Each Monday I post the next section of my 2001 book, which was originally called (by the publisher) Hoover’s Vision but which I have now retitled The Art of Enterprise. I have posted over half of it already; click on the “Monday” column to see all the prior sections. The entire book can be downloaded as a PDF for $10 at http://www.scribd.com/doc/25085990/The-Art-of-Enterprise-by-Gary-Hoover-January-2010
My favorite industry is education. This book began with the premise that exploration driven by curiosity is the starting point for building and leading successful enterprises. Education is perhaps the key factor in the world’s growing wealth, and as our society becomes more complex and more globally integrated, our need for information and understanding grows exponentially. For all these reasons, education is a major growth industry.
Demographic factors will help spur the growth of education as well. Millions of retiring baby boomers will want to devote serious time and money to new activities and interests. While massive numbers of people will want to pursue traditional hobbies like photography, gardening, and golf, there will also be significant numbers interested in learning about any subject that you have ever seen on PBS or the Discovery Channel. The diversity of people’s interests will drive the demand for education down more and more diverse channels. There will be demand for courses on everything from the history of dentistry to Islamic ceramics, from the human genome to the works of Shelley and Byron, from Zen meditation to model rocketry.
This trend spells growth potential for any enterprise that has exciting educational content to share through any medium. Even today, relatively little of our total life’s education takes place in traditional classrooms. Our largest education enterprises include not only Harvard and the University of Michigan but also Borders bookstores, PBS, the Discovery Channel, HarperCollins, the National Geographic Society, Disney’s EPCOT, the Library of Congress, Scientific American, The New York Times, Junior Achievement, Semester at Sea, and the Art Institute of Chicago. In other words, any enterprise that informs or educates us.
Within this huge and promising realm, most of my attention has been focused on higher education. It’s a paradoxical industry. In many ways, higher education is one of America’s best and most globally competitive industries. Students from all over the world flock to US universities, and much of the world’s most important basic research takes place there. At the same time, US higher education is in many ways a backward industry, plagued by economic inefficiency, lack of differentiation, and structural inertia.
Economic inefficiency. I’ve spoken about the evolution of enterprises, about how streamlining hit the steel industry, then worked its way through most other US industries. Higher education is glaring exception. For most colleges and universities, control of rising costs does not appear to be a big issue. In the 1990s, average college tuition rose 83.7%, more than any other category of consumer spending and far more than the 30.5% average increase in other prices. While the rate of increase slowed at the end of the 90s, it was still higher than in most other industries, with private university tuition up 5.2% in 1999. Early in 2000, Williams College in Massachusetts, consistently ranked as one of the top five colleges in the US, announced that, for the first time in forty years, they would not raise their annual tuition. A sign of hope? Maybe – but a small one. They held the line at $31,000!
In an economy where inflation in nearly every industry and every cost component is low, something is wrong in those few industries where it isn’t. The reasons aren’t obvious. I don’t think the professors are getting rich. I don’t think the industry is investing in new equipment at a higher rate than, say, the semiconductor industry. But it’s likely that the higher education industry is not pinching pennies or applying new technologies as aggressively as the rest of US industry. Frugality and economic efficiency are simply not high priorities on most campuses.
I got a little glimpse into this when we began selling Hoover’s Handbooks (the first product of Hoover’s) in the early 90s. We met with librarians from universities and public libraries. Hungry for business and exposure, we offered them deep discounts – 40% off of the list price. But virtually every library turned us down, opting instead to stick with their present wholesale supplier who gave them half the discount we were offering – 20%. As I talked to the librarians, I realized the level of bureaucratic inertia. The decision to buy our books was made by one department (acquisitions), but those folks did not dirty their hands with financial affairs – that was up to the purchasing department. And the purchasing department’s life was easiest if they remained with their longtime wholesale suppliers, the people they saw at the annual library industry trade shows. Within this system, there was no place for buying directly from Hoover’s. There was no one who would get a bonus, a raise, or even a pat on the back, for saving a few bucks.
Contrast this with the experience at a bookstore chain. While my friends who buy books for the chains are primarily focused on the nature and quality of the book – is it something people will want – they end their meeting with each supplier discussing the price they will pay. Is there any free freight offer available? How many more books would they have to buy in this order so that they could qualify for another point of discount – let alone the 20 points we had offered the librarians!
Don’t misunderstand me – I am not down on librarians or library wholesalers. And Hoover’s selling books to librarians was an insignificant part of our overall business. But it saddens me to see the average library pay more for books than the average bookstore. Even the slightest nudge (or reorganization) might make librarians more focused on what they are getting for their money. And make their library wholesalers get more aggressive on pricing.
