How do you know when an industry is broken and radical change is undoubtedly on its way? The question is an important one for established and start-up companies. Industry transformations offer rich opportunities and devastating risks.
Take the case of college education. I’ve seen enormous progress in my daughter’s writing and critical thinking skills since her arrival at Bates College in Maine where she is a Junior. Yes, the tuition payment (without any scholarship or financial aid) is very high, but I see significant value in the exchange, based on the college papers Lauren has shared and conversations about issues at the dining room table.
Apparently Lauren is the exception to the rule among college students, according to a recently released book, Academically Adrift: Limited Learning on College Campuses by Richard Arum and Jospia Roksa. “According to their analysis of more than 2,300 undergraduates at twenty-four institutions, 45 percent of these students demonstrate no significant improvement in a range of skills—including critical thinking, complex reasoning, and writing—during their first two years of college.” (Book website)
A large part of the problem is that many college students aren’t being asked to do hard work. The book’s findings are consistent with a longitudinal study, The National Survey of Student Engagement, which, according The New York Times, “has polled more than 2 million students at more than 1,000 colleges and universities over more than a decade — and reported that many spend little time studying or writing.” Add in the fact that many private national college chains (e.g., University of Phoenix) have terrible graduation rates, suggesting these schools are in essence legal entities to tap into the flow of student loan money. And don’t forget that the cost of college as a percent of family income is skyrocketing. Net net here’s an industry in serious trouble.
With the education example in mind, what are the indicators that an industry will undoubtedly be transformed?
New technology can be an indicator, but it’s not always the catalyst for change, as the printing press and more recently the Internet have been in transforming the news industry. Often technology is an important enabler of change, with a different root cause driving industry transformation. Technology will be an important enabler transformations in higher education, with distance education paving the way. I’ve often wondered why every student in the University of Wisconsin System should not benefit from lectures from the best professors on any University of Wisconsin campus.
Let’s look at five root causes other than technology that lead to industry transformation:
Benefits relative to prices are falling and there’s evidence of higher-value solutions available elsewhere. Other nations spend less than we do on high-school education with far better outcomes. Open the kimono over US high schools, and you discover rising drop out rates. In 1969, 77% of students graduated from high school in 4 years, a statistic that fell to 68.8% by 2007. And this is happening at a time when the US needs more not fewer high school graduates.
Consolidation has run its course. The pharmaceutical industry consolidated rapidly as companies used mergers to grow earnings (through cost-cutting synergies and better sales force leverage from expanded new drug pipelines). There’s not many consolidation opportunities remaining, suggesting that pharmaceutical companies are going to have to radically rethink their business models to generate continued profit growth. Indeed, you see this transformation starting with pharmaceutical companies as they outsource drug discovery to biotechnology start-ups.
A huge external shock has occurred that will reshape markets. The new federal health care law will transform markets for health care products and services if it ultimately passes legal tests. If the courts throw out the law, health care markets will ultimately be transformed (see above) because the cost of our health care system is rising faster than the benefits received and our nation cannot afford to provide the baby boom generation with the same rate of procedures today’s elderly receive through Medicare.
An industry’s customers are vastly over-served, and many who might buy the industry’s offerings do not because the product is over-built for their needs. This is the disruptive innovation case that Clayton Christensen presents in The Innovator’s Dilemma. Pottery Barn, Crate and Barrel and other national home furnishings chains made a high-end interior designer look (which had been very pricey) finally affordable to the masses.
Customer demographics are no longer viable for healthy performance. Track the age distribution of how clothing is being purchased by different age groups and you might short department store stock, an industry likely to experience what newspapers experienced over the last decade as more and more readers switched to on-line reading.
What other predictors of industry transformation are on your list?