Text #1 - Masters of Management Studies in Kunshan

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MMS China Proposal
Committee Members: Jennifer Francis, Jim Smith, David Robinson, Bill Boulding (ex officio)

Our charge: Our committee was charged with identifying design options for a Fuqua MMS program in Kunshan that would satisfy three criteria:

1) Meet or exceed our quality standards for degree programs

2) Enhance, or do not harm, the quality of our research activity

3) Have long‐term financial viability.
Process/Materials considered:

(1) We studied materials provided by the China Market Research (CMR) Group who conducted a market analysis of the market for the MMS program in China. This CMR report will be made available to Fuqua faculty. (Funny. This is the report that FC made available to any reader who asked for it a month ago, and more than 300 did!)

(2) We assisted in the design of a new market research survey, recently completed by the CMR Group. The new survey is directed toward understanding employers’ demand for MMS China graduates.

(3) In addition the CMR studies, Fuqua's East Asia regional team commissioned an internet‐based employer survey and wrote a report summarizing their findings and those of others who have studied China's needs for business education. This report will also be made available to Fuqua

(4) We conducted two focus groups with current MMS students: one group was solely Chinese and the other included students from the US, Europe and Mexico, but not China. In each of these focus groups, we explored current MMS students’ perceptions of the attractiveness of a MMS program in China, as well as potential alternatives.1 We also reviewed Fuqua's China regional
manager's response to the feedback of the MMS students.

(5) We considered the opinions and perspectives of many faculty members and others who shared their views about the nature of the market, the nature of logistical challenges, etc. The former
Associate Dean Committee (which includes two members of the current committee) met with each academic area at Fuqua to discuss the China initiative.

(6) We reviewed financial models prepared by Fuqua's finance team in conjunction with the Provost's office, as well as the "Duke‐Kunshan Planning Guide" prepared by the Provost's office and available at the Academic Council Website.

1 We understand that our focus group surveys are biased because they sought information from students who
already selected to come to the Durham MMS program.

Overall Conclusions:

Demand for Programs: Many have argued that China has a great need for business education. For example, a BCG report prepared for Fuqua in 2008 notes that "the supply of Chinese MBAs sorely trails
the soaring demand." The report prepared by Fuqua's East Asia regional team makes this argument and their employer survey showed that many employers have "some interest" in hiring MMS graduates. In
meetings with Blair Sheppard and Greg Jones (and others), business leaders in Kunshan and Taiwan have expressed interest in and support for a Duke MMS program in Kunshan.

Yet, despite this expressed need and support, we found little evidence to indicate that there is strong
demand among Chinese students for a Kunshan‐based one‐year MMS degree offered at tuitions typically associated with Fuqua degree programs. Market reports, student focus groups and faculty
perspectives have consistently expressed the view that what Chinese students seek is immersion in the US business/cultural experience.

Although many Chinese parents hope that their children will choose to live in China in the long run, they
are happy to see them pursue graduate study in the US. Moreover, although Chinese parents sacrifice
to pay US tuitions, parents and students generally do not view the China‐based programs to be as valuable.

Most China‐based business programs charge considerably lower tuitions and are perceived to be of lower quality.2

The Chinese students and faculty we spoke with indicated that Duke has a reasonably strong brand name in China, but that a DKU degree would be considered a “lesser” or “lower quality” product almost by definition. The Chinese students voiced concern that this would erode the quality of their own Duke Durham University MMS degree.

Chinese MMS students had no interest in a China residency experience (mandatory or optional) as part of their MMS program. Non‐Chinese students voiced mixed
enthusiasm for the opportunity to include a China residency in their MMS experience. One concern that the students expressed pertained to faculty quality: specifically, would they receive the same quality teaching in China that they would receive in Durham?

These mixed reports leave the committee with considerable uncertainty about demand for an MMS program in Kunshan.

Interest of Faculty: Based on our discussions with faculty, it is clear that relatively few of our current faculty members are interested in spending a significant amount of time in Kunshan. Though faculty may be willing to spend two weeks (comparable to the old GEMBA program) to teach in China, the
consensus is that longer visits would be difficult for many faculty, particularly those with family responsibilities in Durham.

