Albritton final
- 1. Page | 1 MEMORANDUM To: Dr. David Albritton From: Richard Frische Re: Industry and Firm Analysis: Colleges & Universities in the US Date: Thursday, December 22, 2016 Contents Introduction...................................................................................................................................................2 Industry overview & definition.....................................................................................................................2 Industry revenues, trends, & growth rates....................................................................................................2 Industry analysis.............................................................................................................................................2 Suppliers....................................................................................................................................................2 Buyers........................................................................................................................................................2 Potential entrants.......................................................................................................................................3 Substitutes.................................................................................................................................................3 Degree of Rivalry ........................................................................................................................................4 Key success factors.........................................................................................................................................4 Customer-driven.........................................................................................................................................5 Technology-driven......................................................................................................................................5 Competitor-driven......................................................................................................................................5 Industry attractiveness....................................................................................................................................5 Firm analysis: Northern Arizona University.......................................................................................................6 Strengths....................................................................................................................................................6 Weaknesses ...............................................................................................................................................6 Opportunities.............................................................................................................................................6 Threats.......................................................................................................................................................7 Conclusions....................................................................................................................................................7 References.....................................................................................................................................................8
- 2. Page | 2 Introduction Industry overview & definition The following report analyzes the nonprofit higher education industry in the United States, identifies its key success factors, and assesses Northern Arizona University's ability to deliver on these factors. This industry includes both public and private not-for-profit colleges and universities in the United States. For purposes of this analysis, this industry definition does not include for-profit universities, trade or technical schools, or community colleges. Industry revenues, trends, & growth rates Research group Mintel projects that overall college enrollment will increase by 14 percent between 2015 and 2024. While this is not necessarily the case for local and regional enrollment, as the following analysis discusses, there will be an overall increase in the number of students attending college. Accordingly, IBISWorld projects that industry revenue will grow 3.5 percent per year to $653.4 billion in 2021. Employment and number of institutions in this industry will also grow during this time. However, with this growth, students can expect tuition and fees to gradually rise as well (IBISWorld, 2016). One of the most significant trends this industry will see in the next few years is the increasing proliferation of technology on campus, including online education and Massive Open Online Courses (MOOCs). Industry analysis Porter's Model of Industry Competition analyzes five market and industry forces – suppliers, buyers, potential entrants, substitutes, and degree of rivalry – that shape the competitive landscape and dictate the key success factors for a firm in that industry. Suppliers Supplier bargaining power involves supplier concentration, number of buyers, switching costs, availability of substitute raw materials, and threat of forward integration. It is difficult to concisely name a university's suppliers, since institutions often have several materials and services suppliers for virtually every aspect of campus operations. Therefore, this analysis focuses on suppliers of academic and student services – namely, course management systems and textbook publishers. For many institutions, especially larger, more established universities with interconnected systems, the costs of switching suppliers is often prohibitively high, which gives suppliers significant bargaining power. However, due to the high barriers of entry discussed below, the threat of forward integration is low. Buyers Buyer bargaining power is composed of similar factors as suppliers, but from the opposite perspective. The most significant factors for the higher education industry are buyer concentration, number of suppliers, and availability of substitutes, since these have the highest impact on college enrollment and revenue. Historically, colleges and universities have focused their recruitment efforts on traditional residential students who come straight from high school. Additionally, for public institutions, those students are generally concentrated within that particular region, state, or adjacent states. However, the Western Interstate Commission on Higher Education (WICHE) recently released its projections of the number of high school graduates, and it does not look promising. In the coming years, for every region except the South, the number of high school graduates will flatten out and even
