Sunday, January 26, 2014

The barbarians are at the gate! Of universities, moats and disruption!

In my last post, I attempted to break down the bundled product that comprises a college education into its component parts, and closed by arguing that the future of universities rests on their ability to preserve the competitive advantages that have allowed them to get premium prices for these bundles and that of online education entrepreneurs on their capacity to find chinks in the university armor. 

In this one, I would like to look at the competitive advantages that colleges/universities have on each component and how close (or distant) the online threat is on each of them. Borrowing from the terminology of value investing, universities have moats around their “educational castles” and the online barbarians (at least as seen by the members of the educational establishment) are trying to breach the establishment. Since so much of this debate comes from one side of this divide or the other,  I decided that it would be good to try to look at both sides. In the table below, I take a look at each piece of the bundle, what colleges/universities bring as a competitive advantage on that piece and the challenges faced by online disruptors.

The University Moat and the Online Challenge
 Bundled item
The “University” Moat is deepest at
The Online Challenge
More selective” schools that have reputations based on long histories and tradition. It is also self-perpetuating, since your selectivity allows them to attract the best students who burnish their reputations further. 
In softer disciplines, where it is difficult, if not impossible, for an outsider to observe output or make judgments on quality.
Online entities have a "chicken & egg" problem, since they need good reputations to be selective and need to be selective to generate those reputations.  However, they may have a much better chance of breaking through 
(a) if they can team up with an entity that has a reputation (a university like Stanford/MIT or a pure screener like the College Board) or
(b) in areas where the skill sets of graduates are measurable and observable. (Engineering, software coding etc.)
(c) in disciplines where there is a common certification exam (accounting, law).
Colleges that help students create customized study or degree programs, built around their interests and objectives. 
Online education is currently chaotic when it comes to structuring. While course offerings proliferate, guidance for novices on structuring & sequencing these courses is limited or non-existent. 
Colleges that offer classes that are well taught by “star” faculty and built around interaction, group learning, individualized feedback and informative grading systems (that measure learning and not attendance/memorization) have an edge.
Online classes are often too passive, focused on delivering content and mechanized testing/grading. Creating more interactive, dynamic online classes as well as hybrid variations, which are online much of the time, but have in-person meeting components, may help bridge the gap.
The Network
Colleges that create networks among students that continue long after they graduate, augmented by small group networks such as sororities/ fraternities and campus clubs/activities.
Fostering close networks when your interactions are all online is more difficult ( but as Facebook and Linkedin's success show, it is not impossible) and serendipitous contact (like the ones you have on the college green with strangers) is very limited.
Career Advice/ Placement
Colleges that provide career guidance early in college life, followed by access to good placement services (with exclusive and privileged access to prized employers) .
Getting employers to trust your “products” as much as they trust established institutions (colleges & universities) will take time, though it should be easier in professions where the proof of competence can be tested.
Colleges with strong sports teams and cultural activities on campus.
Entertainment options online are getting richer but it will be difficult to match the real thing. Online universities don't have basketball teams or play bowl games.
Colleges that try to students how to learn & prepare them for life.
Same challenge, but magnified because you are restricted to do this online.

I know that I am probably being simplistic in some of my assessments, but the key is to get this conversation started. 

Last year, I gave this talk at a few schools about the future of education, and I tried an experiment, making one half of the audience play the role of the university (and giving them the job of defending the moat) and the other half of the audience the role of online disruptors. I created worksheets for each group to try to get them to be specific about gauging the state of the moat at their institutions and potential challenges. If you are interested, the links to each side are below:
  1. Worksheet for the University side (on how to make the moat deeper) (Download as pdf file)
  2. Worksheet for the Online disruptor side (on how to get across the moat) (Download as pdf file)
If your sympathies lie with the university side or your future depends upon it's survival (because you are a faculty member or administrator), you can see that keeping the education monopoly will require work and changes in the way universities are structured. Lifetime tenure, a low teaching load and research freedom may all be viewed as inalienable rights by university faculty today (at least at the top research schools) but they will all have to be reexamined in light of the competition. 