In addition, for faculty contemplating a visit to Kunshan, it seems it would be
difficult to relocate family to Shanghai where the American schools are located and commute to the Kunshan campus. The lack of enthusiasm on the part of our faculty poses a serious challenge for
offering a residency based program in Kunshan.

Summary and conclusion: In this report, we discuss three curriculum options:

1) A full, one‐year MMS degree to be delivered wholly or mostly in Kunshan.

2 For example, the Peking University HSBC Business School offers a high‐quality program in Shenzhen that operates
under the umbrella of Peking University. They teach in English and attract students from China and abroad. Their
tuition is about $9,300 per year.

2) A "3+2 program" where students would spend the summer and two fall terms in Durham and spend their last two terms in Kunshan.

3) A "3+1+1" option where Durham‐based MMS students would have the option of spending
Spring Term 1 in Kunshan. This proposal adds an option to our existing Durham based MMS rogram.

Of course, a fourth option would be to do nothing, i.e., to not offer any kind of MMS program in Kunshan.

Our committee is not prepared to make a specific recommendation at this time. All of the options have merits and weaknesses, but need to be explored further before we can recommend implementing or
rejecting them. In all cases, we have serious concerns about our ability to staff the programs and maintain high quality, particularly with Option 1. With Options 2 and 3: (a) we do not know whether
these would be approved by the Chinese Ministry of Education or would be acceptable to Duke's partners in Kunshan and at Wuhan; (b) since these programs do not utilize the Kunshan campus for a full
year, we do not know how the fixed costs (and benefits) of operating these programs might be shared with other programs in Kunshan; (c) we have little information about student demand for these options
and (d), in light of (a)‐(c), we have not attempted to model the costs and benefits of these options.

Finally, we do not fully understand the implications of "doing nothing" in terms of Duke's commitments to Kunshan and Wuhan.
Having failed to develop a specific recommendation for faculty at this time, the committee would nevertheless like to hold the June 1st faculty meeting to discuss these (and other) options for the MMS Program in Kunshan. Such feedback would help the committee develop a proposal that could be considered in early fall.
Option 1: A Full MMS Program based in Kunshan

This is essentially what is envisioned in the proposals made to Duke's Board of Trustees. In this model,
students would spend a summer term in Durham, followed by the rest of the program in Kunshan.

The current course order for the Durham‐MMS Program is provided in Appendix 1. There are a number of possible variations on course offerings. For example, one could offer specialized programs in China
that focus on, say, finance or operations. However, in our view, it is not clear that specialization would be preferred. The current program seems to fit well with the needs identified by employers. For
example, a survey of 650 HR Professionals and China Business Leaders identifies "analytic skills, demonstrating initiative and independent thinking as the most apparent gaps for China’s young
professionals" (see the report prepared by Fuqua's Asian regional team).

The new CMR study suggests
that employers see needs for "soft skills" (e.g., communication skills) as well as analytic skills. An added benefit of keeping the Kunshan program more‐or‐less in lock step with the Durham program would be
to allow Durham‐based students to spend some time in Kunshan and Kunshan‐based students to spend some time in Durham with minimal difficulties.

Staffing such a program will be difficult. The Provost's financial models assume that these programs will be staffed with a mix of tenure‐track faculty (one‐third), adjunct faculty (one‐third) and Kunshan‐based Professors of the Practice and the Associate Dean (one‐third). The financial models assume that tenure
track faculty would be compensated at a rate of 1.5 course credits for 1 section and 2 credits for 2 sections; there would be travel and living expenses associated with the tenure‐track and visiting faculty.

Though these are merely pro forma assumptions developed for exploratory purposes (rather than a design constraint), this is a rather different mix than the Durham MMS program, which is staffed mostly by tenure‐track faculty. A significant shift away from tenure track faculty may reduce costs but raises
quality concerns.

On the other hand, heavy reliance on tenure‐track faculty would increase costs and stretch a faculty that is already stretched thin by Fuqua's offerings.
We considered a variety of ways to arrange the teaching in this program to be efficient and attractive for
faculty who are not based in Kunshan.