This lesson was reinforced when I later befriended three different publishers, each of whom had two divisions – one in basic textbooks and one in trade (bookstore) books. The basic textbooks were sold to charitable literacy organizations (another favorite cause of mine), GED programs, and other nonprofit groups. In each of the three cases, the big profits were in the basic textbooks. The publishers complained to me that the bookstores drove such hard bargains; they had to make their profits somewhere. If educational institutions are not sharp on what they pay for books, they are also not likely the toughest buyers of chairs or whiteboards or sidewalk construction.
Lack of differentiation. Most of America’s colleges and universities have little brand identity. The thousands of small liberal arts colleges sell the same product, at least as perceived by their customers (students and parents). Most of the giant, rich universities are in similar straits. Harvard is one of the few universities blessed with a strong brand identity – one which comes from being very old and staying a leader. It’s true that, within academia, a particular school may be known as the place for nursing, for economics, for art history—or for keg parties, ski weekends, or intramural rugby. But the universities have not capitalized on these differences. They have not gotten the word out and established their brands in the overall public consciousness. Outside of academia, who really knows what differentiates Indiana University from the University of Illinois? And if there is no real differentiation, do we need all these separate enterprises?
Structural inertia. While many, if not most, of today’s business mergers are pointless and will be unwound in coming years, it makes economic sense that every industry should have some mergers. It is just as irrational for an industry to have zero mergers as it is to have everyone merging. Yet when was the last time two universities merged? If a merger makes sense for Daimler and Chrysler, why doesn’t it make sense for New York University and Columbia . . . for Williams College and Amherst . . . or for Hofstra and Long Island University?
I can hear the moans from alumni everywhere who are emotionally glued to these great institutions. Your feelings are natural and understandable, but put them aside for a moment. Consider the benefits that could be gained by merging certain departments. Two medium-sized schools that merged their astronomy departments might be able to buy a larger telescope than either one could afford alone; merged Russian departments might have enough students to make expanded course offerings practical. And what about the savings that could be realized by having one accounting department rather than two, and by buying everything from classroom chairs to hamburger buns in larger quantities?
When we begin to see universities market themselves as unique, differentiated entities, and when we see at least a few mergers designed to bring economic benefits to students and the academic community, we will know that the higher education industry is beginning to catch up to the rest of the world.
The innovative thinking needed in education will be encouraged and accelerated by the burgeoning growth of for-profit universities. Just as competition from Toyota helped save GM and Ford by forcing them to wake up, the creation of the Apollo Group, which runs the 80,000-student University of Phoenix, and similar for-profit educational organizations will spur improvements in the non-profit universities that I cherish.
The fact that Apollo is profitable (netting $71 million on sales of $610 million in the 2000) says a tremendous amount. How can they make a profit while competing with outfits which are under no profit constraints and pay no taxes? They must be offering something that the customers want. Chicago-based DeVry Institute, which also operates the 7,100-student Keller Graduate School of Management, has a similarly successful track record (having earned $47 million on $505 million in revenues in 2000). The Learning Annex is another growing for-profit force in education. More schools like these are on the way.
Apollo and DeVry focus on teaching practical, job-related skills to adult learners. But the for-profit model they are pioneering could work with students of all ages and with many subject areas. In the coming years, millions adults, especially retirees, will want to take courses on everything from Homer to horticulture. And they’ll shop for learning wherever good teaching is available, regardless of whether it’s through a for-profit or not-for-profit organization.
Primary and Secondary Education
And that brings me to what may be the hottest topic in this whole book – the future of our primary and secondary education system, especially of our public schools.
When it comes to innovation, diversity, and consistently high quality of service, primary and secondary education in the US is not doing a good job. Compare the range of choices available with the thousands of options offered to buyers of food, clothing, travel, or even financial services. If you want your kids to go to school eleven months out of the year or six days a week, you probably don’t have that option. If you’re a working person who wants to attend high school on nights and weekends, you may not have that option. If you want a school that specializes in foreign languages, math and science, or the performing arts, you probably don’t have that option.
One result has been the dramatic rise of home schooling across the US. In some of our cities, very few of the affluent send their kids to public schools. In what is probably the most expensive effort ever by consumers to “change where they shop,” America’s middle class has fled the cities and headed to the suburbs to find better schools for their children. In short, millions are opting out of stagnant and unsuccessful public school systems.
Some education advocates call for increased spending, but many nations that outrank us in student achievement spend less per student than we do. Even within America, the cities and states that spend the most do not always have the best school systems, nor have past increases in spending been correlated with increases in educational quality. Money alone is not the answer.
