November 07, 2014

Why Harvard Business School Should Spin Out HBX

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A Case Study In The Disruption Of Higher Education

The lessons from any number of industries teach us that those that truly innovate — fundamentally transforming the model, instead of just incorporating the technology into established methods of operation ­ — will have the final say.  – Clayton Christensen

BOSTON, Mass., July 1, 2020 — Bharat Anand is reeling in his office. He has just gotten off the phone with HBS Dean Nitin Nohria. Instead of the congratulatory call he had been expecting, Nohria informed Bharat as gently as he could that HBX was being shut down.

“But we’ve exceeded almost all of our targets: 20% more students, 15% more revenue, quality scores of 98%, and although we’ve had to trim our pricing, we are very close to achieving our financial targets,” Bharat said almost pleadingly.

“I’m very sorry, Bharat. You know that you are way over your expense budget and getting worse; and the revenue at HBS has been dropping. Last year we lost two of our best professors.  After you made them online stars, they were recruited away with the promise of shares in a competitor. Still, you deserve credit for HBX providing a new technological infrastructure for HBS. The trustees have a strong faith in our HBS product, and they have decided that we can no longer tolerate a lower-priced alternative eating into that revenue stream.”

This year Harvard Business School launched a new online learning venture called HBX. The goal of HBX is to teach the language of business to undergrads, non-business grad students, and those early in their careers. The initial HBX offering known as CORe (Credential of Readiness) comprises three interlinked courses: Business Analytics, Economics for Managers, and Financial Accounting. The price is $1500 for the 9-week program.

HBX is being implemented as a high-end, slick online program. It uses a sophisticated new virtual classroom called HBX Live! that provides a state-of-the-art approximation of the in-person HBS case classrooms. The subjects are taught by endowed Harvard Business School professors who also teach Harvard’s full-time MBA students. According to the school, the initial students who enrolled were 1/3 from Humanities, 1/3 STEM, and the rest from economics, social science, and business undergraduates.

The approach that Harvard is taking with HBX has been carefully designed not to encroach on the HBS market. It is what Clayton Christensen, author of The Innovative University: Changing the DNA of Higher Education from the Inside Out, would call a sustaining innovation or product line extension, rather than disruptive innovation. This is a safe path, with minimal implications on the Harvard brand; and in the short term it would seem not to have any adverse financial effect on HBS. The cash flow of HBS and its executive education programs is protected. The program could even feed selected graduates into HBS.  Overall, it has the endorsement of strategy experts like Michael Porter. But is it best for HBS in the long term?

Christensen has described the serious, perhaps existential threats, facing colleges and universities today. Looming over higher education is the weight of $1.2 trillion of student debt. The markers of disruption have begun to appear, signaling dramatic change. These markers include:

  • New market entrants serving previous non-consumers. In higher education, examples of previous non-consumers include under- or unemployed individuals looking to change career paths, college drop-outs, employees at companies who have set up in-house institutes to teach new specialized or functional skills. These non-consumers become consumers when a product of much lower cost becomes available that meets their needs.
  • A growing technological core. For higher education this includes competency-based learning systems, adaptive learning technologies, and online learning platforms such as those developed by Khan Academy and EDx. Note that it was once believed that Massive Open Online Courses (MOOCs) were disruptive, but the lack of a viable MOOC business model precludes this.
  • Product-related standards. The concept of digital badges and certification is growing in the education field. The Open Badge Initiative has added momentum to the trend.
  • Modularity. As products become standardized, they become more modular and lend themselves to outsourcing to the low cost provider. Competency-based education may be accelerating this trend toward modularization.

When disruptive innovation enters a market, the leaders in that market almost universally make decisions to sustain their short term financial metrics and migrate up-market. By so doing, they leave the innovation and learning experience that grows around the emerging technological core to the new market entrants. As the established players are forced into a diminishing niche, they are unable to compete for the newly-dominant customers, who are fully satisfied by the innovative technology that has now grown to become mainstream.

Today, Harvard Business School is at the very high end of the education market. They are investing in HBX as a way to sustain their position in a world where online teaching is taking on a growing role. In the short term this path is revenue-positive and consistent with their strategy. But it means they will not participate in the disruptive innovation taking place in the market. A bolder and arguably wiser decision, would be to create a separate entity to sell a new online education product to current non-consumers, similar to what IBM did with their independent PC business unit in 1980. If Harvard built their new product around the emerging technological core and priced it to sell to non-consumers, they could potentially become the leader of the next wave of higher education.

Here are some indicators of how different the next wave of education will be from the current campus-based university version. Harvard Business School has 900 students. The new HBX has 600. By comparison, the University of Phoenix has 135,000 business students. Today, video lectures with online professors (sometimes actors) can be edited and produced to perfection; no hems and haws, no unplanned hesitations; all miscues are edited out. The lighting and even background music can be designed to subtly, but perfectly enhance the recorded presentations. At ground-breaking community colleges, hotbeds of innovation, students who finish competency-based courses do not get a completion grade, but rather are certified as fully competent in the subject matter. These schools have a completely different business model from Harvard.

It is rare that an incumbent, even a market leader, can survive true disruption. To do so, requires boldly spinning off an independent venture unencumbered by the processes of the established parent. HBX is a high quality project, staying true to the high end strategy of HBS. It will certainly help sustain the leadership of HBS within its existing market. But Clayton Christensen’s school is missing the opportunity for a live a case study of industry-changing innovation. We will see how they fare in 2020.

About The Contributor:
Bob NilssonDirector of Vertical Solutions Marketing

Bob Nilsson is the director of vertical solutions marketing at Extreme Networks. In this role, Mr. Nilsson leads the Extreme Networks strategy and programs for vertical markets including Healthcare, Higher Education, K-12 Education, Federal Government, and Hospitality. He has over 30 years of experience in marketing IT systems to Global 1000 companies worldwide. Before joining Extreme Networks Bob was VP Marketing at Clear Methods. Prior to that Bob held senior marketing positions at Digital Equipment and HP. Bob holds an SB degree in EE from MIT and MBA from Columbia Business School.

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