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Transcript of 12-6-7 Disruptive Text Article
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DIGITAL DIFFUSION AND THE PROSPECT OF DISCONTINUOUSCHANGE IN THE
HIGHER EDUCATION TEXTBOOK INDUSTRY
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1. INTRODUCTION
Digital diffusion has indisputably changed the nature of publishing. For example,
previously published materials were predominately available at brick and mortar stores. Now,
virtually all printed material is available through the internet. The techniques of publishing have
changed from setting type to desktop publishing. This has reduced costs to large publishers and
opened the realm of publishing to authors with limited resources.
This raises the specter of the magnitude and character of this change, Is this change
sustaining and enhancing the existing compatancies of dominant incumbent publishers?
Alternatively, does this change undermine these existing compantcies, disrupt the status of
incumbents, and provide opportunities for new entrants to succeed in the industry?
Aspects of the effects of this digital diffusion and its concomitant change have been
explored in other chapters of this volume, For example, Faustino (2012) investigated the
disruptive elements and trends in the general publishing industry. Colbjrnsen (2012) examined
edge and ad hoc innovators in relation to digital publishing and book apps.
This chapter focuses on whether the effects of digital diffusion into the higher education
textbook sector has fomented sustaining or disruptive innovations.
2. The Background of Higher Education
Textbook Publishing.
Historically, higher education textbook publishing has been a relatively low technology
industry in comparison to the usual technology focused industries studied by innovation scholars.
In fact, prior to the advent of digital publishing, the printing process employed in textbook
publishing was a direct and close descendent of the Guttenberg press process of the 15th century.
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As a result, the financial success of college textbook publishers has largely been based on its
distinctive traditional business model.
The traditional business model involves publishers marketing to educators who make the
decision to adopt a textbook. After the adoption decision by educators, publishers are essentially
free to sell the textbooks to the captive market of students without the influence of any price
competition. The product was traditionally a printed, hardbound textbook, which was revised on a
regular cycle in order to render used textbooks obsolete. This business model, more than the actual
textbooks themselves, has been the centerpiece of the financial success of the dominant, incumbent
publishers.
Over the past twenty-five years, the book publishing industry has produced a succession
of new products, many based on the utilization of digital technology. These include supplemental
materials such as online cases and chapter readings homework that can be answered and corrected
on a computer, and textbooks custom designed by individual professors. Given the fundamental
nature of the traditional industry business model, if these innovations are disruptive, they are
bound to undermine the traditional business model; if they are sustaining or continuous, they will
perpetuate the traditional business model (Christensen, & Raynor,. 2003; Johnson, Christensen,
and Kagermann, H. 2008).
These issues are examined through a comparative case study of the McGraw Hill Higher
Education division, a company that has been a leader in the industry for over one hundred years,
and Flat World Knowledge, Inc., a relatively new entrant into the industry and a digital native that
applies (at least in part) a non-traditional, Freemium business model.
Tthe analysis in this study will examine the consistency of available case evidence with
one of two innovation scenarios. Scenario one, that digital diffusion is disrupting the traditional
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college textbook publishing business model of McGraw Hill and other incumbent publishing
companies, which provides an opportunity for new market digital publishing entrants (such as Flat
World Knowledge) to penetrate the book publishing market. Scenario two, that digital diffusion
of e book publishing business models and offerings are promoting a wave of sustaining or
continuous innovation that supports the traditional business model and consolidates the dominance
of incumbents (such as McGraw Hill).
This chapter is comprised of six sections.
This introduction comprises the first section.
The second section reviews the conceptual framework (including a literature review).
The third section describes the studys case comparison methodology.
The fourth section presents the rcase study findings based on interviews, the analysisof annual reports and other public records.
The fifth section sets forth the studys findings, its implications for the chaptersprimary study questions, and reviews areas for future study.
3. THE CONCEPTUAL FRAMEWORK
As previously noted, the recent history of the college textbook publishing industry has
a. included the introduction of new products and services, mainly based on digitalcapabilities. It is necessary to aexamine these innovations in the context of thetraditional college textbook publishing business model to assess the nature andcharacter of these developments and the magnitude of change that they have fomented.Sustaining and Disruptive TechnologyChange .
The concept of the technology based change is well founded in th discipline of
Management (Tushman & Rosenkopf, 1992; Tushman & OReilly, 1996; Christensen, 1997;
Christensen et al, 1998; Loch & Huberman, 1999; Romanelli & Tushman, 1994; Gersick, 1991;
Klepper, 1996). Technology based change is generally divided into two categories: incremental or
sustaining change or innovation, and revolutionary, discontinuous, fundamental, radical,
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transformational or disruptive change (Tushman & Rosenkopf, 1992; Tushman & OReilly, 1996;
Christensen, 1997; Christensen et al, 1998; Loch & Huberman, 1999; Romanelli & Tushman,
1994; Gersick, 1991; Klepper, 1996).
III.
The disruptive innovation paradigm provides a strong framework to analyze the nature and
transformational potential of business innovations. Clay Christensen is credited with introducing
the concept of disruptive innovation into the lexicon of business management (Christensen, 1997;
Christensen and Raynor, 2003; Christensen, Anthony, and Roth, 2004).
The disruptive innovation model divides innovations into two general categories, disruptive
innovations and sustaining innovations (Christensen, 1997: p. xviii). Sustaining innovations are
developments that improve on the existing performance of a product, process or business model.
In contrast, disruptive innovations bring to a market a very different value proposition than had
been available previously (Christensen, 1997: xviii). Often, disruptive innovations
underperform established [products, processes, or business models] in mainstream markets. But
they have other features that a few fringe customers value. Products based on disruptive
[innovations] are typically cheaper, simpler, smaller, and, frequently, more convenient to use
(Christensen, 1997: xviii).
