My favorite industry is
education. Hoover’s Vision began with the premise that
exploration driven by curiosity is the starting point for building and
leading successful enterprises. Education is perhaps the key factor in the
world’s growing wealth, and as our society becomes more complex and more
globally integrated, our need for information and understanding grows
exponentially. For all these reasons, education is a major growth
industry.
Demographic factors will
help spur the growth of education as well. Millions of retiring baby
boomers will want to devote serious time and money to new activities and
interests. While massive numbers of people will want to pursue traditional
hobbies like photography, gardening, and golf, there will also be
significant numbers interested in learning about any subject that you have
ever seen on PBS or the Discovery Channel. The diversity of people’s
interests will drive the demand for education down more and more diverse
channels. There will be demand for courses on everything from the history
of dentistry to Islamic ceramics, from the human genome to the works of
Shelley and Byron, from Zen meditation to model rocketry.
This trend spells growth
potential for any enterprise that has exciting educational content to
share through any medium. Even today, relatively little of our total
life’s education takes place in traditional classrooms. Our largest
education enterprises include not only Harvard and the University of
Michigan but also Borders bookstores, PBS, the Discovery Channel,
HarperCollins, the National Geographic Society, Disney’s EPCOT, the
Library of Congress, Scientific American, The New York Times,
Junior Achievement, Semester at Sea, and the Art Institute of Chicago. In
other words, any enterprise that informs or educates us.
Within this huge and
promising realm, most of my attention has been focused on higher
education. It’s a paradoxical industry.
In many ways, higher education is one of America’s best and most
globally competitive industries. Students from all over the world flock to
US universities, and much of the world’s most important basic research
takes place there. At the same time, US higher education is in many ways a
backward industry, plagued by economic inefficiency, lack of
differentiation, and structural inertia.
Economic inefficiency. I’ve
spoken about the evolution of enterprises, about how streamlining hit the
steel industry, then worked its way through most other US industries.
Higher education is glaring exception. For most colleges and universities,
control of rising costs does not appear to be a big issue. In the 1990s,
average college tuition rose 83.7%, more than any other category of
consumer spending and far more than the 30.5% average increase in other
prices. While the rate of increase slowed at the end of the 90s, it was
still higher than in most other industries, with private university
tuition up 5.2% in 1999. Early in 2000, Williams College in Massachusetts,
consistently ranked as one of the top five colleges in the US, announced
that, for the first time in forty years, they would not raise their
annual tuition. A sign of hope? Maybe – but a small one. They held the
line at $31,000!
In an economy where
inflation in nearly every industry and every cost component is low,
something is wrong in those few industries where it isn’t. The reasons
aren’t obvious. I don’t think the professors are getting rich. I
don’t think the industry is investing in new equipment at a higher rate
than, say, the semiconductor industry. But it’s likely that the higher
education industry is not pinching pennies or applying new technologies as
aggressively as the rest of US industry. Frugality and economic efficiency
are simply not high priorities on most campuses.
I got a little glimpse into
this when we began selling Hoover’s Handbooks (the first product of
Hoover’s) in the early 90s. We met with librarians from universities and
public libraries. Hungry for business and exposure, we offered them deep
discounts – 40% off of the list price. But virtually every library
turned us down, opting instead to stick with their present wholesale
supplier who gave them half the discount we were offering – 20%. As I
talked to the librarians, I realized the level of bureaucratic inertia.
The decision to buy our books was made by one department (acquisitions),
but those folks did not dirty their hands with financial affairs – that
was up to the purchasing department. And the purchasing department’s
life was easiest if they remained with their longtime wholesale suppliers,
the people they saw at the annual library industry trade shows. Within
this system, there was no place for buying directly from Hoover’s. There
was no one who would get a bonus, a raise, or even a pat on the back, for
saving a few bucks.
Contrast this with the
experience at a bookstore chain. While my friends who buy books for the
chains are primarily focused on the nature and quality of the book – is
it something people will want – they end their meeting with each
supplier discussing the price they will pay. Is there any free freight
offer available? How many more books would they have to buy in this order
so that they could qualify for another point of discount – let alone the
20 points we had offered the librarians!
