According to Harvard Business School professor Rakesh Khurana, U.S. business schools are fighting to be meaningful on multiple fronts. Khurana is known for his ongoing efforts to chronicle the changes in management education, most recently with his book From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession (Princeton University Press, 2007). But in 2013, his warnings about the decline of business schools have particular urgency. Most management schools are reporting a decline in the number of applicants for their two-year MBA programs; some students are flocking to one-year specialized degrees, and others are choosing to take courses online or on a part-time basis.
The reason has to do with diminishing relevance, argues Khurana. It is driven in part by the impact of globalization on business success. Aside from the sheer cost of earning a two-year MBA (tuition at Harvard Business School is US$53,500 per year), management school graduates are finding that their skills and training are not ideally matched to the needs of global corporations that have undergone rapid changes. Many of these companies are looking for business leaders who can help them expand in developing markets where the rules of engagement are quite different from what they might be at headquarters. They need leaders who can build coalitions with governments, nongovernmental organizations, and social activists.
S+B: Why are U.S. business schools facing such difficulty?
KHURANA: There is a dramatic shift in three core pillars of management education. First is a shift in what is taught. There has been an incredible race to the bottom among business schools. They have become everything and nothing to everyone at once. This is partly a result of the huge growth in the number of business schools in the United States—to about 900. In contrast, there are only 140 to 180 law schools and 130 or so medical schools. At the same time, there is no longer consensus on what constitutes a core curriculum. Historically, business schools used to require courses such as marketing, organizational behavior, accounting, finance, and similar subjects. Today, it’s not even clear what an MBA consists of anymore. The fastest-growing degrees are one-year and part-time degrees. Online MBA degrees are emerging, and executive education continues to evolve into new forms. This sends very complicated and confusing messages to potential students.
Another force is the lack of quality and consistency in the development of general management knowledge. In an attempt to obtain academic legitimacy, especially at the research-based business schools, the faculty began to ape the arts and sciences faculty. The social scientists hired into business schools established their careers by applying their specialty, but not by producing general management knowledge; instead, they just reiterated their previous perspective. The economists hired into business schools acted even more like economists once they were here. The same goes for sociologists and psychologists.
That was the strategy for getting promoted and getting tenure, and it worked, because the incentives were based on research and developing academic credibility, but not oriented toward producing management knowledge. Thus, very little general management knowledge has been produced. If you’re a healthcare company or in the pharmaceutical industry and you want to find basic research, you turn to medical schools at universities. But we business schools have lost the place where we could be turned to as a source of basic research and basic knowledge. Very few businesses turn to us. They turn to other sources of knowledge, such as consulting firms, instead.
Finally, there’s a shift in who is being taught. The orientation of most students has changed quite dramatically. Increasingly, students see an elite MBA as more desirable for its selection effect than its educational impact. If you get in, you’ll get a highly valued credential, but you’re not going to learn much along the way. It’s more a way to signal to employers that you’re a smart, hardworking, and competent person. If you don’t get into the top programs, there’s really no point in going to a business school. You can always do a part-time program or go through a company’s training program.
S+B: So students aren’t really excited by the prospect of helping large U.S.-based companies conquer global markets?
KHURANA: One of the big challenges we’ve had is that the original logic for founding business schools, back in 1908, was to produce managers to run large, complex organizations that were having a larger and larger impact on the social welfare of the country. The underlying notion was that companies should be run not just in the interest of shareholders, or labor, or the state, but also in the broader interest of society. Managers were seen as an emerging class of professionals, who would be able to adjudicate the claims of these different stakeholders and lead the institutions according to the long-term best interests of the institutions and the country.
The world of 2013 looks really different. Most of our students are not interested in working for large, complex businesses. Two-thirds of them are interested in the services and advising world, which means consulting, or in the world of financial transactions. One reason is that the compensation is so different. If you go into a management training program at General Electric or Procter & Gamble, you won’t get the same compensation as you would in a transactional business.
