Strategic Leadership in Context 213
is the achievement of long-term financial stability for the organization. For most
colleges and universities, this means achieving financial equilibrium, the char-
acteristics of which can most easily be illustrated for independent colleges and
universities but that increasingly have direct parallels at state-sponsored institu-
tions as well. Being in equilibrium involves (1) maintaining a balanced operating
budget; (2) keeping the rates of increase in expenditures and in revenues in line
with one another while accounting for discounts in financial aid; (3) making
annual provisions for the depreciation of the physical plant and equipment that
should eventually reach 2 percent of replacement value; (4) creating annual bud-
getary flexibility by building in contingencies for enrollment variations and other
factors, and using any proceeds to create funds for new initiatives and reserves up
to designated levels; and (5) safeguarding the purchasing power of the endowment
while providing for a steadily enlarging stream of endowment income.
Financial equilibrium sets a rigorous standard that many institutions can only
aspire to as a model. Nonetheless, the concept illustrates the structural depths
that strategy must reach in order to be an effective method of leadership. To
achieve equilibrium, all the options and tools of policy and decision making are
on the table within a long-term horizon of aspiration. Every choice and issue, from
increasing tuition to the effectiveness of the financial leadership of the president
and board, are part of the strategic equation of financial equilibrium.
The task is to build a financial engine that can meet the test of sustainability
by operating in perpetuity at the highest levels of effectiveness and efficiency.
The engine will always need more fuel, but it has to be built so that it can operate
under adverse conditions, switch to resilient strategies when fuel supplies run low,
and continuously replenish some of its own resources from within. From a strategic
perspective, the goal is constant: to create a financially self-renewing organization
that is able to dominate its environment by exercising choice about its future.
Affordability: Hitting the Wall
As our environmental scan has suggested, the challenge of creating financial
equilibrium has intensified for almost all institutions over the past decade because
of structural shifts in the affordability of higher education. Strategic thinking and
the goal of financial sustainability are strict taskmasters in the current environ-
ment. Years of tuition increases beyond rates of inflation have lifted college prices
well beyond the growth in average family incomes. The average price for room,
board, and tuition at major private universities in 2007 was only a few thousand
dollars less than the median family income before taxes. Many public universities
face parallel challenges as they cope with declining state subsidies from an inco-
herent trend toward privatization that results in escalating tuition charges.
Colleges have responded by discounting their charges based on need and merit
aid, creating a vicious fiscal cycle in which higher charges produce lower marginal
new revenues as more and more families become eligible for discounts. As a result,
countless colleges have begun to “hit the wall” financially because the price of