Universities at risk in a demand-driven market: Ernst & Young study
Monday, 11 July 2011— Many Australian universities have focused on the growth opportunities presented by the forthcoming change to a demand-driven model in higher education, but few have explored the potential downsides.
An Ernst & Young study has found that universities with less regarded brands and weaker positions in the market will be most at risk by the 2012 shift to a demand driven model.
Ernst & Young Advisory Executive Director Justin Bokor said the business models of established universities were likely to be affected if the uncapping of supply led to significant increases in the level of competition - as appeared evident from the 2011 enrolment approaches of various universities.
“Universities are already feeling the crunch with wages and other input costs rising. The increased costs associated with attracting and retaining students along with lower revenues from the loss of students to competitors chasing market share will undoubtedly have an impact if it hasn’t done so already.”
The study surveyed 1,000 current and prospective students on their drivers of choice and their ratings of eight Victorian universities.
The results showed stark differences in student ratings of the quality of tier 1 universities (the likes of Monash University and the University of Melbourne) compared with tier 2 universities, as well large gaps between the ratings of tier 2 universities. A number of the tier 2 universities were rated well below their competitors, exposing them to potential loss of market share under a demand-driven model.
“This would be especially challenging if the loss came from the traditional profit-driver program areas such as business, management and law,” Mr Bokor said.
Ernst & Young's report also draws parallels with other sectors that have deregulated over the past 10 to 15 years such as telecommunications and utilities. Incumbents in these sectors have had to completely transform their business models from engineering-led, 'product-focused' organisations to become more consumer-focused.
Mr Bokor said Ernst & Young sees a similar transformation ahead for the university sector.
“In the past, phrases such as 'psychographic segmentation' and 'fighter brand' (established to compete with low cost entrants) haven't been part of the lexicon for university strategy makers but they will need to be in the future.”
“As the higher education sector becomes more consumer driven, universities should reflect on the strategies and tactics used in other consumer focused industries, including multi-brand strategies and customer segmentation driven by a deep understanding of specific segments’ needs, behaviours and preferences.”
Mr Bokor said the report also challenges the sector on the absence of more fundamental forms of restructuring - collaboration, mergers and divestment strategies. It seems universities are used to collaborating on research activities but there are few examples of collaboration beyond this, for example in course and program delivery.
“Unprofitable teaching programs, for example, could be merged. Back office functions and the asset base could be more efficient through collaboration or mergers."
Mr Bokor said that the report also questioned the longer term fundamentals of international student education, with the growth of the so-called 'second estate' (near OECD standard education in emerging markets at mid-tier price levels) diverting volumes from Australian and other OECD providers, especially those with high exchange rates.
Traditionally there has been a large gap in education standards, and price levels, between OECD education institutions and domestic institutions in emerging markets. A variety of players are seeking to fill – or exploit – this gap, creating a ‘second estate’ of near OECD standard education in emerging markets at a fraction of the price.
These developments will create a whole new level of competition for Australian institutions seeking to return to the days of sustained double digit growth of international education. Australian institutions will need a sharper value proposition for students and their parents in international markets, as well as clear alignment of the student experience. Regardless of how effectively they do this, Australian institutions may need to resolve themselves to lower levels of growth from international education and align their finances and business models accordingly.
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