Don’t misunderstand me –
I am not down on librarians or library wholesalers. And Hoover’s selling
books to librarians was an insignificant part of our overall business. But
it saddens me to see the average library pay more for books than the
average bookstore. Even the slightest nudge (or reorganization) might make
librarians more focused on what they are getting for their money. And make
their library wholesalers get more aggressive on pricing.
This lesson was reinforced
when I later befriended three different publishers, each of whom had two
divisions – one in basic textbooks and one in trade (bookstore) books.
The basic textbooks were sold to charitable literacy organizations
(another favorite cause of mine), GED programs, and other nonprofit
groups. In each of the three cases, the big profits were in the basic
textbooks. The publishers complained to me that the bookstores drove such
hard bargains; they had to make their profits somewhere. If educational
institutions are not sharp on what they pay for books, they are also not
likely the toughest buyers of chairs or whiteboards or sidewalk
construction.
Lack of differentiation. Most
of America’s colleges and universities have little brand identity. The
thousands of small liberal arts colleges sell the same product, at least
as perceived by their customers (students and parents). Most of the giant,
rich universities are in similar straits. Harvard is one of the few
universities blessed with a strong brand identity – one which comes from
being very old and staying a leader. It’s true that, within academia, a
particular school may be known as the place for nursing, for
economics, for art history—or for keg parties, ski weekends, or
intramural rugby. But the universities have not capitalized on these
differences. They have not gotten the word out and established their
brands in the overall public consciousness. Outside of academia, who
really knows what differentiates Indiana University from the University of
Illinois? And if there is no real differentiation, do we need all these
separate enterprises?
Structural inertia. While
many, if not most, of today’s business mergers are pointless and will be
unwound in coming years, it makes economic sense that every industry
should have some mergers. It is just as irrational for an industry
to have zero mergers as it is to have everyone merging.
Yet when was the last time two universities merged? If a merger
makes sense for Daimler and Chrysler, why doesn’t it make sense for New
York University and Columbia . . . for Williams College and Amherst . . .
or for Hofstra and Long Island University?
I can hear the moans from
alumni everywhere who are emotionally glued to these great institutions.
Your feelings are natural and understandable, but put them aside for a
moment. Consider the benefits that could be gained by merging certain
departments. Two medium-sized schools that merged their astronomy
departments might be able to buy a larger telescope than either one could
afford alone; merged Russian departments might have enough students to
make expanded course offerings practical. And what about the savings that
could be realized by having one accounting department rather than two, and
by buying everything from classroom chairs to hamburger buns in larger
quantities?
When we begin to see
universities market themselves as unique, differentiated entities, and
when we see at least a few mergers designed to bring economic benefits to
students and the academic community, we will know that the higher
education industry is beginning to catch up to the rest of the world.
The innovative thinking
needed in education will be encouraged and accelerated by the burgeoning
growth of for-profit universities. Just as competition from Toyota helped
save GM and Ford by forcing them to wake up, the creation of the Apollo
Group, which runs the 80,000-student University of Phoenix, and similar
for-profit educational organizations will spur improvements in the
non-profit universities that I cherish.
The fact that Apollo is
profitable (netting $71 million on sales of $610 million in the 2000) says
a tremendous amount. How can they make a profit while competing with
outfits which are under no profit constraints and pay no taxes?
They must be offering something that the customers want.
Chicago-based DeVry Institute, which also operates the 7,100-student
Keller Graduate School of Management, has a similarly successful track
record (having earned $47 million on $505 million in revenues in 2000).
The Learning Annex is another growing for-profit force in education. More
schools like these are on the way.
Apollo and DeVry focus on
teaching practical, job-related skills to adult learners. But the
for-profit model they are pioneering could work with students of all ages
and with many subject areas. In the coming years, millions adults,
especially retirees, will want to take courses on everything from Homer to
horticulture. And they’ll shop for learning wherever good teaching is
available, regardless of whether it’s through a for-profit or
not-for-profit organization.
