Higher Ed Tuition Bubble Update

This is sobering: The looming student loan bubble – Almost half of all student borrowers were not making payments. 1 out of 4 in debt repayment past due on student debt.: “The looming student loan bubble – Almost half of all student borrowers were not making payments. 1 out of 4 in debt repayment past due on student debt.”

(HT: Instapundit)

MBA tuition bubble update

If you want to see just where the MBA business may soon be heading, read this – just in from Balkinization (HT: Instapundit): The Law School Crunch Is Here–Finances and Quality to Suffer. New numbers released by LSAC show applicants to law school for 2012 are down in every region of the US vs. previous year, with the majority experiencing drops of 15%-20%. Enrollment is also dropping – 2012 may see the lowest enrollments since the 1990s (from 52,000 enrolled in accredited programs two years ago to a possible 43,000 this year). With such a precipitous enrollment drop comes low quality students and severe financial difficulties. The bad news is that even at these low numbers, the number of graduates far outstrips the number of available jobs. Tamanaha estimates the equilibrium number of first year enrollments to be around 35,000. The good news is hard to find.

The law school industry appears to lead its b-school counterpart by a few years. Many of the trends affecting law schools – the most salient being the discouraging cost/benefit ratio facing prospective students – are also affecting graduate business schools. The lag between the two may be due to the fact that, for law schools, the immediate value of a law degree is much more transparent. One cannot be a lawyer without a law degree and the only purpose in having a law degree is to become a lawyer. When the bottom falls out of the market for lawyers, one would expect it to fall out of the market for law education in short order. Since MBAs are, ostensibly, useful in any business endeavor, the connection between the education and practitioner markets is less obvious.

That said, business schools face other challenges. For example, law schools still provide an important certification function and, as such, have presumably retained a requisite level of educational content. This maintains their position as a necessary link in the professional chain. Business school educational content, on the other hand, has been on a downward glide path ever since the advent of Business Week surveys in the late 80s (and the Northwestern response innovation to treat students as “customers”). With no objective certification requirement, b-schools have been free to dumb down the education, admit large numbers of questionably-qualified-but-able-to-write-a-check students, and increase activities that have little to do with learning (e.g., social networking). Simultaneously, we see the stirrings of competition from untraditional  sources, such as high quality schools in Europe, China and India (previously a growth segment of the domestic MBA education market), free online courses from top schools such as MIT and Stanford, and alternative forms of education (such as E[enstitute]‘s apprenticeship approach). These differences suggest that the bottom, when we hit it, may be worse than that for law schools.

During a discussion of these developments the other day, a young colleague objected to (what he interpreted as) my Cassandra-like apocalypticism on this topic. The objection was misplaced. I do believe the market for MBAs is going to get a lot tougher in the near- to mid-term – perhaps catastrophically so for programs outside the first tier. In the long-term, however, the turbulence is going to force our institutions … wait, I mean us, the faculties … to revise our business and educational models to compete effectively. The reason to start thinking about the bad-news scenarios now is to prepare. So, when the crunch comes, clear-thinking colleagues can step up to implement successful responses. In my judgment, the market for business education is going to become much more fragmented and diversified. This strikes me as a good thing, with one  winning strategy being to take the research-education link and its attending certification role seriously once again. And, that, in my opinion, would be a wonderful development.

B-school tuition bubble update

Business dull, 65 B-schools across India to shut down

This is what happens when the b-school market has excess capacity. ROI for students is negative, enrolment declines and, at some point, it is literally the case that the value of the land the school is built upon becomes more valuable in some alternative use.

Higher Ed Tuition Bubble Update

The drumbeat continues: MIT launches free onine “fully automated” course. Aside from the fact that these innovations have major implications for the livelihoods of my friends and I, the economics are interesting per se.

With the elimination of capacity constraints on the distribution side, will brick-and-mortar education providers go the way of Blockbuster and Borders? The market does not like brick-and-morter. It is inefficient – costly and inconvenient.

What happens when one professor can serve the entire market? Will superstars play an even larger role in academia? Will there be a market for top researchers (scarce) or good teachers (less so)? The same question holds at the institution level. Will everyone get a degree (and work for) HBS one day?

UPDATE: Megan McArdle provides a more thoughtful essay on this event at the Atlantic.

