposition. In short, using to examine the neurobiological re-
of effectiveness, cost, and relevance the language of strategy, it’s time for sponses within the brain and apply-
in higher education. Fortunately, a new business model. ing those insights to the classroom.
university leaders are beginning to For example, a cross-disciplinary
recognize that they could soon face Know Your Potential Rivals research team from the University
the kind of disruptive competition Sun Tzu, one of the earliest writers of Bristol, including faculty of the
already familiar to those in the cor- on the art of strategy, implored his Graduate School of Education, the
porate world. readers, “Know your enemies and Department of Computer Science,
Clayton Christensen and Henry know yourself.” Faced with a com- and the Department of Experimen-
J. Eyring have articulated a view of petitive threat, businesses seek to tal Psychology, examined the role of
this potential disruption in The In- benchmark their rival (and potential dopamine release in response to un-
novative University (Jossey-Bass, rival) innovators, not just in their certain rewards in a computer-based
2011). “Until the relatively recent own industry but across industries. learning activity.
emergence of the Internet and on- Like most businesses over the past But just as with businesses that
line learning, the higher education decade, higher education should fo- ignore innovative ideas that bubble
industry enjoyed an anomalously cus on the disruptive implications of up from within, these innovations
long run of disruption-free growth,” Internet-enabled innovation. often fail to interest the broader orga-
they write. “The demand for the The most obvious place to nization. In his presidential address
prestige the elite schools confer far start would be the for-profit, on- to the International Mind, Brain,
exceeds the supply, allowing them line universities — such as Phoenix, and Education Society conference
to cover rising costs with tuition in- DeVry, and Kaplan — which cur- in 2009, Kurt Fischer of Harvard
creases and fundraising campaigns.” rently serve 9 percent of all college University acknowledged the prev-
Although those few elite insti- and graduate students. But, as with alent skepticism about building a
tutions may be buffered from dis- the early Internet businesses of the bridge between research scientists

4. essay global perspective
and education practitioners. But he Another model tied to the tra- titions to identify top talent on the
countered by highlighting the in- ditional higher education players, basis of demonstrated proficiency.
tegration of scientists, doctors, and Coursera, was founded in 2011 by These Web-based challenges are of-
nurses in major teaching hospitals. Stanford professors Andrew Ng ten sponsored by technology leaders,
He also invoked the private-sector and Daphne Koller with fund- such as Google and Sun Microsys-
example: “Almost every major mod- ing from venture capitalists John tems, and attract participants from
ern business grounds itself solidly in Doerr of Kleiner Perkins Caufield around the world; the site maintains
research that is shaped by practical & Byers and Scott Sandell of New more than 400,000 individual pro-
questions about how products func- Enterprise Associates. Positioned as files. The ratings inform companies
tion and how they can be used ef- social entrepreneurship, Coursera seeking to crowdsource software
fectively in context. What happened grabs headlines by building tools to components in a reverse auction or
to education?” broadcast existing content through hold “bug races” to eliminate errors
One innovative company, free video lectures in partnerships in programs. The TopCoder model
3 Carnegie Learning Inc., has dem- with top-ranked universities such as offers a new spin on certification
onstrated the practical value of this Princeton and the University of Vir- and fulfills workers’ growing desire
integration in computer-aided learn- ginia. Intent on efficiently manag- for flexible working arrangements
ing. Founded in 1998 by cognitive ing massive course enrollment, the rather than 9 a.m. to 5 p.m. cubicle-
psychologists Steven Ritter and John company seeks to develop new tools, based jobs.
Anderson, the company continu- such as software that prioritizes stu- Although not an obvious place
ously tests and refines its products dent questions for interactive ses- to find innovative business models,
— such as its MATHia software, sions with thousands of participants evangelical megachurches offer les-
developed for primary school stu- and for organizing peer-reviewed sons on scaling up technology while
dents and teachers — in response to grading. Research in primary educa- maintaining an immersive experi-
constant feedback from field experi- tion has shown that blind grading, ence. For example, North Point
ence and new research on such areas peer grading, and self-grading cor- Ministries in Atlanta serves an av-
as intrinsic motivation and academ- relate strongly with teacher assess- erage of 30,000 congregants each
ic alienation. MATHia monitors ments, and can enhance learning. week through a network of five cam-
student performance to adjust prob- (Disclosure: The Darden School of puses, and its collection of podcasts,
lems dynamically to the appropriate Business, where I am on the faculty, newsletters, and streaming videos are
degree of difficulty and also custom- is offering its own Coursera Massive accessed a million times per month.