And that brings me to what
may be the hottest topic in all my writing – the future of our primary
and secondary education system, especially of our public schools.
When it comes to innovation,
diversity, and consistently high quality of service, primary and secondary
education in the US is not doing a good job. Compare the range of choices
available with the thousands of options offered to buyers of food,
clothing, travel, or even financial services.
If you want your kids to go to school eleven months out of the year
or six days a week, you probably don’t have that option. If you’re a
working person who wants to attend high school on nights and weekends, you
may not have that option. If you want a school that specializes in foreign
languages, math and science, or the performing arts, you probably don’t
have that option.
One result has been the
dramatic rise of home schooling across the US. In some of our cities, very
few of the affluent send their kids to public schools. In what is probably
the most expensive effort ever by consumers to “change where they
shop,” America’s middle class has fled the cities and headed to the
suburbs to find better schools for their children. In short, millions are
opting out of stagnant and unsuccessful public school systems.
Some education advocates
call for increased spending, but many nations that outrank us in student
achievement spend less per student than we do. Even within America, the
cities and states that spend the most do not always have the best school
systems, nor have past increases in spending been correlated with
increases in educational quality. Money alone is not the answer.
What is? There may be no
magic elixir that fixes our school problems. We hear about experiments
from Boston to Milwaukee to San Francisco. Some indications are promising,
others are not. We have tried charter schools and vouchers. Some reformers
are calling for merit pay to reward and incentivize great teachers and
school leaders; others emphasize testing as a way to ensure accountability
for results; still others talk about reduced class size or greater
parental involvement as keys to an enhanced learning environment. No one
knows for certain which reforms are likely to work. But the only way to
find out is to try new things – to encourage our best entrepreneurial
minds to tackle this most perplexing, complex, and important of
challenges.
From an entrepreneurial
viewpoint, the greatest opportunities in education are in the mass market.
While wealthy people have always had choice in schools, and even the
middle class has at least had the option of moving from one town or one
neighborhood to another in pursuit of better schools, the bulk of the
population has been stuck with the schools that local government provides.
Modifying our legal, economic, political, and social structures so that
public schools are opened to entrepreneurial innovation can change all
that. Creative thinkers tend to go where the market is. More energy and
resources are devoted to fast food than to gourmet dining, to Toyota than
Mercedes, to Target than Neiman-Marcus. Giving a great education to large
numbers of people is where the greatest opportunity lies for
entrepreneurs, not in providing private schooling for the privileged.
Among the most important
contributions to education that entrepreneurial thinking can make is to
reexamine how resources are allocated. Some suburban schools spend
enormous sums on plush new buildings, while other schools (especially
those in aging inner-city neighborhoods) defer maintenance on older
buildings until they are too expensive to fix. Many school systems spend
significantly more on administration than an entrepreneurial organization
might, while those on the front lines – the teachers – are starved for
resources. Many systems reward years of service rather than excellence.
In Texas, there was an
uproar recently over the fact that some high schools pay their football
coaches $80,000 per year, over twice what the average teacher makes. Many
declared, “Those coaches’ salaries must come down.” My reaction was,
“If the coaches are great coaches, let them have the money. But make
sure that the best teachers in the history and English and math
departments also make $80,000.”
Our schools are now seeing
some early efforts at entrepreneurial experimentation. The leading light
is Chris Whittle’s Edison Schools, chaired by former Yale President
Benno Schmidt. After spending $60 million studying schools around the
world and developing a blueprint for improvement, Edison traveled the US
seeking contracts to operate public schools. Today the company manages 115
schools in 21 states and the District of Columbia. Edison students spend
more days and more hours in school than those in traditional classrooms.
In fact, according to some estimates, by the time an Edison student
graduates from high school, he or she will have spent the equivalent of
four extra years in school. Every student receives a home computer, and
every teacher receives stock options. All for the same amount of money
that public schools spend per pupil.