What is? There may be no magic elixir that fixes our school problems. We hear about experiments from Boston to Milwaukee to San Francisco. Some indications are promising, others are not. We have tried charter schools and vouchers. Some reformers are calling for merit pay to reward and incentivize great teachers and school leaders; others emphasize testing as a way to ensure accountability for results; still others talk about reduced class size or greater parental involvement as keys to an enhanced learning environment. No one knows for certain which reforms are likely to work. But the only way to find out is to try new things – to encourage our best entrepreneurial minds to tackle this most perplexing, complex, and important of challenges.
From an entrepreneurial viewpoint, the greatest opportunities in education are in the mass market. While wealthy people have always had choice in schools, and even the middle class has at least had the option of moving from one town or one neighborhood to another in pursuit of better schools, the bulk of the population has been stuck with the schools that local government provides. Modifying our legal, economic, political, and social structures so that public schools are opened to entrepreneurial innovation can change all that. Creative thinkers tend to go where the market is. More energy and resources are devoted to fast food than to gourmet dining, to Toyota than Mercedes, to Target than Neiman-Marcus. Giving a great education to large numbers of people is where the greatest opportunity lies for entrepreneurs, not in providing private schooling for the privileged.
Among the most important contributions to education that entrepreneurial thinking can make is to reexamine how resources are allocated. Some suburban schools spend enormous sums on plush new buildings, while other schools (especially those in aging inner-city neighborhoods) defer maintenance on older buildings until they are too expensive to fix. Many school systems spend significantly more on administration than an entrepreneurial organization might, while those on the front lines – the teachers – are starved for resources. Many systems reward years of service rather than excellence.
In Texas, there was an uproar recently over the fact that some high schools pay their football coaches $80,000 per year, over twice what the average teacher makes. Many declared, “Those coaches’ salaries must come down.” My reaction was, “If the coaches are great coaches, let them have the money. But make sure that the best teachers in the history and English and math departments also make $80,000.”
Our schools are now seeing some early efforts at entrepreneurial experimentation. The leading light is Chris Whittle’s Edison Schools, chaired by former Yale President Benno Schmidt. After spending $60 million studying schools around the world and developing a blueprint for improvement, Edison traveled the US seeking contracts to operate public schools. Today the company manages 115 schools in 21 states and the District of Columbia. Edison students spend more days and more hours in school than those in traditional classrooms. In fact, according to some estimates, by the time an Edison student graduates from high school, he or she will have spent the equivalent of four extra years in school. Every student receives a home computer, and every teacher receives stock options. All for the same amount of money that public schools spend per pupil.
Edison is an early-stage developmental company. Its annual revenues of $225 million do not cover its overhead and development costs, and losses last year were $36 million. But investors from Microsoft’s Paul Allen to the Gap’s Donald Fisher are believers. And since the company’s 1999 IPO, its stock price has risen around 40%.
Another public company, Nobel Learning Communities, operates more than 160 preschools and grade schools and is profitable on annual revenues of $127 million. These and other innovators are the wave of the future. And the faster we try new ideas, ranging from enhanced teacher compensation through innovative use of new technology, the sooner our school systems will rise to the level of the best US industries.
Pulling education together. This century promises to be a great period of change and innovation in the educational industry. If we are lucky, we will see new structures which combine the best of non-profit, for-profit, and government initiatives. More and more people of all ages and incomes will be the beneficiaries of increased educational choices. Money and resources will flow into the industry from energized pools of volunteers and donors as well as from venture capital firms and other investors. Using all of these resources wisely will be critically important.
I look for more creative alliances involving all the participants in the education industry. National Geographic Society already sponsors a national geography bee, which encourages learning about our planet, its peoples and resources. PBS does some great things working with teachers and students at all levels. We need more such partnerships among booksellers and universities, publishers and literacy programs, local newspapers and broadcasters and school systems. All of these enterprises have a vested interest in a public that reads, thinks, and learns.
Our best entrepreneurial energies have found ways to bring us faster, cheaper computers, affordable fresh food, safer and more economical cars, and a wealth of choices in entertainment. Picasso and Dickens, Darwin and Einstein, Aristotle and Tocqueville deserve no less.
More About Education
American Higher Education: A History by Christopher J. Lucas gives a little long-term perspective on an important industry. Charter Schools in Action by Chester E. Finn, Jr., Bruno V. Manno, and Gregg Vanourek and Schools, Vouchers, and the American Public by Terry M. Moe are two books basic to understanding these innovative ideas.