On creative destruction in the APS market.

One bugbear of school owners when they talk about dangers they face in the current APS market is the emerging presence of chain schools. These schools, which are often run by corporations, are seen as a threat because parents rightly perceive a much higher quality. The real risk to APS is low from the existing chain schools because the fees are high enough to place them well out of the reach of the working poor. However the risk of a chain school which does target the less than 600 Rs. per month customers is a real one, and some chain schools have floated the idea of creating a new product of this type. The emergence of APS chain schools could also follow what Joseph Schumpeter called creative destruction.

Joseph Schumpeter, an economist in the early half of the 20th century, wrote that the way that economic growth happened was by a process of innovation, in which each new wave of inventions and processes is more efficient than the last. Old businesses and processes are destroyed by new creative ones.

Because of population growth and a lack of capital investment the private school market in India has long been a comfortable one. The population growth trend is slowing however the increasing urbanization will probably help to maintain high demand as the number of school age children continues to increase, however as capital moves into the APS market a proliferation of innovations both in the education product and in its delivery will probably unleash a wave of creative destruction in the next decade. The schools which adopt the most efficient practices will now have access to capital and will be able to open new branches. Over time the APS market may be dominated by a few hundred of these new chains of schools.

This is not the only possible scenario and it is by no means a bad outcome. In fact the innovations which cause these successful schools to dominate will certainly have a positive effect on the more than 1.5 million school children here in Hyderabad.  However it would be prescient to take this outcome into account by IDEX, GMC, ISFC and other donors and companies who wish to have a long term impact. One danger is that those schools which fail to innovate will progressively become more indebted. A danger is that these schools, desperate for funds as they run multiple unprofitable years, will make their way into the portfolios of lenders such as ISFC. From the perspective of IDEX, it may be expected that many of the school partners will be either in expansion or contraction, so we should be prepared to witness schools opening new branches and others closing down while an IDEX fellow is in residence.

Economists generally celebrate creative destruction, which is rightly seen as a wealth creating force.  We also should be willing to embrace the changes which are surely on the way to the APS market. To fight innovation would be to risk being destroyed.