- 3. Page | 3 decline during some years, which indicates, according to the report, that "the U.S. is headed into a period of stagnation" (Supiano & Hoover, 2016). Therefore, although colleges can expect enrollment to rise in the future, they will have to look to other groups of students to realize that enrollment – namely, transfer students, adult learners, and online programs. According to Mintel, for example, enrollment of students aged 25 and older, for example, has increased since the 1970s, along with the diversity of the student body (Mintel, 2015). The availability of substitutes, combined with students' increased need for speed, convenience, quality, and affordability, also presents a competitive challenge to incumbent institutions. Mintel's latest report, "Attitudes towards Higher Education," discusses the "rise in alternatives to four-year, campus- based degrees, such as boot camps, stackable certificates and lesser degrees (i.e. getting more than one degree or certificate to build a customized skill set), online classes, and earning credits at community college." While these alternatives may not yet be complete substitutes to a four-year degree, as discussed below, they are projected to be increasingly competitive in the coming years. Potential entrants The threat of new entrants includes factors like economies of scale, cost advantage, brand identity, access to distribution networks, and government policy. According to IBISWorld, the barriers to entry for colleges and universities are high and steady because most established institutions have an advantage in all the factors described above. As a result, the threat of new entrants is relatively low. For example, new private institutions must have sufficient financial resources to compete against those with already-established endowments and funding sources, and new public institutions must be able to obtain government support, and with the recent trend of state governments divesting from public higher education, that is unlikely to happen anytime soon (IBISWorld, 2016). These high barriers do not, however, eliminate the possibility of disruptive innovation, especially by technology-focused companies. Therefore, institutions should be quick to embrace online learning and use it to their advantage, such as in cutting costs. Regarding the use of new technology on campus, futurist and author Anthony Townsend argues: "Public universities are going to have to be much more aggressive with this stuff for the same reasons they were aggressive with MOOCs and distance learning — because there’s so much financial pressure on them," he says. "Anywhere there’s technology that promises a productivity edge for them, or higher asset utilization on the expensive real estate and buildings they have, they’re going to have to find a reason not to go for it" (Blumenstyk, 2016). Substitutes The threat of substitute services considers functional similarity, price performance trends, and brand recognition. The most significant substitute products for this industry are community colleges, for- profit institutions, trade and technical schools, and MOOCs. From a price standpoint, community colleges, trade/technical schools, and MOOCs pose the greatest threat to colleges and universities, especially given the recent (and unlikely to end soon) trend of tuition hikes. According to IBISWorld, "Continued tuition increases will make it more difficult for some students to pursue higher education. While the federal government has taken steps to increase student loan availability, the cost of attending a traditional four-year college will cause some students to choose more affordable
- 4. Page | 4 alternatives." Mintel's research reveals a similar sentiment: nearly six in ten respondents list the cost of tuition as the most influential factor when it comes to college selection. Functionally, however, these alternatives are not quite similar. Community colleges, by definition, do not grant any degree higher than Associate, so many community college graduates end up transferring to four-year institutions to complete their baccalaureate degrees. MOOCs and other online course providers may be more accessible to students who otherwise could not afford higher education, but they usually do not count toward an official degree or certification unless offered in conjunction with coursework from established institutions. However, as Simon Nelson, CEO of FutureLearn, points out on the Chronicle of Higher Education, this may not always be the case: "I think MOOCs are only going to grow, but what’s going to happen is their credibility and their value is going to significantly increase." His company is already working on online academic programs that will receive professional accreditation (Young, 2016). Additionally, according to Mintel's report, 70 percent of current and prospective students say it is more important to acquire skills than a degree, and while a majority of respondents still believe "a college degree provides security" and "is necessary to have a successful career," these numbers are dwindling. With all this in mind, it is crucial that colleges and universities embrace, rather than try to fight, these alternatives and use them to augment their existing programs and appeal to a wider range of students. Degree of Rivalry The degree of rivalry is the central point of Porter's model where the other four forces converge. This force deals with number of competitors, industry growth, asset intensity, product differentiation, and exit barriers. As discussed in the introduction, the industry as a whole will grow steadily over the next ten years. Concentration in the industry is low and expected to stay that way due to the high barriers to both entry and exit (IBISWorld, 2016). According to IBISWorld's report, "In 2009 when revenue fell by 21.9%, data from the National Center for Education Statistics indicates that only 17 universities closed their doors. Of these universities, not a single one was a public institution. Consolidations in the industry are infrequent because universities value their academic culture, tradition and independence. As a result, market share concentration has not changed over the past five years." Differentiation is also a key factor on which colleges and universities compete, both within the industry and with external players, like community colleges, trade schools, and for-profit universities. This differentiation, among other things, primarily comes in the form of the institution's reputation. A good academic reputation can attract high-quality students and faculty, and therefore allows universities to become more selective to preserve that quality. It also draws more donors that can increase the university's endowment. Similarly, a good athletic reputation can attract more students and bring in much-needed revenue. Mintel's latest report places academic reputation as the fourth-highest factor influencing college selection, behind cost of tuition, location, and programs/majors offered. Key success factors The preceding analysis reveals three key success factors (KSFs) for the colleges and universities industry. These fall into three categories: customer-driven, technology-driven, and competitor-driven.
