Friday, May 15, 2015

Who does an MBA benefit to- other than the university offering it, of course?

It’s almost impossible to ignore attractive advertisements of MBA courses offered by different universities on TV and other media, job advertisements needing people with MBA degrees to occupy positions related to management and leadership. It provokes people to think if a degree like MBA would make people more entrepreneurial, better managers or worthy leaders. Are organizations recruiting and/or promoting such people more successful?

The concept of business management and business school is a relatively new development. The first business school was founded in Paris, France in 1819 while the first university in the world was established, arguably, in India, Nalanda university, around 427 AD (but subsequently destroyed around 1200 AD), while the University of Bologna, Italy was established in 1088 and continuing ever since. The first business school in the USA is Harvard Business School, established in 1908. It was also the first business school to offer MBA degree. Previously neither MBA nor other management degree or third party certificates (e.g. PMP, Six Sigma Lean etc.) was so important or financially remunerative in corporate America. 

Current widely prevalent culture of MBA and business management in terms of manufacturing and corporate management arrived in the USA during 1970s, instigated by the Japanese companies. It would not be wrong to say that the concept of operational management and constant pursuit of excellence came from Japan or successful Japanese companies like Toyota and National-Panasonic (Matsushita Electric Corp.). Massive success of Japanese companies in western markets provoked or forced American/western companies to initiate or learn Japanese management style. Previously it was assumed that success of such Japanese companies is basically cultural. It started changing around 1974 when Matsushita purchased an ailing American TV manufacturing unit near Chicago from Motorola, retained almost all its previous staff while making the same unit massively successful.

Many big and famous Japanese companies like Toyota maintain its own training programs and institutes to train its employees, mainly the executives, and grooming future leaders.  Few American companies like GE also had similar training centers. But there is a very fundamental difference. The motive of such Japanese training institutes are not making money by offering that training or degree or certificates to anyone who can pay, in stark contrast to its American counterparts. Such Japanese training institutes within a company are highly guarded venture. Admission of others, even for short visit, are not much encouraged, if not prohibited.

It might be surprising to many that top ranking Japanese Universities, former Imperial universities, formed prior to World War-I, later became seven best universities did/do not offer any course in management. Only one of such universities, University of Tokyo, started offering management courses as late as 2008. Few other Japanese universities, mostly private, do have business schools and offer MBA degree. But study of business  or management is not so visible or even important in corporate Japan that practically dominates many sectors of global economy since World War II.

It seems that social mobility and consolidation of wealth is worsening almost globally. America is among the worst affected, at least among developed countries. It perfectly correlates with eroding scientific and technological edge and competitiveness of American industries. USA ranks sixteenth in terms of "quality of research" in 2012, down from its second raking in 1995. Fast declining competitiveness of advanced industries in the USA is almost a routine issue discussed in media and policy makers alike.

Nowadays we hear a lot about developing leadership and innovation. We probably would hear more about those seemingly un-trainable attributes as social mobility and wealth consolidation deteriorate. Organizations have to manage with fewer talents and leaders while the demand for such people is expected to increase due to growing markets in many countries in Asia, Africa and Latin America.

Moreover, we are now hearing a increasing noise about talent shortage in almost every sector. Some industries seem to be in more difficult position than others. And it’s not restricted to just USA. Many Human Resource (HR) professionals do not agree with talent shortage ‘propaganda’. They believe that there is no shortage of qualified manpower. What the companies are complaining is about the price they like to pay for talented employees. Such tendency, even by the companies making good profit, will create more bottlenecks to recruit and retain employees with leadership and innovation capabilities. People investing good amount of money in getting MBA need to recover that expanses, irrespective of its value. Reluctance of companies to pay more is bound to put pressure on both the recruiter and the candidate. That burden will also be passed to other non-MBA employees or job seekers as well.

Many, if not most, of the MBA candidates are already employed. Company's current higher management (again, mostly, MBA alumni) attach a great value to that degree. Many, if not most, pursue the degree to get promoted in the company they are already working for or to get a new job elsewhere. It would be interesting to analyze the job performance, not salary though, before and after such people get MBA, to know if MBA actually add value to an employee and, most importantly, to the company. If the answer is affirmative, then the next obvious question would be- at what price- for the company. If an organization gets $100 benefit but needs to pay extra $1000 per month, then it does not make much sense. Unfortunately, sufficient data of such confidential nature from neutral source is not so easy to come by.