MBA tuition bubble update: Thoughts on the brave new world of MBA education

Here it is: MIT Announces Platform for Free Online Courses

MIT is planning to launch an open platform for free online classes, complete with certification for those who demonstrate mastery of their topics.

The key part of that sentence is the, “complete with certification” bit. I have to admit, that came faster than even I expected. As many who read this site will know, MIT has been running the OpenCourseWare site for 10 years which, according to this article, boasts 2,100 courses and has been used by 100 million people. Offering actual courses with instructor interaction and evaluation is new.

In related news, my good friend Scott Page (Leonid Hurwicz Professor of Complex Systems at Michigan) is going to teach a free online course on modeling in January that presently has over 10,000 people signed up. I understand the free online course in Technology Entrepreneurship being offered in Jan. by Stanford’s Chuck Eesley beats that by a factor of 3+. A couple of days ago, I commented to a colleague, “Well, when they figure out how to add the certification function, we’re in trouble.”

It is now official: we’re in trouble. In case it is not obvious, let me explain why. This technology removes a significant number of capacity constraints. Now, basically every student interested in, e.g.,  technology entrepreneurship can sign up for a course offered by one of the best researchers and most outstanding teachers at one of the world’s the top business schools … and obtain evidence of having completed it satisfactorily. Admittedly, the certification is not, for the moment, what it needs to be. For example, my guess is that verification of who is actually being assessed is not airtight. However, this technology will certainly evolve. At that point, why does Stanford need an admissions policy? Just let everyone who wants to take a shot at learning enroll and, then, let the chips fall where they may. Let’s face it, admissions procedures are notoriously inaccurate anyway.

Here’s a prediction about what will happen in the near future. With places like Stanford and MIT racking up tens of thousands of students for their free online courses, top-tier wannabes will have to follow suit. I can pretty much guarantee that sometime soon your dean will figure out that having thousands of students enrolled in your free online courses will be a necessary component of marketing the bricks-and-mortar program. The fear will be that schools that don’t offer such programs won’t be taken seriously. And, ultimately, I think, that fear will be well-founded. Also, given the fact that every university enjoys government subsidies of some kind or another, there will be major political pressure to provide the social good of low-cost, open access courses.

Then, eventually, the marketing device will actually become the core educational product. What will that wold be like? Will we see Stanford or HBS or Chicago become the Amazon.com of MBA education? At p = 0 pricing, does everyone but a few super-programs go out of business? If so, would that have the perverse effect of turning university-based b-schools into pure, state-supported research institutions?

Folks have long argued whether MBA education is more about learning things versus providing aspiring business managers with a signaling device (see, e.g., Ezra Zuckerman’s comments to my related post over at orgtheory.net) . If I had to make a conjecture, at least for the medium-term, I believe that the online course technology is going to make the split between the signaling and actual learning functions more pronounced. The bricks-and-mortar programs will be all about signaling and the online courses will be mostly about learning content. In their refined role, the bricks-and-mortar MBA will continue to be pricey and even more about being accepted into one’s aspirational social network, much like the private mens clubs of the 18th and 19th centuries. At the same time, those who are interested in learning graduate-level business content will be able to do so at relatively little cost online (though, this too will serve as a signal in its own right and may even be a requirement to admission to the social club, er, full-time MBA program).

What happens in the long-run is less obvious.  After all, once the local, full-time MBA experience becomes pure signaling and social networking, it will face numerous substitutes. After all, there are lots of ways to burn money … and bona fide social clubs still exist. What then?

Finally, there is the question of what happens to the business research community? While I can easily imagine a superstars market evolving, in which the Scott Pages and Chuck Eesleys of the world educate a massive share of the market, I also see an educational role for those doing relevant, state-of-the-art research. Those of us who manage to establish international research reputations are, almost by definition, in possession of scarce, valuable knowledge.  Therefore, I am reasonably optimistic that most of us will continue to make a living doing some facsimile of our present jobs. Whether richer or leaner, I can’t say — the monetization model of the future is opaque.



MBA bubble update

The NYT on The Dwindling Power of a College Degree (HT: Glen Reynolds). Up to the 1970s, less than 11% of the population graduated from college … and most of those had good jobs. “Today nearly a third have college degrees, and a higher percentage of them graduated from nonelite schools. A bachelor’s degree on its own no longer conveys intelligence and capability.”

