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Friday, September 13, 2013

Disruptive Innovation vs. Harvard: Who Will Win? 09-13

Disruptive Innovation vs. Harvard: Who Will Win?

When I was in business school, I was taught that Coca-Cola was the world’s most powerful brand. But that’s plain wrong: elite universities are the world’s most powerful brands. No one ultimately cares all that much whether their daughter has a Coke or a Pepsi, do they? But they would do nearly anything to send her to an elite university.
Could the most powerful brands in the world ever be disrupted? Recently, Harvard Business School professor Clayton Christensen, the father of “disruptive innovation” theory, shared his thoughts on disruption in higher ed at the Knewton Symposium, a gathering of senior leaders from innovative online universities around the world.
What is disruption?
Clayton began by providing a few familiar examples   of disruptive innovation, i.e. “a process by which a product or service takes root initially in simple applications at the bottom of the market and then relentlessly moves up-market, eventually displacing established competitors.” Steel mini mills are his classic example. When mini mills first surfaced in the 1960s, they were very efficient but produced inferior steel to traditional integrated mills. Only the low-margin rebar market would use the mini mill steel. Instead of building mini mills themselves, the traditional mills just ceded this sector to focus on higher-margin products.
Soon the mini mills took over the rebar sector and pushed out the traditional mills. But with so much production, the price of rebar dropped. So the mini mills improved their technology enough to produce angle iron and bars and rods, both higher-quality and higher-margin products.
Before long the same thing happened with these products: mini mills took over, integrated mills focused further up-market, and the price of angle iron and bars and rods dropped. This cycle repeated twice more, first with structural steel and then with sheet steel (the last refuge of the traditional mill). The once low-end disruptors had pushed their way to the top and knocked the integrated mills out entirely.
What makes an industry ripe for disruption?
Every industry has a “technological core” that defines its product delivery. In the case of a disruptive innovation like the mini mill, a new technological core emerges. This enables the disruptor to start at the bottom of the market and, as profit and scale allow for further refinements to the technological core, move up-market. Without a disruptive new technological core, industries — even those that seem ripe for it — cannot be disrupted.
Take hotels: in order to move up-market, a hotel chain like Holiday Inn would have to replicate the amenities and services of, say, the Four Seasons. But that would require entirely new facilities, check-in procedures, staff and staff training, etc. Despite the fact that the Holiday Inn and the Four Seasons offer the same type of product — lodging — there is virtually no overlap between their technological cores.
Historically, the same was true for higher ed. For a community college to become the equivalent of an elite four-year institution would require it to replicate the four-year college’s services — from the quality of professors, to range of courses, to availability of campus housing, etc.
But now online course delivery has the potential to become education’s disruptive new technological core. Like all early-stage disruptive innovations, online learning has heretofore focused its attention on the fringes of the market — students who, because of geography or age or financial limitations, wouldn’t otherwise have access to comparable bricks-and-mortar educational opportunities.
The many “jobs” of bundled experiences
To play out how the theory of disruption might apply to the university, Clayton compares it to another large, multifaceted business undergoing disruption: the newspaper. For instance, the New York Times has many roles, or “jobs” in Clayton’s lexicon. It entertains. It delivers current events knowledge. It delivers business knowledge. It kills time in waiting rooms. It allows people to buy and sell things. It’s a place to find employment.
Each of these jobs has been disrupted by new players that focus on just one of these things. A TV or iPad is better entertainment, Bloomberg has better business news, Craigslist is where you sell things, job websites are where you find employment, etc.
Just like the New York Times, the university serves many purposes. Its primary “jobs” are facilitating learning, increasing employability, and providing a coming of age experience. Secondary “jobs” include research, networking, extracurricular activities, sports and entertainment, study abroad, and job placement.
Some of the secondary “jobs” of the university have already begun to be disrupted, with the advent of alternate study abroad programs, extracurricular activities, networking channels, career assistance, etc. But the most important role of the university — the all-important thing that drives employer and student selection patterns — is employability, both immediate prospects upon graduation and long-term employability (given that careers and industries evolve). The coming of age experience is crucial, but comparable from campus to campus. Students seek out elite schools as a stepping-stone to elite careers.
Could this, the most important “job” of the university, ever be disrupted? Clayton’s theory holds that he who does the job best, will, over time, build the brand and become synonymous with the job. For example, if I tell you that you have 72 hours to completely furnish and move into a new apartment, what is the first thing that comes to mind? One company has done that job so well that all anyone thinks of in this situation is Ikea.
