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Will Stanford's business school get caught between two bursting bubbles? Garth Saloner, the school's dean, thinks not
THE Economist has written a lot recently about whether we are witnessing a bubble in higher education and at business schools in particular. But it is not the only bubble we are concerned with. Two weeks ago, in a cover leader, we asked whether the tech industry, too, was showing signs of becoming frothy. The article cited a handful of examples—secondary markets valuing Facebook at $7.7 billion, Microsoft paying $8.5 billion for Skype (400 times its operating income) and some claims that Color, a photo-sharing social network, is worth $100m, even though it has an untested service—as evidence. It is tempting to conclude that Stanford Graduate School of Business, with its deep links to Silicon Valley, would lie at the confluence, should these two dams burst. The dean of Stanford, Garth Saloner, is bullish on both fronts, however.
Mr Saloner readily accepts that business education may be heading for a shake-out. He even acknowledges that the tide line might be high. What he doesn’t accept is that it will reach Stanford’s lofty peaks. The top-ten American schools can expect to keep their toes dry, he says.
On this point he is probably right. There will always be a demand for elite institutions. Indeed, if we are to see an oversupply of MBA programmes, and an undersupply of attractive jobs for their students, then the only way for MBAs to distinguish themselves from the masses is to graduate from a lofty school.
This was point was hinted at in “Rethinking the MBA” an influential book by three Harvard professors, Srikant Datar, David Garvin and Patrick Cullen. They studied the curricula of 11 elite schools: Carnegie Mellon, Chicago, Dartmouth Tuck, Harvard, INSEAD, MIT Sloan, New York, Kellogg, Stanford, Wharton and Yale. (To this one could easily add IMD and London from Europe and Columbia from the US.) The authors wanted to see what lessons second-tier schools could draw from their success. But perhaps there is only one lesson: to become thought of as more prestigious. This requires a long history and ultra-successful alumni—probably even more than it requires a high ranking. It is therefore a hard clique to break into. Stanford is thus probably safe. It is not unthinkable that, should we see the business-education bubble burst, such institutions will see demand for their programmes increase, as they become viewed as safe havens. Mr Saloner says that Stanford still receives thousands of applications for its $53,000-a-year MBA programme.
He is more dubious of the idea of a tech bubble. He was on Stanford’s faculty in 1999 when the last bubble burst and it is interesting to hear him talk of those times. His students would often just disappear, he says. Months later he would find out that they had dropped out of school having sourced million-dollar funding for some start-up or other, many of which were never sustainable.
There are big differences between then and now, he reckons. "The Valley is more robust than ever," he explains. "[It operates] in many more sectors now: mobile phones, clean-tech, life-sciences. There are many ways in which we are diversifying." Another difference, he goes on, is that tech businesses today are tangible; the ways that they can monetise their products is apparent in a way that it wasn’t a decade ago. And crucially, from Stanford’s point of view, students with good ideas are staying on campus. Because the technology has matured, they can innovate quite cheaply, building iPhone apps and the like.
Which is all just as well, given that the school has just formally opened a new campus, which cost $345m. The trend for huge capital expenditure on things such as flash new buildings, just when an MBA’s value is being called into question, is another reason why many commentators fear that some business schools will become unviable. Stanford at least has the advantage of alumni with deep pockets—and in particular Phil Knight. Nike’s founder doled out $105m to help pay for the new campus. The school claims that it is one of the most environmentally sustainable business-school campuses ever built. Which is a useful attribute to have, when the business-school environment feels so unsustainable.
MBA job prospects: Don't panic, yet
There has been much talk of a bubble in business education, not least on these pages. But the evidence doesn’t all point one way. One of the key predictions of the bubblists is that we are about to see a glut of MBAs flood onto an increasingly ambivalent jobs market. This, it is expected, will trash the return-on-investment that an MBA offers and expose business schools’ sky-high tuition fees.
This apocalyptic prediction may yet come to pass. But a report from the Graduate Management Admission Council (GMAC) suggests that we are not quite at that juncture yet. On the contrary, its annual Corporate Recruiters Survey says that job prospects for graduates have notably improved.
Among the report’s findings are that 57% of this year's MBA graduates received a job offer by March. This compares with just 40% by the same time last year and 50% the year before that (although these are still somewhat lower than historic highs). The average salary of recent MBA hires in America is $91,433, compared with $86,141 in 2010. Consultants can expect the highest salaries: over $90,000 a year in both America and the European Union, this despite decade-high unemployment rates in both regions.