This statement requires some refinement. According to the BLS, the median weekly earnings in 2010 for those holding a bachelor’s degree was $1038, versus $626 for those with only a high school diploma. The respective unemployment rates were 5.4% versus 10.3%. Professional degrees, like MBAs, performed even better: median weekly earning of $1,610 and an unemployment rate of 2.4%. On the surface, college still looks like a good deal and an MBA even better.

Unfortunately, these aggregate statistics do not tell the whole story. First, the discrepancy in outcomes for degrees that require math versus those that do not is enormous (e.g., $98k for Math & Computer Science vs. $29k for Counseling Psychology). Second, the statistics do not distinguish between recent versus long-time grads. Last, and most important, they do not account for cost. From 1978 to 2008, the inflation rate for college tuition was 3x that for the general cost of living. At this point, it is not hard to show that, for the low-paying humanities degrees at least, college is now a bad deal.

The analysis in the NYT article is vague but appears to suggest that a weakening of unions and a less progressive income tax schedule are somehow responsible for growing income inequality, a consequence of which is somehow bad employment outcomes for college grads. My own view is that greedy university administrators (lolz) opened the floodgates to anyone who could write them a tuition check and pressured faculty to dumb down the curricula to accommodate them. Add easily available, government subsidized loans and, not too surprisingly, tuition rates exploded. Low quality, high priced education is the result.

As I have suggested here and elsewhere, the trends in MBA education parallel these developments. Today, the content of a typical MBA curriculum has a lot more in common with a Social Work degree than one in Chemical Engineering. Relative to the content delivered, current tuition rates border on the absurd. I believe a market correction is on its way. If and when that happens, and only then, will MBA programs return to taking the notion of a research-based graduate education in business seriously.

Marginalism and the Higher Ed Paradox

By now, you may be getting sick of reading articles and blog posts about the crisis in higher education. This post is different. It proposes an explanation of why students have been willing to pay more and more for undergraduate and professional degrees at the same time that these degrees are becoming both less scarce and more dumbed down. And that explanation rests on a simple and plausible economic hypothesis.

Read the rest of this entry »

Crowd-sourcing Strategy Formulation

The current issue of McKinsey Quarterly features an interesting article on firms crowd-sourcing strategy formulation. This is another way that technology may shake up the strategy field (See also Mike’s discussion of the MBA bubble). The article describes examples in a variety of companies. Some, like Wikimedia and Redhat aren’t much of a surprise given their open innovation focus. However, we should probably take notice when more traditional companies (like 3M, HCL Technologies, and Rite-Solutions) use social media in this way.  For example, Rite-Solutions, a software provider for the US Navy, defense contractors and fire departments, created an internal market for strategic initiatives:

Would-be entrepreneurs at Rite-Solutions can launch “IPOs” by preparing an Expect-Us (rather than a prospectus)—a document that outlines the value creation potential of the new idea … Each new stock debuts at $10, and every employee gets $10,000 in play money to invest in the virtual idea market and thereby establish a personal intellectual portfolio Read the rest of this entry »

Our Top Posts for 2012

10. Strategies in the new European barter economy.

9. Tom Friedman: Why bubbles are  far-sighted industrial policy when undertaken by bureaucrats.

8. Radical-disruptive-agile-entrepreneurial strategy implications of thought-controlled smartphones.

7. The Rose Bowl as case-discussion classroom: UCLA’s innovative response to online MBA competition.

6. Sorry we got WordPress shut down with that link to one of Russ’s videos—#!%& SOPA.

5. Harvard Business School replaces Ohio as the Cradle of Presidents.

4. Cuneiform Case Studies–archaeologists discover Babylonian analysis of the five forces. (“Gilgamesh had a decision to make…”)

3. “Sustainability” voted official cant word of the decade by the Academy of BS.

2. Facebook’s decision to display users’ Social Security numbers–bid for ad revenue or is Zuckerberg now just screwing with us for fun?

1. New SEC and FASB regulations on precise use of strategy and business buzzwords create “analyst apocalypse” and “consulting catastrophe.”

Duly Noted: Solving the Principal-Agent Problem in Firms:The dumbest idea in the world?

