Editor’s note: This is part two of a series of articles. The first part can be found here.
As outlined in my previous article, the current dominance of DEI-based policies (diversity, equity, and inclusion), characterized by a focus on equality of outcomes, as well as indoctrination and curtailment of speech, is leading higher education on a suboptimal path and resulting in a gradual handicapping of the curriculum. Although there are many paths to restoring balance, an important and underutilized course of action is the establishment of alternative, new colleges that embed freedom and merit deep in their institutional DNA.
How might new colleges that depart from the existing culture be successfully launched? I suggest that consulting the rich literature on innovation will be useful in this quest.
Why innovation? Is a restoration of programs and policies based on academic freedom, equality of opportunity, and merit truly innovative? Yes and no: restoring a culture of merit in higher education is not especially innovative in substance, but the restoration process itself has important similarities with the introduction of an innovative product or service.
The For-Profit Business Model
First, is it appropriate to use a for-profit business framework to evaluate the potential for new educational ventures? Ohio University economist Richard Vedder points out some problems with the business perspective:
There are… important differences between competitive free market capitalism and the environment of higher education. Information is not provided as well (the profit or stock price “bottom line” is non-existent), incentives are muted by the non-profit model (higher ed has no billionaires like Bill Gates or Jeff Bezos), all of which stymies innovation. Great seemingly disruptive innovations, like MOOCs (massive open online courses) often do not end up showing as much promise as initially predicted. Restrictions on innovation (e.g., accreditation) are present in higher education: Tesla or the iPhone never had to become “accredited.”
All of these things mute “disruptive innovation” or “creative destruction,” as does large taxpayer and philanthropic support.
I will address “disruptive innovation” in detail below. For now, it is important to recognize that Vedder’s article focused on innovation in areas such as online education and vocational/non-degree institutions, which established institutions either are trying to implement, or do not consider a threat to their core mission. The restoration of merit-based programs (a disruptive innovation), on the other hand, aims at the very heart of higher education, not to mention the larger cultural environment, and thus the educational entrepreneur should absolutely anticipate obstacles, or “barriers to entry,” that developers of the Tesla and the iPhone never faced.
Let’s begin the review of pertinent literature with Innovation and Entrepreneurship by Peter Drucker. Drucker lists several possible sources of innovative opportunities, one of which he describes as “the incongruity between perceived and actual customer values and expectations.” Are the majority of colleges and universities, with their focus on diversity, equity, and inclusion, misperceiving customer values and expectations? I believe so.
As I discussed in my previous article, higher education’s focus on DEI has left a gap in the marketplace—a market segment comprising academics, students, parents, and donors who would prefer, if offered, institutions founded and operated on a basis of academic freedom and merit, dedicated to teaching how, not what, to think. Does this disconnect in values and expectations create an opportunity for innovative new ventures? In my view, yes. And though the battle for the higher ed marketplace presents several hurdles, I believe these can be surmounted.
Entry Barriers
What entry barriers will these entrepreneurs face? There are many sources that define and describe entry barriers; I will refer here to Competitive Strategy by Michael Porter. According to Porter, there are six major sources of entry barriers, and an educational entrepreneur will face most of them. Many relate to the issues a new entrant will face due to the abundant resources and strong market position enjoyed by well-established competitors:
- Economies of scale: universities with large enrollments can deliver programs at a lower cost per student
- Product differentiation: ”branded” universities (those with noted faculty, accredited and respected programs, and other similar factors contributing to positive reputations and alumni/donor loyalty) can more effectively and efficiently acquire and retain tuition-paying “customers”
- Capital requirements: established universities are often well-positioned to raise funds (or already have access to such funds) for new programs and initiatives, improvements to real property, and other significant investments
- Other advantages:
- Favorable access to resources: established institutions have ready access to a wide range of day-to-day operating inputs, from the most critical (faculty, e.g.) to the routine (supplies and service needs), resources that can be costly for new entrants to obtain
- Favorable locations: the most favorable physical locations, either because they are close to the customer base, or otherwise attractive for educational purposes, are already taken
- Government subsidies: see below
This final point, government subsidies, is clearly a strong and persistent barrier for a new entrant. Established public universities enjoy subsidies from government sources, and both public and private institutions benefit from government contracts. In the current environment, none of these subsidies and benefits is likely to be available to a “start-up” targeted at the merit-based market segment described above, both for fiscal as well as political and cultural reasons.
Of course, Porter’s book was published well before the DEI movement came to dominate higher education, and focuses primarily on for-profit business entities. Thus, he does not contemplate certain entry barriers that today’s educational entrepreneur will surely face, such as a corporate climate that currently favors the dominant DEI perspective. To this climate, we can attribute at least two further significant disadvantages in store for any higher ed start-up:
- It may make recruiting students more difficult and costly, because students may hesitate before pursuing a degree from an unfamiliar institution that, although providing valuable career options and a culture of academic freedom and merit, might be perceived as limiting some post-undergraduate opportunities.
- Brand and reputation building for the start-up will be slower and more costly because established institutions will likely continue to benefit from favorable news and social media treatment, relative to new colleges that de-emphasize DEI concepts.
Although beyond the scope of this article, it is interesting to contemplate the dollar value of the “free” cultural benefits that many colleges and universities enjoy. For example, favorable media coverage likely contributes to reduced costs of student acquisition and brand maintenance, relative to institutions with a non-DEI culture. In many cases, these free benefits could represent substantial (unmeasured) intangible value—value that would be at risk of dissipation if new institutions were to gain “cultural market share.”
Any measurable rollback with respect to the popularity and influence of DEI-based institutions and programs would likely produce a consequent increase in the cost of faculty and student acquisition and retention, as well as potential declines (or slower rates of increase) in tuition and donations. Although, as Vedder mentions, a university’s “stock price ‘bottom line’ is non-existent,” the negative impact on the “brand value” and cash flow of established DEI-influenced institutions would be very real.
