Business Model Innovation: A Useful Resource

Notions of what constitutes a university – its functions, processes, and objectives – are so thoroughly ingrained that it is difficult to imagine fundamentally different scenarios. But there’s clearly a growing sense that the current model is fraying at the edges.

More professionals in higher education are now entertaining the notion that the traditional institutional model will require more than a small adjustment. We face a litany of challenges: rising costs, declining public funds, the rise of the student- consumer, the emergence of international competition, the rapid rise of for-profit schools, increased demand for spaces (and poorly scalable organizations), a greater percentage of ill-prepared students (see “increased demand”, above), and, of course, the Internet and its various, wonderful, unfolding and unpredictable implications. There’s a sense that something new is on the horizon. We’re just not sure what it looks like (or if it will include us).

Higher education shares this concern with many other institutions: newspapers, automakers, the television industry – each is asking what the future will look like.

None of this turmoil is inherently bad. It’s only a problem if we don’t come up new and better ways of doing things.

But imagining radically different models is not something that comes particularly easily – especially in industries as thoroughly embedded as higher ed. (Let’s set aside the fact that, in certain respects, the sector is actually rewarded for maintaining its traditions.)

Because imagining a new approach to higher education is so difficult, I’ve found the concept of business models particularly useful. Like the study of history, the concept of business models helps me see the big picture more clearly. It helps me to understand our current approach to higher education in concrete terms, while stimulating my thinking about new models.

The concept of business models has garnered more attention in the corporate world over the last decade. I suspect that the attention reflects a growing consciousness (fear?) that for many enterprises “business as usual” may prove to be insufficient; that a fundamental rethinking of products, services, processes and markets will be necessary to survive the shake-up brought on by global competition and quickly emerging (often technology-born) rivals.  In some quarters, attention to quality (e.g. total quality management), and later, strategy, has been supplanted by more fundamental questions that the study of business models encourages.

If you’re interested in the subject of business models, I recommend Mark W. Johnson’s “Seizing the White Space: Business Model Innovation For Growth and Renewal” (Harvard Business Press, 2010). Although not an entry-level book, it provides the tools to analyze existing business models and to develop new ones.

At the core of the book is a construct that breaks the business model into four elements.

1. Customer Value Proposition (CVP): “An offering that helps customers [students] more effectively, reliably, conveniently, or affordably solve an important problem . . . at a given price.”

2. Profit Formula: “The economic blueprint that defines how the company will create value for itself . . . It specifies the assets and fixed cost structure, as well as the margins and velocity to cover them.”

3. Key Resources: “The unique people, technology, products, facilities, equipment, funding, and brand required to deliver the value proposition to the customer.”

4. Key Processes: “The means by which a company delivers on the customer value proposition in a sustainable, repeatable, scalable, and manageable way.”

Posted in: Business Models

9 thoughts on “Business Model Innovation: A Useful Resource Leave a comment

  1. Keith,

    I think you are shining the spotlight on something that has been going on in education for a while. Established institutions might not like it or acknowledge it, but business model redesign has happened for quite a long time in education:
    1) NCAT with its focus on “course redesign” and e-learning are examples of business model redesign on a micro-level. The resign is the disaggregation of the role of faculty (curriculum development, course design, instructional design, instruction, tutoring, grading etc.) and recombining in a fashion that reduces costs, increases productivity of everyone involved and allows for more quality control.
    2) Apollo Group (the company behind the University of Phoenix) has offered services to not-for-profit institutions through its IPD subsidiary that redesigns the business model of a campus. IPD creates and helps operate “satellite campuses” that sometimes consists of nothing more than a hotel conference room that is booked for 2-3 evenings a week. IPD and its partners deliver accredited 4-yr programs at a fraction of the normal costs to non-traditional and nor-residential students their partner institutions cannot reach otherwise. They also help many institutions recover the losses their residential program make through a lower cost delivery model.
    3) the description of Kaplan on NPR described very much a business model redesign in action at the macro-level. Cabinet (or its redesigned equivalent), academic affairs, library, classrooms all reside in distributed locations all over the country, operate much longer hours than traditional higher ed and deliver a service and a cost efficiency that a traditional institution never could.