Disruptive innovations usually enter the market in one of two ways (Schmidt and Druehl,
2008: pp. 347-369). First, low-end disruption occurs when the new product enters the low-end of
the existing market and then moves up-market (ibid.). New market disruption occurs when the
innovation meets a need for customers that are distinctly different than those of existing low-end
customers (ibid.).
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The defining characteristic of sustaining innovation is its competency enhancing nature;
that it results in developments that improve on the existing performance of a product, process or
business models (Christensen, 1997; Christensen et al, 1998).
The primary feature of disruptive change or innovation is that it is competency destructive
and undermines the status quo of the industry in which it occurs (Christensen, 1997).
Under the Christensen paradigm, disruptiveinnovations enter an industry at the low quality
or minimal feature and low priced market segment or industry tier. (Christensen, 1997: xviii). As a
result, incumbents cede the lower end of the market to new entrants because the new technology
does not adequately serve the core, most profitable customers of incumbents (Christensen, 1998).
This allows the technology to gain a secure foothold in the industry.
Other studies have also examined the underperformance of incumbents presented with
discontinuous technological innovation. These articles attribute this phenomenon to inertia,
filtering, processes, procedures, and culture oriented to the prior technological regime or dominant
resign (Tripsas & Gavetti, 2000; Tushman & Rosenkopf, 1992; Tushman & OReilly, 1996;
Hannan & Freeman, 1977, 1984; Henderson & Clark, 1990; Gersick, 1991; Sull, 1998).
The Christensen branch of this theory suggests that as new technologies develop, their
offerings move towards the main stream, and incumbents are driven towards niche position
(Christensen, 1997). This results in the former dominant firms losing market share and moving
toward extinction (Christensen, 1997; Christensen et al., 1998).
The existing literature is inconclusive as to whether an ambidextrous strategy (i.e. a
strategy that continues to pursue the prior dominant design and also pursues the new innovations
vying for a position of dominance) can successfully address the challenges presented by
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discontinuous innovation. Christensen (1997) found that such a strategy interferes with
incumbents future successes by holding them captive to obsolete cultures, filters, routines, and
processes. However, Tushman and OReilly (1996) suggest that such an ambidextrous strategy
can successfully serve as a bridge between the prior dominant design (ie. print publishing) and the
new innovation (i.e. the emerging new dominant design, i.e.. the digital publishing).
For the purposes of this study, five factors characteristics are analyzed to examine the
sustaining or disruptive character of the relevant innovations. First, whether the innovation brings
new value to the market (disruptive) or helps the status quo value (sustaining). Second, whether
the innovation as entered the market place enhances the performance of existing technology
(sustaining) or underperforms the existing technologies (disruptive). Third, whether the innovation
is less expensive, simpler, or more convenient (disruptive) or not (sustaining). Fourth, whether the
segment of the market served by innovation is ceded by incumbents as they move up market
(disruptive) or whether incumbents compete for this market share (sustaining). Fifth, whether new
entrants capture the lower end of the segment or industry, aggrandize their position, and then move
up market as the innovation is further developed (disruptive) or not (sustaining). A chart of these
factors is attached as appendix A.
4. CASE STUDY DATA AND
METHODOLOGY
a. Case Comparisons:
b.
.
This study examined how an incumbent textbook publisher with a legacy of print
publishing business models and print offerings and a new textbook publisher that was born digital
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developed their digital offerings and business models over time. Specifically, we wanted to
investigate how the diffusion of digital technologies and tools for digital publishing shaped the
evolution of digital publishing choices and business models for each publisher. Extant theory on
disruptive and sustaining technology and associated impacts on organizational and industry
evolution inform the construction of scenarios for the higher education publishing sector, and the
expectations for publisher choices within each scenario.
The research approach consisted of an archival study of two contrasting cases of publishers.
A case-based approach is justified for exploring the meaning and validity of new analytical
categories like our disruptive and sustaining innovation based organizational change, since as Yin
(1993) points out, a case-based approach is especially advantageous when the analytic goal is to
relate a narrow range of phenomena (ie digital diffusion) to a broader context ( ie. textbook
publishing) . Case-based research is especially applicable when, as here, the boundaries between
phenomenon (digital publishing technology diffusion ) and context (e.g. digital publishing
strategy) are somewhat unknown and require clarification (Yin, 1993, p. 13; Eisenhardt and
Graebner, 2007). Multiple case studies are an appropriate method for theory building (Eisenhardt,
1989) and analytical generation (Yin, 1993, p. 37).
Case One; An Incumbent Publisher with a Print Publishing Legacy.McGraw Hill has been involved in the Higher Education Textbook Industry for more than
one hundred years. It is a publically traded company. Accordingly, the history of its business
conduct is widely available through its annual reports, 10K filings, and press accounts regarding its
business conduct.
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In summary, McGraw Hill is a venerable publisher that has adapted its offerings and
perhaps been at the vanguard of employing digital technology. It is a dominant incumbent in the
industry.
Case Two: A Digital Native Publisher Flat World Knowledge, Inc.
Flat World was created as an online digital publisher that, at least in part, offers access to
textbooks for free. Flat World is essentially an upstart publisher that touts an innovative business
model that includes a Freemium revenue model component. This involves providing free access to
digital versions of its textbooks on its website. It also offers inexpensive black and white versions
of its textbooks and other study materials to students through its website.
In summary, Flat World is a new entrant with digitally based innovations that, on first
examination, appear to target the low end of the market
c. Data Sources.
