Why Aren't Business Schools More Business-Like?

Steve Denning

“In every profession,” writes Schumpeter in The Economist, “there are people who fail to practice 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 constitute such a profession, writes Schumpeter. “Business schools flout their own rules and ignore their own warnings.”

Business schools are well aware of the threat of disruption.  Everyone can see that deep change is looming. Business schools in emerging countries are on the rise. Massive Open Online Courses (MOOCs) can reach much larger numbers of students at much lower cost. Funding from government and industry is forcing greater attention to the practical impact of teaching and research. Results-oriented private schools are emerging to meet obvious pressing business needs.

And business schools themselves teach the very nature of the threat: the failure of businesses to respond to the competitive threat of disruption is a staple of the curriculum. So why don’t business schools themselves do something about the imminent threats of disruption that they themselves face?

Herds of academics

Schumpeter suggests 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…. Oceans of papers with little genuine insight are published in obscure periodicals that no manager would ever dream of reading.

“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 all this is going up, as business schools compete for stars, while the demand for an MBA is falling, with sharp declines in the number of people even taking the GMAT, the test for admission.

A failure to respond to disruption

Declining demand is a warning sign. “The obvious solution,” writes Schumpeter, “for schools outside the top tier is to compete on cost or innovation.” He notes a few schools that are doing so: Cornell, Rochester, Ashridge (shorter courses); and Maryland, UCLA (no fee increase).

“But” Schumpeter concludes, “too many continue to stick their heads in the sand” as disruptive competition emerges. Most business schools “are approaching the future in the most unbusinesslike manner.”

“The mood at this year’s meeting of business school 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. But they showed little confidence in their own ability to grasp opportunities or combat threats.

“The deans have few levers at their disposal to reorganize their schools or cut costs: more than 80 percent 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.”

Isn’t this just like business?

The argument that the business schools are acting differently from business may be too kind to business. In fact, business schools are acting just like business.

As Alan Murray, the executive editor of the Wall Street Journal, has written, firms practicing traditional management “missed game-changing transformations in industry after industry—computers (mainframes to PCs), telephony (landline to mobile), photography (film to digital), stock markets (floor to online)—not because of ‘bad’ management, but because they followed the dictates of ‘good’ management.”

A deeper problem: a flawed concept of management?

When “good management” leads us to consistently bad results, what does this tell us about our concept of “management”? The fact that many large firms still focus on maximizing short-term shareholder value is at the root of the problem, and business schools themselves reinforce this thinking. As Sarah Murray wrote recently in the Financial Times : “While there is growing consensus that focusing on short-term shareholder value is not only bad for society but also leads to poor business results, much MBA teaching remains shaped by the shareholder primacy model.”

Short-term shareholder value thinking is embedded in the core curricula of MBA courses around the world. Managerial economics and accounting tend to assume that short-term profits will lead to long-term shareholder value. Profits are “the overall goal” of the firm.

Constraints to change in business schools

Ironically, business schools also find themselves chained to the treadmill of making money. Business schools often constitute a significant revenue stream for their universities. Students from around the world want “a standard MBA”. Administrators are hesitate to tamper with core curricula lest it jeopardize this revenue stream.

Moreover, business schools succeed in part because graduates get jobs in consulting and finance—sectors still dominated by direct financial goals. These firms are seen to want students schooled in efficiency and shareholder value theory.

Further, the accreditation process of business schools is slow, cumbersome and inflexible. This creates additional pressure to stay with the status quo.

Business school rankings by the Financial Times and others are built on criteria such as acceptance of articles in academic journals, the academic accreditation processes and starting salaries of graduates — thus reinforcing the status quo.

Finally, academics may take comfort in the view that disruption can sometimes be slow. Although there are spectacularly rapid collapses in fast moving sectors like mobile phones, as with RIM or Nokia, Roger Martin, the highly successful former dean of the Rotman School of Management, argues in an HBR blog article that disruption often happens in a more measured pace.

“When entirely new, transformative futures arrive (like the mouse in 1965) their effects take a long time to become evenly distributed — typically a long, long time even in the supposed fast-moving tech sector. Yes, Amazon is utterly transforming the way Americans shop, but 20 years after it was founded, it still has a fractional share of most goods other than books. Even in books, it took a decade for it to really hurt Barnes & Noble and Borders.

“One lesson from this is that real competitive advantage is enormously long-lived. I remember helping Mike Porter with his terrific 1996 HBR article What Is Strategy?  In it, he talked about the competitive advantage of Southwest Airlines, Vanguard Group and Progressive Insurance. Almost 20 years later, after huge changes in their industries, all three are still on top.”

While the leading schools may still have breathing room, the picture for the rest is less optimistic. As Schumpeter comments, “the most dangerous place for a business is to be stuck in the middle without an obvious advantage of cost or quality.”

What to do?

The issues facing business schools are principally issues of institutions, not individuals. Changes in personnel will have little effect without shifts in management processes. Last year, a group of us[i] got together and tried to figure out what business schools should do to get off the money-making treadmill. We concluded that business schools should consider the following five recommendations, which were published as an input for the Drucker Forum 2013:

1. A renewed focus on purpose: Business schools should be equipping graduates to be leaders of the 21^st Century organization that operates in a complex environment where innovation and responsiveness to customers and society are key.
2. Updating the core curriculum: A core curriculum built on shareholder value and efficiency is unsound education for the 21^st Century leader. Merely adding more relevant courses on the periphery will be insufficient. Forward-looking business schools should join together in generating textbooks and courses that reflect an updated view of management.
3. Changes to the ranking system of business schools: The ranking of business schools by the Financial Times and others should include a criterion that reflects practical relevance, vitality and impact. A new approach to measurement and metrics should reflect society’s complex expectations of business schools.
4. Putting “business” back in business schools: Academic recruitment and accreditation processes should be overhauled to reflect today’s complex business world and the need for greater practical relevance.
5. Interdisciplinary approaches in research and teaching: The complex problems now facing firms do not fit traditional disciplinary boundaries. They require radical cross-disciplinary thinking that challenges the old assumptions of each discipline. Some business schools are already experimenting with integrative approaches to teaching.

Scepticism about the likelihood of change

I discussed the issues this morning with Richard Straub, president of the Drucker Society Europe. He shares Schumpeter’s belief both in the need for change and in the unlikelihood of it happening any time soon. He told me:

• Business schools have no pressure to deliver quarterly results. Many of them are private or semi-private and embedded in foundations and are better positioned than publicly owned firms in the private sector to develop and implement mid- and long-term strategies. But sadly in most cases these strategies tend to be more of the same – incremental and not disruptive.
• Business schools suffer from the syndrome of their own success. At the bottom of their heart they don’t see the need to change what they believe is a winning model.
• Quite a number of business schools appointed managers from corporations as deans or presidents and most of those failed in the arcane world of B-Schools.
• Putting Management back into B-Schools (in what they teach in order to become more relevant) would be important—not only putting business back into them. Many business schools lack sound courses for conveying the importance of management and leadership as the foundation for long term success of business. The practice of management does not really show in the curriculum. Hence the specialized disciplines that they impart lack a common foundation.

What do you think?