But Clayton doesn’t get specific in regards to elite university brands, and universities are unique in the power of their brands. In a competition between Clayton Christensen’s theory of disruptive innovation versus the world’s most powerful brands, who will win?
Goldman Sachs doesn’t care about Harvard
After graduating from Harvard Business School, I went to work at Goldman Sachs. With few exceptions, all 120 or so members of my associate class were fellow graduates of Harvard, Wharton, and a handful of other top-tier schools. Most came from the top five programs as ranked by US News and Businessweek. Programs five through 10 each had one or two graduates represented. Programs 10 through 20 had no more than one each. There was no one from outside of the top 20. Then, as now, Goldman (and employers like it) use elite brand MBAs as a proxy for ability.
What if employers instead had access to far more accurate, real-time, and comprehensive data sets around learning outcomes upon which to base hiring decisions? A revolution in educational data mining is underway that will make this a reality. Within a decade, prospective employees will be able to show down to the atomic concept what they know, how quickly they learned it, and how well they retained it.
Goldman Sachs would know whether an HBS recruit was in fact the best, say, at finance concepts or derivatives trading concepts. Goldman would inevitably start seeing recruits from outside of the top five ranked programs who know way more than I did about every type of finance concept or derivatives concept, and who learned them faster and retained them longer. What are the odds that the graduates who are the top in the nation in mastery of those concepts all went to Harvard or Wharton? Educational data mining will soon be able to prove to employers in many fields if they are overpaying for brand or, even worse, hiring the wrong people.
Goldman Sachs doesn’t intrinsically care about Harvard. They care about finding the best person for the job. Elite brand degrees have just traditionally been the best proxy metrics for that, because precise metrics weren’t heretofore available.
What can be measured about individual students can also be measured about schools and departments. Employers (or graduate school admissions offices) will know which school consistently produces the best chemists or derivatives traders or engineers. How likely is it that the Harvard experience is actually number one at teaching everything? Like the New York Times, it’s really good in many fields, but is it actually the best in any? If, as an employer, I know that I can get better computer scientists at School X than at Harvard, and better biological engineers at School Y, I’m going to tilt my recruiting efforts to those schools.
As for students, they’re certain to follow the jobs. They don’t intrinsically care about Harvard either.
Transparency is the bane of brands
For this scenario to materialize, two things must happen. First, employers need to have access to these very deep data sets — and they need to trust them. This seems nearly inevitable.
Second, in order to change hiring behavior, each data set must correlate strongly and obviously to the specific skills of a given job. That is, if I’m a recruiter and I look at two academic profiles — one from a student at an elite brand school, and a stronger profile from a student at an non-elite brand — I will be convinced by the weight of evidence (more concepts learned, faster, at a deeper level of proficiency, retained longer, synthesized better) to hire the applicant from the non-elite brand. This will begin in industries in which job performance is easier to measure, and where even minor differences matter to employers, such as computer science, accounting, finance, math, engineering, science, and medicine.
It’s already starting to happen at Knewton (and across the computer science sector). Several of our tech leads never graduated from college; we hired them because they were able to prove via alternative credentialing that they could do the necessary work exceptionally well. SiteAdvisor and Hunch co-founder Tom Pinckney didn’t graduate from high school; instead, he sent the MIT admissions office lines of code he’d written (and he got in).
The higher the stakes of a given job, the faster employers will catch on. Transparent and high-stakes fields like medicine, where lives are on the line, will be early. If the head of a medical practice can more accurately identify the most qualified recent med school grads, it is a moral imperative (and a business one as well, given malpractice costs) that she hire that person, regardless of where he went to school.
Lower-stakes but still quantifiable jobs, especially those including a business development component, will take a little longer. A Big Four accounting firm will presumably just hire the best candidates it can, regardless of brand. But the owner of a small accounting firm in Des Moines might hire a Harvard grad for brand prestige even if he knows that a U of Iowa grad is technically a bit more skilled. Until the brand erodes beyond a certain point, some employers might rely on the Harvard brand in and of itself to generate some additional business.
The power of university alumni networks might also delay the disruption: graduates may hire slightly less qualified alums from their schools vs. other schools. But as data-driven brand erosion continues within a career field, these biases will break down too. The brand of their alma mater is important to people, but they won’t support the brand all by themselves if they think another candidate is stronger.
What about “fuzzier” professions? It is much harder to correlate an English major’s academic performance with the skill set of, say, a copywriter or marketing coordinator. Is this where the disruption ends? As the more quantifiable career sectors start peeling away, will elite brands recalibrate to focus on students seeking these more creative pursuits? I don’t think so. Once we’ve reached this tipping point, there’s no going back. 

