Unit 5: Business and Multi-Business Strategy

Case 3: The Apollo Group, Inc. [University of Phoenix]

Richard B. Robinson

1 A 55-year-old college professor at San Jose State University with a PhD from Cambridge University and previous teaching jobs at Maryland, Ohio State, and Northern Illinois, John Sperling was a surprise entrepreneur when he started the Apollo Group, parent company of the University of Phoenix, in 1976. Ambitious, his goal was to revolutionize conventional higher education. Most people would say that Sperling, recently celebrating his 91st birthday, has done just that.

2 Rather than catering to 18- to 22-year-olds looking to find themselves, Sperling focused on the then-neglected market of working adults. And he recruited working professionals as teachers, rather than tenured professors. UOP (on-campus and online) has more than 33,000 faculty members with less than 5 percent being full-time. Most radical of all, while nearly all other universities are nonprofits, Sperling ran his university to make money. Those ideas sparked overwhelming resistance from the education establishment, which branded UOP a “diploma mill.” The result? “We faced failure every day for the first 10 years,” said founder Sperling, who turned 91 in 2012.

3 From an IPO adjusted price of $0.76 to a mid-2005 high of $98, Apollo’s stock reflected a company BusinessWeek considered among the top 50 performing companies on Wall Street. The Phoenix-based company, whose day-to-day operations were still generating average annual revenue growth exceeding 30 percent over that time, saw its revenues reach $5 billion in 2010 with net income exceeding $550 million. It has also joined the S&P 500.

4 Tuition at Apollo averages only $18,000 a year, 60 percent of what a typical private college charges. A key factor, says Sperling, is that universities for the young require student unions, sports teams, student societies, and so on. The average age of a UOP student is 35, so UOP doesn’t have those expenses. It also saves by holding classes in leased office spaces around the country, and online, By 2010, over 75 percent of UOP students studied at University of Phoenix Online.

5 By 2010, the UOP had become the dominant player in the online education market that still has lots of potential for growth. The bricks-and-mortar University of Phoenix was one of the first institutions to identify and serve the burgeoning market for educating working adults. In the late 1980s, long before the Web debuted, the school began to experiment with offering its classes online. It got off to a slow start, “and we lost money for a number of years,” recalled Brian Mueller, Apollo’s former president.

6 As a result of this head start, however, UOP’s online option was ready to capitalize on an online-education market that began exploding in the mid-1990s. Today, it is estimated that over 10 percent of the U.S. students earning a degree via the Net are enrolled through the UOP’s online option. UOP’s online option also garners an outsize share of the industry’s revenues—about one-third of the total. That’s because as the market leader, it can charge higher tuition than most rivals. Undergraduates pay a little more than $18,000 a year at UOP, while students seeking a master’s degree pay nearly $25,000. “They’re by far the giant in this industry,” says Eduventure market analyst Sean Gallagher.

Source: © 2012. This case was developed based on publicly available information from the Apollo Group, Inc., the University of Phoenix, interviews with UOP students and professors, and selected reports as cited.

7 Online education is rapidly growing, but it is still just getting started. “There are 70 million working adults in this country who don’t have a college degree,” says Gallagher. Increasingly, they realize that they need a degree to get ahead. But because they often have a family as well as a job, studying online is the most convenient solution. Howard Block, an analyst at Banc of America Securities, predicts “dramatic enrollment growth” for UOP’s online option. He expects that half of the students in postsecondary education will one day make at least some use of the Internet to earn their degrees.

GLOBAL OUTREACH

8 UOP began to seriously tap the international market with its online option in 2005, initially “bringing in about 500 students a month,” said Mueller. “But that’s just the tip of the iceberg.” Though the UOP started offering online classes only in English, it has begun to offer courses in Spanish and plans to introduce Mandarin soon as well. Ironically, UOP has done all this with plain-vanilla technology. While other companies charged into online education with dazzling digital content, UOP has historically offered primarily a text-heavy format that can easily be accessed with dial-up modems.

9 This might sound like a recipe for failure. But UOP realized that interaction with humans—the professor and other students in the class—was far more important to success than interaction with the digital content. Thus, UOP keeps its classes small, averaging just 12 students. And to combat the Achilles heel of distance education—a high dropout rate—it offers its students plenty of hand-holding, including round-the-clock tech support. The result: 65 percent of its students go on to graduate.

