Playing To Win
The Trickiness of University Strategy
Prospering in Multiple Two-Sided Markets
I attended an academic event last week — something I rarely do anymore. The keynote speaker gave a passionate advocacy that universities must resist all the forces that are now buffeting them and maintain their complete independence from the world around them. The audience cheered enthusiastically, but it landed like a lead balloon with me. It inspired me to provide my thoughts on the matter in this Playing to Win/Practitioner Insights (PTW/PI) piece called The Trickiness of University Strategy: Prospering in Multiple Two-Sided Markets. And as always, you can find all the previous PTW/PI here.
Why I Care
I care about the subject of universities in part because I have dedicated over 40% of my adult life to the university sector. For 21 years, I was a tenured full professor (and for 14 of those years a chaired professor) at the University of Toronto, the world’s 21st or 25th ranked university, depending on which of the two global rankings you prefer. And my university was publicly funded, giving me experience at the most dominant form of university in the world. I was also a dean for 15 of those years, so I know a lot about academic administration as well as the life of a full-time tenure-stream professor.
I have high respect for the university sector. I am not an outsider who criticizes without knowing much about how universities actually operate. But I am also a strategist, so I look at the issues that universities face as strategy challenges that require smart strategy choices to overcome.
The Speaker’s Core Premise
The speaker laid out the forces buffeting universities in the modern economy — lower cost online models; encouragement from technology billionaires to skip university education to save the time and capital to invest it in starting a business; artificial intelligence (AI); and even, most recently, aggressive saber rattling by the federal administration. He went through the 1000+ years of university history worldwide and 300+ in America to argue that the university represents a venerable institution that has always been respected and has prospered by being an ivory tower — a place apart.
His punch line: universities should not be questioned or challenged and when they are, they should resist.
The premise landed with a thud for me because it is not at all clear that any institution that has completely ignored criticism from outside has ever survived. “Let them eat cake” didn’t work out so hot for Marie Antoinette and French royalty in general. Politicians don’t survive by attempting to be ‘a place apart.’ Neither do political parties to which they belong. Businesses die fast when they ignore customers and/or shareholders.
Even science is not immune to challenges. Its ‘truths’ get subjected to stress testing on an ongoing basis. When Einstein challenged Newton’s ‘truths,’ the world of science didn’t say Einstein had no right to challenge Newtonian physics because it had been around for centuries. Medical procedures change when existing paradigms get challenged. We used to treat ulcers with antacids and surgery. Now we treat them with antibiotics because we now know ulcers are bacterial not chemical.
Net, I don’t think it is at all helpful to the cause of universities to encourage them generically to resist. Do I think they should generically embrace? No. But they should take outside criticism and challenge as an opportunity to reflect and improve.
The Trickiness of University Strategy
I have lots of sympathy for universities because the strategy challenge for universities is tricky indeed. They operate multiple two-sided markets — and operating a single two-sided market is tricky enough.
Lots is written about two-sided markets these days — including in this series — mainly because some of the most valuable companies in the world are two-sided platforms, like Google, Facebook and TikTok, and everyone would like to be as valuable as them. For the (few) uninitiated, a business is considered a two-side platform when it creates value by connecting two different sets of customers. For example, Google is a platform that connects searchers and advertisers. Similarly, newspapers connect readers and advertisers. Credit cards connect purchasers and merchants.
For me, the most interesting aspect of platform businesses is that the beneficiaries of the product/service the platform produces are either substantially or entirely different than the funders of the platform. Google is an example of the latter in that searchers are the beneficiaries of the product that Google provides to them — ability to search the Internet in a useful way — and they pay zero of the costs that Google incurs to make that service available. Advertisers, who are completely different entities than the searchers, pay 100% of the costs (and a lot more given the profitability of Google). In newspapers, there was (and I use ‘was’ because they no longer exist as commercial entities) a partial overlap. Readers, who are the beneficiaries of the production process of producing news, supplied about 20% of the revenues while advertisers contributed the remaining 80%.
In a similar way, charities are two-sided platforms. St. Jude’s Children’s Hospital produces pediatric health care. The beneficiaries are unwell children and their families, while the funders are individuals and organizations who want to have them helped. Beneficiaries and funders are two entirely distinct markets for which St. Jude’s provides a connective platform. The exact same thing holds for United Way, Feeding America, etc.
Regardless of whether it is for-profit or not-for-profit, a two-sided platform must appeal to both sides if it is to be sustainably successful. It must help the beneficiaries to an extent and in a way that causes funders to continue to fund its operation. In turn, that requires a strategy which ensures a level of value delivery to beneficiaries that motivates funders to continue their support. Newspapers couldn’t do that — and consequently, the industry is spiraling downward into oblivion.
In similar fashion, universities are two-sided markets — but they operate multiple two-sided markets. They spend resources on being an educational two-sided platform and on being a research two-sided platform. That is a strategically tricky challenge.
