Creative Destruction Visits the MBA

Harvard Business Review

I recently wrote a blog post about the forces of competition and market change that are affecting the legal profession, causing many firms to now take the once unthinkable step of letting even senior partners go if they can't produce sufficient revenues to contribute to the firm's bottom lines (as reported in the Wall Street Journal).

Ironically, there was another article in that same issue of the Journal that hit a little closer to home — about the diminishing returns to the investment in an MBA degree. Entitled "For Newly Minted M.B.A.s, a Smaller Paycheck Awaits," the article describes a phenomenon that I've been predicting for some time, which is that as the number of MBA degrees granted grows, the degree itself becomes commoditized and loses its differentiation.

Grow it has — the Journal reported that the US awarded 126,214 masters of business administration in the 2010-2011 school year, 74% more than ten years prior. The same pattern seems to apply as with law schools — since professional degree programs are highly attractive (and profitable) for universities, more and more schools entered the market, producing more and more graduates. Today, just as it isn't clear whether there is sufficient demand for all those young lawyers, it's not clear that there is sufficient demand for all those MBAs. Moreover, employers who used to be willing to pay a price premium for a degree candidate are seeking instead those with relevant working experience.

Related trends are the rise in high-quality international MBA programs (compounded with immigration policies that make it very difficult for students to study in the U.S.); competition from one-year, more focused courses (such as one-year degrees in finance, which are increasingly popular); and the ability to obtain somewhat substitutable credentials of other kinds.

What can we predict? That just as with law schools, business schools without some strong form of differentiation or demonstrable value-added will find it increasingly difficult to stay in the business. Just as astonished senior partners in law firms learned that when the economics don't work neither does lifetime employment, so too will astonished tenured professors. If your school goes out of business, tenure doesn't mean much. In the short-term, admissions offices, scared about their ratings dropping, will increasingly focus on how "employable" a candidate will be after graduation, rather than the more traditional emphasis on academic accomplishments and future potential. And, as major absorbers of MBAs, such as financial institutions, cut back or are regulated to shrink, the lust-inspiring starting salaries and sign-on bonuses of yore are likely to be more rare.

In the longer run, my hope is that these competitive pressures and shifts will lead to some interesting new models for business schools. One I am following with particular focus is how schools are changing to create value for executives throughout their careers, rather than just at the ages of about 26-28. Executive education, to me, is at the forefront of innovation in how the study of business and the practice of business can be mutually informed. I think that is a positive trend that is likely to accelerate.

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