The data analyzed in this study is was derived from a number of public and private sources.
Data on McGraw Hill is principally derived from twenty-five years of annual reports, from
1986 through 2011. This focus on annual reports is particularly appropriate since these documents
describe both the factors influencing the market place and a firms strategies to exploit this
environment. They are subject to significant regulation, oversight by the SEC, and substantial
scrutiny by independent auditing firms and by industry analysts. Thus, the information set forth in
annual reports in generally considered reliable. This data is supplemented by 10K reports,
memoranda released by firms, and financial, strategic, and market share data held by such firms.
Data regarding Flat World was derived from information provided by the company to
publishers and academics, information in trade publications and the general press. Further
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information was also obtained through interview with the president of Flat World Knowledge, Jeff
Shelstad, conducted telephonically on February 1, 2012.
Industry and market share data are derived from industry trade associations such as the
National Association of College Stores, the American Textbook Council; from research and data
developed by textbook publishers such as McGraw Hill and Flat World Knowledge, and from on-
line retailers such as Amazon, from public sources such as the Department of Education, and from
industry coverage in the New York Times.
IV. Case Findings;
MCGRAW-HILL
McGraw-Hill is a seminal participant in the modern higher education textbook market.
The company was founded in 1898 and has been continually involved in textbook publishing since
that time. Presently, McGraw-Hill is the third largest college publisher in the United States
(McGraw-Hill Higher Ed. Intensifies Its Strategy : p. 1).
Its education division is responsible for a significant component of the parent companys
revenues. For example, MHE contributed 40.1% of the parent companys 2009 revenues (The
McGraw-Hill Companies, Inc. Company Profile, 2010: p. 8). The Higher Education,
Professional and International Group, known as HPI, serves the college and university markets,
as well as professional, international and adult education markets (The McGraw-Hill Companies,
Inc. Company Profile, 2010: p. 8).
Through most of its history, MHE has relied on the traditional educator focused business
model to produce extraordinary performance. In the historical absence of technological
innovation, publishers have employed a differentiation strategy focused on employing a rather
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small cadre of academically distinguished scholars to author textbooks, textbooks have been
published mainly in hardback format, and the final product was sold to students mainly through
dedicated college bookstores.
The traditional dominant design in the industry has been inextricably connected to its
unusual business model. The consumer value proposition component of the business model targets
the professors and administrators that select the textbooks and make the purchase decision. These
educators are the gatekeepers. The targeting of educators has involved deploying a strong sales
force to convince professors and educators to adopt the publishers textbooks. This has also
involved providing free textbooks and materials to professors and designing the publishers
offerings to appeal to solving the needs of professors (e.g. instructors notes, standard homework
assignments, pre-fabricated quizzes and exams). The profit formula component of the business
model is based upon purchases and payments from the captive consumer base comprised of
students (Koch, 2006). Thus, the key CVP component of the traditional business model largely
ignores the needs of the ultimate consumer, the students.
Historically, a further component of the traditional textbook business model is that
distribution has largely transpired at the college books stores dedicated to conducting business at
the institution where the educator is employed (CITE). This limited point of distribution has
further served to make the student purchaser a captive consumer, powerless to influence either
price or selection through the elementary economics principles of supply and demand.
Finally, the revision cycle rewriting existing textbooks renders prior editions largely
obsolete and forces students to purchase new textbooks at high prices.
Thus, in or about the early 1980s, at the advent of the digital era, McGraw Hill provided
print four color textbooks and published ancillary materials (e.g. workbooks, homeworks, practice
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tests), authored by distinguished scholars, marketed to educators that selected the required editions,
distributed mainly through college or university bookstores, and sold to a captive student body that
was forced to purchase the textbooks in order to pass the classes in which they were enrolled.
The issue explored in this study is whether the digital innovations that followed were
sustaining or disruptive. Specifically, were the new digital publications competency enhancing or
competency distructive? Did they target the low end of the market or simply help solidify market
share within the market? Did they bring new value to the market or help sustain the status quo
value? Did they undermine the traditional educator focused business model or help entrench this
business model? Did the innovations underperforms the existing technologies when they entered
the market or did they improve the performance of existing products and services? Were the
innovations less expensive, simpler, or more convenient? If the innovations served the lower end
of the market, did they cause dominant incumbants to cede the lower end of the market move up
market to continue with their prior offerings? Did the new digital offerings allow their adopters to
capture the lower end of the segment or industry, aggrandize their position, and then move up
market as the innovation is further developed?
McGraw Hills annual reports from 1986 through 1997 clearly demonstrate the firm
essentially continued to offer the products and adhere to the same educator focused business model
during this period.
In 1986, McGraw Hills college division was part of a unit referred to as the Book
Company (McGraw Hill annual Report, 1986, p. 21). The report states that its revenues were
based substantially on newer revisions of several publications.
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With regard to digital diffusion, the 1986 Annual Report prospectively refers to the
computer and communication revolution which will transform the industry (p. 1). In this context,
the firm also boasts about the introduction of its initial digital offerings, CD ROM products (p. 2).
At this time, the College Divisions sales were down. Specifically, revenues had
decreased by 17% over the previous year. From this time in 1986 until the present, the Higher
Education Division experience continual growth.
In 1988, the company restructured into three divisions: Publishing, Information Services,
and Financial Services (p. 1). McGraw Hill acquired Random House publishing for $200 million
(p. 6). This brought on experienced sales staff on board (p. 6). The firm also stated that its plans
for increased sales growth included a focus on new editions and revisions. In fact, the following
year, McGraw Hill stated that the take-over had netted twenty five new sales managers, 127 new
editions, and 113 new revisions (McGraw Hill Annual Report, 1989, p. 14).
