Teaching is my passion, writing gives me joy and finance is my playground. While I am blessed in being able to immerse myself in all three, my activities put me in three businesses, education, publishing and financial services, that are begging to be disrupted. In fact, as disruption starts to challenge the status quo in all three businesses, I have a front row seat to observe how they react to these changes and perhaps add to their discomfort.
The targets of disruption
As technology and globalization disrupt one business after another, it is useful to start with a simple question. Why do some businesses get targeted for disruption and others left alone? As I see it, there are three characteristics that businesses that get disrupted seem to share:
  1. Sizable economic footprint: The probability of a business being disrupted increases proportionately with the amount of money that is spent on that business. Using this template, it is easy to see why financial services (active money management, financial advisory services, corporate finance) and education are attracting so many disruptors and why publishing offers a smaller target.
  2. Inefficient production and delivery mechanisms: A common characteristic that disrupted businesses share is that they are inefficiently run, and neither producers nor consumers seem happy. Consumers are unhappy because producers are non-responsive to their needs and deliver sub-standard products at premium prices, but producers seem to have little to show in surplus. In education, for instance, students (especially under graduates at research universities) complain that they get a bad deal for the money they spend but colleges collectively seem to have trouble balancing their budgets, as is evidenced by their frequent and frantic attempts to raise money from alumni to cover their unmet needs. Publishers claim that their business models are being threatened by Amazon, while textbooks still cost outlandish amounts of money. Even in finance, where there are a few big winners every period, it is becoming increasingly difficult to find entities that win big consistently, and consumers of financial services are not exactly happy campers.
  3. Outdated competitive barriers and inertia: If these businesses are so big and inefficiently run, you may wonder what has allowed them to continue in existence for as long they have. The strongest force that they have going for them is inertia, where consumers have been programmed to accept the status quo: that it should take four years to get an undergraduate degree, that you need professional (paid) help to invest and that it makes sense to pay outlandish amounts for new editions of textbooks (on accounting, economics or mathematics) that are little changed from the old editions. Adding to the protections are regulatory or licensing requirements that have long outlived their original purpose and serve to protect incumbents from insurgencies. I have posted previously on how universities have bundled together screening, classes, networking and entertainment into packages that students have to take whole or leave and publishers and financial service companies have their own bundling variants.

The Dance of the Disrupted: The Five Stages

One of the enduring challenges that we face is explaining why disrupted businesses take so long to respond to disruption. Why did retailers not react faster to online retailing, in general, and Amazon, in particular? In a more updated version, what is it that is stopping traditional cab service companies from responding better to the car-sharing services like Uber and Lyft? I will let corporate strategists hash out the answers to those questions, but watching the education business respond to disruption has given me some perspective. With apologies to Elizabeth Kubler-Ross, I see disruption working its way through disrupted businesses in five stages, starting with denial and ending with acceptance.

Stage 1: Denial and Delusion

The first reaction to a disruptive challenge at most established businesses is delusion and denial, the delusion coming from the belief on the part of the existing players that the established way of doing business is the only (and best) way, notwithstanding widespread dissatisfaction on the part of both producers and consumers, followed by denial that others can do it better. I see this clearly in the education business, where I hear university overseers, administrators and faculty all express shock that anyone would question the Rube Goldberg contraption that forms the modern university education and conviction that no one outside the hierarchy understands education like they do.

Stage 2: Failure and False Hope

In most businesses, the initial wave of disruption usually fails, both because the disruptors do not understand the businesses that they are trying to disrupt and/or ran foul of the rules of the game (written by the establishment). Thus, Napster’s initial foray into the music business ended in it being shut down and the online retailing challenge was derailed (at least temporarily) by the tech market collapse in 2000. In the education business, the MOOC phenomenon was the shooting star that challenged the education establishment five years ago but it looks like it has fizzled out, partly because its providers mistook a university degree for a collection of courses. That initial failure was a moment of relief for the education establishment, since it reinforced its sense of superiority, and has created the hope among some in it that the disruption has passed.

Stage 3: Imitation and Institutional Inertia

The threat of disruption scares the establishment, though it moves in conventional ways to counter the disruption: by mapping out long-term plans and trying to borrow ideas from the disruptors. Those moves, while initiated with fanfare and backed up by resources, are generally undermined by an unwillingness on the part of those who benefit from the status quo to give up or compromise any of their existing privileges. In the education business, this “me too” phase is in full force, as universities create online course and some even offer online degrees, with a few faculty contributing willingly and a large majority going along either grudgingly, or not at all. If the only way that traditional colleges can compete with online education is by forcing professors to be accountable for the classes they teach (tying hiring, pay and tenure to teaching quality more than to research output) and firing those who do not measure up (no matter how productive they have been in their research), do you think that proposal has any chance of succeeding at a modern research university? I do not!

Stage 4: Regulation and Rule Rigging

The initial disruption may fail but it exposes both the weaknesses of the existing system and ways of getting around its defenses. Just as Napster softened up the music business for the assault of Apple’s iTunes store, the failure of MOOCs has offered valuable clues to disruptors as to what they need to do differently to beat universities at their game. In this post from September 2014, I laid out what I think will characterize the first successful online university: a combination of student screening, top-notch classes, discussion and interaction forums and networking opportunities , and I remain convinced that it will happen sooner rather than later. I predict that the education status quo will respond as other disrupted businesses have in the past, with a combination of complaints about unfairness and bad quality of the disruptors and

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