But available data do indicate that most top performing American companies starting from older generation of successful companies, which are no less important even today, like Ford, Boeing, General Electric, General Motors, Pfizer, Monsanto and many more; to today’s successful tech giants like Microsoft, Google, Apple, even Spacex, were established by leaders and entrepreneurs without an MBA. The long list of such companies also indicate that profile of such companies fit almost all types of industries. MBA does not seem to help much to ambitious entrepreneurs- earlier or now.  It’s becoming clearer that companies created by technocrats and/or scientists generally are more sustainable, productive and successful in creating wealth in the long run.

It does not take much to understand that whatever way you divide $1000 among some people; it still remains $1000. More you manage for yourself (and certain people), less others would get.  The pie would increase only if the total value increases. Here I should mention that sharing of profit arising from improved technological or managerial practice, in fact, declined in the US in last few decades, unlike past corporate history of Henry Ford era. He doubled average workers’ wage, shortening the workday from nine hours to eight, along with few more job benefits. And he did all those without any compulsion from law or labor union. He revolutionized not only global automobile industry but also helped building legendary American middle class and America as a super power.  

It’s now a well-accepted fact that talented students do not favor science and technology as a career, almost everywhere, even in developing countries. Creative art and humanities are doing even worse. As a society, we seem to be more obsessed with wealth management than wealth creation. Our economy and businesses are now overwhelmingly dominated by one aspect- finance. About 60 percent of the graduates from top three Ivy League universities (Harvard, Yale and Princeton) opt for careers in finance and management and not in science and technology. Talented students from prestigious universities still flock to Wall Street. This craze for wealth management among talented students in almost every developed country is also destroying able human resource needed for wealth creation, and cater to other faculties of human mind and creativity. Fortunately, the trend seems to be reversing. Since last couple of years, a growing number of ivy league business school graduates are joining Silicon Valley tech sector, leaving the glamour of Wall Street.

It has been proved many times that neither leadership nor the ability to innovate can be taught or learned much in formal education. A decently accepted model postulates that only 10 percent comes from formal education while 70 percent comes from on-the-job experience to develop leadership. Actual leaders and geniuses rely more on heuristic. But that capability can come only if one has mastered the boolean, i.e. sense of logic supported by data or fact. Once one master the art of boolean, then only s/he can practice heuristics successfully and go beyond direct experimental proof or evidence based hypothesis or conclusion. There are many examples of such heuristics geniuses in human history, starting from Fermat’s last theorem to Einstein’s famous formula E=MC2. In all such cases, experimental proof came much later, if at all. Nonetheless, great sense of logic (boolean) and/or scientific or technical ability alone is not and must not be the main parameter for a great leader. To me, management seems to be a common sense approach based on sense of heuristics and, more importantly, personal integrity and innate ambition where social, personal values and ethics play a huge role.

Behavioral economists suggest that predictable or rationally irrational decisions are far more common among top executives than we might think. The last global financial meltdown around 2008 is an example, may be little extreme,  for neglecting such human ‘misbehavior’. And it’s very much possible that many such top executives who were part of the global financial meltdown were motivated more by the social upbringing, personal values and ethics, or lack of it, that I mentioned earlier.

Many people would agree that the most challenging management job would be to become the President or Prime Minister of a democratic country. But no country has any requirement for its top executive to have any such degree like MBA. Neither people with long corporate career with prestigious management degrees and/or experience are proven to be a better national manager or leader. 

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  1. I searched in google and found an interesting trend that though several CEO of fortune 500 companies in USA are having MBA but none of the founders have the degree.
    1. Walmart CEO C. Douglas McMillon vs founder Sam Walton
    2. Apple CEO Tim Cook vs founder Steve Jobs
    3. GM CEO Mary T. Barra vs founder William C. Durant
    4. Ford CEO Mark Fields vs founder Henry Ford
    5. AT&T CEO Randall L. Stephenson vs Graham Bell
    6. Google CEO Sundar Pichai vs founders Larry Page and Sergey Brin
    7. MS CEO Satya Nadella vs founder Bill Gates

    My deduction is same as your article that to innovate and create something from scratch cannot be taught anywhere with any amount of money. It has to be something from inside. The data makes sense as people with entrepreneurial abilities are a complete misfit in an environment where they have to follow the existing rules. So they take risk and open a new venture after another driven by their strong desire to do things differently. On the other hand job of a CEO is mostly to understand the present system and work diligently to continue to make it work smoothly. CEO needs to have the domain knowledge not necessarily revolutionizing new ideas. In fact the founder may prefer to appoint a CEO with MBA to do things according to the existing norms so that founder’s own ideas remain safe. It is clear that to progression of human history came by innovators and we need them. At the same time all these founders themselves work as CEO before retiring or moving to a new venture, so they can do both. But the main problem is they are only a very low percentage of the population. We cannot expect average people to think or behave like those revolutionaries. Then how to solve the gap. I like the Japanese style where they teach its own employees on the company rules rather than paying high salaries to an MBA from outside. There is more chance of success for the company as that employee will be more aligned with the Company views and culture than someone from outside.

