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Universities: The Problems with Academic Conglomerates

October 16, 2018

 

Major research universities are struggling with the forces of rising tuition, demographic changes, online learning growth, pressure on research funding, volatile endowment earnings, and overall dissatisfaction with graduate employment opportunities. All these are trends with significant risks for university departments, colleges, and central administrations.

 

In practicality, research universities are similar to corporate conglomerates in structure, but suffer from limited degrees of freedom. A university can be viewed as a conglomerate of independent businesses: colleges, divisions, and school. All of these “businesses” differ by norms such as intellectual traditions and educational objectives. The university supports these by serving as a platform for attracting and allocating resources.

 

The corporate strategy behind conglomerates involve economic value derived from the coinsurance of risks across its businesses. Conglomerates are able to attract a lower cost of capital as lenders take solace into diminished idiosyncratic risk by one business will be offset by other parts. Whebn units under perform, conglomerates are able to restructure by selling unprofitable divisions, or by breaking up  / spinning out divisions.

 

Yet, universities struggle with such steps partly due to the fact that not all strategic options available to a business are accessible to a higher-education conglomerate. Some barriers universities have to face are regulation (e.g governmental approval) and the stickiness of faculty contracts. Also, the interests, expectations, and demands of past and present donors, and alumni have to be considered, to avoid issues regarding public image.

 

Keith Knutsson of Integrale Advisor commented, “Universities are struggling with problems that need strategic re-thinking. Looking forward, if these issues are not curbed, a larger problem could arise.”

 

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