Business schools are better at analysing disruptive innovation than at dealing with it

Those who can’t, teach

Business schools are better at analysing disruptive innovation than at dealing with it

Feb 8th 2014 | From the print edition

IN EVERY profession there are people who fail to practise what they preach: dentists with mouths full of rotten teeth, doctors who smoke 40 a day, accountants who forget to file their tax returns. But it is a rare profession where failure to obey its own rules is practically a condition of entry. Business schools exist to teach the value of management. They impart some basic principles—like setting clear goals and managing risk. They also teach how dangerous the business world has become. The most fashionable phrase today is “disruptive innovation”: professors solemnly warn people that entire industries face powerful new forces and that comfortable incumbents are at the mercy of swift-footed challengers. But when it comes to their own affairs, business schools flout their own rules and ignore their own warnings.

Opportunities abound. Demand for good management is spreading to the emerging world and to the public and voluntary sectors. The number of business schools worldwide has increased from a handful a century ago to 12,000 institutions that now deliver some form of business education—and first-class establishments are today found in Hyderabad and Shanghai as well as London and Boston. But at the same time they face huge risks. They lack barriers to entry to protect them from changes that are sweeping through the education industry. Good management could ensure that they thrive. But it is in scarce supply for two reasons.

The first is that business schools have been captured by the academic guild. In 1959 two inquiries sponsored by the Carnegie and Ford Foundations argued that business schools were little better than trade schools and urged them to be more academic. Now they are little more than flags of convenience for academics. The surest way to get a tenured post is to write a PhD (on a subject only loosely related to business) and publish a string of articles in respected journals. Tenured academics are untouchable and can block any change in a school. So far the best schools have been able to thrive despite the power of the academic guild. Academic star-power helps them to attract high-paying MBA students.

But even at the elite level the power of the academic guild can be a problem. Professors have too little incentive to focus on teaching: the best will perish unless they publish in the right journals. And they have too little incentive to produce usable research. Oceans of papers with little genuine insight are published in obscure periodicals that no manager would ever dream of reading. Innovation is fuelled by bringing ideas from different spheres together. But academics specialise in dividing the world into tiny sub-disciplines. And when you get to the fat middle of the market these problems rise to the level of dysfunction.

The second problem is a herd mentality. Business schools suffer from a bad case of Harvard and Stanford envy: they dream of having fancy buildings and star professors. But the cost of participating in the arms race is going up—Columbia Business School is spending $600m on a campus—and the supply of people who are willing to pay top-dollar for an MBA is falling. The number of people taking the GMAT, which regulates admission to many business schools, fell by 50,000 last year. The number of Americans taking the test has fallen particularly sharply, forcing mid-ranking schools to dig deeper into their admission pool or rely on recruiting Asians, who will increasingly have business schools of their own to choose from. The reason for the softening demand is that returns on investment are also falling. The Graduate Management Admission Council, which conducted a survey of graduates of American business schools, found that 8% of the class of 2012 did not have a job when they graduated.

The obvious solution for schools outside the top tier is to compete on cost or innovation. Though the average fee for an American MBA course has risen by a third over the past four years some schools, such as Cornell and Rochester, are offering shorter courses and others, including Maryland and UCLA, are forgoing the annual fee increase. Ashridge, near London, focuses on short courses for executives. But too many continue to stick their heads in the sand. Meanwhile, they face competition from companies with a monetary incentive to control costs and expand enrolment. The Career Education Corporation, an American firm, is assembling a portfolio of business-oriented institutions. Laureate Education has over 800,000 business students in 30 countries. Private schools such as these are directly challenging the faculty-dominated not-for-profit model, employing staff to teach rather than research and making it easier to combine study with work. And some consultancies and investment banks are running in-house mini-MBAs.

Mind your own business school

The result is a paradox: many of the people who run business schools are approaching the future in the most unbusinesslike manner. The mood at this year’s meeting of deans in Gothenburg, Sweden, was a mixture of gloom and fatalism. They talked about academic inflation, image problems and the threat of MOOCs or massive open online courses (see Free exchange). But they showed little confidence in their own ability to grasp opportunities or combat threats.

The deans have few levers at their disposal to reorganise their schools or cut costs: more than 80% of their bills go on academic salaries. They also have few incentives to pull what levers they have: almost all of them are former academics who are appointed for a maximum of five years. Michael Porter of HBS once warned that the most dangerous place for a business is to be stuck in the middle without an obvious advantage of cost or quality. Over the next few years a striking number of business schools are going to discover just how right he was.