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Market-Based Education: The New Game Has Begun

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Will the public K-12 industry reject, co-opt, or compete?

Good history teachers relate historical matters to their students not merely as facts to be memorized but as important lessons that provide unique insights into today's changing world. Now, in an era when choice and competition in education are gaining acceptance among both parents and policymakers, it is the educational community itself that may need to heed a lesson from the past.

In 1955, the domestic auto industry produced 98 percent of all cars sold in the United States. No one even noticed that it was not 100 percent. The 2 percent produced by foreign automakers was not enough to get on the industry radar screen, even though it foreshadowed a market revolution. In 1965, the import share had grown to 6 percent. The view of the industry's leadership had scarcely changed. No one in their right mind would want to buy one of those little things from Japan or Germany. Not enough chrome, not enough power.

Move ahead 10 more years. Imports account for over 18 percent of car sales, and the industry is looking at a major economic disaster. But what was the response of American carmakers to abandonment by many of its once-captive customers? Poorly built products like the Pinto and Gremlin.

It took another decade and greater slippage in the market share held by American companies before a serious response was launched. They began to learn about quality and customer expectations--lessons the Japanese had internalized from the American W. Edwards Deming. By 1985, imports had over 25 percent of the market, and tens of billions of dollars in sales were dropping off the income statements of the Big Three.

Since then, the American auto companies have competed fairly effectively against foreign competition. They have dramatically improved their products and, with a bit of help from international currency trends, have recaptured some market share. Imports have declined to only 19 percent of domestic car sales.

But, as the $200 billion auto industry stabilizes after its worst jolt since the Great Depression, another similarly-sized segment of the economy faces the beginning of a major market realignment: the K-12 education industry. The encroaching competitors are called charter schools.

As charter schools emerge across the nation, public education is facing something completely alien: real markets. This year, the scale of charter schools has made competition for customers very real for many school districts. This is business as usual for company presidents and CEOs, but, for educators, it is foreign territory.

According to the Center for Education Reform, there were in 1995 more than 270 charter schools with at least 60,000 students nationwide. Although comprehensive data are not yet available for the 1996-97 school year, the numbers are undoubtedly higher. In states such as Michigan, every student who leaves a district to go to a charter school takes up to $5,800 along. In the Lansing district alone, two charter schools launched this fall already have over 1,100 students. Had they all gone to the public schools, the district would have had $6.3 million in additional revenue. In addition to taking kids from the Lansing schools, these two charter schools attracted students from parochial schools and from outside the Lansing district as well. Why were they able to do so when the public schools could not? The simple answer is that they responded to a market segment more effectively than did the public schools.

From the start of this movement, the proponents of charter schools have intended two consequences. The charter schools were expected to provide facile and innovative alternatives to what they viewed as ponderous and unresponsive public school bureaucracies. If they were to continue their trajectory, the public schools would simply be superseded by the charter schools. If, on the other hand, the public schools were to respond aggressively, the result would be a transformation of the public education system. In either case, went the argument, education would become more responsive to the need for change. Opponents of charter schools feared that they would divert educational resources from already-strapped central city schools and leave many high-risk children behind. The fact is that in many states the debate is over. The rules have been changed, and the new game has begun.

Charter schools could be to public education what Saturn has been to General Motors: a test-bed for new products and processes.

To date, three types of responses seem to have emerged from the public K-12 industry. They can be summed up as reject, co-opt, or compete. Some simply continue to reject the principle of charter schools. They are trying to play the old game, refusing to acknowledge that the game is over. One Michigan school refused to accept student-teachers from a university that issued charters. A superintendent in another district responded to the launch of a new charter school by announcing that he was opposed to charter schools. These pathetically irrelevant reactions miss the obvious imperative: Learn what it takes to compete. If parents choose charter schools for their kids, there must be a reason. Few public school leaders understand those reasons with the requisite precision. If they don't learn, they will perish.

Their reaction sounds much like those of the U.S. automakers when the invasion of Japanese cars began. They dismissed them, then lobbied against them, then tried "buy American" slogans. Eventually, they recognized that they had to compete on terms that mattered to their customers: quality and cost. This was a painful lesson that cost billions of dollars and hundreds of thousands of jobs.

Some districts have begun to use the tools of the new competitive environment. They are chartering schools themselves, which gives them a foothold in the new market. Their charter schools could be to public education what Saturn has been to General Motors: a test-bed for new products and processes. That corporation has tried to use Saturn as a vehicle for reinventing itself from the inside out. Although Saturn itself has been quite successful, the process of inculcating its lessons elsewhere in GM has been spotty. The dramatically smaller scale of local school districts makes it more likely that such an approach could work.

Finally, a few superintendents are beginning to talk about making all of their schools responsive enough to be competitive in any environment. They speak of creating a system of schools rather than a school system. They understand that parents are customers who have opinions and options. This enlightened approach takes the bull by the horns, a bold but risky metaphorical step. A school system is a truly unwieldy and potentially dangerous beast. Grabbing it by the horns could be hazardous for a leader. One does, however, admire those educational matadors who try.

Business owners think in terms of responding to market conditions and demands quickly and accurately. Schools have not faced competitive pressures and so have not had to respond in this way.

Several factors will determine whether districts respond effectively to this new environment. First, local leaders must come to know their markets. Second, they must learn new skills and strategies. Third, they must actively sell their wares.

Every business learns about its market. It must know its own product, its competitors, and its customers. Business owners think in terms of responding to market conditions and demands quickly and accurately. This allows them to attract and keep customers. Schools have not faced competitive pressures and so have not had to respond in this way. Even the most innovative schools were not confronted by this economic necessity until now.

School leaders must learn new skills and strategies quickly enough to avoid a serious erosion of their market share. Most schools do not have the financial reserves necessary to weather the kind of long-term storm experienced by the auto industry. They must, therefore, respond much more quickly. This means getting help. Outside resources can assist them in developing needed market analysis, quality improvement, and advertising skills very quickly. The auto industry floundered in attempts to improve quality using old ideas. Its leaders did not turn to outside sources of new thinking. Meanwhile, Mr. Deming was nearly canonized by the Japanese, who used his ideas throughout their industry.

The job of a superintendent will change with the market environment. What had been the mainstays--care and feeding of school boards, negotiating contracts, refereeing disputes--will be superseded by an array of new disciplines. Aggressive marketing is one of them. Public schools must compete, but the basis on which they compete is up for grabs. Price is pretty much off the table, since the basic grant is typically the same for both traditional public and charter schools. This means that the successful competitors will demonstrate that they provide more value than do others in the market, which in turn means that they must understand precisely how those customers calculate value. The marketing process could become a nightmare of wasted resources, or it could be a means for educating parents about real differences between the competitors.

There will be no turning back. The trend toward charter schools and even toward other forms of competition is inexorable. With bipartisan support from Washington, if anything, the trend toward more permissive charter school and choice laws will accelerate. One can only hope that the commonality of scale of public schools and the auto industry does not portend similar inertia in responding to the market challenge facing the schools. If it does, public education is in for decades of shockwaves.

Jeffrey D. Padden is the president of Public Policy Associates, a national consulting firm based in Lansing, Mich., that specializes in education, workforce, and economic-development research, policy development, and evaluation. He is a former Michigan state representative and Michigan commerce department official. PPA is conducting research on the education-marketplace dynamics fostered by the charter school and choice movements.

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