Although it had previously recognized the advent of the digital revolution, the Annual
Report makes clear that digital products were not yet the focus of its business or future growth in
the 1980s. Nevertheless, the division grew 8.5% , up to $5.6 billion in annual revenues (McGraw
Hill Annual Report, 1988, p. 11). Future industry growth was anticipated by the predicted growth
in college enrollments (p. 11).
Thus, during the mid-1980s, McGraw Hill was clearly entrenched in the traditional higher
education textbook market. In this regard, its emphasis on sales staff and printed textbook new
editions and revisions is consistent with the traditional business model (i.e. target the gatekeeper-
educators, derive revenue from the captive student purchasers). Furthermore, the products were
still solely comprised of print materials. No innovations directed at the low end of the market are
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described; no competency disruptive innovations are described. To the contrary, the emphasis on
new editions and sales staff is directed to supporting the existing price structure with the existing
products.
The 1989 Annual Report hearkens McGraw Hills new, digital custom textbook printing
service. This is demonstrated by the fact that the company vaunts that it introduced the first
computerized publishing system that lets teachers customize a textbook to match their curriculum
(p. 3). The application of digital technology to mass produce customized textbooks is not
competency destructive. Rather, it simply results in a printed textbook that excludes chapters that
a professor would not cover and includes certain materials that would have assigned through been
supplemental reading materials. The company further indicates this customized product will allow
the company to succeed against the used book market and reduce inventories (p. 14).
Customization makes the applicable textbook unique and undermines the used book
market. Furthermore, the custom textbook is clearly directed to educators, not students, since it
solves the problem for educators of allowing them to have a book tailored to their expertise and
specific teaching needs. It is significant that there are no references to providing materials to
students on a more economical basis or competing on the basis of price. To the contrary, the
emphasis on new and revised editions and undermining the used book market is a tactic that tends
to prop-up existing prices or support price increases. Such a product is based on the publisher
having a data base of substantial depth and breadth to provide the educator with a sufficient
selection of materials. Developing such a data base required the significant resources of dominant
incumbents.
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This demonstrates that the early effects of digital diffusion into the industry produced
sustaining innovations, such as custom publishing, that helped to perpetuate the traditional
business model, entrench the position of the textbooks offered McGraw Hill, support the present
pricing scheme, and otherwise secure the dominance of incumbent firms.
For context purposes, it is necessary to review the phenomenon of premium pricing and the
used book market. The traditional business model essentially imbues publishers with monopolistic
pricing power. Specifically, when a publisher convinces an educator to adopt a textbook, all of the
students that are the ultimate consumers essentially have to purchase the textbook and, due to
copyright protection, no other publisher can produce the book. This practice insulates the
purchasing transaction from the elementary economic principles of supply and demand.
As a result, the price of many texts climb[ed] to $150 or more in the U.S. (is this data
based only on North America or USA data?) (The Future of Educational Publishing, 4/17/11).
From 2007 to 2008, the average student spent $488 (NACS, 2008). During the 2010-2011
academic year, the average annual textbook cost to a student had increased to approximately $900-
$1,000 (Weir, 2010). More importantly, college textbook prices have increased at twice the rate
of inflation . Increasing at an average of 6 percent per year, textbook prices nearly tripled from
December 1986 to December 2004 . (GAO, 2005). In 2010, college textbook prices had
increased by 11 percent (Weir, 2010).
A second phenomenon is recognized in these annual reports: The influence of the used
book market. The used book market developed through repurchase of used texts from students and
reselling the used books and sale to subsequent students by college book stores. Used textbooks
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have generally cost approximately seventy five percent of the new textbook price (Please provide
CITE). Each semester, the stock of used textbooks increased until it essentially undermined the
profitability of the new textbook by limiting the numbers sold. The 2009 College Store Industry
Financial Report disclosed that used textbooks accounted for over 30% of the sales (NACS, 2009).
To combat the influence of the used book market, the major higher education textbook producers
tended to shorten their revision cycles from 4-5 years ten years ago, to 3-4 years in the current
market (GAO, 2005).
In its 1992 Annual Report (p. 15), McGraw Hill patently refers to students resistance to
higher book prices (along with decreased enrollments) as a principal factor depressing growth in
College publishing division. However, McGraw Hills response was not devise some economical
textbooks or to revise its business model and compete on the basis of price. Rather, McGraw Hill
responded by shortening its the revision cycle (p. 15). This had been the traditional tactic
employed against the used textbook market.
However, McGraw Hill now employed digital innovations as well.
For example, the 1992 Annual Report promotes its Primus custom textbook publishing data base
as a response, claiming it encourages the purchase of new textbooks (p. 15). Another digital
strategy included developing digital supporting materials to encourage the purchase of new
textbooks (p. 15). These include videodisks, videotapes, tutorial software programs, and
computerized tests. This is an early reference to bundling digital products to support the sales of
its printed materials. Again, McGraw Hills application of new digital technologies was directed
to supporting the sales of its hardbound, printed textbooks under the traditional business model (a
competency enhancing application).
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One departure from were the McGraw Hill Overture Book series. Thi was a new black and
white imprint obviously directed at offering lower priced textbooks. As simpler product entering
at the lower end of the market, this had the possibility of assuming the characteristics of a
destructive innovation under the Christensen (1997) paradigm. However, Overture Books never
divided the market into an upscale and downscale segments, and did not take over the low end. In
fact, Overture Books was never mentioned in another annual report.