But before we get too carried away, there does appear to be a caveat. For some sectors and functions—notably marketing and sales, human resources, consulting and business development—most of the growth is in Asia. The report doesn’t tell us whether firms from this region are hiring from local schools or expensive Western ones. But a recent report in The Economist suggested that the trend is decidely towards the former. If this is so, schools in Europe and America should, perhaps, hold their sighs of relief.
GMAC has produced an interactive graphic of its results here.
A TROUBLING report published in Bloomberg Markets looks into the murky world of university endowments. A couple of issues stand out. First, Bloomberg claims that John Allison, the former chairman of BB&T, a bank holding company, succeeded in influencing many universities’ curricula in return for large donations. At least 60 schools, it is claimed, agreed to create a course which had "Atlas Shrugged" by Ayn Rand—which promotes laissez-faire economics and is Mr Allison’s favourite book—at its heart. "Allison’s crusade to counter what he considers the anti-capitalist orthodoxy at universities has produced results—and controversy," reports Bloomberg. "Faculty at several schools that have accepted Allison’s terms are protesting, saying donors shouldn’t have the power to set the curriculum to pursue their political agendas."
This is a line that clearly shouldn’t be crossed. But in today’s climate, in which a university defines its success as much by its financial muscle as by the quality of its students, it seems the merest flash of a donor’s cash can send it so giddy that it forgets any sense of propriety. It was only a few months ago that the story broke that the London School of Economics had accepted fistfuls of dollars from the Qaddafi regime.
It is also, perhaps, more evidence of a higher-education bubble. One reason, no doubt, why universities feel compelled to bow to the whims of their sugar daddies, is that they are being squeezed both by a drop in government funding and an inability to wrestle any more cash from students who now pay much more attention to the return-on-investment of a pricey college education.
It is a subject to which we will return, no doubt. But there is another section of the article which also demands some scrutiny:
Drexel University spent years wooing Bennett LeBow, chairman of cigarette maker Vector Group Ltd. (VGR), to get $45 million to construct a new building to house the LeBow College of Business. He gave Drexel $10 million in 1999 in a naming rights deal, but he demanded that the institution improve its position in business school rankings before he donated more.
It might sound surprising coming from a publication that publishes an MBA ranking, but this is wrong-headed. It is actually quite easy to boost your ranking in the short term. Here’s a four point, beginner’s guide:
- Only accept the students with the highest GMAT scores, regardless of whether they are sociopaths.
- Recruit some professors with the kind of esoteric research interests that will get them published in rarely-read business journals. Don’t worry if they are useless in the classroom.
- Never accept anyone onto the programme who has a decent, well-paying job. She (much better if it is a she) will only muck up your average before-and-after salary comparison.
- And while you're at it, instruct your careers department that, under no circumstances, must students be encouraged to take badly-paid, do-gooder jobs, such as working for a charity or a hospital trust. In fact, if possible, ensure they all become bankers.
Of course, while taking such steps might impress a wealthy donor, as the school scales the ranking ladder, it wouldn’t be much fun for the students, who would soon take their own cash elsewhere.
Ranking organisations such as The Economist are often perceived as inhabiting ivory towers, handing down evaluations from on high. But in my experience most are honest about the limitations of their lists. Each measures something different, and none can be considered (or would consider itself) the sole, authoritative judge of a school’s worth. But they are a very handy way for the lazy to appraise a school.
The University of North Carolina's new online MBA, MBA@UNC, is an interesting experiment. There are plenty of online programmes which offer a basic MBA to a mass audience for relatively little money, such as the Universities of Phoenix or Liverpool. Equally, a lot of top-notch schools offer online equivalents to executive MBAs: high-priced programmes, but with a cohort that has already climbed high up the corporate ladder. However, UNC reckons it is the first top-100 business school to offer the equivalent of its full-time MBA online, with fees roughly equivalent to two years' full-time tuition: $89,000.
It is a bold move. Instinctively, one thinks that an online programme must be cheaper to run than an equivalent full-time, campus-based one. There are economies of scale, for a start, as more students can be accommodated on an online programme. There are also none of those overheads involved in running a physical space. Plus, you don't need to pay for those costly extra-curricula services such as a careers department, as the point of an online programme is that students usually work and study at the same time. So will people really be willing to shell out the same money to study from the comfort of their bedrooms as they would to spend two years immersed on a university campus?
