Matthew W. Burr MBC 645: Industry Analysis Project: For-Profit Universities in the US (IBIS 6113b) Industry Definition/Executive Summary: For-profit universities are higher education institutions. They offer opportunities for advanced education and training. The industry has experienced tremendous growth, until the last five years. The changing laws and regulations, schools shuttering operations and the increased awareness of student loan debt has caused a downward trend in enrollments and revenue throughout the industry. “Despite experiencing robust growth early in the five-year period, operators have come under scrutiny; which has significantly constrained industry expansion.”i Legislation has haltered the industry growth as, congress and the US Government Accountability Office investigated for-profit universities in 2010 and the five largest for-profit universities have continued to be investigated into 2016. “Ongoing negative publicity has reduced enrollment levels for for-profit universities; overall, enrollment is expected to fall at an average annual rate of 5.8% to under 1.3 million students in the five years to 2016.”ii Revenue throughout the industry did fall at an average rate of 5.6% during the five-year period to $22.7 billion. However, over the next five years’ growth is forecasted in the for-profit industry, at an annual rate of 1.3% growth to $24.3 billion in revenue. For-profit universities experience growth very differently than other industries. In times when unemployment is high, there is an increase in application and admissions, due in part to joblessness and time for academic advancement. The for-profit university system is in the mature stage of operation, but can evolve and grow in global markets. As technology, has evolved, as to has the way in which education is now instructed. The technological evolution has been the driving force behind the explosive growth of the for-profit university industry. This analysis will focus on Porter’s Five Forces of the for-profit universities industry in the United States. Threat of Entry: Threat of new entry into the for-profit university market is low. The evolving regulations and growing student loan debt crisis has stifled new entrance into the market. The two largest players in the for-profit university system are DeVry Inc. and Apollo Group Inc. “See Appendix A” From the data provided in Appendix A, we can see that DeVry Inc. and Apollo Group Inc. make up only 18.9% of the market. Although an open market does exist, new entrants face a steep curve in gaining credibility and attracting consumers. The challenges faced by new entrants is product differentiation, economies of scale, cost advantage and governmental barriers. Each university is offering similar programs and degrees, related to course work and field of study. “The For-Profit Universities industry has a low level of capital intensity…for every dollar spent on wages, industry operators will spend $0.07 in capital investment.”iii Even with smaller upfront investment related to academic development and instruction; an organization must invest in a learning management system (technology) and a marketing campaign. “Online courses require investments into technology to support program delivery, a factor that will increase capital costs during the outlook period.”iv Additional barriers include new regulations. These have been established to hold for-profit universities accountable for

gainful employment numbers, financial aid and aggressive recruiting practices. “See Appendix B legal changes” With the increased legislation, entering this market would be a challenge for any organization. However, opportunity exists in a global context, with building opportunity domestically. Globalized for-profit education is now in the infancy stage, compared to a saturated and mature domestic market. “Globalization within higher education is relatively low…for-profit university has been increasingly globalized…more than 40,000 students attend American for-profit colleges in about 20 countries.”v The threat of new entrance is low, due in large part to the industry maturity and the evolving regulations forcing industry change. Substitute Competition: The threat of substitute competition in the for-profit university industry is high. The opportunity to substitute is due in large part to the return on investment (student loan debt), cost and quality. “Over their college career, students at for-profit colleges will have borrowed $4,400 more than the average college student and $13,300 more than an academically equivalent student at community college...As such an advantage is nowhere evident, the net returns to attending a for-profit college are considerably lower than those to attending an alternative college type. The returns from a community college dominate the returns to for-profit college.”vi (See Appendix C for cost comparison) A study by the Rand Corporation, in June of 2014 provided information comparing the performance of a for-profit institution and state universities in resume submission. “Our results provide no indication that resumes that list for-profit college credentials generate more employer interest that those that list community college credentials. If anything, the opposite may be true.”vii For-profit buyers borrow more money and have less professional opportunity. Organizations continue to view for-profit education differently as shown in the Rand study. My experience in Human Resources holds true, I have not hired anyone with a for-profit degree, it is less valuable. Other substitutes include technical training schools, apprenticeship programs, free training, professional certifications (HR specific HRCI and SHRM) and webinars. “Stanford and MIT, for example have recently started putting coursework online free of charge.”viii As the education industry becomes more competitive, substitution of for-profit education is an industry threat. Free training is only effective in certain situations. Community colleges, trade schools, apprentice programs and state colleges are a true threat of substitution. These substitutes are government funded and offer true career development and professional opportunities. Substitution will remain high in the industry. Industry Rivalry: Industry rivalry is high in the for-profit university industry. There are currently 1,500 for-profit universities throughout the United States. Competition within the industry has increased, as schools have shuttered operation and legislation has forced accountability. “As a former recruiting representative at Institute, we were told to enroll everyone that walked in the door. The background did not matter, they wanted the federal loans and we had a mandate to enroll any person interested.” Former Employee (2016, October, 22). Personal Interview M. Burr. As seen in “Appendix B,” recent regulation was passed to restrict these aggressive recruiting practices. The diversity of competition varies based on the program, with most of these