From 1993 through 1996, McGraw Hill continued with the same pattern. For example, in
1993 and 1994, the Annual Reports cite the used book market and students resistance to higher
text books as the cause of relatively flat sales (1994, p. 31). In fact, in its 1994 Annual Report,
McGraw Hill acknowledged that students were buying fewer textbooks. At the time, McGraw Hill
was the third largest college publisher at the time (p. 30). During the 1993 year, McGraw Hill
stated that despite staff cuts of 8%, the sales force was expanded by over 22% (p. 11). The sales
force was directed at persuading educators to adopt McGraw Hill textbooks.
Additionally, the company clearly recognized that the digital revolution must be a part of
its future. For example, the Annual Report states that McGraw Hill is capitalizing on the growing
demand for multimedia learning products (p. 9). It continued to emphasize its Primus custom
publishing product. In the three years since its introduction, Primus had expanded to over 1,000
campuses (p. 30). The company also referred to the growing importance of on-line, CD-ROM, and
other laser disk mediums (p. 8). As previously noted, these are educator focused materials that
help organize and lead classes, manage home works, and provided notes. Each of these
applications is competency enhancing in that they ultimately supported the marketing of printed
text books to educators, the cornerstone of the traditional business model.
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In contrast to the conservative nature of its applications of digital technologies, the 1994
Annual Report predicts the close of an era when information is pushed out to consumers and the
beginning of an era when is pulled in by broadchatchers (p. 5). This would seem to require the
firm to deviate the traditional products and business model, each which focused on pushing out
educational materials through professors to students However, as demonstrated by the subsequent
years annual reports, such innovation, either in products and services, or in its business model.
never materialized.
Perhaps the most important component of the 1997 Annual Report is the overt recognition
that bundling digital supplemental materials to printed, new textbooks was designed to combat the
used book market. McGraw Hill explained this practice and its effects as follows, the used book
market share has leveled off partially due to the creation of value packs where new textbooks are
bundled with components such as CD-ROMs or Web sites (P. 29).
This again describes the practice known as bundling. This involves bundling digital
ancillary products adopted by a professor to required textbooks (e.g. self-grading home works).
Students are able to gain a valid password only with proof of purchase of a new textbook. As a
result, students cannot share these materials or sell them on the used textbook market.
Furthermore, these supplemental materials were clearly educator focused. In this regard, they
alleviate educators from the burden of having to design such practice materials, quizzes and even
tests. Moreover, in some circumstances, the quizzes and tests are even automatically evaluated and
scored by computer analysis, relieving professors from the dreaded task of grading oppressive
numbers of quizzes and exams. Essentially, this bundling represents a sustaining or competency
enhancing innovation in that required the purchase of new printed textbooks monetized under the
traditional business model.
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McGraw Hill further indicated that Technological innovation continues to gain
momentum in higher education publishing, with demand for custom publishing and Web-enhanced
curriculums growing (P. 23). This substantiates that company was still focused on applying
custom publishing as a sustaining innovation to support the traditional business model.
In 1996, a significant factor was the divestiture of Shepherds by McGraw Hill in return for
acquisition of Mayfield publishers. It also acquired Times Mirror higher Education Group in late
1996 (p. 29). It engaged in the immediate revision of titles such as KnorrePuntos de Partida, an
Invitation to Spanish, GarrisonManagerial Accounting, which expanded the existing key frontlist
materials.
The role of McGraw Hills acquisitions in the context of industry consolidation also
demands review. If the digital diffusion was precipitating an era of destructive innovation, it
would have caused the dominant incumbent publishers to suffer some negative business
consequences such as contracting market share or revenue losses. However, McGraw Hills
acquisitions had the opposite effects. The 1994 acquisition of Random House provided increased
market share by adding significant titles and increased revenues. The additions of Mayfield and
Times Mirror had similar effects.
These acquisitions were part of a trend of industry consolidation. Four firms ascended to
essentially control the industry: McGraw-Hill, Pearson, Houghton Mifflin Harcourt and Reed
Elsevier.
Through the mid-1990s, the four big publishing companies [Pearson, McGraw-Hill, Reed
Elsevier, and Houghton Mifflin] absorbed dozens of independent textbook companies. Several
major educational publishing houses have disappeared as a result of these mergers and
acquisitions (American Textbook Council, 2005: p. 2).
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Thus, the consolidations have also helped sustain the dominance of the major incumbents,
including McGraw Hill. (U.S. General Accounting Office [hereinafter GAO], 2005; Koch,
2006).
In recent years, companies such as Reed Elsevier and Thomson have divested themselves
of education businesses, feeling education has lagged behind other areas in the switch to digital
distribution (Houghton Mifflin Plans $4B Acquisition of Harcourt, 2007). For example, in
2007, publishing giant Reed Elsevier put education publisher Harcourt up for sale (Houghton
Mifflin Plans $4B Acquisition of Harcourt, 2007). Harcourt was acquired by Houghton Mifflin
(Houghton Mifflin Plans $4B Acquisition of Harcourt, 2007).
The late 1990s resulted in a continued focus on using technology to develop sustaining
innovations to support the traditional business model. In this regard, each annual report included a
statement similar to the following: technology continues to be the key trend in higher education
for course management and content delivery, the division will aggressively pursue a variety of e-
initiatives, including the already successfulPageOut, e-books, eLearning sessions, the Online
Learning Center, and faculty training and support. (McGraw Hill Annual Report, 2001, p. 28).
Other than the e-book, virtually all of these digital based innovations were deployed to help market
the companys traditional printed textbooks and to support the traditional business model.
