Print this article | Return to Article | Return to CFO.com
No form of education is more commercialised than management education. But are business schools teaching the right things?
Economist Staff, The Economist
May 21, 2004
Applications to business schools are down this year Â— at least in America, where management education was born and where business schools still award about 85% of the world's business degrees. Kenneth Dunn, dean of Carnegie Mellon's Tepper School of Business, says that applications for the full-time MBA programme, one of the country's best, are about 30% lower than this time last year. Allan Conway of the University of Calgary, and programme director of the MBA Roundtable, an industry body, estimates that applications this year for MBA programmes in America are down by between 15% and 25% on 2003.
Does that spell disaster? Not for top schools such as Tepper, which turn away far more applicants than they accept. Applications for MBA courses are counter-cyclical: they tend to rise when executive jobs are scarce and shrink when they are plentiful. This year's decline is a sign of the current economic boom, just as the 40% rise in applications to Tepper two years ago partly reflected hard times in the managerial job market.
But business schools face more competition, and more criticism of the quality of their work, than they have ever done before. In time, that may lead to fundamental changes in the structure of the business-school market, and perhaps in what schools teach and how they teach it.
The demand for business education has certainly grown at a phenomenal rate. As Paul Friga of Indiana University, co-author of a paper on the future of business schools, points out, business degrees rose from 14% of all undergraduate degrees in 1971 to 21% in 2001, and MBAs from 11% to 25% of all master's degrees. (See "Changes in Graduate Management Education and New Business School Strategies for the 21st Century" by Paul Friga, Richard Bettis and Robert Sullivan. Academy of Management Learning and Education, 2003, Vol. 2, No. 3.)
American universities award more than 100,000 MBAs a year. And business education is booming in places where it hardly existed a quarter of a century ago. In Britain, for example, enrolment on MBA courses grew by 35% in five years in the late 1990s and business schools have become one of the country's top 50 exporters. China now has at least 21 MBA programmes run with American partners, and another 40 or so run by Chinese universities alone. In Russia and central and eastern Europe, more than 1,000 new business schools sprang up during the 1990s.
Why the boom? After all, in America at least, there are fewer jobs for middle managers. The answer may be that people yearn for the riches that they think a business career will bring. A hungry young doctor or lawyer may see an MBA as a short-cut up the corporate ladder. Business schools sell themselves as a way for students to raise their incomes. Jeffrey Pfeffer, from the Graduate School of Business at Stanford University, argues in a critical article that the basic business proposition of business schools, especially those with MBA programmes, is "the enhancement of the careers, measured mostly in terms of salary, of their graduates". (See "The Business School 'Business': Some Lessons from the US Experience" by Jeffrey Pfeffer and Christina Fong. Forthcoming in the Journal of Management Studies.)
Diversify and Grow
Vigorous though the market for business education may be, it is no longer the traditional full-time MBA that is driving the growth. In all but the smallest programmes, says Mr Conway, that source first lost momentum in the early 1990s and then stalled by the late 1990s. In response, schools found all sorts of ways to supplement the core business of the conventional MBA. However, some of these activities are now under threat, for various reasons.
Thus 15 years ago, schools launched executive MBAs, charging premium prices and suggesting to companies that such programmes might be a handy tool to retain itchy-footed high-fliers. Whereas individual students usually carry the cost of an ordinary MBA, companies often finance an EMBA. However, employers have since grown wary of sending good managers on a course from which they may be poached by a rival or where they may suddenly decide to make a career change and leave to start their own business. The MBA Roundtable's figures suggest that applications for executive MBAs are 15-20% lower this academic year than they were in 2003.
More successful are evening and part-time MBAs, often backed with distance learning to allow students to pursue the course off-campus. There are now significantly more evening MBA programmes than full-time ones, says Mr Conway. More than 48 American business schools now offer online MBAs, among them upstarts such as the universities of Phoenix and Webster, both with annual enrolments of around 4,000 and 7,000 full- and part-time MBA students respectively.
The other big money-spinner has been foreign students, who account for 20-30% of students on many American MBA programmes. At the top European schools, the proportion of foreign students is much higher: at IESE in Barcelona, for instance, Spanish students account for only around 20% of each year's class, a proportion that is carefully managed to retain the international flavour of the school. But here, too, American business schools face a threat from the squeeze on visas to study in America. For example, 25% of the students in Tepper's current first-year class come from abroad, well down on two years ago when the share was 36%.
Profitable or Pleasurable?