- 5. Page | 5 Customer-driven The primary customer-driven KSF for higher education is its ability to respond to students' diverse needs. According to IBISWorld's latest report, "The student demographic is changing and now includes students from nontraditional backgrounds, including students that are older and employed. Universities that introduce flexibility to cater to these students will benefit from this growing market." This, combined with the expected decrease in the number of high school graduates, will force institutions to look beyond their traditional applicant pools. Additionally, as students start to demand more options and pathways to a degree, universities must become more flexible in their course offerings. This can include community college partnerships and accelerated, part-time, and online programs. These can not only help recruit students, but also retain them once they've enrolled. Technology-driven IBISWorld lists "Effective cost controls" as one of its key success factors for colleges and universities, and while this is certainly important and there are a variety of cost-cutting initiatives that institutions could pursue, the preceding analysis reveals that adopting technology into campus operations and academic programs is a much more urgent factor, and it can achieve both cost efficiency and differentiation that can enhance competitive advantage. As multiple reports illustrate, the proliferation of technology-based alternative routes to an education is here to stay, and to remain competitive, traditional institutions must embrace these alternatives to appeal to students' ever-diversifying educational needs. Additionally, given the budgetary pressure most institutions face, using technology to automate campus operations also presents cost savings that they can then pass to the students. Competitor-driven Finally, while all three of these KSFs can relate to competitive advantage, the most significant competitive success factor in this industry is an institution's reputation (IBISWorld, 2016). This encompasses everything from the quality of students, quality of faculty, employment rates, and student-to-staff ratio. When a university improves its reputation, it has a domino effect that increases enrollment, academic quality, and external funding. Additionally, while many of the other factors influencing students' college selection (like costs and location) are difficult, if not impossible, to control, an institution's reputation is a realistic improvement to invest in, although it usually takes years to see any benefits. Industry attractiveness Since this industry analysis only includes nonprofit institutions, profitability is not an issue with industry attractiveness. Growth, innovation, and cost control, however, are key issues, and successful institutions will have a solid grasp on all three factors. The current competitive environment certainly presents some viable threats to the industry, and the players within it must be able to respond to them, but most experts agree that the traditional brick-and-mortar institution is not going away anytime soon. As Mr. Nelson from FutureLearn argues, "I think that many of the top institutions can still do perfectly well just focusing on their core business, and that’s going to sustain them for a long time. Those early predictions of the death of universities, the whole swathes of universities going out of business in a few short years, not only were they wrong, they were pretty unhelpful because they’re so far-fetched" (Young, 2016). While the increasing trend of students rejecting the traditional, four-
- 6. Page | 6 year path to a college degree may seem troubling to incumbent institutions, this does not mean that death is imminent. The majority of people still see the value in education, but they are now starting to demand a more diverse array of options to achieve that education. If colleges and universities can become flexible enough to meet this demand, they can continue to be an attractive industry for the long term. Firm analysis: Northern Arizona University After analyzing and defining the key success factors for the higher education industry, this section focuses specifically on Northern Arizona University (NAU) and the degree to which it meets these KSFs. The following SWOT analysis looks into the internal and external environment at NAU to reveal its areas of strength and improvement. Strengths One of NAU's most salient strengths is the community it fosters on campus, as well as the community it resides in. Mintel's research shows that location is second only to cost of tuition as the most influential factor for students choosing a college, and NAU's location in Flagstaff distinguishes itself fromany other institution in Arizona. NAU mostly attracts students from Arizona and Southern California, and one of their top reasons for coming is the change of scenery from the desert landscape that pervades these areas. NAU is also the smallest of the three state universities, and when combined with the greater Flagstaff community, NAU can differentiate itself on the small, intimate, and tight-knit community that can be hard to find on other campuses (especially Arizona State – the largest public university in the country). Weaknesses NAU's primary weakness is its reputation. While some of its academic programs are highly ranked (top 15 for Hotel and Restaurant Management and top 50 for undergraduate engineering programs (U.S. News & World Report, n.d.)), its overall reputation is less prestigious. NAU comes in 579th place on Forbes list of top colleges, 211th place in public colleges, 215th in research universities, and 152nd in the region. NAU's location in Flagstaff, Arizona, while a strength, also presents a challenge. Since it is a rural location with few neighboring cities, most students move away from home to attend school, and NAU has a difficult time recruiting commuter students or those who wish to attend but are otherwise tethered to a larger metropolitan area. Therefore, it will need to be creative in meeting the diverse needs of its future students. One of the ways it can do this is with technology, discussed next. Opportunities NAU's most significant opportunity is technology. Since it cannot change its location, NAU can broaden its student appeal by expanding online offerings, allowing students from any location to enroll in NAU courses. The university already has the infrastructure in place, and with its recent centralization of information services and creation of its School of Informatics, Computing, and Cyber Systems (SICCS), it should not be prohibitively difficult to further expand into this area.
