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The commodity market and the university education.

ONE OF THE MOST SIGNIFICANT pressures facing colleges and universities is dictated by an underlying change in their marketplace. Increasingly, higher education is taking on the attributes of a commodity market.

Commodity markets are characterized by homogenous products or services. Who really cares which bushel of corn one buys? Any one bushel is the same as another. Without distinguishing features to encourage buyers to prefer one farmer's corn over another, competition revolves around price. What is the lowest price a farmer will accept for a bushel of corn? It's a race to the bottom of the market. Information is nearly perfect; it's difficult for a buyer to pay higher than the going price, as agricultural prices are updated constantly and available via a number of media outlets.

University education has traditionally had a much different market structure. Each of our institutions has relied upon unique academic programs that have allowed some institutions to charge a higher price than their rivals. Universities have had some control over the ability of students to buy from other providers via the control of transfer transcript credit. Consumer information about programs, access, and price has been less than perfect, which constrains choice among prospective students.

But that world is changing.

What has caused the shift toward a commodity market?

In his book The World Is Flat, Thomas Friedman refers to the democratization of information as a powerful tool for consumers. No longer need they be uninformed about choices in any market. In fact, university degrees can be delivered right to the desktop of the most remote personal computer. Many in traditional residential college settings have responded to this market change by joining the movement and have added coursework of their own to the menu of choice for students.

While distance education has grown, another more common change has taken place in the U.S. marketplace. Consumers have increasingly adopted a preference for mass marketing and big-box consumption, or at the very least a greater tolerance for it. Smaller implies fewer choices and higher price to Americans today. Impersonal retailers, U-Scan, you name it--if it saves a few bucks for nearly the same product, we're in. Whether it is the megachurch, the megauniversity, or the megaretailer, Americans love value.

What educated consumer chooses the smallest Realtor, the friendliest bank, or the closest college? We shop around for leverage, buying power, marketing savvy, economies of Scale, and efficiency: A recent conversation with a colleague illustrates this point. In searching for a mortgage lender, my colleague posed the question of whether to go with the local banker with whom she has done business for a decade, or to switch to an internet lender. After all, the online lender was offering a monthly payment that was lower by $30. If we are willing to go online with our finances, engaging in a traditionally private and well-guarded transaction to save $360 a year, is it any wonder that our prospective students and their families will shop for an educational experience to save $3,600 a year?

Students are increasingly likely to practice price-shopping among institutions. Gathering three or four financial aid packages is not uncommon. It's also not uncommon for them to expect institutions to match a competitor's package and final price. After all, haven't we all heard that one grocery store will match the coupons of another, or that an appliance store "won't be undersold"? Savvy "consumers" make it difficult for institutions to defend high price.

Gone also is the captured student audience of the past. As universities attempt to differentiate themselves in a commodity market, students have increasing choices to personalize degree programs by sampling courses from a variety of sources. Universities cannot count on four full years of tuition revenue from any one entering freshman. Students create degree options for themselves through credits earned as high school students, summer coursework from other institutions online, international or other unique term experiences centered at another university, community college coursework, and so on. Unique institutional culture or mission is not as relevant in today's marketplace as the desire for utility and value. The degree earned becomes an individualized package rather than an institutional one.

Additionally, the current public policy focus on standardized outcomes and assessment creates pressure for more homogenized education. A one-size-fits-all mentality increases the demand on universities to provide sameness and commodity-like education even as universities attempt to resist commoditization.

What will be our response to the changing economics of our industry?

The time is coming when growth in tuition revenue will no longer outpace inflation. Institutions operating on the margin will find themselves hard-pressed to succeed via a strategy of increased price. Instead, downward pressure on price and increased expectations of quality and choice for students will force many institutions to adopt new strategies.

The first impulse for many facing tight budgets and increased competition will be to slash costs wherever possible. We are familiar with the standard cost-cutting solutions: using more adjunct faculty to hold down payroll expenses, larger class sizes, increased ratios of faculty and staff to students, outsourcing or cutting auxiliary services to hold the line on tuition, to name a few. After a time, there will be few additional avenues for cost cutting.

Examining the academic enterprise in order to identify areas of excellence and reputational advantage is another approach. Consolidating investment in key centers of excellence will benefit some institutions. Instead of offering a wide array of academic programs that are perceived as similar to what other schools offer, the consolidating university capitalizes on unique areas of strength. Rather than accept the movement toward homogeneity, these institutions strive to develop a loyal following of students who strongly prefer their brand of service. Of course, some institutions may wish to shortcut this process and simply rely upon increased emphasis on marketing in order to create the perception of excellence. Expediency is no substitute for genuine excellence.

A path less traveled, yet one that holds some potential, is collaboration with other educational and noneducational partners. The United States has a rich array of colleges and universities offering unique and valuable programs. It also has considerable duplication, overlap, and separation that are not to the advantage of students or the academy. Wouldn't it be better for some institutions to combine efforts to offer top-notch education rather than the merely adequate preparation some are now able to provide separately? Are there not administrative areas prime for collaboration that would allow small colleges to gain economies of scale in administrative overhead? Collaboration may have potential on paper but is probably less practical than other strategies suggested. Resistance to change and the uniqueness of each institution's culture have a tendency to turn discussions of collaboration into arguments about control and dominance.

What will be your institution's approach? Will it be business as usual? Incremental cost cutting across the board is a familiar approach. Or perhaps it will be to grow a little here and cut a little there. But not too much in either direction--our egalitarian predisposition won't allow too much unequal treatment. While most palatable to some constituencies in the short run, an incremental cost-cutting approach places many institutions in the unenviable position of competing solely on a price basis with other homogenous providers of higher education.

Or will your institution adopt a strategic outlook that focuses on continuing to develop areas of excellence through which it is set apart from competitors? Faculty and administrative leadership commitment and consistency are essential to carrying out such a strategy. What will you choose to do, and what will you deliberately choose not to do? Becoming sidetracked by the issues of the moment can derail this approach.

The forward-looking institution will have conversations about its unique areas of excellence. Students will benefit from strengthened academic programs. Through an intentional strategy we are more likely to be able to live out our university mission and vision. The overall academy will prosper as we make decisions to invest in wise ways even in a changing marketplace.

By Ann C. McPherren, vice president for university planning and strategy, Huntington University (Ind.)
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Title Annotation:THE State OF HIGHER EDUCATION
Author:McPherren, Ann C.
Publication:University Business
Date:Oct 1, 2007
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