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Harvard Business School - An Operations Perspective

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Elephants & Cheetahs: Systems, Strategy and Bottlenecks 2019-20
END TERM ASSIGNMENT
Harvard Business School: An Operations...

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In 1922, it started the doctoral program to train faculty who could teach at the newly founded business
schools across the...

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Executive Education & Publishing business
MBA remains the flagship program offering at HBS. However, in recent decades, HB...

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Harvard Business School - An Operations Perspective

  1. 1. Elephants & Cheetahs: Systems, Strategy and Bottlenecks 2019-20 END TERM ASSIGNMENT Harvard Business School: An Operations Perspective Executive Summary Harvard Business School, one of the top business schools in the world is analysed from an operations strategy perspective. The business and operating model of the school is elucidated & the key assets in its model are identified as follows: brand, program, campus, faculty, intellectual property, students and alumni. The operating model is categorised as highly autopoietic with strong deviation-counteracting influences in the form of alumni involvement as faculty and administrators. The operational bottleneck is identified as the brand, which risks dilution in the case of significant ramp up of operations. Its competitive strategy is identified as broad-based – a large class size to effect alumni impact, high disbursal of scholarship as means of third degree price discrimination, broad focus across all branches of management to maintain all-round leadership and avoid getting pigeonholed, and recruiting alumni as faculty despite concerns of in-breeding. Compared to its competitors, it has been able to diversify its revenue stream much more effectively across publishing and executive education, leveraging its strong brand image which is built on the successful integration of all its assets. Introduction The Graduate School of Business Administration at Harvard University (Harvard Business School - HBS) is consistently ranked among the top business schools in the world. It is one of the wealthiest educational institutions globally with an endowment of $3.8 billion1 and a topline of & $856 million (Exhibit-1). The school offers a full-time MBA program, a doctoral program, several executive education programs, and online education under HBS Online. It also owns Harvard Business Publishing which publishes business books, articles, case studies and the Harvard Business Review magazine. HBS was established in 1908 and it started the world’s first MBA program with a faculty of 15, 33 regular students, and 47 special students. It was initially established by the humanities faculty and gained independent status in 19102 . 1 Harvard Business School 2018 Financial Report 2 https://www.hbs.edu/about/facts-and-figures/Pages/history.aspx
  2. 2. In 1922, it started the doctoral program to train faculty who could teach at the newly founded business schools across the USA and also set up the Harvard Business Review. In 1924, it adopted the case method of teaching which sets it apart from its peer B-schools. It jumped on the bandwagon of executive education in 1945 and thereafter, started admitting women students beginning 1959. Another significant leap occurred between 1997 & 2006 when HBS opened Global Research Centres in Silicon Valley, Asia-Pacific (Hong Kong, Shanghai, Singapore), Latin America (Buenos Aires, Mexico City, São Paulo), Japan, Europe (Paris), India, and Africa (Dubai, Istanbul, Tel Aviv). Its revenue sources are chiefly: 1. Publishing (28%) 2. Endowment (27%) 3. Executive Education Tuition (24%) 4. MBA tuition & fees (16%) (see Exhibit-1) HBS’ competing rival schools can be enlisted as: 1. Wharton School of the University of Pennsylvania 2. Stanford Graduate School of Business (GSB) 3. Booth School of Business, University of Chicago 4. MIT Sloan School of Management 5. Columbia Business School 6. Kellogg School of Management, Northwestern University These seven schools are collectively referred to as the M7. Among its competition, it has the second-lowest acceptance rate3 at 9.9% after GSB (5.7%) which may be attributed to significantly larger MBA class size (See Exhibit-3). Compared to its peer schools, its acceptance rates are significantly lower. Except Stanford GSB, its yield rate4 is also heads and shoulders above the competition (Exhibit-3). In terms of tuition fees, however, HBS lies squarely in the middle of the range set by its peer schools, at $146,880, between Stanford GSB ($143,652) and Wharton ($160,326) (See Exhibit-4). It has the third-highest MBA class size among its peers and one of the lowest faculty-student ratios in M7 (Exhibit-3). 3 Acceptance rate – It is the ratio of the number of admissions offers made by the business school and the total number of applications. 4 Yield rate – It is the ratio of the number of admissions offers accepted (students who enrol in the MBA program) and the total number of admission offers made by the business school.