10 Some see plain technology as a potential negative for the virtual college. “At some point, UOP online will need to upgrade the sophistication of its platform,” warned Trace Urdan, an analyst with ThinkEquity Partners, a boutique investment bank. That will require more spending on research and development and information technology, he warns, which could crimp margins. Still, any extra spending could be easily offset if UOP bumped up its class size to 15 students, argueed Block. Even with today’s small classes, operating profit margins now top 20 percent. As if listening to them, the UOP now has an excellent, visual explanation of how this type of multifaceted online educational approach works.1

THE ONLINE TREND

11 The dot-com bubble may have burst in the world of commerce, but the promise of harnessing the Internet for paradigm-changing growth—and even profits—still thrives in the halls of academia.

12 A decade after the dot-com fizzle began, e-learning has emerged from the wreckage as one of the Internet’s most useful applications. Nearly 90 percent of the 4,000 major colleges and universities in the United States now offer classes over the Internet or use the Web to enhance campus classes, according to market researcher International Data Corp. About 7 million students took online classes from U.S. higher-ed institutions in 2010 according to John G. Flores, head of the U.S. Distance Learning Assn., a nonprofit trade group outside Boston. And it’s not just a U.S. phenomenon: students from developing countries are jumping online, too.

13 These classes continue to open new horizons for the fastest-growing segment of higher education: working adults, who often find it difficult to juggle conventional classes with jobs and families. Adults over 25 now represent nearly half of higher-ed students; most are employed and want more education to advance their careers.

14 E-learning is an influence in the traditional college class as well. Online classes won’t replace the college experience for most 18- to 24-year-olds. But from the Massachusetts Institute of Technology to Wake Forest University in North Carolina, colleges are using the Web in on-campus classes to augment textbooks and boost communication. And students, far more technology savvy than many of their professors or administrators, are using Web-based tools, social media, and many other approaches to morph Web-based capabilities into their academic experience with or without their university following along, or even approving.

MASS MARKET?

15 Quality is a problem, which is a key reason why many online students drop out. That will force a further shakeout, eliminating mediocre players. Many colleges grapple with such issues as how much time their faculty should devote to e-teaching. And long-established rules make it difficult for online students to get financial aid. Even as these problems are resolved, “online learning will never be as good as face-to-face instruction,” argues Andy DiPaolo, director of the Stanford Center for Professional Development, which offers online graduate classes to engineers.

16 Ultimately, the greatest e-learning market may lie in the developing world, where the population of college-age students is exploding. Just as cell phones leapfrogged land-based telephones in many developing countries, so may e-learning help to educate the masses in countries that lack the colleges to meet demand—and can’t afford to build them.

COST-EFFECTIVE

17 E-learning is a good fit with the military, where frequent transfers complicate pursuing a degree. The U.S. Army awarded PWC Consulting a $453 million, five-year contract to create an electronic university that allows soldiers to be anywhere and study at Kansas State University or any of the 24 colleges involved in the program.

18 eArmyU already has changed the perspective of soldiers like Sergeant Jeremy Dellinger, 22, who had been planning to leave the Army to go back to school when his basic enlistment ends. Then he enrolled in eArmyU to earn his bachelor’s degree from Troy State University in Alabama. “Now I can get my degree and still do the work I love” as a supply sergeant, says the Fort Benning (Ga.)-based soldier. Like Dellinger, about 15 percent of those who have signed up so far have reenlisted or extended their commitment. By cutting turnover, “eArmyU could almost pay for itself,” says program director Lee Harvey, since it costs nearly $70,000 to train green recruits.

19 Corporations, too, see e-learning as a cost-effective way to get better-educated employees. Indeed, corporate spending on e-learning is expected to more than quadruple by 2015, to $35 billion, estimates IDC. At IBM, some 500,000 employees received education or training online last year, and 75 percent of the company’s Basic Blue class for new managers is online. The move cut IBM’s training bill by $750 million last year, because online classes don’t require travel.

CAUTIOUS ELITES

20 Phoenix Online aside, the big e-learning winners so far are the traditional nonprofit universities. They initially captured nearly 95 percent of online enrollments, figures A. Frank Mayadas, head of e-learning grants at the Alfred P. Sloan Foundation. Most active are state and community colleges that started with strong brand names, a faculty, and accreditation, says Mayadas, as well as a tradition of extension programs.

(Pearce 3-1-3-4)

Pearce, John, Richard Robinson. Strategic Management, 13th Edition. McGraw-Hill Learning Solutions, 2016-01-02. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.