MBA Industry and Porter’s Five Forces
MBA Industry and Porter’s Five Forces
MBA Industry: The MBA school industry includes universities and colleges that offer academic courses and grant graduate degrees. The general requirement for admission is a bachelor’s degree and GMAT® scores. Some schools and programs also require prior employment experience. Instruction is typically provided on physical campuses, although online education and other unconventional approaches are gaining popularity. For purposes of this paper, for-profit institutions or community colleges are not included in the industry definition. The major forces that affect MBA market are: competition between public and private business schools, buyers of business education including both students and employers, faculty as the key suppliers to the industry, and substitutes in the forms of alternative means of delivering graduate business education. Porter suggests that evaluation of these forces will provide insights into the prospects for long-range profitability1. Competition: The MBA market in the United States is an unregulated industry that allows schools to develop their own distinctive styles and personalities, and to define their own missions5.
B-Schools consider it their mission to educate and research, but face intense pressure of managing faculty issues, finding new funding sources and distinguishing themselves from competitors9, highlighting the most prominent areas within this category: cost, revenues, and reputation. Reputation is differentiated by rankings and accreditations, specializations and regional focus and flexibility10. Rankings drive how students, faculty, and employers perceive the MBA program. In turn, how students, faculty, and employers perceive the MBA program drives rankings, resulting in developing a brand name for universities, leading schools to expend vast resources in pursuit of being highly ranked or even ranked at all8. The significant costs associated with business education have left room for competitive entry by low cost providers. B-Schools now face the reality that they must compete with the low-cost providers who can turn a profit because they are not burdened with the high fixed costs of the “bricks and mortar” university4. As tuition alone will not cover the costs of running an MBA program, funding is usually sourced from donations from alumni.
Most successful schools are usually ones backed by alumni that are willing and able to give back to their alma maters. Suppliers: The most important suppliers to the MBA industry are the business school faculty who fill the teaching, research, and administrative roles with any MBA program. There is an increasing demand for qualified business faculty, while simultaneously there is a stagnating or decreasing supply of such faculty. As the pool of high quality, freshly minted Ph.D.’s is diminishing; competition for associate and assistant professors is increasing. Institutions that can afford to bid are becoming more aggressive in recruiting faculty from other schools, inflating salaries beyond what some can afford10. Rising salaries for new hires has encouraged experienced faculty to move to different institutions to receive pay raises of their own, and thus the market continues to stay extremely competitive. Buyers: The buyers of graduate management education are either the students, employers, or both.
With respect to the power of student as buyers, both the MBA programs and the students possess some leverage. There is obviously significant demand for the MBA degree from students because they believe that it will enable them to receive greater opportunities in their career, receive a higher salary, or launch them into a new career7. Employer preferences have a significant effect on market for MBAs. The employer’s demand for MBAs dictates the job availability and salary range, which is proportional to demand for MBAs. Employers are always seeking the best value to raise their company’s performance by enhancing employees’ abilities. What employers define as “benefit,” however, can range from training, which raises employee efficiency to higher-level education, which emphasizes critical thinking and complex problem solving skills. Substitutes: Most participants do not enter to challenge industry leaders but to offer tailored programs that appeal to sub-sets of their prospective students. Top-ranked business schools have little need to worry about substitutes. Consumer demand for the “Top brand MBA” will always outpace the supply.
The same threat to mid and lower tier schools, however, is real. The online and distance learning schools target the same students that would otherwise attend these schools forcing the lower tiered schools to diversify their offerings6. Barriers to Entry: The main barriers to entry for new entrants in MBA industry are infrastructure costs, attracting and retaining good faculty, and gaining accreditation for courses. Schools must have a solid reputation to charge more tuition to attract students and afford good
professors that produce strong results among students. Furthermore, it can cost a significant amount of capital to perform research projects, which enable a school to build specialized facilities and can also contribute to a strong reputation. While public schools rely on public funds for financial aid, a large endowment is essential for many institutions.