‘Trouble in the middle’; Economist, October 15th

I carried this short but interesting article over from the last blog, because there were so many other competing articles. It builds on two other articles reviewed last time; the top hundred business school rankings published by the Economist and the article in Management Today about the growth of business schools in emerging countries.

The article starts with the interesting and counter-intuitive observation that business school attendances often boom during a recession, as managers ‘seek shelter from the storm’. And, following this trend, there has been a recent fall-off in global attendances as economies have begun to recover. This fall has been so severe - particularly for mid-ranking schools in the USA - that there are fears that the traditional business school model is in trouble.

The key ratio behind the willingness of managers to invest in MBAs has always been the multiple of salary earned to investment required. Five years ago the average investment for a two year MBA was around $60,000 and the likely salary earned would be nearly $80,000, a multiple of around 1.33. Since then salaries have stagnated while costs have gone up and the ratio has reduced to around 1.0, still not bad if you remember that the salary is - hopefully - for many years.

The article suggests that current pressures are resulting in the ‘squeezed middle’ as the top schools retain business and the cheaper, lower level schools attract those who cannot afford the high investment. The elite schools like Harvard and Stanford generally retain good ratios of cost to salary, as recruiters are reassured that admittance is a good sign of calibre and commitment. But the mid-level schools are losing out and, at the same time, they cannot afford faculty of the right calibre or to maintain buildings to the high standards expected by modern managers.

Adding to these pressures are the dangers of losing overseas students to the increasing competition from developing countries’ schools. In 2011, about a third of students of American schools were from overseas, double the ratio of ten years ago. Though the new business schools in countries like China and India will take time to grow their international reputations, the pressure for students to stay at home will be intense, particularly as the cost - excluding travel - is around 50% of the USA schools. Though the cost differential may reduce as the emerging schools recruit international faculty, the cost differential will still be substantial.

It is also suggested that the emerging business schools will have other advantages by offering courses that are more global that the US centred American schools. There are at present very few sessions or case studies that cover cross-border activities and truly global issues. There is not enough focus on ‘difficult economies’ and the article quotes one Russian school as accepting students from crime families to help face up to the real life issues where crime and corruption are endemic. Maybe there will be Mafia faculty next!

The expected response is for many US and European schools to follow the example of INSEAD by offering shorter courses of a year or less; apparently this has not impacted the reputation and earning capacity of INSEAD graduates. Another response may be more specialisation, for instance an MBA for those managing in the health sector or in a particular industry.

Overall a thought provoking article that must give the managers of the mid ranking schools - and the universities who rely on their revenue - much food for thought.

Click here to view this article in full:

http://www.economist.com/node/21532269