Business School, Disrupted

If any institution is equipped to handle questions of strategy, it is Harvard Business School, whose professors have coined so much of the strategic lexicon used in classrooms and boardrooms that it's hard to discuss the topic without recourse to their concepts: Competitive advantage. Disruptive innovation. The value chain.

But when its dean, Nitin Nohria, faced the school's biggest strategic decision since 1924 - the year it planned its campus and adopted the case-study method as its pedagogical cornerstone - he ran into an issue. Those professors, and those concepts, disagreed.

The question: Should Harvard Business School enter the business of online education, and, if so, how?

Universities across the country are wrestling with the same question - call it the educator's quandary - of whether to plunge into the rapidly growing realm of online teaching, at the risk of devaluing the on-campus education for which students pay tens of thousands of dollars, or to stand pat at the risk of being left behind.

At Harvard Business School, the pros and cons of the argument were personified by two of its most famous faculty members. For Michael Porter, widely considered the father of modern business strategy, the answer is yes - create online courses but not in a way that undermines the school's existing strategy. "A company must stay the course," Porter has written, "even in times of upheaval, while constantly improving and extending its distinctive positioning."

For Clayton Christensen, whose 1997 book, "The Innovator's Dilemma," propelled him to academic stardom, the only way that market leaders like Harvard Business School survive "disruptive innovation" is by disrupting their existing businesses themselves. This is arguably what rival business schools like Stanford and the Wharton School have been doing by having professors stand in front of cameras and teach MOOCs, or massive open online courses, free of charge to anyone, anywhere in the world. For a modest investment by the school - about $20,000 to $30,000 a course - a professor can reach a million students, says Karl Ulrich, vice dean for innovation at Wharton, part of the University of Pennsylvania.

"Do it cheap and simple," Christensen says. "Get it out there."

But Harvard Business School's online education program is not cheap, simple or open. It could be said that the school opted for the Porter theory. Called HBX, the program will make its debut June 11 and has its own admissions office. Instead of attacking the school's traditional MBA and executive education programs - which produced revenue of $108 million and $146 million in 2013 - it aims to create an entirely new segment of business education: the pre-MBA. "Instead of having two big product lines, we may be on the verge of inventing a third," said Jay W. Lorsch, who has taught at Harvard Business School since 1964.

Starting last month, HBX has been quietly admitting several hundred students, mostly undergraduate sophomores, juniors and seniors, into a program called Credential of Readiness, or CORe. The program includes three online courses - accounting, analytics and economics for managers - that are intended to give liberal arts students fluency in what it calls "the language of business." Students have nine weeks to complete all three courses, and tuition is $1,500. Only those with a high level of class participation will be invited to take a three-hour final exam at a testing center.

"We don't want tourists," said Jana Kierstead, executive director of HBX, alluding to the high dropout rates among MOOCs. "Our goal is to be very credible to employers." To that end, graduates will receive a paper credential with a grade: high honors, honors, pass.

"Harvard is going to make a lot of money," Ulrich predicted. "They will sell a lot of seats at those courses. But those seats are very carefully designed to be off to the side. It's designed to be not at all threatening to what they're doing at the core of the business school."

Exactly, warned Christensen, who said he was not consulted about the project. "What they're doing is, in my language, a sustaining innovation," akin to Kodak's introducing better film, circa 2005. "It's not truly disruptive."

To run HBX with Kierstead, Nohria tapped Bharat Anand, 48, a strategy professor who had been researching how traditional media companies have coped, or haven't, with digital disruption. "I think about those cases a lot," said Anand, who is also Nohria's brother-in-law.

The dean handed him a sheet of six guiding principles, including these: HBX should be economically self-sustaining. It should not substitute for the MBA program. It should seek to replicate the Harvard Business School discussion-based style of learning. This was no easy assignment, Anand conceded.

"What is competitive advantage?" he asked, invoking Porter's signature theory. "It comes from being fundamentally different. We teach this all the time. But saying it is one thing. Putting it into practice is hard. When everyone is going free, everyone is going with a similar type of platform, it takes courage to do your own thing."

On campus, Harvard business students face one another in five horseshoe-shaped tiers with oversized name cards. They fight for "airtime" while the professor orchestrates discussion from a central "pit."