The programme's director, Doug Shackelford, admits it is a risk. He says that he has asked himself many times why no other comparable university has done what he is doing. The school has sunk considerable sums into the project, producing slick online lectures and investing in technology. Yet he is not certain of returns.
Nonetheless, the initial take up has been promising. Although interest has so far been overwhelmingly confined to domestic students, the school has had little trouble in filling its first intake, which it has limited to 50 students for the first year. Those currently serving in the military have been particularly keen, says Mr Shackelford.
It is a microcosm of a wider, looming debate. Some think the current generation are now so used to living their lives online that education at a distance has become an inevitability. Dipak Jain, the dean of INSEAD, is sympathetic to this view. Yet there are others who believe that nothing will ever usurp the classic university experience. It is hard to imagine Harvard, for example, ever teaching its programmes remotely. For them it is, above all, a question of protecting its brand.
The problem that an innovative programme such as MBA@UNC may well face is that it gets caught between two stools. Mr Shackelford says that he sees no theoretical limit to the number of students the programme will admit to the programme, as long as quality isn't compromised. This is a sticky position. One reason why people are prepared to pay such huge sums for an MBA is that it is an entrance to an exclusive club. Would students be prepared to pay the high fees if the cohort ran into the thousands? It will require a big change in students' mindsets. Particularly with many now proclaiming that business education is showing all the signs of being a bubble about to go pop.
Eminent professors explain their subjects
The finance course examines the ways that individuals and companies raise and spend money—both how they do and how they should—so as to produce the highest expected value from investments in assets.
An asset is an object into which an investment is made with the expectation of uncertain future cash flows. Assets can be “real” (for example, plant and equipment, new products and markets or companies) or “financial” (stocks and bonds). The study of investments in real assets falls under the rubric of corporate finance, while that of financial assets comes under capital markets.
Corporate finance addresses how managers of companies make real investments, raise capital, control risks and return money to investors. Topics of study include cash flows, capital budgeting, capital structure and cost of capital, business valuation, mergers and acquisitions, risk management and payout policies.
The course on capital markets examines how financial securities are priced by markets, and how to make decisions concerning investments in portfolios of different types of financial assets. Topics of study include the relation between risk and return, pricing of bonds, stocks and derivatives, term structure of interest rates, allocation of wealth among different types of securities, and institutional frictions that prevent the attainment of optimal prices.
A few simple assumptions about investor behaviour underlie much of finance: that, all else being equal, investors prefer more wealth to less, less risk to more, and want their cash flows sooner rather than later. This leads to the idea of a discount rate, the notion that future cash flows are discounted in value to equate to the present, using a factor that reflects a risk-adjusted cost of capital relevant to the asset.
These ideas combine to establish a key rule: we should invest in an asset only if it is expected to generate a return greater than its cost of capital, in other words, if it has positive expected value today (“positive net present value”). Since that judgment requires assessing an asset’s intrinsic value, tools and methods to assess such value are central to finance. Intrinsic value, in turn, is determined by the sum of all expected future cash flows from the asset, discounted back to the present at its cost of capital.
In its theories and practice, the core ideas in finance are founded on a set of logically cogent ideas. There are few disciplines in business schools where academic research and the real world come together as remarkably well as in finance. The ideas that underpin the field not only win Nobel prizes regularly, but they also form the basis upon which billions of dollars change hands every day.
That said, there are many questions that finance still continues to grapple with. What causes recurrent financial crises? What is the role of “long tail” risks, and how can they be understood and analysed better? Why do we witness apparently predictable irrational investment decision-making by investors and managers? Why do markets and companies seem prone to herd behaviours? How can corporate governance and incentives be structured so as to produce value-creating outcomes for the long run as opposed to the short run? What is the right balance between free markets and regulation in enabling the best outcomes for society?
Scholarship in finance continues to make exciting progress on all of these important questions.
Anant K Sundaram: Finance professor at the Tuck School of Business at Dartmouth College
News from the schools, May 2011
Rolling news from the business campuses
*Melbourne Business School has appointed Zeger Degraeve as its new dean. Mr Degraeve is currently a professor at London Business School, specialising in decision making. He was also instrumental in setting up LBS's campus in Dubai. Jennifer George, the current dean, is to go on maternity leave.
*Stanford Graduate School of Business has moved into a new home. The campus, called the Knight Management Center, cost $345m and was funded, to a large extent, by a donation from Philip Knight, the founder of Nike and Stanford alumnus.
