The Higher Education Bubble: Can it Burst?
A competitive analysis to determine if the higher education bubble will burst and why.
The competitive landscape of higher education will intensify if the current trends continue. If Universities continue to increase tuition, costs continue to rise, political headwinds continue, and foreign students continue to find other options around the world, the US higher education landscape will continue to change. Will these changes and others lead to a bursting of the higher education bubble?
This post breaks down the competitive landscape for higher education with a focus on business school graduate programs (focusing on MBA programs solely due to my interest).
The more we understand the competitive environment of graduate business school programs, the more we can find opportunities to improve existing institutions and ways to make a better education experience for everyone.
This post uses a Porter’s 5 forces analysis to try to understand the industry.
Threat of Entry: What’s the risk of other players entering the market and taking profit from incumbents?
Historically, elite higher education players have benefited from a low threat of entry; there is a low threat of competitors taking market share.
First, accreditation provides an intense moat for graduate programs. Accreditation comes from approved accreditation bodies (Association to Advance Collegiate Schools of Business). These accreditation bodies control the number and quality of accredited universities. It is difficult to obtain and maintain accreditation, which provides a moat to entrants who want to “sell” a business degree to students.
“Maintaining accreditation is fundamental for higher education institutions to attract and maintain enrollment, faculty, and revenue.” - Deloitte's “Significant risks facing higher education”
Elite institutions have a low threat to entry due to their brands. Building a brand takes decades, and the oldest institutions remain prestigious brands across the world. While brand is a strong barrier to entry, we’re beginning to see the possibility of new schools to build strong brands in a short amount of time. Schools/programs like the Lambda School or Y Combinator provide evidence that brand moat is penetrable.
Building a brand is difficult because it’s a flywheel problem: the better the brand, the higher quality people are brought into the institution, which builds a better brand.
Closely associated with a brand, established institutions have low threats of entry due to their ability to attract and retain prestigious professors.
A typical higher education institution has low threats of entry because of the large physical asset investment. Most colleges do not separate their graduate programs in their financial statements, but Dartmouth (including its business school) has a billion invested in land, buildings, equipment, and construction in progress.
However, online schools have a much lower barriers to entry given the low costs and scalability of the internet.
Retaliation is the final threat to entry. How will incumbent higher educators retaliate to those attempting to enter the industry? They will likely adjust their programs to fit the needs of the times.
“Bill Boulding, dean of Duke University’s Fuqua School of Business, said he is optimistic that applications to business schools will recover over time. Many schools are making changes to their programs, offering specialized degrees in fields such as data analytics, or finding ways to give graduates access to additional courses after graduation at little or no cost.” - WSJ.
Likely, higher education will pivot to remain relevant. They will “retaliate” by adapting their courses and structure.
Threat of Substitutes: What’s the risk that incumbents will lose profit from similar products?
Top tier programs have an incredible advantage - there are few substitutes to a name brand education. The bottom line is that obtaining a degree from a top 25 university gives you access to boundless opportunities in many industries.
However, while there isn’t a substitute for this type of elite education, is there a substitute to gain what this education provides: network, status, high quality information, access, and high paying careers?
Some substitutes have taken market share from top programs recently. First, the pre-COVID job market decreased the demand as people decided they don’t “need” the payoff of an elite higher education. They decided to remain in their current role due to high potential for career growth. Also, business schools in other parts of the world provided a great “return on investment” (China, Canada, and Europe).
As such, graduate business degree applications have fallen recently (WSJ).
Also, a reasonable assumption on the threat of substitutes is that some programs have seen declining demand due to rising higher education prices.
Source: WSJ
Source: WSJ
A threat of substitutes includes an increasing “education delivery mix.” According to Deloitte, this “includes expansion of new or existing part-time programs, Massively Open Online Courses (MOOCs), independent-study, accelerated executive programs, and shorter certificate programs.” In terms of online education, there are a variety of resources available as I describe here: Online Learning Resources.
In short, the traditional graduate programs threat for substitutes is relatively high because of the increasing variety of education. Declining demand for MBA programs could indicate that the demand is elastic.
“As students increasingly elect to forgo the traditional path in favor or alternative programs, institutions should be prepared with responses to questions about their student’s preparedness for potential jobs and whether an online education is attractive enough and accepted by potential employers for them to become gainfully employed.” - Deloitte.
The threat of substitutes is a critical factor when considering the competitive landscape of higher education and graduate programs. Do these programs have an irreplaceable product that students will pay anything for? Are there positions in business that are inaccessible without an MBA? Certainly there are cases where this is true. However, there are many cases where this might not be the case.
Bargaining Power of Buyers. How much power do the buyers have in the exchange?
There are many buyers (students) of advanced degrees but few suppliers (top tier schools). As such, elite graduate programs have high bargaining power. This has allowed (in part) these institutions to rise prices consistently over the past few decades.
This industry is unique. Unlike the car industry, there are many alternatives and substitutes to a prestigious graduate degree program (including not purchasing). As such, these programs look more like a luxury good rather than an essential product. Scott Galloway says, “University brands are the premier luxury brands globally, built over centuries, with margins and the illusion of scarcity that renders Hermès vulgar.”
There are many, many alternatives to a Rolex, but they remain in business for their ability to show status. The high price tag and exclusivity is part of the appeal of an elite institution and a Rolex.
Bargaining Power of Suppliers. How much power do the suppliers have in the making of the product?
Dell has little bargaining power over its suppliers (Microsoft and Intel) because there are only two legitimate suppliers.
To create an elite graduate program, there are many essential inputs: lectures, professors, physical assets, administration, network, and a brand.