For example, we could have one of the three courses each term run for the full six weeks (plus a final exam period) and two other courses run for three weeks each (plus an exam). However, our belief is that quality would be compromised with such compressed courses – it may be difficult for students to learn at such a fast pace and the experience of a residential program would be harmed by having such short visits by faculty.

Moreover, our sense is that even three weeks is too long to be away from home (or too long to be in Kunshan) for most of our current faculty. These time demands may also make it difficult to find high‐quality visiting or adjunct faculty.

In addition, our interviews with the Chinese MMS students raised concerns about deviations between the Durham program and Kunshan program; they felt most deviations would signal an inferior quality
program in Kunshan. Deviations considered include the course delivery (6‐week versus something else) and the composition of faculty (the Durham MMS program is heavily staffed with tenure track Fuqua

Other deviations proposed and discussed (such as the use of teleconferencing technology) were uniformly rejected as signaling an inferior program.

As documented in the CMR Report and discussed earlier, demand for a full time program in Kunshan is quite uncertain, as is the market's willingness to pay western‐level tuitions for these programs.
Appendix 2 shows the financial model for the MMS program prepared by Fuqua finance staff in conjunction with the Provost's office. We have added notes on the right side of the worksheet, explaining some of the calculations and a few rows at the bottom in effort to get towards a "bottom
line" contribution for the MMS Program.
We believe the revenue assumptions of this model to be rather optimistic. In this model, the number of students grows from 60‐170 students over the first 5 years of the program. The students are assumed
to be a mix of Chinese and international students and are assumed to pay, on average, 80% of the $41,000 tuition. The sections are assumed to be able to run with up to 90 students; this section size is substantially larger than the section sizes in the Durham MMS program and raises quality concerns.

Note that the "Faculty Compensation" line item (and therefore the "FSB MMS Contribution" line item)does not reflect the costs of the Associate Dean or Professors of the Practice who are assumed to teach of one‐third of the courses for the program. The cost of these staff members is included in the fixed
expenses for staff.

The "fixed expenses" here represent that the fixed expenses for all of the Fuqua programs operating in Kunshan; this includes the MMS program, an undergraduate certificate program (which is not
necessarily a Fuqua program), an executive MBA program, and executive education. To estimate a "bottom line" for the MMS Program, we allocated the fixed costs across these programs. Specifically,
we include FSB staff who will likely be working on the MMS program in the MMS Staff costs, including the Associate Dean and Professors of the Practice who are assumed to teach one‐third of the MMS

Also included in this figure are admissions, career services, and other support staff (e.g., information technology support) for the program. We allocate the building costs, debt service (to cover the capital costs associated with furniture, fixtures and equipment) and common costs for the campus
across programs in proportion to the assumed number of students in the programs.

The "bottom line" figure for the MMS program is consistently negative, ranging from a loss of $2.6 million in its first year of operation (with 60 students) to a loss of $0.4M (with 170 students in the
program). Because we believe the forecasts for the number of students and their ability to pay are optimistic (and section sizes to be too large), we view these bottom line figures to be quite optimistic,
even though they are negative.

Given the apparent lack of interest in this program among potential students, the lack of enthusiasm among faculty for teaching in Kunshan for extended periods, the concerns about quality of the program,
and the high cost of offering this program (particularly in light of Fuqua's uncertain financial position),
we cannot recommend offering such a program at this time.

However, given our uncertainty about
some key issues – in particular, our ability to staff the courses and the implications of pursuing other
alternatives (other program designs or doing nothing) – we do not recommend closing the door on the possibility of offering a full‐year MMS program based in Kunshan at this time.
Option 2: A "3+2" MMS Program
The second option we considered was a model where Kunshan MMS students would spend the first three terms of the program in Durham with the Durham MMS students and spend their final two terms (i.e., the spring semester) in Kunshan. The course selection could stay the same as in the Durham‐based program, though there is an opportunity to specialize the offerings for the final two terms in China. The
main advantages of this 3+2 program, as compared to the full MMS program are:
 With fewer than half as many courses in Kunshan, the program should be easier to staff than a full MMS program. The same difficulties and risks remain, though the magnitude is smaller.

 The program may appeal to non‐Chinese students who want to study in China but may be reluctant to spend a full year there.