The major innovations introduced by McGraw Hill in the 21st Century have been based on
the continued diffusion of digital capabilities. ALEKS was also introduced in 2001; this is an on-
line evaluator and tutor for higher education math (McGraw Hill Annual Report, 2002, p. 13).
Grade Summit was also launched in 2001; this helps college students assess learning needs,
optimize study efforts, achieve better grades (McGraw Hill Annual Report, 2001, P. 13). Both
ALEKS and Grade Summit ultimately utilize technology to alleviate educators from performing
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these evaluations and tutoring functions. This focus on educators helps confirm the firms
perpetuation of the traditional business model and, hence, the sustaining nature of the
technological innovations.
McGraw-Hill launched its present custom educational publishing platform, Create, in 2010
(McGraw-Hill, Cengage Enhance Custom Offerings, 2010: p. 5). Create is a self-service
website that allows [professors] to create custom course materials print and eBooks by drawing
upon McGraw-Hills comprehensive, cross-disciplinary content (McGraw-Hill Website - Create,
2011). This includes 4,000 leading textbooks .. 5,500 articles 25,000 law and business
cases 11,000 readings (ibid.; McGraw-Hill, 2010 Annual Report, p. 8). It allows access to all-
rights-reserved, third party sources, such as the Harvard Business School library (McGraw-Hill
Website, Special Collections, 2011). It also allows educators to upload their own custom content
(McGraw-Hill Website - Create, 2011). According to McGraw-Hill Higher Education, custom
publishing has been increasing at 25% a year (McGraw-Hill, Cengage Enhance Custom
Offerings, 2010).
McGraw-Hill now offers about 95 percent of its current textbooks in eBook form,
featuring interactivity, search and note-taking functionality (McGraw-Hill Website Fact Sheet,
2011). However, e-textbooks are not a significant component of the market. In this regard, .
McGraw-Hill Connect is a comprehensive on-line, all-digital platform that serves as
interface between course materials and students (McGraw-Hill Website Connect, 2011).
Connect provides students with access to their professors recorded lectures, notes, Powerpoints,
practice exams, and homework assignments (Global Publishing Industry Profile 2009: p. 9). It
also gives instant feedback on homework (ibid.). The company indicates that it has experienced
strong growth in its Connect product (McGraw-Hill, Cengage Enhance Custom Offerings, 2010;
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McGraw-Hill, 2010 Annual Report, p. 30). As a result, McGraw-Hill is adding 170 new online
courses (ibid.).
McGraw-Hill also has formed a partnership with Blackboard Inc. to make its full Connect
materials fully compatible with, and accessible to students on their college or university
Blackboard sites (McGraw-Hill Website Fact Sheet, 2011).
McGraw-Hill predicts that technology will continue to be a key trend for course
management and content delivery (ibid.). A key McGraw-Hill strategy is to focus on driving
digital usage including e-books, homework support for students and online faculty training and
support (ibid.).
Needless to say, each these innovations is a tactic focused on persuading educators to adopt
McGraw Hill products and services and to help market its printed textbooks. In this regard, the
marketing and sales of these digitally based products is directed to universities and colleges and
universities. In the first instance, they often reduce the work load of professors. For example,
Connect is a streamlined manner for professors to disseminate course materials and even avoid
the onerous task of correcting quizzes, homework assignments, and examinations. It is necessarily
connected to the use of a McGraw Hill printed textbook as the principle teaching tool. Similarly,
Create, the current custom publishing system, is continually referred to in the context of
professors and educations, not to students. These factors confirm that McGraw-Hill has been
focused on the current traditional business model and has used technology as a sustaining
innovation to produce printed textbooks that are marketed and distributed under the traditional
business model.
Furthermore, during the period between 2000 and 2010, MHE revenues grew from $880.4
million to $1,323.7 million in revenues (McGraw Hill Annual Reports 2010, 2011). The company
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attributed these increases to the growth in enrollment in higher education institutions during the
same year. 2010 revenue growth was generated from traditional print published titles; including
Nichols, Understanding Business, 9e;Holes Human Anatomy and Physiology, 12/e; Lucas, The
Art of Public Speaking,10e; Saladin,Anatomy and Physiology, 5/e; and Sanderson, Computers in
the Medical Office, 6/e (ibid.: pp. 22, 30). Digital growth was achieved by the Homework
Management product line, which was related to the Connect platform (ibid.: p. 30). These digital
applications are patently competency enhancing in that they ancillary to a print textbook utilized
by the class and support the traditional business model.
This essentially follows the archetypal pattern of sustaning change: Strong, steady
financial performance by a dominant incumbent based on the continued execution of its traditional
business model and sustained by incremental technical innovations.
In summary, McGraw Hill digital innovations have mainly focused on ancillary products
and services that tether educators and students to its printed textbooks that are marketed and sold
through its traditional business model (i.e. that markets to educators and sells to captive students).
These digital innovations include Create (that allows professors to customize their printed
textbooks essentially an incremental improvement on the printed textbook) and connect (that
provides on-line study materials, homework, and tests that are corrected by computer essentially
an incremental improvement on printed supplemental materials). None of these digital products
and services entered the market at the low end. Instead, they were inextricably attached to high
end, printed textbook offerings. None of these digital innovations underperformed the market.
Rather, they essentially increased the performance of the printed textbook and other previously
printed ancillary materials (e.g. workbooks and homeworks were printed before they were
distributed on line and were self-correcting). None of these digital innovations were alternative
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inexpensive substitutes for the more expensive printed textbooks. To the contrary, in certain cases,
such as bundling, the digital offerings were part of an explicit tactic to support the premium pricing
enjoyed by McGraw Hill. None of these innovations undermined the traditional educator focused
business model. These facts support the conclusion that digital diffusion into the higher education
textbook industry has been the basis for sustaining, not disruptive, innovation.