The biggest of all the revenue boosts has been executive education: short courses that do not lead to accreditation, but offer mid-career training to company managers. They are handily pro-cyclical Â— companies spend on them in boom years Â— so that they offset the counter-cyclical swings in demand for MBAs. They have expanded hugely, and now often account for over half of a business school's revenues. Some top schools, such as MIT and Stanford, do little executive education; others, such as Columbia in New York, INSEAD in France and IMD in Switzerland, do lots. Harvard Business School offers no part-time or executive variations on the conventional MBA programme. But it does offer executive education, despite grandly turning down most of the companies that want its academics to work with their staff and refusing the usual quibbling over fees.
Off-the-peg (or open-enrolment) courses are harder to sell these days. They face competition from, among other things, companies' own "universities", of which there are now some 1,600 in America, more than the 1,300 or so conventional universities offering undergraduate business degrees. "There has been a huge swing to custom programmes," says Fiona van Haeringen of IESE, who attended a recent annual conference of business-education providers in America. "The market is very aggressive, very competitive and the power is with the buyer." Don Kuhn, executive director of Unicon, a group of about 75 business schools around the world that offer executive education, says that a survey of about 40 members found that three-quarters of them said overall revenues had grown between 2002 and 2003, but the remaining quarter said they had declined. Looking to this year, most saw growth coming mainly from customised education tailored for one company. "It's just knocking the cover off the ball," rejoices Richard Vietor, who was until recently in charge of executive education for Harvard Business School.
The trouble with executive education is that it draws faculty away from teaching MBAs and doing research. It also brings business schools into territory that is under attack from a host of commercial competitors, such as consultancies, private-education firms and executive coaches. That in turn raises questions about paying faculty. John Quelch, who once ran the London Business School and now teaches at Harvard, points out that Harvard can resolve such conflicts by picking only the clients who raise questions that challenge and intrigue its faculty. Faculty are paid extra for work on customised programmes, but not for teaching open-enrolment courses. Lesser business schools find the dilemmas greater.
And the competition is growing. Mr Kuhn bewails the fact that companies increasingly buy their executive education through purchasing organisations, which treat it like any old commodity and demand complicated contracts with lots of targets and conditions. IESE's Miss van Haeringen frets that companies increasingly want evidence of a return on their investment. "That is really tricky," she confesses. "We can't fully control what people learn and what they come out with."
But it is not just executive education that is becoming increasingly competitive. In future, the market for MBAs may well polarise. At one end will be the elite schools, fighting furiously for their place in the various rankings tables. American schools dominate the 2004 Financial Times ranking, the most European of the annual lists; only five of the top 20 schools were European. The top American schools survive on the strength of vast endowments and lavish gifts from alumni. "We get 30-50% of our budget from gifts," says Paul Danos, dean of the Tuck School of Business. "You lose money on every traditional MBA," admits Tepper's Mr Dunn. "My guess is that no top MBAs cover their costs, because you need outstanding faculty to attract the students, and you need money to finance their research. You make it up out of endowment, gifts and contributions from companies." David Tepper's donation of $55m to Carnegie Mellon persuaded the school to change its name.
At the other end of the scale are the universities of Phoenix and Webster, with modest entrance requirements and no expensive research staff to finance. The schools squeezed in the middle include those attached to American public universities, which often use their business schools as cash cows, creaming off some of the high fees that students pay.
And Does It Pay?
While competition grows, so does criticism. This is not for the first time: in the late 1950s, exhaustive reports by the Carnegie and Ford foundations complained about the inadequacies of MBA programmes. One described business administration, as taught in universities, as "a vague, shifting, rather formless subject", a criticism that still holds in many schools.
However, business schools now find themselves criticised from several (sometimes conflicting) directions: for paying too much attention to the return on their students' investment, for example, and yet for not giving value for money; for being too academic, and for being too concerned with teaching basic practical skills.
The most commercially wounding criticisms are those that appear to contradict the claim that an MBA enhances career prospects. There was uproar when, two years ago, Mr Pfeffer and Christina Fong argued in Academy of Management Learning and Education that there was little evidence that getting an MBA had much effect on a graduate's salary or career. "Usually it just makes you a couple of years older than non-MBA peers," one source told them.
Of course, business schools may be important mainly as a screening mechanism Â— their basic skill may be choosing students, not teaching them. Once in, and the vast bill paid, few are ever thrown out for failing their exams even though, as Mr Pfeffer and Ms Fong mischievously point out, they are much more likely to cheat than students in other disciplines.
Moreover, business schools certainly work extremely hard Â— much harder than other educational institutions Â— at getting their students into the job market. They employ squads of recruiters. Harvard, for instance, has 17 full-time staff and 24 part-time counsellors to help 900 students find glamorous jobs. Even if the school taught students nothing, they would still be buying the finest job marketing imaginable.