S+B: Do U.S. business schools still have a monopoly on the best business insights?
KHURANA: That, too, is changing. For a long time, people came from around the world to Harvard Business School or Stanford to learn the management practices of U.S. businesses. Whether that meant total quality management, Michael Porter’s five-forces analysis, or innovative human resources practices, they had something of value to take back to their home countries.
But today, some of the most innovative business practices are happening outside the United States. These include some of the interesting management practices at technology-services companies like Infosys, the bottom-of-the-pyramid strategies like those that Tata is pursuing with the Nano car, or the rapid innovation of some Chinese companies. We’re living in a multipolar world, at least as far as capitalism is concerned.
That requires a reconfiguration of how American business schools “think” and approach the world. We’re not the center of gravity anymore, and we can’t just be a source of best practices. We have to increase our research reach and our understanding of what is going on in other parts of the world and bring that knowledge together.
The good thing about emerging markets is the opportunities—in healthcare, energy, entrenched poverty, and the environment. But our Western style of leadership doesn’t translate all over the world. In the fastest-growing economies, you can’t just take advantage of opportunities that exist. You can’t take things like literacy for granted; you can’t assume that electric power will be on 24 hours a day, or that roads will be available. You have to create your business opportunities. You have to get active in building institutions.
In the U.S., when executives talk about the role of stakeholders, they talk about customers and shareholders. We look at chief executive officers as being the “white knight” opposed to an evil, intrusive government. But in other parts of the world, the government is not the enemy. It’s your best customer. Other stakeholders—like NGOs, labor, social movement groups, and more empowered consumers—are also more powerful than they are in the United States. Also, with globalization, large numbers of non-Americans have taken senior roles in major companies. This morning, I taught a case study on AIG’s financial products unit. This was the group that brought down AIG. We had one of the most senior AIG executives in the class, discussing paying $165 million in retention bonuses in 2009, which had caused an uproar at the time. One of the students asked, “Did you try to appeal to people’s patriotism instead of paying them bonuses? Did you say, ‘This is important for our country’?”
The answer was that when you’re managing people in England, France, the former Soviet Union, and China, they don’t care about American patriotism. You can’t say, “Oh, we all have the same values.” People have very different values. Take the orientation toward democracy and the role of the state, or issues about women participating in the workforce. You can’t take any of it for granted. We have to teach students to be authentic leaders in that world, but it’s brand new stuff and we’re still trying to figure it out.
S+B: How are you trying to make that transition at Harvard Business School?
KHURANA: Last year, we introduced a major reorganization of the first year of our program. We now essentially get all 900 of our students out of the classroom. We moved away from an individual orientation toward a team orientation. We created team projects and sent them around the world to work on problems. They got graded by the people who were their constituents. Projects ranged from working with big traditional companies like Intel or L’Oreal, to working with startups, to doing market surveys for midsized family companies. We want to encourage students to use more innovation and entrepreneurship rather than just becoming cogs in the machine.
S+B: The traditional MBA education prepares people to keep track of the numbers centrally for an entire enterprise. But most large companies want to shift decision making to the regions, away from headquarters. How are you preparing MBAs for this new landscape?
KHURANA: U.S. corporations are historically imprinted with a hierarchical model—you develop something at headquarters, you scale it, and then you diffuse it. The challenge we face is how do we re-legitimate ourselves as a source of foundational knowledge. We have to have a more innovative and experimental mind-set. I don’t think anybody has figured it out yet. Adopting that has got to be the heart of our repertoire.
S+B: So what you’re saying is that Harvard is basically failing globally minded companies?
KHURANA: Not altogether. Global corporations need leaders who think institutionally, who see themselves as part of the larger fabric of society. They have to work closely with other institutions. They have complex relationships with the environment. They need people with skills that are not just internally focused, like trying to squeeze the last penny out of the supply chain, but externally focused. The next generation of leaders needs to be very comfortable negotiating complex coalitions with NGOs, suppliers, some competitors, and others. In that context, where the organization starts and ends is more ambiguous than ever. For example, Apple would love to say that the organization begins and stops in Cupertino, Calif. Society says no, it goes as far as Foxconn in China. And it goes so far as to say, “After the consumers buy your product, how do they get rid of it? Do they recycle parts or not?” The boundaries of the corporation are not what they used to be.
