IN 2009, when the American economy was beset by recession, interest in MBA programmes hit a record high. No one was much surprised: applications to business schools often rise during the first years of a recession as people seek shelter from the storm. So perhaps no one should be surprised that in both succeeding years applications have fallen. That’s what prolonged doldrums do.
Yet, privately at least, some business schools are worried that a two-year decline, along with a level of applications from American students lower than it has been this century, is more than just a response to the economy. They fear that the established model of business education may be in trouble, if not for all schools, then definitely for mid-ranking American institutions offering a traditional two-year MBA. Two-thirds of schools which offer long, residential programmes saw applications drop in 2011.
In comparison, the schools at the ends of the spectrum look more appealing. Lower-level programmes, which harbour no ambitions to be international players and are not covered in our ranking, are seeing applications rise. They are much cheaper to attend and often offer a discount for local students. For those taking the increasingly popular part-time or online programmes, there is no reason even to leave their jobs. (Disclosure: The Economist has an online business-education business, but not one that offers an MBA.)
Elite business schools still look like a fair deal. MBA students attending a top-15 institution may be charged an average of $92,262 for their tuition, but they can expect a basic salary of $110,879 once they graduate. Payscale, a company that collects pay data, claims that graduates from Harvard’s MBA programme will earn $3.6m over a 20-year career (although it is not able to compare this with the rewards that go to equally smart cookies who haven’t bothered with an MBA).
Few expect the lustre of an MBA from Harvard, Wharton or Stanford to fade. As the number of business schools increases—the AACSB, a body which accredits 633 business schools in 41 countries, estimates there are now 13,670 institutions worldwide offering a business degree—being able to distinguish yourself from the masses matters more and more. And just being clever enough to be accepted on to an MBA from a top institution is a useful signalling device for recruiters. At a recent Harvard colloquium, a bigwig from one of the large consultancies told his audience of star professors that the only person he valued at the school was the admissions officer. A former student who was there reports that none of them batted an eyelid.
Tiger teams
Schools with names that send a less sexy signal, though, may be in trouble. For one thing, wages have become a huge drain on their resources. An AACSB survey of 503 American business schools found that a newly-hired academic can expect a salary of $169,000. At a mid-ranking school, salaries of $250,000 and above are common. That’s just for nine months: plenty of time for books, consulting and visiting professorships during the long summer vacation.
Another strain is that pampered faculty and high-paying students expect to be housed in posh buildings with nice gardens. Few schools enjoy the resources of Stanford, which recently opened a $345m campus. But many feel the need to splurge millions on new facilities in the hope of poaching applicants from their peers.
As the pool of domestic applicants has fallen, many American schools have come to rely on students from emerging economies to fill their programmes. In 2000, around 15% of people sitting the GMAT (see chart 2), the de facto entrance exam for MBA programmes, came from Asia. By 2011 that had risen to over a third. But tapping into this new market can itself be costly—it is not cheap to send recruiters and admissions officers to Asia. And the influx of Asian students to America may peter out.
China and India are furiously investing in business education programmes; brand-name schools such as INSEAD and the Massachusetts Institute of Technology (MIT) are opening franchises in Asia. Dipak Jain, the dean of INSEAD, believes that strong Western schools might still have an advantage for as much as 20 years. But business-school case studies are littered with companies that didn’t appreciate how fast overseas capacity was growing.
Asian business schools still have a long way to grow. The Economist currently ranks just eight of them among the world’s top 100. Of these, only one, the China Europe International Business School, can be found on mainland China; it has campuses in Beijing, Shanghai and Shenzhen. India, too, has only one: the Indian Institute of Management in Ahmedabad (IIM-A).
It is the tip of a substantial iceberg. AACSB reckons that there may be 1,500 business schools in India, and other estimates put the figure as high as 2,500. But perhaps only 20 could aspire to become internationally competitive, says Pankaj Ghemawat, a professor at IESE business school in Spain and author of “World 3.0”, a book on globalisation. To do so they will need to hire teachers who cost more than they can currently afford. IIM-A may have 552 applicants for each place on its Post-Graduate Programme, considered the equivalent of an MBA (Harvard, by way of comparison, has 11) but it only charges a tuition fee of $38,000.