A different complaint is that business schools fail to teach their students the right things. The strongest advocate of this view is Henry Mintzberg, a professor at Canada's McGill University. In "Managers Not MBAs", a new book, he argues that conventional MBA courses offer "specialised training in the functions of business, not general educating in the practice of management". Their students are often too young and inexperienced to learn skills that, in any case, are often easier to acquire in the workplace than sitting in a classroom. "Conventional MBA programmes train the wrong people in the wrong ways with the wrong consequences," he complains. They ignore the extent to which management is a craft, requiring zest and intuition rather than merely an ability to analyse data and invent strategies.
Maybe that is why, as Mr Mintzberg gleefully points out, a list of America's most-admired business leaders (Warren Buffett, Herb Kelleher, Michael Dell, Bill Gates, Jack Welch and Oprah Winfrey) contains not a single MBA. And that is in spite of the fact that a growing proportion of chief executives, at least in America, now has an MBA. A study by the Leadership Initiative at Harvard Business School found that about 10% of America's chief executives or founders of large companies had an MBA in the 1960s, compared with almost 60% in the 1990s. Some business schools seem to be trying to meet such criticisms. They have launched new courses that encourage students to learn to collaborate with each other and work in teams; they offer executive coaching rather than just lecturing; they create ambitious new courses in leadership. All are attempts to bridge the gap between the academic classroom on the one hand and the more practical, hands-dirty approach of commercial management development.
Roughly the reverse of Mr Mintzberg's complaint is the criticism advanced by Rakesh Khurana of Harvard Business School, who is writing a book on why management has failed to develop as a profession. He points out that other activities in which society prizes a sense of restraint, judgment and the pursuit of the common good, such as law, health care and religion, have evolved into professions. A surprising number of business schools, including Wharton in Pennsylvania and IESE in Barcelona, were founded by people who wanted to improve the ethical sensitivity of managers. (IESE, founded by Opus Dei, a Catholic organisation, still has religious statues and paintings in its principal rooms.) "At the heart of professionalism is the renunciation of certain things," claims Mr Khurana. American managers have not obviously been keen on renunciation in the past decade.
But could business schools change this? Lots of them now offer courses on ethics, surely a key attribute of professionalism. Students are not always enthusiastic. Besides, whatever the ethicists say, the overall impact of a course may teach a different lesson. In 2002 the Aspen Institute surveyed 2,000 MBA students and found that their values altered during the course. By the end, they cared less about customer needs and product quality and more about shareholder value. Management research tells a similar tale. A study last year of management research in economic and social contexts found far more emphasis on economic performance and objectives than on social goals. (See "Social Issues and Management: Our Lost Cause Found" by James Walsh, Klaus Weber and Joshua Margolis, Journal of Management, 2003.)
A rather different complaint is that business schools are increasingly pulled in two directions. They want to teach students practical relevant skills. They want their research to come up with important, novel findings. But the gap between teaching and research grows ever wider.
In her presidential address to the Academy of Management last year, Jone Pearce of the Graduate School of Management at the University of California, Irvine, drew attention to the divide between the scholarly world of research and what she called "folk wisdom": the insights conveyed in the classroom. "Many of us", she told her fellow practitioners, "have created these two nearly parallel worlds as a way of coping with the conflicting pressures of conducting serious scholarship and the need to teach experienced managers who pay a lot of money to learn something useful." Yet little of the folk wisdom drew on the findings of research or had undergone scholarly testing.
Part of the problem is the way that management research Â— like so many areas of knowledge Â— tends to explore ever more obscure topics as scholars seek out an unvisited niche. With reason, Ms Pearce is particularly baffled by so-called "critical management theory". A description of this abstruse subject on the Academy of Management website announces that "Our premise is that structural features of contemporary society, such as the profit imperative, patriarchy, racial inequality and ecological irresponsibility often turn organisations into instruments of domination and exploitation." Few are the companies happy to pay $50,000 for their top managers to learn that.
Pulling together research and teaching will be hard. "You are starting to get splits," reports Roy Lewicki, editor of Academy of Management Learning and Education: "Contract faculty teach, and tenured faculty mainly do research and are better paid." Perhaps the professionalisation of management teaching, recommended by those two reports of the late 1950s, has now gone too far. Perhaps management education would beat off its critics more effectively if it went back to its beginnings, and got more corporate managers to teach. It might be easier to train them to communicate properly with students than to get professional management academics to teach students to be good managers.