Look at the dramatic leadership issues facing Indra Nooyi, chief executive officer at PepsiCo. We just did a case study about the issues of childhood obesity and taxes on soda. Will Big Food become like Big Tobacco? PepsiCo is associated with salty snacks and sugary drinks that are translating into public health costs. Growth in the United States has stagnated. The growth is all in China, India, and the Middle East, which now have the fastest-growing rates of diabetes in the world. You’re Indra Nooyi. What do you do? This is the future of leadership.
If we teach this case 10 years from now, I can hear the students saying, “Oh, how stupid. Couldn’t they see this coming? All the data was there.” But when you are teaching it in real time, there are serious, unresolved questions about when to cash in a winning hand and fundamentally change a business.
Our students understand what is at stake. They are also increasingly knowledgeable about the new enterprise boundaries in every value chain. They have a mind-set of total responsibility, with a greater ability to forge coalitions between competing groups to find solutions, and more contextual intelligence.
S+B: That sort of knowledge doesn’t come out of a textbook, does it?
KHURANA: No. You have to lead students through carefully coached experiences. Many of our students were actually tackling these issues on their own, through their own clubs, conferences, and social network groups. In some ways, those were attempts to take what they learned in the classroom and apply it to what they were interested in. Historically, that part of education has not been curated. But if so much learning is happening through those activities, we should curate it so that it is not so random.
We can’t impose an identity on a student, but we can create rich experiences and ask them to reflect. For example, in our field approach, you actually have to go deliver a product or a solution, as part of a team, and apply your skills of leading and managing to that team. One of our most popular elective courses is on authentic leadership. It’s largely peer-based learning and self-reflection.
We actually put our students in the teams; we don’t let them self-select. In the working world, you don’t get to pick everybody you work with. They have to manage the cross-cultural issues, and also the gender issues. Some nationalities resist the role of women, for example. The whole goal for us is that education must be transformative. We used to think the transformation happened through the books. But now we know that people can be transformed through their interactions with peers.
S+B: Are all the major business schools doing this, or is Harvard leading the way?
KHURANA: Harvard is actually a fast second mover, as most dominant institutions tend to be. We are not the first to do this, but we are doing it on a scale that is bigger than that of our peers, and we’re putting our own twist on it. Participant-centered learning has always been at the center of what we do. Sometimes we weren’t recognized for this because of the fame of the case method. But the emphasis has always been on participant-centered learning, and I think we’re doubling down on it now. This was made possible by our new dean, Nitin Nohria. He’s not U.S.-born and he’s not an economist but rather an organizational behavior specialist.
S+B: In this environment in which people from so many different national cultures work together, how can you teach ethics? For example, how can you persuade a Chinese or Russian student that it’s wrong to pay off a middleman, or a Saudi student to work on cross-gender teams?
KHURANA: It’s a huge challenge. We haven’t been able to say, “This is right and this is wrong.” We have no Hippocratic Oath. We can say that we know from research that societies with low levels of corruption have faster economic growth. They have better equity markets. But connecting an individual’s self-interest to the collective good is difficult. You have to remember that our traditions, and I say this as an immigrant who has adopted these traditions, come from John Locke and enlightened self-interest. It’s a very real question whether we should be imposing these practices on other countries. Successful Western countries run to other parts of the world and say, “We’re from the West, and we’re here to help you.” I think some humility is needed particularly now that those other economies are doing well.
- William J. Holstein is a contributing editor to s+b and author of The Next American Economy: Blueprint for a Real Recovery (Walker & Company, 2011) and Why GM Matters: Inside the Race to Transform an American Icon (Walker & Company, 2009).