izes word problems to reflect student Open Online Course, called “Grow Each facility seats from 1,000 to
interests, even including names of to Greatness: Smart Growth for Pri- 5,000 attendees; the church em-
friends. Although it is focused on vate Businesses,” beginning January ploys theater-style screens broadcast-
primary education, Carnegie Learn- 28, 2013, as part of a University of ing from high-definition cameras
ing’s successful science-based ap- Virginia initiative. I am not directly originally designed for NASA. The
proach offers an excellent model for involved in this course. As of Sep- multi-campus network supports this
multidisciplinary efforts targeting tember 2012, more than 23,000 immersive experience through three
adult learners in higher education. people had registered for it.) levels of engagement using a house
Farther afield, the software as the metaphor: The “foyer” hosts
company TopCoder Inc. is chal- Sunday morning sermons (with pro-
Tim Laseter lenging the fundamental need for an duction values worthy of a premium
lasetert@darden.virginia.edu advanced degree by explicitly mea- rock concert); the “living room”
serves as a professor of practice at the
Darden School of Business at the suring ability, not pedigree. When holds smaller, more active periodic
University of Virginia. He is the author or Jack Hughes founded it in 2000, the events; and the “kitchen” is the place
strategy+business issue 69
coauthor of four books, including The Por-
table MBA (Wiley, 2010) and Internet Retail
company set out to tackle the busi- for weekly study groups of eight to
Operations: Integrating Theory and Practice ness challenge of recruiting and as- 12 people led by lay members of
for Managers (Taylor & Francis Group, sessing programming talent. Rather the church. Those who remember
2012). Formerly a partner with
Booz & Company, he has more than 25 than relying on education creden- how the televangelists of the 1970s
years of business strategy experience. tials, TopCoder runs coding compe- and ’80s leveraged cable television

5. essay global perspective
will recognize the need to watch this dent population reached online. It college, an admissions director cap-
model closely. isn’t clear whether Stanford seeks to tured the essence of the philosophy:
Online gaming offers another do so, but someone almost certainly “We train you for nothing…but we
technology model worth exploring. will — and institutions of higher educate you for anything.” A finan-
Massive multiplayer role-playing learning must plan for that day. cially stretched parent may bristle at
games — such as the immensely Before taking action, universi- the thought of paying $200,000 for
popular World of Warcraft — cre- ties and colleges need to take stock that four-year education; however,
ate a world in which participants in their own positioning: “Know in a fast-changing world, the ability
can collaborate to tackle complex
challenges. The original Warcraft
game, first released in 1994, has
spawned three additional releases;
“Almost every major modern
the latest version supports more business grounds itself in research
than 9 million subscribers. More
than 200 servers around the world shaped by practical questions. 4
host “realms” with up to 1,500 si-
multaneous users controlling avatars
What happened to education?”
who individually or collectively pur-
sue quests and battle for dominance yourself,” as Sun Tzu advised. Using to build on foundational knowledge
against competing factions. The the language of business strategy, and adapt can be a highly prized as-
game was not designed for educa- institutions must understand their set — if you can afford it.
tional purposes, but some believe it “value propositions” from a set of Certification. Many university
could play more of a university-like four distinct benefits. leaders balk at the idea of providing
role. The popular science fiction Selection. For employers, the training in technical and problem-
novel Ready Player One, by Ernest admissions process of a top-ranked solving skills, but it should be a
Cline (Crown, 2011) portrays an en- university generates tremendous val- critical part of their value proposi-
ergy-drained future world in which ue by culling applicants to create a tion. In many of the STEM disci-
most of the population spends time select pool of potential employees. At plines, employers seek technical skill
plugged into “OASIS,” a massive top business schools, the recruiting certification. A few short tests in a
multiplayer environment accessed process begins before matriculation typical job interview process cannot
with goggles and gloves by the poor starts; recruiters track the progress validate the breadth and depth of
— or fully immersive clothing and of those who have been accepted. In technical skills typically sought.
equipment by the wealthy. In this other high-demand fields and for the Immersion. First-generation col-
dystopia, set in 2044, the masses at- right undergraduate majors (such as lege students may not realize the
tend virtual schools that were built finance, economics, and some engi- worth of this factor, and it may seem
by simply replicating software code neering fields), hiring decisions can less tangibly valuable than the fast
and recruiting teachers to connect occur well before graduation. The track to employment that can come
and lecture remotely — using tech- value generated through the admis- with selection or certification. But
nology that mostly already exists. sions process directly correlates to a immersion can yield the most last-
university’s “brand value.” ing and meaningful benefits.
