Are American business schools headed For a GM-like catastrophe?

Harvard Business School
The Harvard Business School Baker Library faces the Charles River in Boston, Massachusetts, U.S., on Sunday, June 26, 2011. Photographer: Kelvin Ma/Bloomberg
Photograph by Kelvin Ma—Bloomberg via Getty Images

(Poets&Quants) — One of the more tortured narratives in business has been the long and steady decline of the U.S. auto business. A relentless deterioration in market share ultimately led to the bankruptcies of General Motors and Chrysler. Are U.S. business schools headed for a similar fate?

Roger Martin thinks so, and he is deadly serious about it. The former dean of the University of Toronto’s Rotman School of Management, Martin is a leading thinker on business school trends and issues. He’s an iconoclast who has little patience for the status quo of business school academia.

He equates the tenured faculty at top business schools to the United Auto Workers union in their single-minded pursuit of higher wages for less work in the classroom and their placement of their own needs and wants over the interests of the customers, the tuition-paying students and the companies that hire MBA graduates. “I can’t help but see the situation as eerily similar to General Motors in 1971, when the company experienced a shock with OPEC, and GM didn’t do all that much to change,” says Martin. “Some 37 years later, the company was bankrupt.”

Martin sees early warning signs of a collapse in the U.S. business school model. Enrollments are being propped up by an increasing percentage of international students. Rising tuition and relatively stagnant starting salaries for MBA graduates have weakened the value of the degree, from a 170% return in 2001 to 96% last year. The MBA market share of master’s degrees in business began to decline in 2010. The upshot: Martin says that the top 50 U.S. schools will be forced to dramatically reduce tenure-track faculty as MBA enrollments continue to shrink and companies refuse to pay higher salaries to graduates.

“It’s not just MOOCs or the impact of technology on higher education. It’s not just Peter Thiel who is offering $100,000 to kids to drop out of college. And it’s not going from a payoff on the MBA of 170% to under 100%. It’s all of those things together that is creating storm clouds that are now being ignored. I absolutely believe that if business schools don’t take action in the next five years, we are looking at a GM scenario. Some 90% of current tenure-stream faculty positions will not exist.”

Like U.S. consumers who began buying Toyotas and Hondas, Martin sees rising numbers of would-be MBA students opting for one-year specialized master’s degrees, enrolling in online MBA programs at a fraction of the cost of full-time, two year MBA experiences, or simply doing without advanced education and progressing in their current jobs.

“The MBA has had this awesome run from a tiny business in 1955, when it was 5% of all master’s degrees awarded in the U.S., until it became the dominant educational option in the U.S.,” he explains. “In 1985, the MBA degree started to flatten out compared to other graduate education. It ceased to become the winner, but graduate education was growing by leaps and bounds so it became a bigger and bigger business largely due to the growth of graduate education overall. There were things about the market that allowed the people in it to say, ‘Things are fine. There is no problem here.’ But there are signs that things weren’t so great.”

A Harvard MBA and former consultant, Martin served a highly successful run as dean of the Rotman School from 1998 to 2013. Since then he has been the academic director of the Martin Prosperity Institute at the leading Canadian business school. He presented his observations on the future of the MBA last week at the Academy of Management’s annual conference in Vancouver. Martin focused his research on U.S. business schools because, he says, the U.S. is the “bellwether market” for the MBA degree. Martin recently shared his observations in an interview with Poets&Quants.

Tracking three-year salary increases for MBAs of the 50 to 60 U.S. schools in The Financial Times’ business school rankings, Martin found that the return on the degree was in the 170% range as recently as 2001. “It dipped below 100% for the first time last year,” he notes. “That is a spectacular fall because we have saturated the world with plenty of MBAs who mostly are narrow specialists. From the perspective of students, it’s not quite the deal it used to be. That’s why fewer North Americans are taking the GMAT to go to business school.”

As the pipeline of American students has fallen, schools have largely made up the gap by increasingly filling class seats with international students. In 2009, roughly 31% of the incoming MBA students at the top 50 U.S. schools were international. Today, that total has grown to 40%, according to Martin’s analysis. “To save their bacon from being less attractive to U.S. students, they filled in with foreign students. That is not a bad strategy, but it is a short-term strategy.” Over a two-year MBA program, those additional international students alone are providing about $100 million in revenue to the top 50 schools, Martin estimates.