  3. 3. Executive Education & Publishing business MBA remains the flagship program offering at HBS. However, in recent decades, HBS’s growing and lucrative executive education program which attracts mid-career professionals and celebrities from around the world has taken centre-stage in the school’s finances. Such courses cost thousands of dollars and run from several days to several months. Compared to 1800 students in the MBA program, executive education allows HBS to reach almost 12,000 students per year. Harvard Business Publishing and executive education combined net over 52% of the school’s revenue; at $445 million, HBS’s side businesses net more than rival business school’s entire budget. In fact, Stanford’s and Columbia’s combined executive education gross is only 40% of HBS’s5 . Another formidable leg of HBS’s operations is Harvard Business Publishing – a multimedia and publishing company that dwarves its rivals in scale and reach. The Harvard Business Review has a bi- monthly reach of 250,000 executives, journalists, business professors and students and 7 million monthly readers online. Through the Harvard Business Review Press, it publishes books for executives to hone their management and business skills as well as thousands of business case studies used in teaching curricula worldwide. Being steeped in the case study pedagogy since almost a century, it has the oldest and best-known repository of case studies which it sells to schools and corporations worldwide; in 2017, it sold 14.8 million of these, almost half of all cases sold in the world. It also distributes case studies by other institutions like the University of Virginia Darden School of Business and University of California–Berkeley. Business & Operating Model HBS’s business model can be captured in two processes: (1) Value creation: pooling top-tier faculty and educational resources and organising them into programs which delivers exceptional business education & research output (2) Value capture: monetising educational programs such as MBA, DBA and executive programs as well as leveraging research & brand image to capture value through publications & online courses. HBS’ operating model effectively aligns with its business model by transforming the following assets6 : 1. Brand 5 https://slate.com/business/2018/05/harvard-business-schools-golden-geese.html 6 https://digital.hbs.edu/platform-rctom/submission/hbs-harvard-business-school/
  4. 4. An established and recognised symbol of excellence in academia and practice, the brand lends itself to alumni who achieve success who further burnish the brand, culminating in a self- perpetuating cycle. The brand attracts top-tier faculty, students and recruiters who help in reinforcing it. 2. Program Educational programs capture value from students through tuition fees and manufacture alumni who bolster the brand and contribute through endowments. 3. Campus HBS leverages its campus for teaching and residential purposes, as well as an incubator for in- house start-ups. 4. Professors Top-tier faculty is drawn to the HBS brand which it subsequently reinforces. Professors help in training students as well as conducting research which is subsequently leveraged by Harvard Business Publishing. 5. Intellectual Property HBS sells the intellectual output of its faculty through publications, online courses and executive education programs. 6. Students Students are drawn from leading professional setups and serve to advertise the program in their place of work and at large through their professional success. 7. Alumni Alumni serves as effective advertisers as well as financial and intellectual contributors to the school. Moreover, they help in propagating the operating model by recruiting future classes of students. They also help in the creation of case studies as educational material. Operational Aspects All of the assets in the operating model as described above replace themselves periodically and synergize with one another. The brand is such that it is continuously reinforced by faculty and the growing body of alumni. The brand is probably the least replaceable element in the system which integrates all the remaining assets. However, the brand has sustained itself for nearly a century with recurrent onslaughts such as scandals involving alumni. The campus which serves as the platform where all learning happens does not serve as the precursor or linchpin of operations, with operations gradually moving online. The campus is also periodically expanded and renovated through operational cash flows. The current faculty which numbers over 230 is also periodically replenished by the in-house DBA program, as well as through other doctoral programs in competing schools. With incoming students in
  5. 5. the class of 2021 from 71 countries7 and more than ten times the number of applicants as the number of seats, students do not represent the bottleneck in operations. Lastly, the alumni body is also periodically replenished by graduating students. Therefore, a bird’s eye view of operations indicates a robust system which is autopoietic throughout the entire value-chain. The robust autopoiesis in operations is accompanied by deviation-counteracting processes which sustain the model. For instance, the alumni who return to Harvard Business as faculty and administrative staff – a significant portion of faculty are graduates of the MBA or DBA programs while administrative positions such as CFO are also filled by alumni – help preserve the ethos and culture at HBS over decades and sustain the legacy. The brand is bolstered by powerful alumni who have a stake in it and prevent it from being tarnished. Alumni contribute to the campus renovation and also via case studies which adds to the intellectual base of the school. Thus, alumni contribute significantly in the HBS model and provide an extremely potent deviation-counteracting influence. In the HBS model, the identifiable bottleneck is the brand – significantly expanding operations beyond an MBA class size of 900-1000 students would gradually dilute the brand of HBS and the model would gradually tend to disintegrate. This is because of multiple reasons: 1. Dilution in student quality would send negative signals in the industry leading to poor recruiting 2. Poor recruiting would hamper the arrival of top student talent at HBS accompanied by a fall in rankings 3. A fall in rankings would drastically hamper sales of Harvard Business Publishing and also tarnish the attractiveness of Executive education programs. Another lens to analyse HBS operations is in terms of product quality. In terms of the 8 dimensions of product quality, HBS stacks up as follows: Performance As per HBS’s stated aim, “we educate leaders who make a difference in the world”, HBS exhibits stellar performance with the highest number of Fortune 500 CEOs (40)8 and the highest MBA average lifetime earnings9 Reliability The operations are highly reliable due to deviation-counteracting loops which produce quality alumni year after year Durability With a unmatched corpus of $3.8 billion and geographically diverse sourcing of students and faculty, HBS operations are among the most durable vis-à-vis competition 7 https://www.hbs.edu/mba/admissions/class-profile/Pages/default.aspx 8 https://poetsandquants.com/2012/05/16/schools-with-most-mba-alums-atop-the-fortune-500/?pq- category=business-school-news&pq-category-2=mba-jobs 9 https://poetsandquants.com/2012/06/14/where-mba-career-pay-totals-3-million-plus/2/
