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In my last essay, I provided a financial forecast for the higher education sector. My assessment: colleges and universities face an incredibly challenging environment over the next three to five years. I predict declining enrollment, declining revenue, constraints on the ability to increase tuition and increasing costs. These factors will put many institutions in a financial vise grip. As the closing this spring of 181-year-old Iowa Wesleyan makes clear, these are existential, not operational, challenges. For many colleges and universities, what is at stake is survival.
So how should colleges and universities respond? That depends on their current market position. I place institutions in three different buckets.
The Top Tier
Top-tier institutions will continue to thrive despite average industry trends. In this era, the strong will only get stronger. These institutions possess a very strong brand, significant endowments and either multiple revenue streams (think Stanford) or a secure market position in a narrow niche likely to persist (think Amherst). In an era in which consumers doubt the value of college, these schools will continue to enjoy deep applicant pools because their brand is so strong, they appear to be safe bets. Given their strong market position, these colleges and universities enjoy a large margin of safety. Their only real strategic question is whether they want to expand or not. How many schools fit in this category? Perhaps only 80, many fewer than a generation ago.
The Bottom Tier
In contrast, schools in the bottom tier face potential bankruptcy if they do not seriously alter their market position. What schools fall into this category? Let’s put it this way. If (1) you are drawing or have drawn funds from your endowment in order to meet operational expenses, (2) have seen your bond rating downgraded, (3) are selling off property to meet short term financial needs or (4) have seen reductions in revenue or applications in excess of 35 percent over the last few years, you fall into this niche.
Boards of institutions in this category should ask themselves a really difficult question: Is their school’s continued existence necessary? Are they meeting some unique social or economic need? The answer, given low demand for their school, may well be no. In the increasingly national educational market created by online education, and with the movement from a rural to a highly mobile urban nation over the last 100 years, the United States probably does not need—and the market will not support—thousands of small institutions distributed equally over the landscape. Market consolidation is inevitable.
Colleges that fall into the bottom tier should consider merger before they have run through all of their assets. Merging into and thus strengthening a more secure and viable institution, or combining with three to five other small, struggling institutions, is not giving up. It represents, in many cases, wise stewardship of charitable resources. Merger allows you to monetize excess real estate, combine multiple small endowments, preserve faculty and program strength, and eliminate duplication. This will result in reduced employment for faculty and staff, but it is better than no employment at all, the likely fate if struggling schools simply operate until they reach a point of no return and must close. It also provides some degree of institutional continuity for alumni.
The Middle Tier
What about the vast middle tier? These institutions are not facing imminent collapse, but unlike the top tier, they do not occupy a virtually impregnable market position. They are currently scraping and scrapping to attract students, secure revenue and cut costs. They have an average brand and an adequate student body, but their balance sheets are precarious, their long-term prospects a matter of concern. If these institutions are not careful, they could easily find themselves slipping toward the bottom tier, into an existential crisis. What should these schools do?
There is, of course, no one-size-fits-all solution. I do think, however, that many of these institutions would benefit greatly if their leaders devoted significant time to analysis of the university’s fundamental strategic assumptions.
Boards of trustees of these institutions tend to ask, when they examine strategy, whether their college or university has a viable business model. I think this is the wrong question. Nonprofit educational institutions are not businesses. Talking about them as if they are tends to alienate every major constituency you possess. But more importantly, focus on the business model often leads to short-term thinking, to tactical moves to cut minor costs or generate a little extra revenue. This small-ball thinking is inadequate in the current ultra-challenging financial environment. You need to take a more fundamental approach.
Instead of focusing on business models, I would encourage these schools to examine, instead, their value proposition. An institution will not thrive unless it possesses a strong value proposition. That means that the school offers potential students (1) a service of clear benefit for which (2) there is clear and robust market demand (3) that is either unique or superior in price, quality or branding to the similar service offered by all institutions in their relevant, cross-elastic market.
Many institutional leaders cannot articulate their school’s value proposition. Here’s a test: if you are a university leader and you cannot write your value proposition down on a 3-by-5 note card without more than a minute’s reflection, you probably don’t have one. If you fall into that category, this is critical. Ask yourself: What do we offer of real social benefit? Is there a clear demand for this? How is our product better than that of our competitors? Why should students choose us? You must answer these questions in order to be able to chart a clear path forward.
Other institutions possess a clear value proposition, but it is not a strong one, because it fails critical parts of the test. There may be limited demand for the school’s product, perhaps because it is out of date, based on market assumptions that were valid decades ago but no longer hold true. More common, perhaps, is a competitiveness problem. The school offers something of value that students want, but it is not attractive because of the school’s price, branding or perceived quality. The best value proposition is one that is unique: one that no one else in your relevant market offers. But if, as is more likely, you have clear competitors, you need to identify how you will outcompete them. Price, quality, brand: pick your approach and align your institution.
Asking these questions may seem a little basic, yet many institutional leaders today have not conducted this fundamental and necessary analysis. If you are in the middle tier, that is the place to start.