A. FLAT WORLD KNOWLEDGE, INC.
Flat World was founded in 2007 on the premise that it could offer higher education
textbooks to students via Internet for free (Publishing Perspectives, 8/23/2010). Given that it is
difficult to compete on the basis of price with a free offering, such an innovative business model
has the potential to be an agent of disruptive change in the educational textbook market industry.
The most salient characteristic of Flat World is the fact that it makes access to all of its
textbooks available for free at its Website. This is obviously a product, service, and tactic that is
based on digital technology.
However, the free use of these textbooks is limited. They may only be viewed at the Flat
World website for free; they cannot be downloaded, printed, or stored on a persons laptop or
tablet for free. As a result, the company generates revenues through the sale of . optional materials
to students (Snyder, 2009). For example, consumers can elect to order a print copy of any book
for between $29.95 and $69.95 (Flat World Knowledge Website, 2011). The textbooks can be
self-printed for $24.95 or e-books can be downloaded for the same price (Flat World Knowledge
Website, 2011). Flat World also offers supplemental class material, such as study aides for $14.95,
and audio books for $39.95 (Flat World Knowledge Website, 2011). Single chapters can be
downloaded for $2.49 (Flat World Knowledge Website, 2011).
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Only 1% to 2% of its website traffic is directly related to its free offerings (Flat World
Interview, 2/1/12). Based on data collected during its 2009 Beta release, Flat World learned that
two thirds of its orders are for print copies of the textbook and one third are for PDFs and study
aids (ibid.). Approximately, 70% of its printed material is distributed through college bookstores
and 30% is distributed digitally through its website (Flat World Interview, 2/1/12). The majority
of demand is for its economical black and white materials (Flat World Interview, 2/1/12).
According to Flat World, its consumers make 1.2 purchases per site visit and one in ten purchase
additional study materials.
Flat World estimates that it receives an average of $20 per individual consumer. This
breaks down as follows. Flat World indicates that approximately 65% of its users purchase some
add-on for an average purchase of $34 (Flat World Knowledge Website, 2011; Flat World
Interview, 2/1/12; 150,000 College Students to Save $12 Million ,2010; Anderson, 2010).
Flat World began offering textbooks in the area of business studies (Publishing
Perspectives, 2010). However, it has now expanded into the twenty-five of the largest disciplines,
which are comprised of general education courses, such as introductory psychology and sociology
(Weir, 1/20/10). This expands Flat Worlds potential consumer base to community colleges, as
well traditional colleges and universities (Snyder, 2009). Furthermore, Flat World is expanding its
original 20 book library to approximately 50 books by 50 authors by 2012.
The company began to offer its textbooks to the general public in March 2009 (ibid.). The
textbooks are produced in a manner similar to traditional textbook publishers: they are authored by
respected scholars under peer review (Ibid.; Snyder, 2009;150,000 College Students to Save $12
Million ,). As of August 2010, Flat World had published twenty four textbooks, which were
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selected by 1,300 professors at 800 different colleges in the U.S. and fifty other countries (ibid.).
This is three times more professors than the previous year (ibid.).
Flat World authors enjoy a high royalty rate of 20% (in contrast with the 15% royalty rate
in the traditional textbook business model) (Publishing Perspectives, 8/23/2010). Under the Flat
World model and its digital technologies, textbooks are continually updated in real time and made
available through the Internet (Flat World Interview, 2/1/12). This results in an average revision
cycle of six to nine months (Flat World Interview, 2/1/12). Moreover, the revision schedule is
driven by the author and professor, not the publisher (Flat World Interview, 2/1/12) This liberates
the Flat World books from the traditional three-year revision cycle. This also means that the
authors are free from the devaluing effects of the used book market, piracy, and the international
book market (Publishing Perspectives, 2010).
Flat World indicates that its custom textbook options are a key to its future success (Flat
World Interview, 2/1/12). Under Flat Worlds custom textbook option, professors are permitted, in
fact encouraged to customize any textbook (Publishing Perspectives, 2010; 150,000 College
Students to Save $12 Million , 2010; Flatworld Interview, 2/1/12). This includes omitting
chapters or even adding material (ibid.). It is estimated that over 30% of its books have been
customized by faculty (ibid.). This is made possible by a Creative Commons License, rather than
the traditional all rights reserved approach employed by traditional publishers (ibid.; 150,000
College Students to Save $12 Million ,2010). This permits professors that adopt a Flat World
textbook to make changes even at the sentence level (Flat World Interview, 2/1/12).
This leads to the issue as to whether Flat Worlds business model and the foregoing
factors describe a pattern of discontinuous or disruptive change, or possible emergence of Flat
World as a new dominant incumbent that contributes to an era of sustaining or continuous change.
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The actual products and services, e-books, printed textbooks, and ancillary services such as
digital work books, study guides, tests and educator customized textbooks are essentially similar to
those offered by McGraw Hill. Thus, they do not particularly underperform the market, or offer
more limited features. The textbooks are authored by respected academics and its catalog
corresponds to the trdtional course offerings. The books and ancillary materials are offered at less
expensive prices than those offered by McGraw Hill. However, alone, this essentially constitutes a
price differentiation strategy. Thus, the intrinsic characteristics of Flat Worlds products and
services do not appear to be disruptive innovations.
However, a business model itself can constitute a disruptive innovation. Flat World does
offer access to its textbooks for free on its website. This is clearly designed to market its materials
directly to students. This represents a radical departure from the traditional higher education
textbook business model, which marketed textbooks to educators to help support premium pricing.
