On dangerous ground

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Markets are polarising. Mid-range products and services are growing more slowly than products and services at both the luxury and the value (or lower) end of the market. One example of this in the UK is the clothing market, where sales at companies such as Primark continue to grow at the expense of middle-of-the-road retailers. Meanwhile, designer brands continue to flourish.

According to research by McKinsey*, the flight to either end of the market is universal; the difference is in the speed, degree and direction. They conclude the middle ground is the most dangerous place to be. This is a point captured by Tom Purves, BMW’s North America chief executive, who says: “The car market seems to be bifurcating . . . the middle ground is the killing fields, the worst business to be in.”

Difficult economic conditions tend to accelerate migration to the extremes. So can we expect to see bifurcation in the business school market, particularly for MBA degrees?

The answer lies in the “value proposition” of providers within each market segment. The top schools offer brand recognition and are the first port of call for blue chip recruiters. They offer high-status, top-class networking opportunities, unrivalled peer learning, quality faculty, steep career trajectories and high salaries. They attract individuals early in their careers targeting large global companies or mid-career individuals seeking senior positions in top firms.

The value-oriented schools offer intense and competent teaching, relatively small classes, flexibility to minimise disruption to learners, tight structure, effective pastoral care and, most importantly, lower fees. They attract those with little managerial experience, who are often targeting small and medium-size enterprises operating within their national boundaries, and entry-level managerial positions.

The mid-ranking schools, however, lack the brand recognition and status that MBAs from top schools confer on their graduates and, by charging high tuition fees, they fail to match the “value for money” proposition of schools at the other end of the spectrum. The value proposition of schools stuck in the middle is by and large unclear. The exceptions are schools that focus on a niche and develop a world-class reputation in a particular field, for example, Babson.

Until recently, the choice of an executive or a part-time MBA has been strongly influenced by ease of access, and the geographic barrier has offered the mid-ranking regional schools a degree of protection. Today, location is less of an advantage for two reasons. First, the top schools are increasingly willing to deliver their programmes at different locations. Second, there has been an increase in distance learning provision. Such developments will have a significant impact on competition for full- and part-time MBA students.

There is compelling evidence to suggest that the MBA is susceptible to market bifurcation. In the UK some private budget colleges are recruiting a large number of MBA students. For example, one school charging £6,000 a year regularly recruits more than 400 students, while some mid-ranking schools are struggling to recruit a dozen students. Why? Because their fees are less than half that charged by most mid-ranking schools and their degrees carry the same perceived value. I am told the University of Phoenix is similarly taking market share from the mid-ranking schools there.

In order to survive, mid-ranking schools must create a strong niche or trade upwards or downwards. Trading upwards is extremely hard, not least because the resource gap is widening and it takes a long time to develop reputation and brand. Trading down will meet strong faculty resistance.

The alternative is to develop a strong niche and use it to create a halo effect for the MBA and other offerings. This will require vision, market insight and perseverance.

Abby Ghobadian is professor of organisational performance at Henley Business School.

* Knudsen, T.R., Randel, A., and Rugholm, J., “The Vanishing Middle Market”, The McKinsey Quarterly, No 4, 2005.

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