Competitor Retaliation
What might the educational entrepreneur need to plan for with respect to potential retaliation by existing institutions? In a reasonably competitive market, one might anticipate that large, well-financed academic institutions with strong brands and reputations would forcefully respond. How? By employing these brand names, reputations, human and financial resources, and other advantages to capture market share and profits in this “new” segment while effectively blocking the entrance of new competitors, or at least serving to reduce the incentive for market entry. But would that actually happen?
Although the deck is currently stacked in favor of the existing DEI culture, there are many opportunities that await the educational entrepreneur.Here I return to the topic of innovation management via The Innovator’s Dilemma (TID) by Clayton Christensen. It is important to note that TID focuses on the impact of technological innovation, whereas our focus might be better labeled as paradigmatic, or model innovation, where the new “product” is a process or model for doing things. Presently, most established colleges and universities can be described as following a DEI model, whereas our proposed new institutions will follow a non-DEI model, with the previously described emphases on merit, academic freedom, equality of opportunity, and a curriculum that prioritizes “how to” think.
One foundational concept of TID is the distinction between sustaining technologies and disruptive technologies. Sustaining technologies “improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued.” … Disruptive technologies bring to market a very different value proposition than had been available previously.” For our purposes, I will label the current selection of DEI-influenced programs as the sustaining model, reflecting its dominant position both within and outside of academia, and non-DEI programs as the disruptive model.
Christensen identifies another foundational concept, which he terms the value network:
… the context within which a firm identifies and responds to customers’ needs, solves problems, procures input, reacts to competitors, and strives for profits. Within a value network, each firm’s competitive strategy, and particularly its past choice of markets, determines its perceptions of the economic value of a new technology. … In established firms, expected rewards … drive the allocation of resources toward sustaining innovations and away from disruptive ones. [emphasis added]
This suggests that established colleges and universities might be more likely to “double down” on “sustaining” DEI-based programs, rather than invest in “disruptive” alternatives.
In the concluding chapter of TID, Christensen summarizes seven dilemmas of innovation, that is, seven generic explanations for why entities fail to respond to disruptive technologies. I will review a few of these below. This is a critical and relevant area of focus. The correct assessment of potential responses (or, hopefully, non-responses) of powerful, established, and culturally-favored academic institutions—as well as the entrepreneur’s strategy for, and capability of mitigating these responses—could make the difference between success (obtaining financial resources, faculty and students) and entrepreneurial failure.
Most of the factors that TID describes as accounting for a failure to respond to disruptive innovations relate to resources and capabilities that large, established universities do not lack. However, are there any “dilemmas” that might realistically preclude or slow universities’ retaliation and thus supply entrepreneurs with sufficient time to acquire resources and implement competitive programs? Discovering such weaknesses in the current higher ed model is crucial for any educational entrepreneur, since in the absence of sufficient time to establish a viable business and acquire paying customers, investors are unlikely to be incentivized to invest, and potential faculty are unlikely to make a career commitment.
Fortunately, Christensen’s summary contains two “dilemmas” established colleges may face. First:
… the capabilities of most organizations are far more specialized and context-specific than most managers are inclined to believe. This is because capabilities are forged within value networks. … these capabilities – of organizations and of individuals – are defined and refined by the types of problems tackled in the past, the nature of which has also been shaped by the characteristics of the value networks in which the organizations and individuals have historically competed. [emphasis added]
In other words, existing colleges and universities may have too many resources invested in their current DEI-inspired “value networks,” and may well lack the adaptability to migrate to our disruptive non-DEI model. Perhaps, then, there are limits on existing institutions’ abilities to capture that market before innovators do.
In addition, Christensen’s seventh and final dilemma appears particularly promising:
Perhaps the most powerful protection that small entrant firms enjoy as they build the emerging markets for disruptive technologies is that they are doing something that it simply does not make sense for the established leaders to do. Despite their endowments in technology, brand names, manufacturing prowess, management experience, distribution muscle, and just plain cash, successful companies populated by good managers have a genuinely hard time doing what does not fit their model for how to make money. … Conventional managerial wisdom at established firms constitutes an entry and mobility barrier that entrepreneurs and investors can bank on. [emphasis added]
I would supplement TIP’s “dilemmas” with one based upon the previously discussed cultural environment. Established universities would likely be unwilling to re-enter the traditional non-DEI market segment, as described above, due to the risk of losing all or a portion of their unmeasured but strategically significant intangible asset value arising from government support, positive media coverage, and a corporate culture that favors DEI programs.
Summary
This brief review of the literature of innovation and entrepreneurship supports the argument that, while the establishment of new, non-DEI influenced institutions entails great and somewhat unique risks, some of the risk may be mitigated by the relatively low probability that existing colleges and universities will directly retaliate against new entrants, at least in the short run. This might provide encouragement to potential educational entrepreneurs:
- to further review the concepts and strategies of innovation management
- to consider employing them in the creation of new, disruptive institutions
- to use them as selling points in the acquisition of investors and faculty
Although the deck is currently stacked in favor of the existing DEI culture, there are many opportunities that await the educational entrepreneur. As Fred Johnson advised in a different context (Episode 1, Season 5 of The Expanse): “You’ve got to stop focusing on the end of the world. Go build something.”
David C. Dufendach is a former partner of Grant Thornton LLP, where he specialized in the valuation of businesses, intellectual property, intangible assets, and complex securities. He has written many articles and spoken at numerous national and international conferences on complex valuation topics. He was an adjunct in the graduate business school of Seattle University, holds an M.B.A. from the Wharton School of the University of Pennsylvania, and a B.A. from the University of Washington.