In terms of physical publication, the Flat World free on-line textbooks are simple, black and white,
digital files. Thus, they have some of the characteristics of disruptive innovations: They are
entering at the low end of the market, they are cheaper, simpler, and underperform the four color
imprints offered by McGraw Hill.
However, to succeed, such a Freemium model must attract or be attached to a profitable
revenue stream and allow Flat World to move up market. The free on-line textbooks, as
educational materials, cannot attract revenues through advertising. Also, they are not bundled;
they do not require the mandatory purchase of any other products or services. Thus, the Freemium
component of Flat Worlds business model is not self-sustaining.
Flat World does subscribe to a traditional higher education textbook business model as
well. In this regard, Flat World focuses on persuading educators to adopt its textbooks and
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ancillary materials, which in turn generates sales to a captive student population. Flat World
appears to focus on differentiating itself from other higher education textbook publishers in two
ways.
First, it offers all of its materials at substantially lower prices. Flat World textbooks cost
between $29.95 and $69.95 (Flat World Knowledge Website, 2011), and the textbooks can be self-
printed for $24.95 or e-books can be downloaded for the same price (Flat World Knowledge
Website, 2011). The average textbook is now $. Flat World anticipates making profits through
the volume that will be generated by offering its products to students at a fraction of the price of
the traditional textbook publishers (Publishing Perspectives, 2010). Flat World estimates that each
of its textbooks will achieve profitability at around the fifth semester that a book is available
(Publishing Perspectives, 2010).
Second, its custom book publishing is more extensive than those offered by dominant
publishers such as McGraw Hill. This is made possible by a Creative Commons License, which
allows even sentence level alteration.
Flat World is also focused on competing in the heart of the market. This includes twenty-
five of the largest disciplines, which are comprised of general education courses, such as
introductory psychology and sociology (Weir, 1/20/10).
Thus, its business model is conventional and aimed at educators.
However, the Freemium offerings considered in conjunction with the traditional business
model suggests that Flat World is pursuing an ambidextrous business model. This is comprised of
offering access to its catalog for free on-line and marketing and selling print textbooks and
ancillary materials under a traditional business model.
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CONCLUSION
McGraw Hill has continually developed digitally based products and services that solve
problems for educators as the targeted consumers. This include Create, a custom text book
publishing product that allows professors to design their own textbooks from available materials;
Connect, a product that a product that relieves professors of the task of composing,
disseminating, and correcting quizzes, homework assignments and tests. Furthermore, McGraw
Hills higher education publishing division has had respectable earnings in virtually each of the
relevant years. Thus, there is no evidence that this dominant incumbent is retreating up-market or
surrendering market share or otherwise suffering negative business consequences as a result of this
pattern of digitally based innovations. Accordingly, McGraw Hills innovations have clearly been
sustaining in nature and directed at perpetuating its traditional business model.
It is axiomatic that Flat World is entering the textbook market at the lowest end by offering
its products for free. For the add-on sales, the average transaction is $34. Books are available in
black and white through print on demand or by download in PDF format. This clearly appeals to
existing low-end users who do not require the features of the traditional textbooks and wish to pay
a lower price. Finally, the low price and easy accessibility also attract the un-served market
presently diverted to the used book market, international editions, or pirated material. Thus, the
entry point and consumer value proposition fit the disruptive innovation model.
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However, the Flat World business model is dependent on educator adoptions, not direct
student sales. Furthermore, its focus on its common license custom publishing products is
essentially a differentiations strategy, designed to distinguish its service form the service offered
by McGraw Hill and the other dominant incumbents.
Furthermore, Flat World has formed strategic alliances with Virginia State University and
the University System of Ohio to provide the main textbooks to all students (VSU, 2010; Reid,
2011). This will undoubtedly require coordinating with the relevant college bookstores, the
traditional point of distribution for higher education textbooks (nb. the Freemium component of
their business model would displace these book stores as a link the value chain). Additionally, Flat
World has formed another strategic alliance to publish audio books and brail books for
handicapped persons.
In summary, these factors suggest sustaining or continuous change.
The radical Freemium component of the business model has existed since 2007 and has not
heretofore undermined the college textbook market. Rather, it has evolved into a component of
Flat Worlds marketing plan to support the educator focused adoption process. It creates a halo
effect with students, with educators at large institutions that adopt textbooks for a diverse student
bodies, and even with state legislatures that influence the adoption at large state university and
college systems (Flat World Interview, 2/1/12). For example, the president of Flat World was
invited to address the Utah state legislature on the issue of textbook expenses and access to
educational materials. The dominant incumbents have not tended to use price and improved access
to materials as part of their business strategy.
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This raises the issue as to whether this signals a retreat from the traditional business model
or a retreat up-market, as described in Christensens (1997) paradigm.
In February 2012, Flat World entered into an alliance with the MIT OpenCourseWare
program to provide complete open materials, including syllabi, lecture notes, assignments and
examination (heretofore, only textbooks were offered for free). If Flat World is moving to a more
student focused Freemium business model, and away from its current traditional educator focused
tactics, this could be evidence of the possibility of disruptive or discontinuous innovation.
These phenomena appear to require further study as the current trend develops and
becomes more clear. (it would be good at this point to suggest what future research needs to pay
attention to in order to determine whether true disruptive innovation is going to occur in the US
higher education text book market. Give the reader some suggestions of what needs to change to
provide such evidence. Also, if there are any examples of such possibilities (that are outside our
current Flat world example), please indicate that these other players might deserve closer research
attention in the future.
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