TO: Mr. Wolfgang Gatterbauer
FROM: Zeynep Yayla
SUBJECT: Online MBA in Tepper
DATE: Feb 25, 2015

1) In order to analyze the industry structure of higher education, I will use Porter’s five forces. In terms rivalry, the higher education industry consists of 4000 colleges and universities, 10% of them having over 50% of the market share. Since the demand for higher education is constantly increasing, the number of students applying to universities are increasing which results in a rise in the combined revenue generated by the industry. Being in a growth industry in a sense reduces rivalry since non-profit and for-profit universities target different niche markets. In terms of barriers to entry, extensive federal regulation and economies of scale by well-known colleges are the most crucial obstacles for potential new entrants. Approximately 90% of for-profit universities’ cash flow consists of tuition and fees; and the 64% of these tuition and fees consist of federally backed student loans. (King 9) As a result, there is a decrease in the earnings of for-profit colleges, which is a problem any potential new entrant needs to consider. Also, colleges and universities are large and established organizations with established administrative operations, facilities and alumni base. All these characteristics, which make up for a large economies of scale, present a barrier to any potential new entrants. In the higher education industry, threat of substitutes is high since there is a high price difference between non-profit, private and for-profit schools. For-profit colleges purposefully price their programs between the non-profit and private institutions, which is effective for profit making, but with a negative side effect of minimizing the switching costs between public university and a for-profit institution. (King 10) In terms of degree of buyer power, we can say that the students have free and available information on colleges, the courses they offer and their rankings, which give students a power of choice. The bargaining power of suppliers in the higher education industry is low compared to other industries since there are numerous suppliers offering similar products. (Except for the top 10% colleges that are highly prestigious and selective.) Currently, the majority of the higher education institutions, including Tepper School of Business, offer in-class education. However, there also is an increasing demand for online learning, and with the establishment of MOOCs providers such as Coursera and edX, it is easy to predict that in the future, a large portion of higher education will be done through online learning. There will be several online and offline distribution channels. Although online channels will be more popular than offline channels due to convenience and affordability, offline channels will still own a certain share of the market since they offer in-class learning and interaction between students and professors, which online distribution channels cannot. Figure 5 is a reconfigured version of the higher education value chain by Pathak and Pathak. (Rathee, Rajain 5) According to this version, technology, research raining and development, teaching and learning, academic administration and procurement are the primary stages of the higher education value chain. The main reason I chose this value chain rather than the typical ones is that Pathak and Pathak take into consideration the technological developments in the higher education industry. They included technology (teaching independent of physical presence) as an “enabler and creator of cost advantage and enhanced efficiency.” (Rathee, Rajain 4) In the higher education industry, students and universities are the main stakeholders. Universities create value by providing a well-designed education program through the assistance of technology and motivated and skilled faculty. Also, the in-class atmosphere allows students to connect with each other and with the