"We don't do lectures," Nohria said. "Part of what had already convinced me that MOOCs are not for us is that for a hundred years our education has been social."

The challenge was to invent a digital architecture that simulated the Harvard Business School classroom dynamic without looking like a classroom. In a demonstration of a course called economics for managers, the first thing the student sees is the name, background and location - represented by glowing dots on a map - of other students in the course.

A video clip begins. It's Jim Holzman, chief executive of the ticket reseller Ace Ticket, estimating the supply of tickets for a New England Patriots playoff game: "Where I have a really hard time is trying to figure out what the demand is. We just don't know how many people are on the sidelines saying, 'Hey, I'm thinking about going.'"

It's a complex situation meant to get students thinking about a key concept - "the distinction between willingness to pay and price," Anand said. "Just because something costs zero doesn't mean people aren't willing to pay something." A second case study, on the pay model of The New York Times, drives the point home.

Then a box pops up on the screen with the words "Cold Call." The student has 30 seconds to a few minutes to type a response to a question and is then prodded to assess comments made by other students. Eventually there is a multiple-choice quiz to gauge mastery of the concept. (This was surprisingly time-consuming to develop, Anand said, because the business school does not give multiple-choice tests.)

At a faculty meeting in April, Anand demonstrated the other two elements of HBX: continuing education for executives and a live forum. He unveiled the existence of a studio, built in collaboration with Boston's public television station, that allows a professor to stand in a pit before a horseshoe of 60 digital "tiles," or high-definition screens, with the live images and voices of geographically dispersed participants. "I'm proud of our team, and how carefully they've thought about it even before they've done it," Porter said.

The Clashing Models

Not everyone was so impressed. Christensen, for one, worried that Harvard was falling into the very trap he had laid out in "The Innovator's Dilemma." "I think that we've way overshot the needs of customers," he said. "I worry that we're a little too technologically ambitious."

He also feared that HBX was tied too closely to the business school.

"There have been a few companies that have survived disruption, but in every case they set up an independent business unit that let people learn how to play ball in the new game," he said. IBM survived the transition from mainframe computers to minicomputers, and then from minicomputers to personal computers, by setting up autonomous teams in Minnesota and then in Florida. "We haven't got the separation required."

Porter has expressed the opposite view. Companies that set up stand-alone Internet units, he wrote in 2001, "fail to integrate the Internet into their proven strategies and thus never harness their most important advantages." Barnes & Noble's decision to set up a separate online unit is one of his cautionary tales. "It deterred the online store from capitalizing on the many advantages provided by the network of physical stores," he said, "thus playing into the hands of Amazon."

Here is where the two professors' differences come to a head. In the Porter model, all of a company's activities should be mutually reinforcing. By integrating everything into one, cohesive fortification, "any competitor wishing to imitate a strategy must replicate a whole system," Porter wrote.

In the Christensen model, these very fortifications become a liability. In the steel industry, which was blindsided by new technology in smaller and cheaper minimills, heavily integrated companies couldn't move quickly and ended up entombed inside their elaborately constructed defenses.

"If Clay and I differ, it's that Clay sees disruption everywhere, in every business, whereas I see it as something that happens every once in a while," Porter said. "And what looks like disruption is in fact an incumbent firm not embracing innovation" at all.

In other words, it's not that United States Steel was destined to be undone by minimills. It's that its managers let it happen.

"The disrupter doesn't always win," argued Porter, who nonetheless called Christensen "phenomenal" and "one of the great management thinkers."

Who will win the coming business school shakeout? Porter acknowledged that it's a multidimensional question.

Most schools offering MOOCs do so through outside distribution channels like Coursera, a for-profit company that has Duke University, Wharton, Yale University, the University of Michigan and several dozen other schools in its stable. EdX, of which Harvard was a co-founder with the Massachusetts Institute of Technology, counts Dartmouth College and Georgetown University among its charter members.

"These will come to have considerable power," predicted Jeffrey Pfeffer, a professor of organizational behavior at the Stanford Graduate School of Business. He pointed to the aircraft industry: "In order to get into China, Boeing transferred its technology to parts manufacturers there. Pretty soon there's going to be Chinese firms building airplanes. Boeing created their own competition." Business schools, he said, "are doing it again; we are creating our own demise."

© 2014, The New York Times News Service