The Party's Over: The Coming B-School Shakeout

Globalization has fueled the good times for business schools. Since the 1980s, billions of people have joined the world's market-oriented economies, and massive improvements in the well-being of diverse societies have spiked demand to learn how to market products, become entrepreneurs, and lead organizations. When properly done, an MBA education provides deep insights into how organizations work and the nature of competition.

For business schools themselves, the good times have meant more money—tuition increases have exceeded inflation for each of the past 27 years. More students have gained entry into management education through a somewhat odd mix of schools, ranging from high-end universities deciding that they couldn't do without a business school to stand-alone entrants in hot spots around the world. The number of new business schools is so staggering that accreditation agencies have only a rough handle on the 10,000 schools now operating throughout the world.

Will the good times come to a screeching halt for management education? Yes. Partly because of the performance of the leaders of our global financial businesses but more fundamentally because schools are subject to some of the same economic forces as the businesses their graduates hope to run someday. But to understand the nature of the harsh competitive dynamic already under way, we must consider how business schools compete and the constraints on how they operate, both locally and globally.

Talent, not Market Share

First, like most of higher education, business schools compete on the quality of the talent they attract rather than on global market share. Second, as part of universities, most business schools face organizational constraints such as the fact that faculty members don't like to be physically separated from their colleagues or their students.

These two factors help explain why business schools are small and tend to be local. They have responded to globalization by diversifying their human capital, developing exchange programs, and adapting their curriculums, But while the world has flattened during the past three decades, most business schools have remained in their own corners. A supporting fact: If one focuses on the U.S. schools that have made BusinessWeek's top 30 at some point in 2000-08, these 34 elite schools as a whole did not expand their full-time programs during that eight-year period.

Thus, at this dramatic point in management education, business schools collectively are in a peculiar state. There are a huge number of business schools, many of them recent entrants, and they are local in terms of how they are organized. The only substantial exception to this claim is that many have entered into cross-border joint-venture arrangements for the purpose of offering executive MBA degrees.

Shrinking Funds

What's happening to business schools right now? Demand for degree programs of various types and for non-degree executive education programs is dropping worldwide. Corporate support and alumni giving—a major source of revenue for all higher educational institutions—are down. More subtle, the ability of MBA grads to move to high-paying jobs is being called into question by many changes. Endowments are being leveled. As of last June, two business schools in the world, (Harvard Business School and Stanford), had endowments in excess of $1 billion, and five more, (Chicago Booth, Kellogg, MIT, Wharton, and Yale), had endowments in excess of $500 million. My guess is that only HBS will remain above $1 billion, and the number above $500 million will be cut to four. With these drops, the schools most dependent upon endowment income as well as those with shaky tuition revenues will face large adjustments.

In concert with all these changes, business school deans face big strategic questions. The circumstances facing schools and their objectives vary dramatically, precluding a one-size-fits-all solution. But there are guiding principles that will serve business schools well in these trying times.

First, in addressing competition, the very nature of competition will shift to a much greater emphasis on the strength of a school's franchise in its relevant market. Regional strength matters. So does strength in particular product markets, e.g., an evening MBA program.

Second, while responding to the economic downturn, schools must avoid budget-driven decisions and focus on market-driven strategies. "We need to raise tuition by X% or expand class size because of lost income" is not a good approach. Smart businesses don't just raise prices or increase output in response to market changes. The schools that train their leaders shouldn't either.

Third, global strategies should be rethought, but this has been a constant in the globalization of the past 20 years. One response to the broadening of audiences is the rise of micro segmentation. Building on regional strengths, schools should consider global strategies that have more narrow purposes, e.g. learning that's focused on an industry, region, or theory.

For me and for the University of Chicago Booth School of Business, the most important guidance is to stay focused on quality. Each school needs to understand its market and recognize that the competitive dynamic will force a shakeout wherein the losers will be those who cannot sustain quality.

At the most basic level, business schools operate in two important markets: attracting students and supporting their placement as graduates. For schools who cannot do both very well, the stress test of the next several years will force consolidation, contraction, and perhaps closure. This is a time when long-term, global reputations will be built through a fierce focus on the durable value of management education.

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