Edison is an early-stage
developmental company. Its annual revenues of $225 million do not cover
its overhead and development costs, and losses last year were $36 million.
But investors from Microsoft’s Paul Allen to the Gap’s Donald Fisher
are believers. And since the company’s 1999 IPO, its stock price has
risen around 40%.
Another public company,
Nobel Learning Communities, operates more than 160 preschools and grade
schools and is profitable on annual revenues of $127 million. These and
other innovators are the wave of the future. And the faster we try new
ideas, ranging from enhanced teacher compensation through innovative use
of new technology, the sooner our school systems will rise to the level of
the best US industries.
Pulling education
together. This century promises to be a great period of change and
innovation in the educational industry. If we are lucky, we will see new
structures which combine the best of non-profit, for-profit, and
government initiatives. More and more people of all ages and incomes will
be the beneficiaries of increased educational choices. Money and resources
will flow into the industry from energized pools of volunteers and donors
as well as from venture capital firms and other investors. Using all of
these resources wisely will be critically important.
I look for more creative
alliances involving all the participants in the education industry.
National Geographic Society already sponsors a national geography
bee, which encourages learning about our planet, its peoples and
resources. PBS does some great things working with teachers and students
at all levels. We need more such partnerships among booksellers and
universities, publishers and literacy programs, local newspapers and
broadcasters and school systems. All of these enterprises have a vested
interest in a public that reads, thinks, and learns.
Our best entrepreneurial
energies have found ways to bring us faster, cheaper computers, affordable
fresh food, safer and more economical cars, and a wealth of choices in
entertainment. Picasso and Dickens, Darwin and Einstein, Aristotle and
Tocqueville deserve no less.
I grew up as a member of the
Church of the Brethren, a Protestant denomination closely akin to the
Mennonites, the Amish, and the Society of Friends (or “Quakers”). Both
of my grandfathers were ministers. I believe that this church and its
sister denominations do a great job of teaching fundamental values that
are valuable throughout life. And I know that I am only one of billions of
people around the world whose lives have been enhanced by religion.
But as an entrepreneur I
have to say that the religion industry is not in the best of shape. While
some faiths are growing in membership and attendance, many are in decline.
Is it reasonable to think of
religion as an industry? Why not? As a collection of enterprises that
employ resources – time, talent, and money – in the service of human
needs, religion certainly qualifies as an industry. And while the goals of
religion may transcend the merely earthly aspirations of most enterprises,
few religious leaders would want their churches, synagogues, temples, or
mosques to be less well run than secular enterprises. If anything,
the higher ideals to which religion aspires demand a higher standard of
accountability and achievement.
I believe that the best hope
for our religious institutions lies in entrepreneurial leadership. If you
are a religious leader, you need to ask yourself some of the same kinds of
questions that an aspiring entrepreneur should ask. Is the mission of your
church clear? (For simplicity, I’ll use the word “church” henceforth
to refer to all kinds of religious enterprises.) Is it consistent? Is it
unique? How does it differ from the mission of the church down the street?
And are you really passionate about serving people?
By the service standards of
business, many religious enterprises fall woefully short. No business has
such limited hours as most houses of worship. In many places, if you have
a spiritual need any time other than Sunday morning, you’re out of luck.
No wonder televangelism and religious broadcasting have boomed in
popularity, since they make God’s word available seven days a week, 24
hours a day.
How aggressively do the
churches use their assets? As an architecture buff, I travel the world
visiting and photographing buildings, many of them houses of worship. They
are often beautiful, expensive, historic – and almost always empty.
Couldn’t the magnificent spaces created by the devout be used around the
clock for other cultural and community purposes? Couldn’t two or more
faiths share the same building and use the resultant savings to serve more
people?
What is your church doing to
attract younger members and to keep them coming? Too many religious
enterprises die out as their members age. Is your church deeply involved
in the life of the entire community, or is it isolated, serving only
believers? A church that operates like a private club not only violates
the basic spirit of religious service but also dooms itself to a gradual
decline in relevance and membership, and ultimately to extinction.