  6. 6. Serviceability HBS operations are highly serviceable because any assets in the value-chain can be replaced more easily compared to rivals Aesthetics A strong brand imbues HBS with high aesthetic appeal Features HBS has a wide repertoire of offerings – MBA, DBA, Executive Education, Books, Magazines and online courses Conformance HBS graduates are consistently ranked amongst the most employable in the industry Perceived Quality With the highest average lifetime earnings and arguably the strongest brand in business education, HBS wins hands down Analysing HBS operations in terms of flexibility: Mix flexibility HBS has little flexibility to modify the MBA class size in times of low demand in favour of online programs. However, it does modify its mix of executive education offerings to suit the demands of that year Changover flexibility HBS can rapidly changeover faculty from one program to the next due to the inherent nature of the resource Modification flexibility HBS periodically redefines its MBA curriculum to suit the needs of the industry Volume flexibility There is very little volume flexibility for its flagship brick and mortar courses such as MBA and DBA. In this sphere, HBS is severely inflexible Rerouting flexibility HBS can redeploy faculty in the same area to some extent subject to faculty availability. The large size of faculty helps in this regard Material flexibility There is immense flexibility in terms of inputs – students – due to the enormous demand for the program across the world Responsiveness HBS has been proactive in auguring trends in the business education sector such as executive education and HBS Online Concluding Remarks In terms of competitive strategy, HBS has closed doors which lead to high student volumes (>1000/year), high tuition fees (nullified due to highest total scholarship disbursal with 50% students receiving aid, see Exhibit-6) and unique focus on a specific branch of management (for e.g. Kellogg continues to identified with marketing, Wharton with accounting and Babson with entrepreneurship). It has shut doors on being a niche school with a small class size such as Berkeley’s Haas. In toto, HBS plays on adequate student class size to register alumni impact in the industry over the years, a broad focus on all-round management to maintain industry though leadership and avoid getting pigeonholed,
  7. 7. as well as recruiting alumni as faculty against notions of inbreeding. Its generous disbursal of scholarship helps it effectively segment student population, subsidising the section which cannot afford the costs of an MBA while retaining priority admitted candidates. For this section of candidates who have received multiple admits and deciding between business schools based on tuition fees, HBS is effectively able to compete on cost while maintaining its high-quality price perception in the other, price-insensitive segment where it competes on quality. Its successful diversification of revenue streams is a testament to its operating model which draws on the successful integration of its brand, faculty, and alumni. EXHIBITS Exhibit – 1: Revenue growth and breakup
  8. 8. Exhibit – 2: Expenses growth and breakup Exhibit – 3: Cash from Operations ($ million)
  9. 9. Exhibit – 3: MBA acceptance rate and yield rate of top business schools Business School Acceptance rate Yield rate Applicants Admits Enrolled Faculty Harvard Business School 9.90% 90.90% 10351 1021 928 233 Wharton 19.20% 67.10% 6692 1287 863 241 Stanford GSB 5.70% 89.10% 8173 469 418 111 Booth School of Business 23.50% 52.90% 4674 1100 582 211 Kellogg School of Management 20.20% 51.60% 4595 926 478 - MIT Sloan 11.60% 60.30% 5798 670 404 116 Columbia Business School 16.50% 73.90% 6188 1019 753 152 (full time)
  10. 10. UC-Berkeley – Haas 12.90% 50.90% 4007 515 262 167 Dartmouth Tuck 23.00% 48.80% 2610 601 293 Yale SOM 17.40% 48.80% 4098 713 348 Michigan – Ross 25.30% 48.00% 3484 880 422 Duke – Fuqua 22.40% 50.90% 3796 851 433 Virginia – Darden 24.50% 48.60% 2743 671 326 Cornell – Johnson 29.90% 56.00% 1653 495 277 UCLA – Anderson 22.30% 49.10% 3315 740 363 NYU - Stern 20.90% 48.50% 3927 822 399 Note: Acceptance rate – It is the ratio of the number of admissions offers made by the business school and the total number of applications. Yield rate – It is the ratio of the number of admissions offers accepted (students who enrol in the MBA program) and the total number of admission offers made by the business school. Exhibit – 4: Fees for MBA programme across top US business schools
  11. 11. Exhibit-5: Comparison of the Class of 2019 across M7 Schools Source: Poets & Quants10 Exhibit-6: Comparison of scholarship disbursal across M7 Schools Source: Poets & Quants11 10 https://poetsandquants.com/2018/01/10/the-data-is-in-the-m7-schools-remain-on-top/4/ 11 https://poetsandquants.com/2018/01/10/the-data-is-in-the-m7-schools-remain-on-top/4/
  12. 12. Exhibit-7: Alumni networks across M7 Schools Source: Poets & Quants12 12 https://poetsandquants.com/2018/01/10/the-data-is-in-the-m7-schools-remain-on-top/4/

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