 The program may appeal to Chinese students who want to study in the U.S. but do not want to spend a full year in the U.S.

If a 3+2 program is successful in attracting students, we may enjoy economies of scale during the three
Durham terms. For example, we currently have about 100 Durham MMS students. If the number of Kunshan MMS students is large enough, we might run a third section of the summer and fall MMS courses. With smaller demand, we could perhaps simply add students in the 3+2 program to the two
Durham MMS sections with little incremental costs. Of course, in either case, there would still be
substantial costs of staffing the courses in the two Kunshan terms.

With a 50‐50 mix of tenure track and
visitors teachings, these six courses in Kunshan would cost approximately $600K. There would also be costs associated with marketing and administering this new program. A drawback of this 3+2 program, relative to a full year program, is that we would not utilize the Kunshan
campus for the full academic year. One possible remedy to this would be to offer two intakes for the MMS programs, one starting in July and the other in, say, January (or February). The later intake could perhaps use the Kunshan campus in the fall. However, we are not convinced that there is sufficient demand to merit two intakes into the program. It would be more efficient and more effective to have 2
or 3 full sections of the MMS program than to split demand across two intakes.

Another remedy would be to share fixed costs of operating the campus with other programs (e.g., Global Health or some other
program) that could use the campus for the remainder of the year.

The details of the program would need to be managed carefully. For example, would we admit students into the Durham‐based MMS program and 3+2 program separately or would we allow students to choose where to spend their spring semester? We believe that for planning purposes, we would have to admit students into either the Durham program or the 3+2 program rather than allowing the students to choose in, say, November or December where to spend the spring. However, we recognize this policy
runs the risk of creating two classes of students in the joint program, perhaps damaging the cohesiveness of the MMS student body and potentially having lower quality students from the weaker

The Durham‐based MMS students expressed great concern about these issues. The key to controlling quality of the joint program would be in the admissions process. We would want the students in the two programs to be distinguished by their interest in studying in China rather than by their abilities.
Demand for such a program is hard to estimate. The Chinese students we spoke with expressed little interest in spending their last two terms in China. Obviously the Chinese students enrolled in our current Durham‐based MMS program may not be the best people to ask about this. However, Chinese faculty confirmed that these views were likely widely held.

Although this 3+2 program provides some
immersion in the U.S. and may be more attractive to these Chinese students than a Kunshan‐based MMS, we need to remember that there are many other options for study in the U.S. and in Europe that
would provide a one‐year‐long, or longer, immersion and, perhaps, the option to take a permanent job in the U.S. or Europe.

On the other hand, a Chinese student who is primarily interested in taking a
permanent job in China may find the opportunity for a shorter U.S. immersion, followed by a spring term in Kunshan to be attractive; this student could conduct a job search in the spring while in Kunshan.
Anecdotal evidence suggests that there are some non‐Chinese students who would find such a 3+2 program attractive, though these students are hard to identify. Many students may value the option to
spend the spring in China, but may be unwilling or reluctant to commit to this.

For example, a student who secures a desirable job in the fall may welcome the opportunity to spend the spring terms in China.

If the same student has not found a job in the fall, he or she may be reluctant to spend the spring term because it would make job hunting difficult.

We did not attempt any financial modeling for this option. At this point, we are uncertain about the feasibility of this option (e.g., would it be acceptable to Kunshan and Wuhan?) and uncertain about how
we might share fixed costs with other programs using the Kunshan campus. If we can address these issues successfully, we may then want to do market research to assess the demand for such a program
and reconsider a more detailed proposal in the future.
Option 3: A "3+1+1" Option for the Durham MMS Program

This model provides students in the Durham‐based MMS program with the option to spend the Spring term on the Kunshan campus. We envision that the students on the Kunshan campus would take the
same classes as those in Durham, but that these classes could be supplemented with visits to cultural and business facilities in this region China. We believe that this model is perhaps best viewed as "term
abroad" within our existing MMS program. We believe such a program would be more popular with non‐Chinese students than the other options because it gives students the ability to spend time in China
with a relatively small commitment on their part.