Prestigious programs have bargaining power the most important asset of graduate programs - the professors. As there is a limited number of professor seats at the capped number of prestigious schools, the suppliers have limited bargaining power. In addition, business school graduate programs often source professors from non-traditional backgrounds. As such, there is a large pool of professors reducing their bargaining power.
Intensity of the Rivalry: How intense is the rivalry among competitors and will it reduce profits?
At the top of higher education, the rivalry between the schools is not as intense as we may think. There are many applicants fighting for the few top seats. MBA applicants will apply to several of the top programs. Applicants are elastic with regard to the specific institution and the price (as the price difference is negligible).
However, if we again look at these programs with a wider lense, the rivalry seems more intense. As a whole, the elite institutions are fighting against many alternatives:
Alternate credentialing (CFA, Masters in Data Analytics, etc.)
High paying Tech jobs and other ways to maintain status
Online classes (though the status and luxury brand does not hold with online classes)
International MBA programs (these are some political headwinds that are causing US MBA application for international students to drop)
“The American M.B.A. degree, already losing luster at home, is facing a new challenge from abroad. For the first time in more than a decade, most graduate business schools are reporting a decline in applications from international students.” - WSJ
(WSJ)
In summary, the competitive dynamics of the higher education industry lends itself to high potential profits. The brands of colleges create a low threat to entry. Also, the large physical investment creates a large barrier to entry to start a new traditional university. The largest threat to current universities is the threat to substitutes as interest in MBA programs is waning. Will this be enough to burst the higher education bubble? I believe the change will be gradual over a few decades rather than a dotcom type bubble burst.
Part II
The next part of this analysis is to understand the capabilities of higher education universities.
I attempt to understand the capabilities of higher education institutions through their
Resources to Capabilities (what do they have that allows them to deliver a great product?)
Their sustainable advantage over time: how imitabile and durable is their product?
Resources to Capabilities
So, what resources do profitable Universities have that allows them to profit in the higher education industry?
The following chart helps to understand how profitable education institutions make money.
(Source)
Higher education relies heavily on Intangible People and Assets as their core capabilities. The reputation and brand that comes with a top tier education are near irreplaceable.
As discussed, it functions similar to a luxury brand. The value (in part) relies on the perceived value. Since employers and people perceive the MBA to be a great credential, it is. In addition, as it continues to attract and educate high quality students, it maintains its reputation. This is largely positive for education institutions. Luxury brands have high margins and maintain loyalty with their customers. However, maintaining a strong brand is often difficult and fragile.
Higher education institutions understand this. From the Stanford 2019 Financial Report: “Notwithstanding its positive financial results, Stanford continues to be exposed to challenging global, national and local markets, and these pressures are likely to continue in the years ahead. Higher education has recently been overshadowed by negative publicity related to admissions scandals, acts of intolerance and harassment, and skepticism around the value of a liberal arts education.”
An important part of understanding a firm’s capabilities is to understand its ability to sustain its advantage over time.
Sustainable Advantage over Time: Is the advantage imitable and is it durable?
According to Darden’s Foundations of Business Strategy class: there are several factors that are barriers to imitation: legal barriers, control scarce supply, developed over a unique historical path, capabilities that are socially complex, value from tight combinations, and credibly committed to a firm course of action.
Universities have been developed over a unique historical past. Building a brand takes decades of success, discipline, and consistency.
In addition, they have strong barriers to imitation with regards to socially complex capabilities. The network effects of a strong brand and institution have created high value for people paying for an elite graduate program education.
They do not have control of a scarce supply of inputs, however. There is not a scarce supply of information about business. There is not a scarce supply of smart people willing to learn.
However, these institutions create a low supply of their product. The top 10 schools only allow a select number of students into their organization each year. Therefore, there is not access to all.
If you have thousands of students competing for a number of spots, you are able to charge very high prices. Again, the luxury analogy works here.
The second assessment of sustainability of advantage from the durability of their advantage. Can their capabilities sustain over time?
The sustainability of advantage of higher education graduate programs become more clear if you look at the fate of less prestigious programs.
“Business schools at public universities have been particularly hard-hit by the downturn in demand, forced to provide steep tuition discounts to attract more applicants, while facing tighter state budgets, Carson’s Mr. Hunter said.” Universities Take a Harder Look at Whether M.B.A. Programs Are Worth It
This shows the importance of brand and prestige in higher education. Many institutions have moved their MBA resources to the less expensive online programs or more focused Master's programs like data analytics.
“In 2009, Carson began shifting more resources to its online M.B.A. program, which enrolled more than 500 students this year, compared with 200 five years ago.”
In addition, the demand pressures for business school programs have caused headwinds for MBA programs.
“Tippie is the latest business school to abandon the full-time, two-year M.B.A., joining Virginia Polytechnic Institute and State University and Wake Forest University, which chose to discontinue their programs in 2013 and 2014, respectively. Deans and industry watchers say the moves come at a time when young students with heftier student debt are reluctant to exit a strengthening job market to pursue one of the country’s most expensive degrees.”
This raises the question: is there a similar fate for other graduate business programs? Or, is this the natural demise of certain programs and there will be a sustainability of advantage for the best and most innovative programs? I would guess the latter, at least in the short term.
Conclusion
The objective of the post was to attempt to understand the future of higher education. The student loan crisis is a problem in the US, and at the very least it is helpful to discuss the market.
The market is especially interesting due to its lack of disruption and change through the internet revolution. Is it impenetrable by the forces of the internet or is it a difficult space to penetrate?
With more understanding of the competition around higher education, will the incumbent institutions lose their current standing? Will the competitive forces like the threat of substitutes help to burst the higher education bubble? Time will tell.
The following post is the final assignment of Darden’s Foundations of Business Strategycourse.