International students are still heading to U.S. business schools out of hope that they can land a job in America. “That is an enticing lottery ticket to buy, but a bunch of these students are going to end up very sad when they get punched out by immigration,” Martin says.

For U.S. business schools, ‘buying’ international students may well be the equivalent of selling cars at rock bottom prices to rental car agencies to offset declining market share. In the short-term, the practice props up revenue, but it may not be sustainable in the long-term.

“The problem with GM was that the stock market was saying to them, ‘Don’t take strikes. You’ve got to make money. Just keep it going.’ So they agreed to pay more and more to union members—even when it made little economic sense to do so—to avoid any strikes. And for business schools, it’s now the university presidents who are saying, ‘Just keep it going. Don’t tell me you have problems. Don’t tell me I have to bail you out.’

“GM paid for labor peace with rising salaries and benefits. In business schools, professor salaries have risen dramatically. If you are a sociologist working in the business school, you get two times what you would make in the sociology department. It’s the same for economists. The number one thing that business school professors do is negotiate for teaching relief.”

Martin says that the move toward two-tier wages in the American auto industry is now playing out with a vengeance in academia, with increased hiring of adjunct teachers rather than tenure-track professors, who average $300,000 a year in pay and benefits at top schools and teach fewer than three courses a year.

Martin says that tenure-track faculty “are generally engaged in a game of ‘how little I can teach and how I can show complete fealty to my academic discipline.” Efforts to write for practicing managers and executives are often ridiculed by many academics or ignored. “In my faculty, Harvard Business Review articles are considered worth less than nothing,” adds Martin. “They are prima facie evidence that you don’t care about research because you are not talking to other academics.

This highlights a growing divide between the interests of faculty members and the needs of business students. “There is an increasing schism between the funders of MBA education—the students who pay the tuition—and the professors who want to do their research and teach less,” insists Martin. “The real challenge is that with the academy organized the way it is, faculty wants to research in disciplinary areas that are so narrow and more often than not do not correspond to real business problems, which are integrated in nature.”

Unless schools begin to turn out more graduates with skills to address real problems, Martin believes, the value of the MBA will continue to decline and starting salaries will remain relatively stable. “My prediction is that we are going to have a much smaller business,” he says. “In 20 years, there will be 10% as many tenured faculty members as there are today. What I predict is that there will be specialist researchers and the really rich business schools will have 35 to 50 of them and Iowa State will have one. Students will mainly be taught by teachers who have a focus on teaching. “

Martin maintains that most faculty have no idea that they are helping to destroy the current business school model. “I don’t believe … that UAW workers felt they were engaged in destroying General Motors,” he says. “But when you start down that path, you just end up doing things that in fact do destroy the host. Again, there is variance. We have some awesome professors who love to teach students in the classroom and are exceptionally good at it. So I can’t paint them all with the same brush and don’t.”

In many cases, however, business school faculty display the same attitudes that led to massive market share losses at GM. Martin an example of a Rotman faculty member who one day made a bee line to him when he was dean to grouse about the new building the school had just moved into. She bitterly complained that the faculty offices all had clear glass on the outside. “She said, ‘This means that when I am sitting at my desk working on my research, a student could come by and knock on the door. They can interrupt me from my research work. This design is anti-research.’ I pointed out that her office was on the upper floor and that I would bet that maybe one student a day would venture onto that floor. But she wanted opaque walls to prevent the possibility that one student maybe once a day or once a week might actually knock on her door. At that moment, I thought to myself that this is a sign the apocalypse is upon us.

“Now, these are bright, hard working people, and I personally would rather have them guided toward doing work that is more relevant to the highest value business challenges out there. But most academics are working on the easiest and less relevant issues. We have to have them understand where the money comes from. It is a tuition-supported business, and it isn’t going to be anything different. The numbers just don’t support it. The staff cares deeply about the students. They universally do. But we have professors who just don’t and they are a huge cost item. We can’t have this gigantic cost item against the interests of the people paying the money. The industry will be devastated if we don’t do more relevant research and don’t pay attention to students.”

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