institutions offering associate, bachelor, master and doctorate related coursework; competition to enroll will remain high. “For-profit curricula vary in terms of their level and focus, though generally the majority are below university level and focus on a few high-demand, business-friendly subjects.”ix The differentiation is built on name, success and aggressive marketing. Recent University of Phoenix ads have a current NFL player Larry Fitzgerald, discussing the completion of his degree. Competition throughout the industry also varies based on geographical region. “Concentration can be high in specific geographic regions; the number of players in a specific geographic market often depends on the area’s population and its demographics. Large schools often have multiple locations in cities where traffic is a problem.”x Cost conditions throughout the industry are relative. According the College Affordability and Transparency Center, “the national average for 2-year for-profit schools is $12,500 and 4-year for profit schools is $15,500.”xi In this mature market, competition will continue to increase as school’s shutter operations and larger for-profit universities grow through acquisitions and mergers. Globalization will also increase rivalry within the industry. Buyer Power: The bargaining power of students in the for-profit university industry is low to medium. As legislation, student loan pressures and demands have changed. Buyers have gained additional bargaining power. “Ongoing negative publicity has reduced enrollment levels for for-profit universities; overall, enrollment is expected to fall at an average annual rate of 5.8% to under 1.3 million students in the five years to 2016.”xii The rate of unemployment and disposable income also affects bargaining power. “As per capital disposable income increases, Americans are more likely to take out loans or pay tuition fees to attend industry institutions, thereby increasing demand per industry.”xiii The for-profit university system is 90% funded by student loans. The student loan debt problem is significant to buyer’s price sensitivity or substitution of for-profit education. “See Appendix D for student loan debt information.” “Our job was to get the students to apply and file the student loan paperwork, we discussed at a high-level student loans, fees and tuition costs.” Former Employee (2016, October, 22). Personal Interview M. Burr. Negotiation or bargaining power related to fees and tuition and loans is nonexistent. The only option to negotiate, is an admissions fee waiver. The buyer has limited option for vertical integration or obtaining the education themselves. No buyer can obtain an associates, bachelors, masters or doctorate degree through free online training, right now. The inability to transfer credits from a for-profit to a non-profit or from a for-profit to a for-profit has a tremendous impact on limiting buyer bargaining power. Many schools will not accept these credits, forcing buyers to retake and pay more for additional credits. Once a buyer starts a program, there is a limited option of leaving the program without incurring additional fees. As legislation evolves and changes are made, the buyer’s bargaining power could increase. As the demand for higher education increases, buyer bargaining power will remain low to medium. Supplier Power: Supplier power in the for-profit university industry is medium to high. “For-profit universities compete on a variety of factors, including quality, price and accessibility…competition has