*GMAC, the organisation behind the GMAT entrance exam, is releasing an iPod app. The app, to be launched later in May, includes sample questions and explanations of answers.
MBA diary: End of year account
In the third of her posts about life as a London Business School student, Neha Ajmera looks back on her first year and offers advice for students heading to b-school this year
As I enjoy a glorious London afternoon, I find myself in a somewhat reflective mood. At the end of my first year at London Business School, and as I look forward to summer internships, exchange programmes and the second year, I cannot help but wonder: what did it all really mean to me?
If I had to pick one word that captures the essence of the first year, it would be resilience. Resilience to death by corporate presentation and to disappointments in the summer internship placement process; the resilience to navigate the vast quantities of information thrown at me and to build a life away from friends and family. And, yes, the resilience to survive dawn classes with a hangover. It has been a tremendous learning and character building experience, but yet somewhat like a roller coaster—you get on with trepidation, yell and scream and squeeze your eyes shut, but when it is over you want nothing more than to get back in line and do it all over again.
So, if you are an aspiring MBA, or an incoming student at a top ranked school, what can you expect, and how can you prepare for the ride? If you were to ask the 400 students in my class this question, you would get, undoubtedly, as many answers. Here is my version. Remind yourself often that the MBA is a life experience. It is so much more than that first, post-MBA job. Keep in mind that whether you get a summer job at Goldman Sachs or not, it will most likely not define how the rest of your career will be. Remember that there will be many highs and many deep friendships forged. But, there will also be a few lows and a ton of hard work. While an open mind is a must, remember also not to get lost in the crowd, especially when it comes to career choices.
I think this last thing is the hardest to do. For instance, as I sat through endless company presentations, ate unmemorable snacks and tried to network my way to a job interview, I often wondered: what did I really want to do? And why was I sitting in a General Mills presentation? I don’t even like cereal! My point is that it is easy to get carried away and lose sight of what really motivates you. So, spend some time this summer trying to think about what that is for you.
The other thing to do this summer is to bid a temporary farewell to your current life. Tell your friends and family that while you love them, you will basically go missing—especially if you are moving to a new country. This isn’t a bad thing. Few other experiences will sate your wanderlust better. I used to think I was well travelled, well read and highly motivated. At London Business School, I find myself dwarfed, both by the tremendous achievements of my classmates and their humility. Remember to open your mind to their experiences. Also, if Sean Fitzpatrick, former captain of the All Blacks rugby team, happens to swing by your school to teach the haka, be there.
Related diaries: Neha braves orientation week, Neha's first term
DIPAK JAIN, who has recently taken over as dean of INSEAD after a long reign at the helm of the Kellogg School of Management, is an energetic thinker about the future of business education. He is also not afraid of airing the odd radical idea. During a wide ranging discussion at The Economist's office recently, he advanced an interesting thought. There would come a time, he said, when the core component of an MBA—those courses at the beginning of a programme in which one learns the basic principles and techniques of management—would be delivered online, before a student steps onto campus. (I hasten to add that there was no implication that such a scheme is imminent at INSEAD.)
It struck me as an interesting concept. There has been huge debate over whether the core of an MBA has become commoditised. You won’t get Harvard, for example, to admit that what is taught at the beginning of its programme varies little from other schools. Nonetheless, all of the top programmes go out of their way to convince us that what really sets them apart (and, by implication, justifies the mammoth fees) is what happens after the core.
Already many schools—including Harvard and Wharton, although there are numerous examples—are cutting the time they spend teaching core subjects. Instead they are allowing students the option to specialise with more elective courses, or to focus on a school’s pet theme, such as leadership or ethics.
It seems to me that Mr Jain’s idea is just a logical extension of that. It gives more opportunity for schools to differentiate themselves. Furthermore, it means that all students arrive on campus with a similar basic grasp of business.
It would be a brave institution that tested the idea; don’t expect any of the top schools to adopt it any time soon. But it would be an fascinating experiment, nonetheless.
Academic view: The difficulty of thinking simply
It is right that MBA students learn how to distil complex business problems into their basic components, says Markus Reitzig, a strategy professor at London Business School. But, as the Fukushima disaster tragically illustrates, there is a downside: the danger of "overconfident oversimplification"
IF I were to ask my MBA students at the beginning of their programme about the reasons behind the Fukushima nuclear accident, I would expect many of them to delve into a rather unstructured debate over technology or public policy. Perhaps, they would focus on the uncertainty of nuclear energy, or on short-sighted politicians who refuse to invest in sustainable-energy alternatives.
