Nonprofit Industry Analysis Essay

Industry Analysis of Nonprofit Institutions

Nonprofit educational institutions compete for resources and market share like any other entity. “The same competition for resources, customers, fund balances (profits) and endowments exist, and higher education is facing the same demands from its customers, students and parents, as well as from its revenue sources… alumni…” More broadly, both for profit and nonprofit firms act to create value. Harvard College, like its competitors in the Ivy League, is a private, nonprofit institution. Harvard creates value by accomplishing its mission, to educate “citizens and citizen-leaders for our society.” While for profits and nonprofits compete differently, qualitative criteria such as reputation and trust

play a greater role in securing competitive advantage for nonprofits than they do for profit-driven enterprises, which is especially true of the Ivy League.

The question is: should elite educational institutions – in this case, the Ivy League – be evaluated under the same strategic planning concepts and models as the for-profit enterprises when analyzing their financial aid choices? We adapt Michael Porter’s five-forces model by replacing the singular bargaining power of buyers with both that of the user and funding groups, which better represent the nonprofit interests of these institutions.

Structure of Industry: Porter’s Five Forces Analysis+

This industry analysis focuses on the competitive landscape of the Ivy League at the introduction of the Harvard Financial Aid Initiative in 2004.

Industry Rivals: Medium to High

For the most part, Harvard’s closest rivals are the other seven universities within the Ivy League: Brown, Columbia, Cornell, Dartmouth, University of Pennsylvania, Princeton, and Yale. For the purpose of this analysis, we won’t be examining other elite institutions (such as Stanford) as direct rivals.

Reputation and rankings, location, curriculum and student programming differentiate schools within the Ivy League – and it is worth noting that many would consider the differentiators between these eight instructions to be minimal when compared to the rest of the higher education market. While each school has a slightly different value proposition based on the unique experiences each campus offers, they lead to similar post-graduate opportunities and are therefore forced to compete on other criteria, such as financial aid packages. Rivalry was dampened prior to the early 1990s due to common agreements between institutions on financial aid decision and faculty compensation. However, these sorts of strategies have been suppressed due to regulatory intervention.

Threat of New Entrants: Low

There are high barriers to entry into the Ivy League, which serves the incumbent schools well by protecting their current market. Ivy League schools are generally viewed as the most of prestigious colleges and are ranked among the best universities worldwide. This group of schools established a strong brand, in part, due to their outsized head start – seven of the eight schools were established in the United States colonial period (the exception being Cornell, founded in 1865). Outside of brand and reputation, entry by another school is still difficult. Entering the Ivy League would mean competing on extensive administrative operations, world-class faculty, pervasive facilities and grounds, and alumni bases with legacies well over hundreds of years old. There is an exceedingly high fixed cost to total cost ratio, as university facilities cannot be sold easily or used as collateral to repay bank loans. This financial structure requires these organizations to quickly operate at full or near capacity, as measured by enrollment, to have a chance of realizing competitive economies of scale. An additional barrier to entry within these extremely research-oriented institutions is the existence of intellectual property and technology transfer offices within most university systems. These offices protect and monetize university research, which represents additional cash flows.

Threat of Substitutes: Medium

When it comes to receiving a “good” education, there are certainly other viable alternatives to the Ivy League, such as private liberal arts colleges and public universities. There are also for-profit colleges targeting niche markets that deliberately price their degree programs between the public and private university tuition schedules, putting the for-profit education sector at the price elastic point of the higher education demand curve and creating a viable substitute to traditional nonprofit education. In a few select industries, high quality work experience might be valued over a degree – providing another substitute to the Ivy experience as some employers no longer regard the one-time provision of an undergraduate (or graduate) degree as sufficient. All of this depends on why one wants to attend an Ivy League school – the above relates more to attending for the purpose of career and employment, but one is often looking for the experiential learning that takes place outside the classrooms, which cannot be fully replicated and creates a smaller threat of substitutes.

Buyer Power [Users]: High

Students that gain admission to these highly selective universities usually have options to choose from when it comes to receiving a college education. While student demand for the Ivy League schools outweighs supply, the abundance of substitutes (other elite, non-Ivy institutions) does present other options should an Ivy League school not meet their needs. These eight schools aggressively recruit the same standout top 10-15% of high school classes, feverishly recruiting this target market in anticipation of sustaining high SAT and GPA admission averages, along with consistent graduation rates – all of which enhance and distinguish their brand. This creates the predictable, but unintended consequence of giving students power to choose among options and negotiate financial aid packages.

Freely available and instantaneous information regarding course descriptions, college amenities, and school rankings help limit information asymmetries, giving potential students (and, if applicable, their parents) greater power of choice. Students also consider many of their personal preferences and needs in making the decision – from financial aid to location to experience. School also rely on alumni donations which warrant that students choose to attend initially and feel happy years after attending so they donate after graduation.

Buyer Power [Funding Groups]: High

In order to admit a truly diverse class of students, the ability to provide funds for low-income, high-achieving students is critical. The tuition funding comes from donations, endowments, grants and loan assistance. Alumni donations and the signaling it provides is critical to a university’s success – not only in providing tuition assistance but also signaling the value of the education received. Merit scholarships have grown as more and more selective institutions have been drawn into a bidding war for outstanding students.
That said, resistance to this practice has traditionally been at the top – the Ivies and about twenty-five other prestigious and highly selective colleges, mostly in the Northeast, have stayed with an elite tradition of restricting aid to the needy. While schools within the Ivy League still lose students to merit-giving institutions, they attract so many good students that they do not have to buy them with offers that might trigger a merit bidding war among themselves (the claim is that they already give merit awards to everyone by choosing all their students more stringently than most colleges pick merit winners, and then give big subsidies across the board from their rich endowments).

Supplier Power: Medium

The Ivies spend considerable amounts of capital in supplies -- increasing marketing efforts, investing in better extracurricular activities, and recruiting more prestigious faculty. Professors and educational leaders are often attracted to the prestigious names and career benefits of Ivy League schools (but many move between these schools over their careers).

These professors are also partially responsible for the quality of the education that students receive, giving them additional supplier power. Faculty boasting a strong research track record, genuine differentiation in their specialization, and a strong value to students will be able to command stronger university contracts. The differentiation provided by faculty increases customers’ demand for the institution.

Nonmarket Considerations

Some economists have claimed this small group of highly selective institutions differ from other schools in that they give student aid for essentially nonmarket reasons—out of social responsibility and to obtain the educational benefits of a diverse student body.

If they gave no aid at all, so the argument goes, they could find enough outstanding, full-paying students to fill their classes without losing academic quality. This argument, we believe, underestimates the interplay between mission and market that has evolved over time for even super-elite private colleges, such as the Ivy League. Many of these institutions were humble-born hundreds of years ago, using aid like any other college to attract students. Today, they could get by without giving such aid, but they likely would not be able to recruit such a range of “interesting” students or produce such a diverse student body, socially and racially, due to societal income stratification. Not offering aid would alienate customers (prospective students including full payers), alumni and other donors—not to speak of existing students, faculty, and public opinion. Aid-supported diversity, in other words, is not just an ideological and educational value; it has become a market asset too. If a highly visible college looked too socially exclusive it would, over the long term, face economic and political scrutiny. In their own way, top colleges are still a part of the market system. With an understanding of the competitive forces at play within the Ivy League, we now examine how firms set

prices.