increased over the past five years as the market for for-profit education continues to grow.”xiv The market is mature and saturated with multiple options for education. A determining factor in supplier power is, “the ease with which the firms (student’s) in the industry can switch between different input suppliers and the relative bargaining power of each party.”xv “I have seen other admissions advisors tell prospective students that the credits earned at Institute will transfer to a 4-year institution. The credits will not transfer and students must start over if they apply somewhere else.” Form Employee (2016, October, 22). Personal Interview M. Burr. As discussed in limiting the buyer’s power; the inability to transfer credits handcuffs the student into continuing with the program, increasing supplier power and generating additional revenues. Accreditation is required for any institution to be eligible to receive federal student loan revenue, the accreditation process increase the supplier power relative to prices and quality standards. Also, increasing the supplier power are industry associations. “In addition, there are a number of industry associations that provide assistance to for-profit universities…the Association of Private Sector Colleges and Universities is an organization that promotes for-profit colleges…the association has 1,400 members.”xvi These associations promote the schools that belong to the association, strengthening the bargaining power of these supplier(s) locally, nationwide and globally. Supplier power will increase as globalization of for-profit universities continue to evolve. “Globalization within higher education is relatively low…for-profit university has been increasingly globalized…more than 40,000 students attend American for-profit colleges in about 20 countries.”xvii Building a brand globally will only strengthen a universities brand domestically. Positioning and strength will belong to those who are proactive in developing a global footprint. Supplier power is constant; legislation and overhaul of the student loan system could weaken supplier power. Supplier bargaining power will remain medium to high based on future demand and globalization. Conclusion: The for-profit university industry in the United States is mature but in an evolutionary state. The industry has become more heavily regulated and a much greater emphasis being placed on the cost of education (for and non-profit). Within the past two years we have seen eighteen for-profit schools close and four more are due to close by 2018. The biggest names are Everest College and ITT Technical Institute.xviii Regardless of the negative publicity, closures, student loan crisis and increased legislation, “in the five years to 2021, IBISWorld forecasts that revenue for the for-profit university will increase at an average rate of 1.3% to $24.3 billion.”xix Similar to any industry purge, the strongest and more innovative institutions will survive and prosper. Major players like DeVry Inc. and Apollo Group Inc. will grow through mergers and acquisitions. Much of the five forces analysis will remain the same within the industry. The industry will only see significant change through legislation and globalization. The challenge faced by the for-profit university industry has been and will continue to be credibility. Employers view for-profit university degrees differently. The analysis has provided evidence that there continues to be a need for for-profit universities and the industry will continue grow and evolve; through innovative technology, marketing and an increased presence globally.

References

i McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database. ii McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database. iii McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database. iv Ibis page McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database. v McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database. vi Liu, Y., Belfield, C., (September 2014). Evaluating For-Profit Higher Education: From the Education, Longitudinal Study. Retrieved from http://ccrc.tc.columbia.edu/media/k2/attachments/capsee-evaluating-for-profit-els.pdf viiDarolia, R., Koedel, C., Martorell, P., Wilson, K., Perez-Arce, F., (June 2014). Do Employer’s Prefer Workers Who Attend For-Profit Colleges? Evidence from a Field Experiment. Retrieved from https://www.rand.org/content/dam/rand/pubs/working_papers/WR1000/WR1054/RAND_WR1054.pdf viii Ibis page McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database. ix Kinser, K., Levy, D., (February, 2005) The For-Profit Sector: U.S. Patters and International Echoes in Higher Education Working Paper Series. Retrieved from http://www.albany.edu/dept/eaps/prophe/dept/eaps/prophe x Ibis page McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database. xi U.S. Department of Education (2016). College Affordability and Transparency Center. Calculation retrieved from https://collegecost.ed.gov/catc/ xii Ibis page McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database.

xiii Ibis page McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database. xiv Ibis page McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database. xv Grant, M., (2016) Contemporary Strategy Analysis xvi Ibis page McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database. xvii Ibis page McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database. xviii https://www.goodbyeloans.com/closed-for-profit-schools/ xix Ibis page McCormick, R. (2016). IBISWorld Industry Report 61131b. For-Profit Universities in the US. Retrieved October 18, 2016 from IBISWorld database.

Appendix A

For-Profit University Market Share

Appendix B

Current Laws and Regulations for For-Profit Universities in the United States

Holding Programs Accountable for Preparing Students for Gainful Employment

Graduation Rate and Job Placement Disclosures: As proposed, this rule would require proprietary institutions of higher education and postsecondary vocational institutions to provide prospective students with each eligible program's graduation and job placement rates, and that colleges provide the Department with information that will allow determination of student debt levels and incomes after program completion.

Approval of Additional Programs: As proposed, this rule would require institutions to provide: 5-year enrollment projections; documentation from employers not affiliated with the institution that the program's curriculum aligns with recognized occupations at those employers' businesses; and that there are projected job vacancies or expected demand for those occupations at those businesses before new programs can become eligible to participate in federal student aid.

Ensuring that only eligible students receive federal funds. Generally, students are eligible for aid only if they have a high school diploma or pass an "ability to benefit" test, and only if their academic standing is satisfactory. As proposed, the regulations would make the following clarifications:

High School Diploma: The proliferation of high school diploma mills has called the validity of some secondary school credentials into question. As proposed, this rule would require institutions to develop and follow procedures to evaluate the validity of a student's high school diploma if the institution or the Secretary has reason to believe that the diploma is not valid or was not obtained from an entity that provides secondary school education.