The Kunshan term could be preceded by a GATE‐like study tour of China which could be open to Durham‐based MMS students who are not planning to spend a full term in Kunshan. Students would be charged a separate fee for a study tour, just as our Daytime MBA students pay for GATE courses.
Students would need to decide whether to join the study tour or spend the term in Kunshan sometime in the fall, say, in November.

We recommend the Spring 1 term for the Kunshan term because (i) the long winter break allows for a study tour to precede the term; (ii) Spring 1 minimize the disruption to job‐search schedule; and (iii) the social ties among students in the program have had time to form and solidify before Spring 1 and could
be reestablished after completing the term.
With even fewer courses in Kunshan, the program should be easier to staff than a full MMS program or the 3+2 model. We believe this staffing challenge could be managed, perhaps with some reordering of
courses for both programs. For example, if we decide to add such an option, we might propose moving the Operations course from Spring 2 to Spring 1 to take advantage of the manufacturing facilities near
Kunshan and to benefit from faculty eager to spend time in Kunshan.

This offering may lead to some inefficiency in staffing. For example, two sections for the MMS program may become one section in each location for the Spring 1 term. Or worse, two sections in Durham may require two sections in Durham and one small section in Kunshan for this term. On the other hand, if this optional spring leads to increased demand for the program, we might have three sections for the Durham‐based courses in all but this term and have two sections in Durham and one in China.

The incremental costs and benefits for such a program depend critically on how much additional demand it
creates and how demand divides into additional sections for the Durham and Kunshan terms.

Of course, this model would utilize the Kunshan campus even less than the 3+2 model. Again, perhaps other schools or departments at Duke may find this "term abroad" opportunity attractive and would
create programs that balance the utilization of Kunshan capacity across other parts of the year. It is also
not clear that such an option would be acceptable to our partners in Kunshan and Wuhan.

As with option 2, we have not attempted to build a financial model of this option at this time. However, one of the key benefits of this option is that it would allow Duke and Fuqua to learn about demand for programs in Kunshan and about how to best operate (staff courses, etc.) in Kunshan with a limited
investment on our part.
Appendix 1