In China, where more than 30,000 MBA students are enrolled in the country’s 184 state-approved programmes, the lack of good business-school teachers remains a problem. Haiyong Ma, of the Changchun University of Science and Technology, says that many are drawn from disciplines such as engineering or the sciences and few have any real-world experience of business. Indeed, in many cases the universities ban them from pursuing outside business interests.
In time, though, Asian and other emerging-economy business schools will be able to attack the incumbents on a second front: their curriculums. For all its claims, says Mr Ghemawat, business education is far from a globalised industry. He cites the example of the University of Chicago, which “proudly points out that it runs programmes in three places [Chicago, London and Singapore] and has exactly the same content in each of them.” “Wouldn’t you want”, he goes on, “some differentiation on that basis?” Emerging-economy schools have an opportunity to offer business education that’s globalised from the get-go.
Only 7% of the research published in the top 20 management journals last year dealt with any kind of cross-border issues, Mr Ghemawat says, pointing to a facultariat out of touch with the times. And case studies, the common method of teaching at business school, are notoriously America-centred. Only around a third of those published deal with an issue outside of America. Just 14% percent deal with a cross-border issue in any way. And in only 6% of case studies is the cross-border issue central to what is being taught.
The need for niches
Some emerging-market schools have already sniffed an opportunity. Skolkovo in Moscow is Russia’s leading business school and has the backing of Vladimir Putin and a handful of the country’s oligarchs. Its MBA prepares students for the vagaries of doing business in what Wilfried Vanhonacker, the school’s dean, describes as “difficult economies”, such as Russia, China and India. The school gives a candid account of the graft, institutional gaps and limited availability of talent that MBAs are likely to encounter. Mr Vanhonacker has even admitted to accepting students from large crime families because “if you want to prepare executives to function in Russia, this is the reality.” He says he frets about the first time he has to give one of them a bad grade.
As the global market for business education grows more cut-throat, America’s non-elite schools are in serious danger. They have two options, either of which would involve radically re-engineering their business model, as they might put it.
One option is to cut short the two-year MBA. In much of the world, and particularly in Europe, students complete MBAs far more quickly than they do in America. At INSEAD the degree lasts just ten months. Yet of the 20 schools whose students earn most upon graduation only Stanford, Harvard, Wharton, Berkeley, MIT and Chicago are two-year, American programmes.
European students outearn their American counterparts in part because they tend to be a little older. Still, there would be an obvious competitive advantage for a school which shortened its programme. One year is cheaper than two, both for the student and for the school. And students would not have to forgo two whole years of wages, so more should be tempted to apply. Indeed, the school which offers the best return on investment in The Economist’s rankings is Hult, one of the very few mid-ranking American schools which has adopted a one-year programme.
The other option is to move away from the generalist MBA. To compete for students from the wider world some schools may need to specialise. One way to do this is to divert money into niche research centres, for example in renewable energy or real estate, thus attracting students keen to forge a career in those areas. Another is to piggyback on excellence elsewhere in the university. Take the Olin Business School at Washington University in St Louis. It is popular within its region, but has found it harder to attract students from farther afield. With a renowned medical school at the university, it would seem perfectly placed to appeal to students anywhere interested in medical-sector management.
Joe Fox, the director of Olin’s MBA programme, likes this idea. But it is hard to put into practice. He has made a start by hiring some joint faculty and encouraging interaction between students at the two schools. He wants to go further, perhaps by collaborating on programmes. The trouble, he laments, is that academics are conservative, at least when it comes to their own lives. Persuading them to change will take time. Yet for many business schools, time may be running out.
As business professors teach their students, failure is an essential part of any dynamic market. A shakeout of mid-ranking business schools would hurt the finances of a lot of universities, which would be nasty. But even the threat of it should spur innovation, and perhaps deliver to business students that most elusive of prizes: value for money.
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