Millions of people around
the world are searching for meaning in their lives. They want to belong to
something bigger than themselves. They turn to new-age philosophies, to
programs of diet, exercise, and meditation, to motivational speakers, to
self-help books, to infomercials, to network marketing. Thus, the
potential market for the rich offerings of traditional religion is huge.
But whether your church will be thriving or forgotten fifty years from
today is up to you.
Of course, the single
largest industry in the United States is our government. It’s also the
last of the big industries to be streamlined. The opportunities for better
resource management, for innovation, and for clear-visioned leadership in
government are enormous.
It’s easy to forget that
government is also among our oldest industries. Visit Washington, D.C.,
and you will see symbols of traditions and practices that have been with
us for over 200 years. While many of these traditions are great, others
hold us back.
Recently, I heard this on
the TV news: “The Post Office is asking for a rate increase of one cent.
The Independent Postal Rate Commission must approve any increase in postal
rates, and that process could take months.” This in an era in which
things move fast. Even giants Microsoft and AOL can turn on a dime – or
at least a quarter. But not the government – not even for a penny.
There are functions only
government can provide, such as national defense. But in many other cases,
the free market can do a better job. For a hundred years, our train
stations and railroad lines were built and run by private enterprise. But
when we took to the air, we evolved a system of publicly-owned airports.
At first, it looked like a great deal for the airlines – the railroads
were mighty jealous. But the net result has been airports that are not
consumer-friendly and that do not adjust flexibly to changing times.
Today, BAA from England and other for-profit companies are gradually
taking over the management of our airports. Better food, better shops, and
more attractive and useful amenities are beginning to show up. Many other
government industries have the potential for privatization.
Resource allocation and
attracting talent. We’ve all heard stories about government waste,
from the Pentagon paying $800 for a toilet seat to Medicare paying ten
bucks for an aspirin tablet. Some of the stories may be exaggerated, but
many have more than a grain of truth.
On the other hand, we
sometimes forget that it is just as great a misallocation of resources to
spend too little as it is to spend too much. Enterprises that produce
great products but are too cheap to advertise them soon disappear. Hotels
with torn sheets go broke. Companies with antiquated systems fail.
Businesses that don’t pay enough to attract the best salespeople lose
out to the competition. But in government businesses, many of these rules
don’t apply.
From an entrepreneurial
perspective, I believe that one of our greatest mistakes is our refusal to
pay senior government managers market rates. Any executive who runs a
multibillion-dollar US corporation today is paid at least $500,000 per
year – more often a million dollars or more. These are some of the
hardest jobs in the world – the pressures are intense, the hours are
long. The risks can be great; in today’s world, you can lose your job in
a heartbeat. These are not greedy people. They are people who work hard,
who want to send their kids to college. Once someone has selected
management or leadership as a career, they adjust to these standards of
living. By comparison, federal department heads, some of whom manage
hundreds of thousands of employees, earn a fraction of that amount, and
even the President is seriously underpaid relative to his (or her)
“peers.”
Today, people with
the needed management and leadership qualifications are largely excluded
from government service. Only those who have already made a fortune in
business, or have inherited wealth like a Kennedy, a DuPont, or a
Rockefeller, can afford to spend a lifetime in government.
If we paid
competitively, I believe we could attract many more people of high quality
to public office. Questions about gifts, favors, junkets, and campaign
contributions would subside if we paid people market rates. Great mayors
and legislators might stay mayors and legislators rather than seeing their
jobs as stepping stones to the next office (or to better paychecks as
lawyers or lobbyists).
Innovation. Above
all, government needs to become more creative, experimental, and
customer-oriented. It’s beginning to happen. Anyone who travels overseas
has noticed improvements in the customs service under the Clinton-Gore
administration. The same administration initiated many other efforts to
improve and streamline government, and Al Gore made “reinventing
government” one of his pet projects. Former Mayor Stephen Goldsmith of
Indianapolis, a Republican, and Mayor John Norquist of Milwaukee, a
Democrat, have been noted innovators, and both have written books about
creative city management. But there’s clearly much, much more to be
done.