- 7. Page | 7 Threats NAU's largest external threat comes from the government bodies that oversee and regulate the university – namely, the state legislature and the Arizona Board of Regents (ABOR). The state legislature decides how much funding to appropriate to (or cut from) the three state universities, and ABOR sets, among other things, enrollment targets for each campus. In 2015, Republican governor Doug Ducey and the state legislature cut nearly $100 million in funding from state universities, and NAU shouldered $17.3 million of those cuts. This forced NAU President Rita Cheng and her administration to make substantial cuts across academic and student affairs divisions, as well as postponing capital investments and closing satellite campuses (NAU News, 2015). In addition, ABOR has mandated that NAU increase its enrollment to 25,000 students by 2020, which places increased pressure on existing university facilities – classrooms and residence halls, in particular. This crowding- out effect can have negative effects on student-to-faculty ratio, small-community feel, and other areas of quality, which can harm the institution's overall reputation and, therefore, its competitive advantage. Conclusions Is Northern Arizona University capable of meeting the industry's key success factors? If so, how strong of a position is it in to do so? The customer-driven KSF, the ability to meet the diverse needs of students, presents both a challenge and opportunity for NAU. The university's location and smaller size limits its pool of resources and inhibits its ability to meet every student's needs. However, while it is not feasible for the university to be in a strong position to meet this KSF, there is room for NAU to make significant progress in this area, specifically in technology. The university has already invested in the infrastructure necessary to make this happen, so now it is just a matter of expanding it. This also puts NAU in a moderately strong position to deliver on the technology-driven KSF: adopting technology into campus operations and academic programs. Finally, NAU is in a moderate to weak position to deliver on the competitor-driven KSF: improving its reputation. The university has made some progress toward improving its reputation with the recent creation of the SICCS, Applied Research and Development facility, and the transition of the University Honors Program into an Honors College. However, there are a variety of factors affecting reputation that NAU has much less control over, coming mostly from ABOR and state lawmakers. In conclusion, what can Northern Arizona University do to improve its competitiveness in the industry and its ability to deliver on its key success factors? This report proposes three action steps, listed in order of importance. First, NAU should expand its technological infrastructure and use technology to enhance its academic offerings and improve the efficiency of campus operations. Then, university leadership should advocate to state legislative and regulatory bodies for more student-friendly, education-focused policies, and they should encourage students to do the same. Finally, to the extent that it can control, NAU should try to maintain the small, intimate community that attracts students to NAU in the first place. This will help preserve the university's reputation and, therefore, its competitive advantage.
- 8. Page | 8 References Blumenstyk,G.(2016, November2). Ride-Sharing Servicesand Boundary-BlurringBuildings:A Vision of the FutureCampus.RetrievedfromThe Chronicleof HigherEducation: http://www.chronicle.com/article/Ride-Sharing-Services-and/238271 Forbes.(n.d.). NorthernArizona University.RetrievedfromForbes:America'sTopColleges: http://www.forbes.com/colleges/northern-arizona-university/ IBISWorld.(2016, September). IBISWorld Industry Report61131a: Colleges& Universities in the US.Retrieved fromIBISWorld:http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=1970 Mintel.(2015). AttitudestowardsHigherEducation - US - December 2015. Mintel Academic. Mintel.(2016). Higher education is a window to theworld and beyond butisit foreveryone? Mintel. NAU News.(2015, May 1). Presidentcharts a course amid significantbudgetcuts.RetrievedfromNAUNews: http://news.nau.edu/president-charts-a-course-amid-significant-budget-cuts/#.WFL_0OIrLct Supiano,B.,& Hoover,E. (2016, December6). A Population in Flux ForcesColleges to Adapt.RetrievedfromThe Chronicle of HigherEducation:http://www.chronicle.com/article/A-Population-in-Flux- Forces/238583?cid=wcontentgrid_19_2 U.S. News& WorldReport.(n.d.). Northern Arizona University OverallRankings.RetrievedfromU.S.News& WorldReport:http://colleges.usnews.rankingsandreviews.com/best-colleges/northern-arizona- university-1082/overall-rankings Young,J. R. (2016, October5). Online Education IsNow a Global Market.RetrievedfromThe Chronicle of Higher Education:http://www.chronicle.com/article/Online-Education-Is-Now-a/237993