Current Course Order for the Master of Management Studies: Foundations of Business
To be effective with the class of 2012, beginning July 2011
Summer Term
Foundations of Financial Accounting
Quantitative Business Analysis
Business Communication I
Fall Term I
Fundamentals of Business Economics
Introduction to Marketing Analysis
Foundations of Corporate Finance
Fall Term II
Foundations of Capital Markets
Principles of Strategy
Business Communication II
Spring Term I
Fundamentals of Market Intelligence
Principles of Cost and Managerial Accounting
Spreadsheet Modeling and Decision Analysis
Spring Term II
Foundations of Management and Organizations
Fundamentals of Financial Analysis
Introduction to Operations and Supply Chain Management
FSB MMS FY12 FY13 FY14 FY15 FY16 FY17 Notes: Added by MMS Design Committee
Tuition $ 4 1,000 $ 4 1,000 $ 41,000 $ 41,000 $ 4 1,000
Number Students 60 90 120 160 170
Number of sections (90 per section max) 1 1 2 2 2 90 Students per section seems awfully large
Number of courses (15 per section) 15 15 30 30 30
# courses taught by AD / POPs 5 5 10 10 10 Costs of AD + 2 POPs are included in fixed expenses; assumed to cover up to 10 courses for MMS + 2 for Undergrads
Program Costs (% of Tuition) 10% 10% 10% 10% 10%
Faculty Cost Tenure Track incl. fringes (per course credit) $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 1.5 course credit for one section; 1 credit per section for 2 or more sections
Faculty Cost Adjunct (per course) $ 4 0,000 $ 4 0,000 $ 40,000 $ 40,000 $ 4 0,000
Faculty Tenure Track ‐ % of courses taught 50% 50% 50% 50% 50% 50% after courses taught by adjunct POP
Faculty Adjunct ‐ % of courses taught 50% 50% 50% 50% 50% 50% after courses taught by adjunct POP
Students ‐ % Chinese 50% 50% 50% 50% 50%
Students ‐ % Other Asian 30% 30% 30% 30% 30%
Students ‐ % Other Int'l 20% 20% 20% 20% 20%
Scholarship % ‐ Chinese 35% 35% 35% 35% 35%
Scholarship % ‐ Other Asian 5% 5% 5% 5% 5%
Scholarship % ‐ Other Int'l 5% 5% 5% 5% 5%
Tuition $ ‐ $ 2,460,000 $ 3,690,000 $ 4,920,000 $ 6,560,000 $ 6,970,000
less: Scholarships ‐ (492,000) (738,000) ( 984,000) (1,312,000) (1,394,000) 20% Scholarships total
Total Net Revenue ‐ 1,968,000 2,952,000 3 ,936,000 5 ,248,000 5,576,000
Variable Program Expenses:
Program Costs (Course Materials, etc.) ‐ 2 46,000 3 69,000 492,000 656,000 6 97,000 10% of tuition
MMS summer term housing (70 days Millenium) ‐ 2 10,000 3 15,000 420,000 560,000 5 95,000 $3500 per student. Note faculty costs do not reflect savings to staff courses in Durham
Total Variable Program Expenses ‐ 4 56,000 6 84,000 912,000 1 ,216,000 1,292,000
Contribution Margin $ ‐ $ 1,512,000 $ 2,268,000 $ 3,024,000 $ 4,032,000 $ 4,284,000
Step Program Expenses:
Faculty Compensation 9 50,000 9 50,000 1 ,400,000 1 ,400,000 1,400,000 Does not include cost of courses taught by AD and POPs
Faculty Travel/Living/Visa/TT Research ‐ 1 04,300 1 04,300 208,600 208,600 2 08,600 = $10,430 per course taught by TT faculty or adjunct. Reasonable when teaching 2 sections; low for one.
Marketing 1 80,000 1 62,000 145,800 131,220 1 18,098 Declining at 10% per year
Total Step Program Expenses ‐ 1,234,300 1,216,300 1 ,754,400 1 ,739,820 1,726,698
FSB MMS Contribution $ ‐ $ 277,700 $ 1,051,700 $ 1,269,600 $ 2,292,180 $ 2,557,302
FSB Fixed Expenses For MMS, EMBA and Executive Eduation
Staff (Academic support & admin) 666,302 1,716,000 1,937,000 2 ,028,000 2 ,158,000 2,158,000 Includes costs of Associate Deans and two POPs; Program Staff, Admissions, Career Services
Facilities 367,935 1,471,742 1,696,884 1 ,873,697 1 ,873,697 1,873,697 Share of building maintenance, housekeeping etc. costs
Common Costs 844,906 5 47,258 2 70,195 221,338 235,057 2 22,156 Allocation of non‐teaching building expenses
Debt Service 161,087 1,133,510 1,133,510 1 ,133,510 1 ,133,510 1,133,510 Allocation of costs for Furnishing, Fixtures, and Equipment (FF&E)
Other non‐programmatic operating 728,363 83,698 2 51,094 272,018 292,943 2 92,943 Miscellenous other operating expenses (telephone, public relations, …); ≈ $10 K per staff member.
Total Fixed Expenses 2,768,594 4 ,952,208 5 ,288,683 5,528,563 5,693,207 5 ,680,306
Added by MMS Design Committee ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Remainder Added by MMS Design Committee
MMS Share of Staff Expenses 666,302 9 23,000 9 23,000 1 ,014,000 1 ,144,000 1,144,000 Allocated based on use of staff
MMS Share of Fixed (Non‐staff) Expenses 1,410,143 1,941,725 1,508,257 1 ,555,806 1 ,767,603 1,761,153 Allocated based on fraction of students in residence
MMS Fixed Expenses 2,076,445 2,864,725 2,431,257 2 ,569,806 2 ,911,603 2,905,153
MMS Contribution (loss) Before Campus' Overhead $ (2,076,445) $ (2,587,025) $ (1,379,557) $ (1,300,206) $ (619,423) $ (347,851) "MMS Bottom Line"
Note this does not include costs for Conference Center; Faculty Residence; Costs/Profits from Dormitories, Central administration
Cumulative Contribution $ (2,076,445) $ (4,663,470) $ (6,043,027) $ (7,343,233) $ (7,962,657) $ (8,310,507

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