If you are an online education entrepreneur, this exercise will be a reality check. Universities will not cede their power easily and have the means to make it difficult for online disruptors to challenge them, since they not only get to define what comprises education but are backed up by licensing/accreditation bodies that have bought into the system. . To wean consumers away from traditional universities, online educators have to think broader, be more creative and use guerilla warfare where necessary. 

I believe that change is coming to education but that it will come in stages and be under-the-surface. The first to feel the heat (if they have not already) will be colleges that have loose or non-existent screens, mechanized degree programs, content-heavy but learning-light classes and nonexistent networks. As they fall prey to online or alternative education systems, it is an open question as to how schools further up the food chain will react. I won’t claim to know the mindset of faculty/administrators at the top schools but my interactions with them suggest that many of them will, for the most part, resist change (especially if it inconveniences them) and argue that there is no chance that their civilized citadels will fall to the barbarians. But they are fooling themselves, since the disruptors have the luxury of being able to experiment, with nothing to lose, until they find the weapons that work. It is only a matter of time!


Now_Lets_Eat_Amen said...

so long as the inflation-adjusted cost of higher education continues to rise, the ranks of those seeking online education will swell. The fact that so many schools have made online education available already provides legitimacy for it as a means of delivering content. The failure of those MOOCs is nothing more than a headline in this war of attrition that universities may not be able to win.

Anonymous said...

Dear prof

It's very good post.
Would you mind I translate into my language and post in my blog?

(Why I want to do that is people tend to read something in their own language, therefore I don't want to post a link from your blogger.)

I would make good reference.



Anonymous said...

Dear Prof. Damodaran,

Thanks for your post. I am from Hong Kong, currently studying in local University, Actuarial Science major.

I enjoy MOOCs a lot. MOOCs provides a lot benefit to human beings.

It is because everybody has a chance to get education, regardless your age, mental ability, education background, economical status, free time schedule, pace and location. As long as you got a computer, internet connection and curiosity, Your mind is your limited, everything else being constant.

For example, my curriculum at school only has a course on corp. finance, all other courses are related to probability, statistics and insurance. However, I want to learn more about finance, that is why I am here.

This would not be possible without people like Prof. Damodaran who generously gives out his lectures for free with a lot of efforts behind it.

Fortunately, there are hundreds other nice professors doing the same thing. This kind of movement does change the world.

Everybody has a chance to fully actualize themselves according to Maslow's hierarchy of needs. I think this is very important, more happy people, more peaceful world. More importantly, more happy people even at the non peaceful area.

I am not sure how the University Vs MOOCs competition will end up.

As long as MOOCs providers are financially sustainable in their operation, everybody is happy.

If MOOCs providers can create real competitive threats, that is even better. As always, competition helps consumer win.

Now, I need to pay US$40,000 in total (current local Uni fee) plus 4 years time and energy. This is not a small number at all, especially it takes years for me to pay back the loan.

It is always more demand than supply in the higher education. If MOOCs win, that would really help our future generation.

Thanks a lot :)


Anonymous said...

Hi Guys,
Can someone PLEASE HELP AND advise me on this:

I would like to invest but dont know if it is a god idea, what do you recommend?


Nice informative post To many professors in to many universities think their untouchable. The world changes so will universities.

myinfoline said...

Find Best hotels in Mumbai. My infoline provide a search engine to search education center and placement service Provider Company in local area. (
Placement Services in Mumbai

Unknown said...

great post this is very informative thank you for sharing this....

Pranav Pratap Singh said...

Thanks for another Great Article Prof. Damodaran! Do you have an opinion on what this would mean for current PhD students in Business Schools aspiring for Academic Careers?

mahi1108 said...

dear prof an enlightening read
appreciate you sharing your insight with us

Unknown said...

Surely, It is an elegant and effective website about financial markets. It is very useful for us. So, I loved it. Many, many thanks to you for creating such an informative website. If you would like more information about this please visit stock market today The advantage of these stock market today is they allow for a vast amount of customization by the user. That same advantage can create a disadvantage for some users. Those users may not really know what they are looking for or what data criteria might produce a stock market today of stocks that present the highest possible probability of a successful stock trade.