Know Yourself Knowledge. The creation of new The college experience offers an
These examples of disruptive ap- understanding and capabilities, for opportunity for creating rich con-
plications of technology represent a society as a whole (and perhaps for nections among like-minded peers
threat or an opportunity, depending faculty egos), resides at the center of pursuing stimulating activities in-
on how institutions of higher educa- the mission of leading universities. dependent of the pursuit of higher
tion react. An ordinary, second-tier Although imparting that knowledge grade-point averages and a job upon
college cannot compete if Stanford to students may take a backseat, it graduation. Parents who blossomed
finds a way to cost-effectively mon- offers a potentially critical value for during their own college years of-
etize a 100-fold increase in its stu- employers. At a leading liberal arts ten maintain deep loyalty to their

6. essay global perspective
undergraduate institution and may those students through TopCoder- many academics invest their efforts
willingly place a high value on im- style competitions would increase in relatively narrow research, writing
mersion despite its less-measurable the value of the courses. papers read only by other academ-
return on investment. Another path might be to lever- ics, with relatively little time spent
Together, these four benefits age partnerships to create satellite teaching and training students. In
provide a basic way to think about campuses — not just internationally some fields — such as the STEM
the value proposition for higher edu- as many leading universities have disciplines — research advance-
cation. Different institutions com- done, but with second-tier or com- ments continue to fuel economic
pete along different dimensions. munity colleges. Following the lead growth and societal prosperity. But
Community colleges highlight cer- of the megachurches, this model in others, the research simply offers
tification; many large state universi- would multiply the reach of “rock alternative perspectives on long-
ties with top-ranked basketball and star” professors with local facilita- standing, foundational knowledge
football programs emphasize im- tors. Such a model would require such as the writings of Aristotle. In
5 mersion. Secluded liberal arts colleg- partnerships with a broader reach, light of declining performance and
es offer a different form of immer- but it parallels the current model growing costs, institutions of higher
sion built on long-term networking of professor lectures augmented by education must invest their precious
value. Research universities often research assistants that is common resources more consciously. They
stress knowledge, whereas the Ivy in introductory courses on most need not all follow a STEM-based
League schools achieve excellence in campuses. Conceivably, this model model, but they will need a clearer,
selection. Few schools do well on all could be delivered largely online, more explicit rationale for what they
four dimensions. linking the center with the satellites deliver, beyond “We teach what our
In the emerging disruptive en- through high-quality videoconfer- faculty think is important,” or they
vironment, all universities should encing such as Cisco’s TelePresence. may not survive.
start with an explicit articulation of Such paths would leverage the Although the specific path for-
the customer value proposition and talent at top universities and defray ward for institutions of higher edu-
design a path forward that leverages the costs of their highly immersive cation may not be obvious, human-
technology to deliver it. Simply put: offering, but what about second-tier ity can take pride in the legacy of
Which of these four benefits should schools? Aggressive players might value of its colleges and universities,
you emphasize, and which should leverage their physical assets and ac- which have been a primary main-
you put aside? And how can you cess to a local population but cut out spring of progressive knowledge
leverage the Internet to deliver that all research as well as much of their and value for at least 1,500 years.
value proposition more widely and faculty and administrative support. Indeed, the source of their current
cost-effectively? Others might specialize more nar- disruption — the Internet — would
As the early days of the Internet rowly in the needs of local business- not exist without them; it began as
demonstrated, attracting eyeballs is es in fields requiring hands-on train- a way to exchange data among mili-
easier than monetizing them. Cours- ing. But attempting to be all things tary and academic research comput-
era seems bent on proving that axi- to all people will not be sustainable. ers. Institutions of higher education
om again, citing the societal benefits The once-feared shortage of college have the ability to solve the crisis
of spreading knowledge in emerging professors may quickly become a they currently face, but resolve pre-
markets rather than addressing the glut — tenure or no tenure. sents the greatest impediment. Will
current crisis in higher education. your alma mater or local source of
But can it create those benefits? Forward to the Basics new graduates leverage the disrup-
A $10 fee for a computer class of Modern universities emerged in the tive technology of the Internet by
100,000 students would generate a fourth and fifth centuries A.D. as applying the principles of business
strategy+business issue 69
windfall and postpone cost-cutting monastic schools in Europe, focus- strategy…or will it be disintermedi-
decisions at leading universities that ing on disseminating knowledge ated by new entrants offering a bet-
have the reputation to attract such a rather than creating it. The disrup- ter value proposition? +
following. Integrating activities that tions of the Internet may return Reprint No. 00147
validate the accrued knowledge of education to those roots. Today,

7. strategy+business magazine
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