Here are some
thought-starters about government. I’m not necessarily proposing
answers, but merely asking questions that wiser heads ought to be
studying. Surely you can add to this list.
¨
What is the best way to reduce congestion and pollution from
urban traffic jams? Light rail? Heavy rail (including subways)? Staggered
work hours? Telecommuting? What if some of the money currently invested in
mass transit and urban highways instead went into incentives to workers
and/or employers to start work at 7 a.m. or 10 a.m.?
¨
Caught in a snowstorm at the Toronto airport, I found that
there were no taxicabs in sight. The same thing happens at the big New
York airports when storms hit. Everyone blames the taxi drivers for
staying home in bad weather. But could it be because the pricing is fixed
by law, leaving no flexibility for cab companies to raise prices when
supply is low or when the work is harder – or to lower them on nice days
when there are too many cabs and too few customers?
¨
What is the best way to price postal services? Is selling
batches of stamps whose price periodically becomes obsolete really the
only option? What about paying an annual subscription for my mailbox?
Could the subscription fee be higher if I live in a remote place?
¨
The US Government Printing Office publishes a huge range of
interesting and useful books that are rarely available at your local
bookstore or your online bookseller. The US Geological Survey produces the
best and most detailed maps in America, but that you cannot find in many
stores. Why not sell these publications commercially? Wouldn’t most
consumers be willing to pay a slightly higher price (to cover distribution
margins) for government publications in exchange for the convenience of
being able to find them in stores?
¨
The US Government is the largest and most complex enterprise
on earth. As prescribed in the Constitution, it is managed by a president
and vice president. But we do not live in the world of 1789. Wouldn’t it
make sense to have more than one vice president? For example, why not one
vice president for domestic affairs and one for foreign affairs? Big
corporations review their top management structure every few years.
Shouldn’t we at least take a hard look at the cabinet every decade or
so? (While we occasionally “tweak” the cabinet, most Presidents run
the government through an ad hoc structure of aides, advisors, and chiefs
of staff.)
¨
We elect the large lower house of our national legislature
every two years. As a result, congressional representatives have to gear
up for fundraising and arduous re-election campaigns every two years. Only
two other nations on earth elect members of their national legislature
this often – Libya and Yemen. Every other nation gives their legislators
at least three years before pushing them through another election cycle.
Is it time we took another look at this?
¨
Isn’t there room for differentiation among our state and
local governments? What if one state characterized itself as a libertarian
state with few limitations on behavior? (I think it might be called
“Nevada.”) At the same time, another could offer up an American
version of Scandinavian social democracy. (It might be called
“Minnesota.”) Giving consumers more choices is generally a good thing.
¨
Is there room for mergers, or at least alliances, among our
governments? What if Arkansas and Mississippi merged their drivers’
license programs, their accounting departments, or their voting machinery
purchases?
¨
What can we learn from national and local governments
abroad? What can we learn from traffic control systems in Singapore and
schools in the Netherlands? How does Norway handle election machinery?
What can we learn from the Japanese high-speed rail system?
¨
On a global level, is anyone taking a look at the costs of
national sovereignty? Traveling the globe, I can’t help noticing that
Slovenia has embassies in hundreds of nations around the world – as does
every other nation, even the poorest nations of Africa. How much does this
cost? Could these nations spend that money in ways that would better serve
their citizens? Is there a better way to achieve the same end? Similarly,
does every nation need its own unique currency and a national airline?
You can see the overall
thrust of these questions. Each governmental enterprise in our country,
and indeed the world, needs to ask, Are we doing our job the best we can?
Are we wasting resources? Are we observing and applying the best
entrepreneurial thinking? Does the free market system offer useful
insights into the challenges we face?
The big news of the early twenty-first century will be the spread of this
kind of thinking to all of our non-profit enterprises – our hospitals,
our schools, our trade associations, our religious institutions, and, yes,
even our governments.