The Educational Two-Sided Market
The funders of university education are governments (in the US, mainly state governments), students, and donors. Governments are bigger funders in public universities and smaller in private — of course. The beneficiaries are students. Governments also benefit from having a higher-skilled labor force, but the benefit is most centrally captured by the students. The educational two-sided market is more like newspapers than Google in that the beneficiaries are responsible for some of the funding.
For this two-sided market to be sustainable, the universities must make sure that their production process produces learning outcomes for the students that are sufficiently attractive to the funders for them to continue their funding. Governments have become more aggressive in measuring educational outcomes and basing funding decisions on them — as the UK has done since 1998 and as some US states have started doing. Student confidence in university education has dropped substantially in recent years as the beneficiaries perceive the value as not as high relative to cost as in the past.
Business school deans like me know the challenges of this two-sided market because business schools are relentlessly ranked by third parties like Financial Times and Bloomberg and both funders and beneficiaries are quick to discipline a school for a drop in ranking.
The Research Two-Sided Market
The funders of research are mainly governments (in the US, primarily the federal government funding agencies) and donors. The beneficiaries are extremely varied. Sometimes in university medical research, the beneficiaries are sufferers of a particular disease. But other times, it is really hard to figure out who the beneficiaries are. In business schools, a lot of research is for the benefit of other business school professors, as argued by this refereed journal article.
The Heart of the Tricky Strategy Matter
These are two distinctive two-sided markets that share a production process centrally featuring one class of human asset — professors — that makes up the biggest chunk of the budget of the university’s twin production process. Those professors produce both education and research — which have different funders and different beneficiaries.
Generally, the more expensive class of professors — the tenure-stream professors — favor producing research over producing education.
Sally Blount, terrific dean of Kellogg who overlapped with my time as dean of Rotman, once made an insightful comment to me about this trickiness in business education. While in sciences, research is luxuriously funded by governments and donors, there are very few research dollars for business research. So, in business education, research is primarily (but implicitly) funded by students who don’t like paying for something that doesn’t benefit them directly. And as I pointed out in this article, the salaries of tenure-stream business professors are kept inflated by the chronic under-production of business PhDs exacerbating this tricky issue for business schools.
The trickiness is in running the core production process — dominated by tenure-stream professors, who also go on to make up the vast majority of university leadership — to keep the main funders of university education (state governments and students), the main beneficiaries of university education (students), the main funders of university research (federal government agencies and donors), and the main beneficiaries of university research (society at large) simultaneously happy.
University Strategy Imperatives
Universities need to recognize that they are and act explicitly as a double two-sided platform. With a single operation, it must well serve funders of education, beneficiaries of education, funders of research, and beneficiaries of research. That is going to require more focus. Universities aren’t going to be able to appeal to broad ranges of all four.
Each university will need to focus more tightly on fields in which funders value what the university can deliver for the beneficiaries who the funders are interesting in benefiting — and help those funders understand and appreciate the degree to which the beneficiaries receive the desired benefits. To the extent that the beneficiaries are funders too (as are students), universities better make the value equation work first and foremost for them — or they will have a revolt on their hands.
They need to stop doing things just because a university ‘does those kinds of things.’ They need to have a rationale that is compelling for the two sides of the relevant market. Cross subsidization is being driven out faster in the modern world than ever before. Universities cross-subsidize to a high degree and that behavior is going to get hammered. That is, those that take resources from funders of education and use it for research, or vice versa, or take money from one discipline and move it to others, are going to feel the wrath of their funders and beneficiaries.
The key is to get your core production factory working for both two-sided markets — or you better figure out how to get out of one or the other two-sided market.
Practitioner Insights
Should universities be scrutinized? Hell yes! For them to argue that they shouldn’t be is self-indulgent, narcissistic and, in the end, self-defeating.
But the same rules apply as with customers and shareholders in the world of business. If you let them order you around, you are toast. Customers don’t know answers — they can only reliably articulate problems. If you give them the answer they ask for, they will often not want it. Similarly with shareholders, if you do what they demand, you might as well just close shop. That is certainly the case for activist hedge funds — you might as well listen to your poodle as to Bill Ackman (unless it is about real estate)!
Universities shouldn’t automatically do what funders and beneficiaries ask for or demand. But they shouldn’t ignore it either. They should listen and use the insights to figure out what strategy choices they need to make to be a platform that is awesomely valuable to matched sets of funders and beneficiaries. If you can’t be such an awesomely valuable platform to such a pair, it is the signal that you should get out of that line of business — before you are forced out.
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As a reminder, I am doing a PTW/PI podcast series with friend Tiffani Bova. The seventh in the series will be on LinkedIn here on Wednesday, June 4th at 12 noon EST and 9am PST. Look forward to seeing you there.