When it becomes conventional wisdom that Harvard, while very good at a lot of things, is not actually the best at preparing students for anything in particular, the brand as a whole will erode even amongst employers in difficult-to-measure fields. The elites ceded the most creative fields — film, design, fashion, dance — to specialist schools long ago anyway. With the exception perhaps of law, the elite schools have focused on exactly those careers — medicine, finance, business, engineering, etc. — where they are the most likely to be disrupted first.
Sometimes the world really is coming to an end
It’s impossible to know the extent to which university brand power will erode. We know that accurate, real-time, and comprehensive data sets around learning outcomes are imminent and inevitable. But we don’t know how strongly and obviously these data sets will correlate to the specific skills of most entry level jobs in the minds of employers. The greater the overall correlation, the more quickly the power of the university brand will decline.
So if you’re the president of Harvard, what do you do? Focus on teaching the most measurable skills as well as possible? Or the softest skills? Disrupt yourself now? Or hope that others don’t disrupt you later?
Here is the advice I would offer to any university president whose institution has a strong brand.
1. Acknowledge and admit that the very long run of universities being immune to commoditization is coming to an end.
The strength of the elite higher ed brands is primarily due to the following three things (strength of network is a secondary thing that will only delay the inevitable if the fundamentals break):
·         The historical, totally arbitrary capacity constraints of delivering higher ed at scale
·         The extreme lack of transparency of the quality of the product
·         The extremely high-stakes nature of the outcome

Two of those things are ending. The third — the extremely high stakes nature of the outcome — is just gasoline that drives up the strength of the elite brand when outcomes aren’t measurable but will just as certainly drive it down when the outcomes are. Commoditization is coming. Brand will decline. Now it’s just a question of how much.
2. Start measuring.
The age of learning outcome transparency is nearly upon us. You can’t improve your processes around driving higher outcomes if you don’t measure those outcomes. Get ahead of the curve and get control of your data.
3. Proactively defend your turf on the most measurable fields like finance, pre-med, and computer programming.
Yes, this is just delaying the inevitable. But since it so happens that the most measurable fields also happen to be many of the most remunerative, you must delay this commoditization for as long as possible and maintain relevance after it has happened. Do so by delivering the best learning product you can. Stop muddling teaching and research. Great researchers should pay for themselves via research only — not by doing a crappy job of teaching to an audience that won’t be captive for much longer. Get the best teachers you can to teach those subjects. Stop with the ancillary fluff. Focus relentlessly on learning outcomes. If something doesn’t improve your students’ learning outcomes, stop doing it.
4. Focus on what you’re best at.
Things you’re not good at, and will never be good at, are ultimately just going to hurt your brand and divert resources and attention from where they’re needed most.
5. Get online, now.
Start offering degrees or, at the very least, courses for-credit (and for a fee). Even Harvard could admit five totally different freshman classes every year from the United States alone without compromising its standards. Offering credits, and even online degrees, to the most talented kids in India, China, Korea, Russia, and the Middle East — many of whom can pay full-fare — will not sully the brand of your degree and will be strategically imperative. Get online now while your brand is still strong and parlay it into global online education dominance.
6. Consider setting up a self-governing offshoot.
In their extensive research, Clayton and his team have found that the only entities to survive disruptive innovation were those who set up fully autonomous divisions that were free to disrupt the rest of the organization (e.g., IBM). Imagine an “XYZ Online University, powered by Harvard,” capable of creating and delivering on a new business model while taking advantage of the Harvard brand — but still independent and free to build on top of a new technological core.
Yes, it will take unbelievable political capital to pull off these kinds of reforms. It will take tremendous courage. Many will oppose you. Their arguments will seem reasonable. They will argue that key constituencies will revolt. (This is true, but it can be managed, and it must be managed, because the alternative is much worse.) They will call for gradualism — which appears safer and more doable now, but will cost your institution strength and position later. And they will resort to ridicule; they will say these ideas are unproven. (Ask the rest of the internet if its disruptive power over distribution and data mining is unproven.) They will say that you are Chicken Little, that the brand is so strong that it can’t erode. (This is just perceptual bias talking, as that brand strength is all they have ever known.)

Do it anyway. The survival of your institution is at stake.