This article in Forbes argues that a new book by the Dean of Rotman School provides an antidote to the rampant excesses of modern day capitalism.  The principle swipe is against the landmark paper (over 29000 Google Scholar citations)  by Jensen and Meckling on both the prevalence of the principal agent problem in the governance of firms and the various solutions to overcome it – including creating incentives that maximize shareholder value.  Quoting Jack Welch, former CEO of GE, the article says that maximizing shareholder value is the dumbest idea in the world.  I my self am not sure if this is THE dumbest idea in the world – in fact there are many more that would easily surpass P-A problem resolution – but I am sure this will ignite a debate about why firm’s exist – what is the best governance mechanism for them and the role of economic theory and action in our lives.  I for one need to go back and read the article and then read the book.

Miscellaneous higher ed links

A list of miscellaneous links:

Do B-School Managers Lack Strategic Vision? Does it Matter?

For many years now, I have been interested in the business of business schools. In 1999, my then Simon School colleague Glenn MacDonald and I wrote a piece entitled, “A Proposal for Transforming the Simon School,” in which we identified several systemic problems looming on the horizon and suggested proactive solutions. Since then, the looming problems have arrived and, by the look of things, could get much worse.

I have written more recently about these issues here and here. My concerns echo those of Glenn Reynolds and others who raise the possibility that we are presently living through a higher education tuition bubble, pointing out that higher education shares some salient features with the pre-collapse housing market. See The Economist andThe Chronicle of Higher Education for related views.

The central question for those of us @strategyprofs.net is: what is the successful business model in which research faculty (i.e., people like us) deliver MBA education? Up until now, I would argue that b-schools have ridden the explosion in demand for MBAs with reckless abandon. After all, when the next class is always larger and willing to fork over higher fees, why trouble oneself over complex questions like this?  However, if the wave we’ve been riding is a bubble and if that bubble bursts, then providing an answer to this question will become a matter of some urgency.

Even if the bubble alarm is overblown, there are plenty of reasons to conclude that the flow of cash spouting from the MBA spigot is in danger of running dry anyway. First, worldwide capacity is expanding at a rapid rate. Not only do existing programs continue to add seats apace, but foreign competitors are working furiously to improve quality and make their programs attractive to domestic candidates (India and China come to mind and Europe already has several programs that rival those of the best US institutions). Second, competition is sprouting up from non-traditional sources, such as “in-house MBAs” offered by businesses and online programs and courses (some of which are offered by places like Stanford). Third, young people are beginning to question the value of the degree (and point to the large percentage of hight-tech moguls who happen to also be college dropouts).

At Rotman, we try to keep student quality up by recruiting heavily from overseas. Even so, the admissions distribution dips further to the left than we’d like. Add to this the fact that we are putting the finishing touches on a building that requires us to increase the number of students by almost 50%. Contrary to the persistent denials of our senior management team, we all know from which side of the distribution that increase must come. Now, if you add to that a smaller population of interested foreign candidates, and things start looking a bit worrisome. Thing is, I don’t think our situation is exceptional. In a industry of high fixed costs, low marginal costs, and softening demand … well, it doesn’t take a Nobel prize in economics to figure out where that ends up.

Over the last several decades — during which tuition money rained from the sky regardless of what we did — we’ve gotten sloppy with our educational strategies. Those running the show seem genuinely confused about the service we are providing. We are here to provide networking opportunities, or signaling value, or interview skills, or “practical” experience. Students have been framed as “customers;” content has been relentlessly dumbed down; grades have been inflated; clubs, parties, case competitions, networking events and a host of other distractions have been granted equal status to academic pursuits.

I raise the question again:  what is the successful business model in which research faculty deliver an MBA education? The research faculty model operates at a cost disadvantage to its alternatives because research faculty require time to do research. So, what is our value proposition? We are not the efficient providers of networking services, pseudo-experience, interview training and so on. If you think about it long enough, I’m fairly sure the answer you inevitably come to is that we must provide an education in which our research plays a central role. That’s the one thing we are uniquely efficient at providing.

Of course, any model build around a research-based education will require that students be treated as students, faculty take their certification role seriously, content and academic standards be raised to a level befitting graduate study, and recruiters and students be brought to understand why state-of-the-art, general academic principles are valuable in practice.