  2. There was this public debate not long agao - probably organised by TIME or Economist or someone. Points on both sides were known.

    In my personal experience, I learnt a lot. This was one area where I went in with zero knowledge on Finance, Economics, Market analysis etc. Classroom experiences and direct consultation with international businesses were an exposure to a whole new world. There are a lot more I can relate but I can say this, its up to you to make it all worth the while. Nothing new, nothing big.

  3. Exactly MBA is a creation of educational institutions.It works very good for private colleges to mint more money.The basic requirements are not strict,anybody with a degree background can join MBA,provided if he has required money to pay.It is a waste of time and money for the younger generations.All those colleges which mushroomed during the past couple of decades (Arts and Eng.colleges) have MBA degrees to offer,but not basic sciences like Botany,Zoology,Chemistry,Physics or Maths ! But,look at the reality,every village has many MBAs and every street has MBAs,all swarming with no job to get.They regret now they have wasted their time and most of their parent's money ! It is true for most computer degree also !

  4. As one successful Canadian ex-executive who worked in many big corporations once told me something like- MBA is a massive education scam invented in America in late 70s by hugely influential higher education industry and increasingly greedier top executives and family dominated corporate America.

  5. Anonymous10:44 AM

    I would have been happier if author mentioned the current useless craze about third party certifications like PMP, Six Sigma Lean etc. Those are even worse than this MBA madness.

  6. There is an American economist named Thomas Sewell who is well known for speaking out against the current business and economic trains of thought. One of my favorite quotes from him is “Much of the social history of the Western world, over the past three decades, has been a history of replacing what worked with what sounded good.”

    I think that the article makes many good points concerning management practices and a general lack of understanding by North Americans concerning what ‘leadership’ is. I think that the MBA is just another example of passing fad in professional requirements, and to be perfectly honest I think that the PMP is the current version of this. Instead of identifying specific deliverables and capabilities in personnel, I think that North American industry finds it easier to use a broad brush to identify competent people; if you have a PMP or an MBA then you must be OK. The alternative requires much more time to find and manage good people, but I consider this as an investment in the team/department/company’s success. It is not glamorous and requires much effort; I think that’s why most people take the easier approach.

    That being said, I don’t discount an MBA by default. When I first made the step into a management position, I recognized that essentially all of my training to date had focused on technical issues and that there was a distinct gap in my skill sets now that I was involved with a different side of the business. Obtaining the MBA provided me with knowledge and understanding of accounting practices, marketing and economic factors, international trade dynamics as well as decision making and negotiating skills. I believe that having the MBA has definitely helped me to be more successful in my subsequent roles.

    It is an interesting topic to discuss and I think does provide some insight into the mind set of many North American executives. Thanks for sending this to me.

    1. Thanks for your feedback.
      In most cases, technical people are recruited, used only for technical duties and few routine paper pusher jobs, like making or evaluating technical reports, prepare such presentations etc. They are not much exposed to the so-called management duties. They did not know how good they are/were at those "managerial" jobs before they got MBA. I am not considering rituals like how much margin a project proposal would have when printed out, what size of page, color of stationary, type of graph etc. Technical people generally officially promoted to managerial duties after they get an MBA.

      I would be more interested to know an employee who used to do 'management' jobs before getting an MBA. Then evaluate his/her performance after s/he get the degree. Is there any change at all, and if yes, at what price for the company. If I get $100 benefit but I had to pay $1000 per month, then it does not make any sense. Right?

  7. Another issue from the rise of MBA, mainly from non-technical background, in corporate hierarchy in actual policy making positions is slowing down the companies, mainly big and medium sized ones, to be innovative and/or attract talented people with actual leadership quality and who can innovate. It's also discouraging to aspiring entrepreneurs to get their proposal properly evaluated by companies who have money and potential benefit. Consequently such new novel ideas do not get required funding and fail to take off.

    Many such novel ideas end up with the current R&D employee who has its own interest while evaluating such external ideas. There is higher chance that the scientist or the entrepreneur who conceived a novel idea would not get either their project funded or the position in the company where they can lead their idea to a natural and logical end by developing a new technology or product.

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