Shakeouts in Everything?

Shakeouts in the business world are pivotal moments in rapidly evolving or maturing industries where the competitive landscape undergoes significant transformation. A shakeout period is characterized by the exit from the market of numerous firms, usually because they cannot sustain operations due to intensified competition, technological advancements, changing consumer preferences, or regulatory changes. During a shakeout, the surviving businesses are typically those that have achieved a level of efficiency, innovation, or scale that gives them a distinct competitive advantage. This process is considered a natural evolution within the business lifecycle, usually promoting a healthier, albeit more consolidated, industry landscape where the remaining players are better equipped to serve market needs (see Schumpeter's "creative destruction").

While shakeouts abound in most industries, so far, the education sector has been relatively immune from the usual shakeout cycle. Leading experts on higher education have forecasted doom for decades, mostly because they expected online courses to render many second and third-tier residential colleges unnecessary. Michael Lennox of the Darden Business School at the University of Virginia wrote in Forbes in 2013 that "the shakeout is beginning," yet a decade later, very few 4-year nonprofit schools have actually closed or merged.

The fact is that colleges have myriad ways of staying open, albeit often as diminished versions of their former selves. We see much the same in private, independent elementary and secondary schools. Despite being on the ropes, schools seem to have multiple ways to survive for a while longer, just like their higher-ed peers.

The problem is that at some point Ernest Hemingway's famous quote in The Sun Also Rises (1926) takes hold. In the book, a character named Mike Campbell is asked how he went bankrupt, to which he responds: “Two ways. Gradually and then suddenly.” This succinctly captures the idea that significant changes can accumulate over time before suddenly becoming apparent and overwhelming.

Enrollment numbers do not tell the whole story. Closures are often foreshadowed by years or decades of net tuition revenue shortfalls, even if total enrollment stays strong. Because of this, a closure is rarely "abrupt" to insiders. Board members and administrators can see it coming if they look, even if they underestimate the speed of closure's approach.

But they don't. "Seeing it coming" requires facing the facts with a clear-eyed, rational view. The late Daniel Kahneman's work on cognitive biases and decision-making shows that human reason, left to its own devices, is apt to engage in a number of fallacies and systematic errors. Humans have various and sundry tactics for avoiding seeing it coming, all of which are likely to be evident in boardrooms of institutions in distress.

Seeing things as they are may be the principal role of the board. This is not to say that management is dishonest; rather, school administrators have a vested interest in putting a best face on circumstances, especially with their bosses. Board members need to be able to unflinchingly assess their institution's condition and prospects for survival and then act accordingly.