Business Model Innovation in Online Higher Education

Note: Part 2 on Business Model Innovation is available here.

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Yes, the concept of “business model innovation” sounds like something a management consultant would conjure up. But I encourage you to suspend your initial reaction. The growing interest in business model innovation during the last five years is in response to challenging conditions facing a number of sectors, including higher education.  And the concept provides a useful framework for imagining new approaches.

A business model is simply the way in which an organization fulfills its mission; how it creates, markets and funds the goods and services it creates for stakeholders – whether they are waste management companies, families buying groceries or students pursuing degrees.

Note: Using the business model concept does not imply that higher education is a business, or that it should be more businesslike. Every organization has a business model, whether it’s IBM or Greenpeace. It’s simply a way to analyze how different types of organizations operate.

Quality > Innovation > Business Model Innovation

Business model innovation is a product of its time. In the 1980s, the watchword was “quality.” (Ford’s slogan was “Quality is Job 1″).  Success was thought to be the result of creating better quality goods and services.

More recently, “innovation” has ruled supreme. Quality alone is insufficient. Quality is merely the “price of entry,” as Tom Peters said. Now, organizations need to become more creative; to “fail fast, fail often.”

Business model innovation takes the change imperative to a whole new level. It calls for organizations to not merely innovate with new and better offerings, but to reinvent themselves in order to survive.

The concept took hold as we witnessed major 20th century companies and institutions falter: Kodak, General Motors and Sears, for example, as well as entire industries, such as music and journalism.

By employing new business models, new organizations emerged and upended established industries. Craigslist cut deeply into newspaper advertising. Blogs pulled audiences away from magazines. Warehouse-style retailers like Home Depot made life difficult for many small retailers. Cirque du Soleil reinvented the circus by creating an entirely new category of entertainment and became a billion dollar company in the process.

Components of Higher Education’s Business Model

Most non-profit higher education institutions in North America operate under essentially the same business model. The differences lie in what they choose to emphasize. For example, some institutions place greater importance on faculty research than others. But most institutions only hire faculty, who have demonstrated the capacity to do university-level research and teach. Faculty are typically charged with doing both.

Clay Christensen and others have argued most higher education institutions, regardless of ranking, share a common notion of what constitutes a great institution. Many seek to emulate the more prestigious institutions, thereby creating greater homogeneity in the sector.

The elements of a business model can be divided in different ways. I’m using the approach developed by Alex Osterwalder, author and advisor on business model innovation.

business-model-generation-2

Business Model Generation by Alex Osterwalder

Market segments

Who does the institution serve? Many universities focus on 18-24 year olds, who have recently graduated from high school. Some universities widen their focus with programs serving adults, who are returning to complete undergraduate degrees.

Value proposition

What are the reasons students and other turn to your institutions? E.g., Widely-recognized credentials that have value in the labor market; ranking as a top research university.

Key activities

Which activities are fundamental to your organization? E.g., Research, teaching, evaluating student performance, developing programs in subjects of value to society, and granting degrees.

Revenue streams

What are the sources of funds that make your institution sustainable and how do you capture these funds? E.g., Government capital grants, tuition, philanthropists and research grants.

Channels

How does your institution interact with stakeholders? E.g., Through on-campus teaching, conference participation, scholarly journals and media.

Key partners

What are the other organizations your institution partners with on a regular basis? E.g., Research granting organizations, private companies seeking research partners, and regulatory/accreditation bodies.

Cost structure

What are your main costs, and how do you go about paying for these costs? E.g., Faculty and instructor salaries, administrative staff, building maintenance and marketing.

Key resources

What are the key resources that every college and university must possess? E.g., Faculty, buildings and accreditation.

Stakeholder relationships

How does your organization build and maintain relationships with its key stakeholders? E.g. alumni organizations, university email systems, university social networking (Facebook), learning management systems, and media relations officers.

In the second post, I’ll touch on the analytical value of business models and examples of business model innovation in higher education.

Business Model Innovation in Higher Education, Part 2

Resources

Business Model Innovation: A Blueprint for Higher Education

Exploring Higher Education Business Models (If Such a Thing Exists)

University Business Models and Online Practices:  A Third Way

The Higher Education Business Model: Innovation and Financial Sustainability

 

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3 responses to “Business Model Innovation in Online Higher Education

  1. Keith,

    Nice post. I tire of the often political-orientation viewpoint limitations on business. One side equates a business orientation & model as good: more efficient, accountable, etc. The other hears “business” & thinks big, bad, profit-driven evil-doers. Ultimately we all work for and/or with organizations or groups. Positive interactions with these groups are more likely when they run efficiently. That requires a good business model & yesterday’s business model isn’t necessarily what works today.

    Good stuff!

  2. Thanks very much, Mark.
    I agree with your assessment of the tired dichotomy of business and non-profit. There are more similarities between for-profit and non-profit organizations than differences. Every organization tries to maximize the “return on its investments” – whether the objective is greater financial profits or improved access for economically-disadvantaged students. Analyses that divide organizations into separate camps are, at times, motivated by a desire to define their own political positions.
    I view the concept of business models as simply a framework for analyzing tactics for achieving institutional/organizational objectives, as well as a springboard for thinking about new tactics.

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