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Friday, July 01, 2011

Analogs to Growth and Productivity in the University Setting - Stanford in NYC!

I'll ease into what I think is my sixth consecutive July guestblogging gig (visualize: counting on fingers - 06, 07, 08, 09, 10, 11, yes, six) with a reaction on a little bit of a tangent to the blogospherics about the state of the law school industry from luminaries like Tamanaha, Bainbridge, Ribstein, Caron, and Seto.   I was particularly interested in the counterpoints of Steve Bainbridge's and Larry Ribstein's comparisons of the law school industry to others in more classically competitive markets.  

Here's my pretty simple-minded take on the analogies.  In for-profit businesses, the value of the business, ceteris paribus, is the present discounted value of the future cash streams of the business.  You should only be able to cause your value (i.e. your stock price) to rise endogenously if you do something to increase the future cash streams.  You do that either by increasing your revenues, decreasing your costs, or both.  Mature businesses generally find lower hanging fruit in this regard by cutting costs; hence, the fact that even profitable businesses continue to restructure (the euphemism for cutting out inputs like facilities and people) and seek productivity (i.e. get more output per unit of input).  The consolidation of the commercial banking industry is a prime example of using cost synergies (i.e more revenue per unit of input) arising from the horizontal combination of pretty much fungible businesses.  That is Steve Bainbridge's point - what would normally happen to preserve the viability of businesses by way of consolidation within an industry is unlikely to happen among law schools.

Larry Ribstein tackles the other side of the cash flow stream.  If your revenue is growing faster than your costs, you continue to add value to the business.  The classic corporate strategists' tool for this is the "new versus old products" and "new versus old markets" matrix.  New products to old markets:  Amazon starts selling stuff other than books.  Old products to new markets:  GM starts selling cars in China.  Old products to old markets:  Starbucks puts MORE stores in downtown areas.  New products to new markets:  Motorola exits the television business and enters the chip business.  (This last one is obviously the riskiest.)  Larry's point is that if you re-think how what historically have been considered legal products might be marketed, there's opportunity for growth in revenue.  Mature businesses (and I don't think Larry would disagree) have the hardest time with this.

So imagine this.  Looking for growth, Dunkin' Donuts believes it can take share from Starbucks in Denver where heretofore there's been only Starbucks.  Or looking for growth in the 1980s, rafts of midwestern regional law firms open offices in Florida, having read the demographic studies and believing the state is underserved by merely Holland & Knight, Greenberg Traurig, and a few other big firms.  Or, as I just read in my alumni magazine, Stanford University sees an opportunity in the New York City Economic Development Corporation's plan to establish an applied sciences and engineering research campus in the city.  Per Stanford President John Hennessey:  "We envision a New York City campus that would be tightly integrated with the California campus, with departments spanning two locations and faculty and graduate students selected in an integrated fashion."  And this:  "I believe partnering with New York City offers a similar opportunity to demonstrate what a difference a great university can make and to begin the process of understanding how universities can operate in more than one location, something our colleagues in industry mastered more than a decade ago."

Fascinating.  But in industry, those in the invaded turf would be unlikely to take the invasion lying down.  Starbucks would likely be thinking about invading a Dunkin' Dominated Donut Domain.  How do Columbia and NYU react to Stanford on Roosevelt Island?  Well, Columbia has done the natural first thing:  itself being one of the 26 bidders (with, among others, Purdue, Chicago, and Cornell).  Should we expect Harvard in Houston?  Yale on Yerba Buena? 

Posted by Jeff Lipshaw on July 1, 2011 at 12:20 PM | Permalink

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