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The Letter From: Industry Fragmentation (II): Consolidation Strategies

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("The Letter From" is on hiatus through December. This is an "encore presentation" from April 11, 2005 - before edbizbuzz came on the scene. Consider it an opportunity to judge my predictive capacity, an introduction to academia's dean of business strategy, and an application of his analytic approach to the school improvement industry.)

Last week‘s letter concluded that the school improvement industry is fragmented for most of the reasons identified by Prof. Porter in Competitive Strategy (1980); not merely the “newness” that goes with emergence.

These factors include the: ease of entry into the market, lack of significant economies of scale the closer the offering gets to the teaching-learning relationship; diseconomies of scale in community relations and quality assurance activities; diverse demands placed on providers by schools and districts; balkanized nature of government regulation; and large numbers of owners interested less in profit margins than personal fulfillment or social mission.

This week's letter reviews the prospects for industry consolidation.

Porter says “The payoff to consolidating a fragmented industry can be high because the costs of entry are by definition low, and there tend to be small and relatively weak competitors who offer little threat of retaliation” Overcoming fragmentation is fundamental to larger providers’ business strategies and an implicit assumption of outside investment in school improvement.

He identifies five consolidation strategies:

1. “Create Economies of Scale or Experience Curve.” The most promising
opportunities for economies of scale in school improvement lie in sales and marketing. For example, publishers, software firms, and internet-based service providers and are in many respects marketing and sales channels. Having invested years in building relationships with educators, they need “stuff” to sell. In contrast, small firms find the two functions severely taxing. Offering services through established brands while servicing clients through the developer may hold promise.

2. “Standardize Diverse Market Needs.” Today's school districts are attempts at homogenization, in the sense that they blend many different kinds of students and teachers together in each of their schools. The result is a false standardization based on average student scores and political satisficing. To the extent that NCLB’s AYP provisions incentivize districts to differentiate students and teachers, opportunities open up for an “authentic” standardization based on networks of like-minded students, teachers, and schools. Today, Supplementary Educational Service providers can connect directly with the students most amenable to their offerings. Comprehensive School Reform providers try to re-order school districts by requiring supportive principals and school staff “buy-in.” Charter school operators present themselves so as to attract teachers and students who share their vision.

3. “Neutralize... Aspects Most Responsible for Fragmentation.” Porter notes that “when the causes of fragmentation center around the production or service delivery process... overcoming fragmentation requires decoupling production from the rest of the business.” Local factors constantly intrude on efforts to standardize or create economies of scale around the core function of teaching and learning. Some degree of customization will always be required to serve each student, teacher, school building and district. Managing these details on a national scale from headquarters is a fool’s errand. Large regional franchise agents balance local needs and corporate quality expectations in other industries. There may be similar payoffs in school improvement.

4. “Make Acquisitions for a Critical Mass.” "In some industries there may
ultimately be some advantages to holding a significant share, but it is extremely difficult to build share incrementally because of the causes of fragmentation.”
This is the century-old story of text book publishing. The most likely scenario for a repeat in school improvement involves those same firms. The firms founded to change teaching and learning - such as Edison, PLATO, Renaissance, Educate also have been making acquisitions. But these players are big fish in a small pond. After they have winnowed the market over the next 5 -10 years, expect the publishing houses to gobble many up.

5. “Recognize Industry Trends Early.” Industry history reveals no sustainable “first mover” advantage. Education Alternatives, MediaSeek, and Alternative Public Schools are memories. Few firms started in the 1990s have realized the plans on which investment was based.. Aside from acquisition, strategies to overcome fragmentation take foresight, and discipline rarely demonstrated in any industry. Acquisition is also beyond the financial capacity of most providers. Providers that have done well in the fragmented market have focused strategies and stuck with them - National Heritage and America’s Choice come to mind.

Next week: Strategies for success in a structurally fragmented market.

Listen to this and the rest of my weekly podcasts since April 2005, here.

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