College Credits: As proposed, this rule would extend eligibility for federal student aid to students without high school diplomas after they successfully complete six credits of college work. This implements a provision that was included in the Higher Education Opportunity Act of 2008.

Ability to Benefit: The Department is responsible for approving test materials developed by testing companies. The Government Accountability Office recommended several ways that the Department could improve its oversight of how ATB tests are approved and administered. As proposed, this rule would follow up on those recommendations.

Satisfactory Academic Progress: Every institution is required to have satisfactory academic progress policies. Audits and institutional program reviews have uncovered policies that meet the current regulatory standards but permit students to receive funds even though they may not be meeting the institution's progress standards. As proposed, this rule would require a structured and consistent approach to evaluating a student's

academic work, while continuing to provide flexibility to institutions in establishing their policies.

Verification: Each year, several students are required to confirm the information on their Free Application for Federal Student Aid (FAFSA). Due to changes in the law and a new data retrieval process with the Internal Revenue Service, as proposed, this rule would, in many cases, reduce the amount of information students would have to provide to institutions.

Protecting consumers from misleading or overly aggressive recruiting practices, and clarifying State oversight responsibilities. As proposed, the regulations will strengthen three current rules that are designed to protect students and taxpayers:

Misrepresentation: During public hearings and negotiated rulemaking sessions, the Department heard numerous complaints from students enrolled in programs where they felt misled on what was and was not being offered, the way programs could be paid for, and their job prospects upon completion. To protect consumers, as proposed, this rule would strengthen the Department's authority to act against institutions engaging in deceptive advertising, marketing, and sales practices.

Incentive Compensation: The Department heard reports of aggressive recruiting practices resulting in students being encouraged to take out loans they could not afford, or enroll in programs where they were either unqualified or could not succeed. Though current laws prohibit schools from compensating admissions recruiters based solely on success in securing student enrollment, regulations known as "safe harbors" allowed this practice to go on under certain circumstances, which we believe violate the spirit of the law. As proposed, this rule would remove all the "safe harbor" provisions.

State Authorization: State authorization is required by the Higher Education Act for a postsecondary institution to participate in federal student aid, and other federal funding programs. Some states have failed to establish how they approve and monitor postsecondary programs. As proposed, this rule would clarify this important State responsibility.

Clarifying the courses that are eligible for federal aid, and the amount of aid that is appropriate.

Credit Hour: Credit hours are the metric used by the Department to measure eligibility for federal funding. Currently there is no standard definition for a credit hour, which has led to reports of institutions awarding more credits (and drawing down more federal funds) than are deserved. To address this issue, the regulations as proposed would define a credit hour and establish procedures for accrediting agencies to determine whether an institution's assignment of a credit hour is acceptable. Recognizing that "seat time" is not the goal, the proposal allows for equivalent measurement of learning outcomes.

Written Agreements: A postsecondary institution can deliver a portion of another

institution's educational program through a written arrangement. Problems have surfaced when the two institutions are controlled by the same entity or do not meet certain participation requirements. As proposed, this rule would limit the amount of a program that can be provided by a school in an arrangement and prohibit arrangements between ineligible institutions that have had their Federal student aid participation revoked.

Retaking Coursework: Currently students who repeat coursework cannot have the course they repeat count towards the calculation of a full-time course load. As proposed, this rule would expand the definition of full-time student by allowing such courses to count if the student is in a program that registers by the term or semester.

Determining When a Student Has Withdrawn: Currently, loopholes complicate the measure of how much federal funding must be paid back if a student drops out of a program. As proposed, this rule would eliminate loopholes and clarify the calculation of returning federal funds to the Department by defining when a student is considered to have withdrawn from a program. It will also clarify the circumstances under which an institution is required to take attendance for calculating a return of federal funds.

Disbursing Federal Student Aid Funds: Under current rules, many students are not receiving their Federal student aid funds in enough time to obtain their books and before the start of school. As proposed, this rule would ensure that the neediest recipients could acquire books and supplies by the seventh day of their payment period.

http://www.ed.gov/news/press-releases/department-track-implement-gainful-employment-regulations-new-schedule-provides-additional-time-consider-extensive-public-input

Appendix C

Percentage of Students Borrowing to Finance Education

https://www.brookings.edu/blog/brown-center-chalkboard/2016/06/23/the-for-profit-student-debt-dilemma/

Appendix D

Student Loan Debt Information (Total Increases For-Profit and Non-Profit/State)