When I ask them at the end of their programme, I expect that most would explain the problem in a crisper way.
They may well reason that an accident such as Fukushima is possible because we price non-renewable energy too cheaply—and have been doing so for decades. That we do not sufficiently account for the externalities of burning hydrocarbons or splitting uranium atoms, be these health issues, climate change or the risk of radioactive destruction. In fact, when it comes to something as potentially devastating as nuclear energy, it is easy to argue that, were we to factor in the true associated costs, it would become entirely unaffordable.
They may even conclude that we still use non-renewable energy because we are in a “prisoner's dilemma”. Even though it would be in everyone’s greater interest to consume energy responsibly, if you are the one ignoring the call for moderation, you can gain an advantage over the rest. Hence no-one acts with restraint. And that means that we continue to pay little for energy and consume a lot, despite consequences such as floods and radioactive contamination.
This way of slicing a phenomenon into its core components, rationalising it using incentive-based theories, and drawing conclusions from the analysis is what we want future managers to pick up at a business school. (Though it is usually the last thing they adopt, because simplification is not an easy technique to acquire.)
I am a strong defender of this approach of teaching basic business to MBAs. For one thing, it makes these executives more rigorous thinkers. For another—and let’s not fool ourselves here—it resonates with their expectation. People who pay $100,000 or more for a degree tend to ask the question “tell me clearly, what is in there for me?”
However, as much as I am a supporter of training managers this way, I also see a dangerous downside: overconfident oversimplification. The Fukushima disaster analysis tragically illustrates what I mean. Whereas it is fine to simplify the problem to describe the status quo, it becomes dangerously misleading if managers confidently do what we encourage them to: base future actions on this analysis.
In fact, if they did, they would have to conclude that we should all continue to do business as before, drawing on cheap energy, as there is no way out. Not only is such inference wrong, but it also paints those who have only understood half the energy business as smart thinkers. And it gives a quasi-intellectual justification to those few established power suppliers who really have no interest in changing the status quo.
In a world in which the downsides of energy consumption start to affect us all more equally—climate change is global, radioactive clouds don’t stop at national borders—the incentive to consume energy cheaply here and now starts to vanish. We are no longer bound to wind up in the prisoner's dilemma. In fact, the challenge for all parties now becomes to design institutions that suppress the undesired effects of free-riding, so that we can co-exist using energy in a more sustainable way.
Management students who take their analysis this far will be at a great advantage. They will benefit from being at the forefront of this process, and will be the first to shape business accordingly. But this requires an understanding of strategic business interaction which goes beyond the basic simplifications we draw on in our core teaching. It invokes the concepts of information, co-ordination and collective action in addition to that of competition.
Management researchers have much to say about these trickier business questions. But while students in our elective classes can learn that it is overly simplistic to view a business interaction through the lens of the prisoner’s dilemma, we need to put much more emphasis on these aspects in our core syllabi. If we get the mass of our students interested in starting businesses that solve both their financial and our societal problems at the same time, then eventually their businesses will create the options we need. The more they work on it, the faster it will happen. The faster it happens, the better for us all.
Markus Reitzig: Assistant professor for strategic and international management, London Business School
Our sister blog over at the Economist Intelligence Unit, is taking a look at the new book from Tuck Business School professors Vijay Govindarajan and Chris Trimble. “The Other Side of Innovation” deals with what seems to be management’s current hot topic: failure. Failure, it argues, is a healthy way of learning valuable lessons. But Messrs Govindarajan and Trimble say that few firms take the time to understand the reasons why things go wrong, believing it better to be seen to be moving on. But, says the EIU:
Establishing a systematic approach to managing both the failures and successes of innovation might not only open the floodgates to new ideas, but also affect the way that corporate decisions are made and staff managed. Some appear to have cottoned on to this. GE's head Jeff Immelt, for example, says he wants to try to inculcate a policy of "fast failure" in the company, so staff are not scared to try out new ideas. Scott Cook, the founder and CEO of Intuit, a tax and accounting software developer, goes further, advocating a new style of management altogether, based on "rampant experimentation". In a recent speech at an Economist conference in Berkley, California, Mr Cook argued for shifting decision-making away from the diktat of the boss, and allowing anyone and everyone in the company to launch "rapid high-velocity experiments" to test what really works in the market.
Read the full post here.
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