    I believe that the biggest obstacle to business redesign is the notion of “the campus”, with lots of green, impressive architecture, buildings that are used 7 months a year, and only from Tuesday through Wednesdays, professors each with their personal assistant, dorms that rival a country club,…. This notion of a campus is making higher education unaffordable and keeps it stuck in the 18th century. Once institutions conceive themselves without a campus they will realize that there is little that needs to be re-invented. Lots of folks have been at it for decades.

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  2. Christoph
    Thanks for this great input.
    To a certain you were anticipating my next post; “jumping ahead”. I actually wrote a few paragraphs on the very two examples you cite – NCAT and the Apollo Group for this post, but chose to make that a second (or third) instalment on the subject of business model innovation.
    A symptom of the innovation problem, of course, is that we thought of the same examples of business model innovation. There’s not a great deal to choose from in higher ed. Indeed, without the for-profit sector, we’d have little in the way of examples. Indeed, the greatest value of the for-profit sector to the non-profit, traditional sector may be that it demonstrates that it is, in fact, possible to rework the higher ed model.
    Keith

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  3. I think you are absolutely right about the need for new business models in universities. At this moment, I’m working with a post-secondary institution that is trying to develop an e-learning strategy, and for this to work successfully for this organization, it has to fit several different business models that run within the same institution.

    One model that has been tried only at the periphery (i.e. in continuing education or business schools) is the full cost recovery program model. In this model, instead of funds all going into a central pot then being re-allocated, funds (including tuition fees and government FTE grants where appropriate) go directly to the program, which then buys back any central services required (or goes outside the institution if it can get them at a higher quality or better price).

    One advantage of this is that it leads to great pressure to bring down general overhead costs, which in a large research university can easily eat up half the operating budget, and in the centrally funded model, overheads tend to be a monster that must be fed before the other animals, such as academic departments.

    Related to this would be a move away from departmental budgeting to activity based costing. This would allow for instance for different ways of delivering education to be better costed and analyzed.

    Both of these models are discussed further in our forthcoming book: Bates A and Sangra A (in press) The strategic management of technology in universities and colleges, Jossey-Bass, available by Spring, 2011.

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  4. Hi Keith,

    It’s great to see you discussing this topic and as Christoph correctly states a lot of established institutions don’t want to address it. It’s interesting that you raise the concept of the profit formula which seems to be a dirty word in the public education space and that Tony is looking at introducing Activity-Based Costing (ABC).

    The business model framework proposed above can actually be “modeled” based on ABC but extended and improved to address a number of traditional ABC shortcomings, like the burden on the organization to maintain and update these types of models. We have successfully built these types of models for a number of Universities here in Australia and would be more than happy to introduce you to them if you wanted to investigate it further.

    Cheers,

    Lea

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  5. How about limiting business model innovation to the way higher ed is financed?

    In the past, while working on a book on the impact of financial innovations, a few colleagues and I kicked around an idea for a new way of financing higher education:
    students receive their education for free and sign over to the institution a certain percentage of future earnings.
    While that model might not work for all academic programs, it would certainly force academia out of the ivory tower into the real world. It would align incentives of institutions, their students and employers a lot better. It would align academic programs better with the skill sets employers seek. It would force transparency on employment prospects of students. It would certainly make institutions care about retention and graduation rates. It might even force institutions to become better stewards of their financial resources, if other institutions offer similar employment opportunities at a lower “claw-back” percentage.
    Last but not least, it could reduce the reliance on federal financial aid while preventing institutions from drowning their students in debt that can wreck their future.

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  6. Tony
    Thanks very much for the insights.
    I’ve worked for several years within the cost-recovery model you describe. We managed to bring down costs (per student) dramatically over the years. Of course, it’s difficult to directly attribute this to the financial model. But . . . people being . . . well . . . people, they often need more than their own good intentions to find ways to reduce costs; they need a financial model that directly rewards the introduction of efficiencies.

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  7. The breakdown of our business model is closer than most in higher ed would like to think. I and several others from academia have been involved for the past 3-4 years with a team at McKinsey looking at higher ed as an industry, and the picture is not very bright for most of the industry without significant change. I wrote a couple of posts on my blog ChangingHigherEducation.com a few months ago addressing some of the aspects of the problem-and the.solution- as I see it. Part I can be found at http://bit.ly/afdnzE , Part II at http://bit.ly/bGbnnT .

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