Stanford Sloan, Entry 22: The Last Entry: Final Finals, Ethics in B-School, the World According to Pixar

Tis the eve of our final final (approximately 11pm when I stared writing this), and throughout the b-school campus, not a mouse is stirring. Well, that’s not entirely true – many MBA’s are out at the final FOAM of the season held at some club in Palo Alto.

As for Sloans, we have our final final exam tomorrow morning, our very last bit of academic nonsense (er, rather, I mean our last serious academic endeavor) during our Sloan year: the HR final exam. The HR class (as per my past post) is one of two Sloan required classes in our final quarter.

Today was officially our last day of class at the GSB, but like many Sloans, I didn’t have any classes today. While many of us were busy studying for our final tomorrow, I took a trip up to San Francisco to wander around a little bit.

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Our other Sloan required class, Non Market Strategy, had a professor who decided to give us our final exam last Thursday. In hindsight this seemed like a brilliant move, because it allowed us to enjoy the beautiful late May/early June weather without stressing about academics last weekend.

This also meant that two of my courses were officially finished last Thursday (the required class, Non Market Strategy, and my elective class, The Business World: Moral and Spiritual Inquiry through literature).

Yesterday (Monday, June 1st) I had my last session of the Leadership Entertainment Industry class (more on this, including our visit to Pixar and the visit of David E. Kelly later). Which means three out of four classes are done, and in less than 12 hours, my academic experience at the Stanford Sloan program will be complete!

As I sit here, I should be cramming for this final exam in HR, I can’t help but reflect what an odd class ithe HR class been. In this class, doing data regression about HR was often emphasized more than actual HR strategy, and cases that we wrote about our co-workers companies seemed much more interesting than the “official cases” from Harvard and Stanford Business School that we were supposed to be learning from. Oh well, learning from our peers has been one of the keys to making business school worthwhile, so I guess this shouldn’t’ surprise me!

Ethics and Morality in Business?

One component of the our Non-Market Strategy class that came up over the past few weeks was the “ethics” component. Despite being a little philosophically abstract (Kantian vs. Utilitarian, anyone? I think I’d rather debate Tastes Great vs. Less Filling!), there was some valuable self-reflection this class forced us to do, at least for a few minutes.

In the wide world, MBA’s aren’t generally perceived to have any ethics, really. Just a constant stream of number-crunchers coming out of business schools who calculate the path to maximum profits with the least weighted average cost of capital, and always recommend the path of most borrowing at the least interest rate, regardless of the long term consequences.

Case in point: our recent financial crisis.

Well, I can’t really argue that this isn’t what business school teaches us. It actually is, for the most part, what we learn in our finance classes. But, there are bright spots of moral reflection in our other classes too, which shouldn’t be overlooked.

In our Non-market class, we were presented with some ethical dilemmas and asked our opinion.

Our professor called it Trolley-ology. A trolley is coming down the track and it is very likely to kill 5 people who are on the track. You have the option to change the track the trolley is on, to another track where only one person will get killed.

What do you do?

OK next step. Forget about the second track. Suppose you are on a bridge overlooking the trolley that is rolling towards killing 5 people. There is one person on the bridge with you. You could push that person off the bridge, which would kill them, but would stop the trolley, and with certainty save the lives of the 5 people down the road.

What would you do now?

Hmmm. If you’re like me, I don’t know that these hypothetical ethical dilemmas about Trolleys really impact our day to day decision in the business world, however much they do help illuminate how we think about ethical issues.

I’m sure that most MBA’s who were involved with institutions that spear-headed the financial crisis (as well as earlier excesses like Enron and Worldcom) probably had ethics classes like this one, but it’s not clear that they did any good.

More interesting and impactful on my long term view though, was my Moral and Spiritual Inquiry Through Literature class. This class, which was taught in seminar format, put a much more textured and personalized spin on these kinds of moral dilemmas.

By reading a fictional story (a novel a week, mind you) of a character who, for example, is staunchly anti-corruption at the beginning of the novel, but succumbs to taking a bribe by the end of the novel, we move beyond platitudes and abstract philosophy and hopefully gain some insight into human nature.

When Ivan Ilyich, described as a career corporate ladder climber in mercilessly accurate prose by Tolstoy, is about to die prematurely and reflects on what was missing from his materially oriented life, it’s not much of a stretch to see the comparison between this late 19th century Ruppy (Russian upwardly mobile professional) and the corporate climbing business school student of the twenty first century!

By being forced to discuss the nature of ethics and the role of religion and spirituality in our lives (and our work), we get, I think, to a much more personalized view of how we as human beings with vying impulses including greed and self-sufficiency might act in a materially obsessed world.

Moreover, by writing a 4000 word essay on how these books had an impact on my own views on morality and spirituality in the business world, I was forced to think through these issues at a deeper level than even trolleys would allow.

For those of my readers who wonder why I’m taking a class on Literature in Business School, I can only say that I wish everyone who had gotten an MBA over the past 10-20 years had to take this class (Moral and Spiritual Inquiry Through Literature), since it’s taught me more about reflecting on what’s important in life and business than all of my other classes combined.

The Law Acccording to Pixar

As always, I like to write about my Entertainment Industry class. Why? Not only because it’s a fun class, but because everyone likes the movies.

Last week, we went on a class visit to Pixar, which is, as we’ve learned the only major studio which has not had a box office failure. The visit was very eye-opening, not just because there statues of one-eyed monsters in the lobby (from Monsters, Inc), but because it made me (and the rest of the class) think about creativity, business, and the importance of modifying stories (whether in business or entertainment) until we get them right.

Pixar is a very creativity driven place. This comes across from the conversations we had with the CFO of Pixar, and from Andrew Stanton, who was the writer on the Toy Story movies, and the writer/director of Finding Nemo and Wall-e.

The first thing that strikes you when you walk into Pixar these days is that it’s all about one film: Up, the new movie that was just released this last weekend. I loved this movie, and it looks like it’s going to be a commercial success, despite analysts ravings that a movie about “a grumpy old man and a fat kid” has limited market appeal and no toy merchandising possibilities.

The thing about this focus is that for much of its history (going back to Toy Story) the folks at Pixar focused almost exclusively on one film. This is contrary to what we learn at business school and contrary to what almost every major studio in Hollywood says – that you need a diversified portfolio of films every year because you never know which of them are going to be successful.

But, as Andrew described to us their process – it can take 4-5 years to produce a Pixar film, one of their reasons for this success became apparent. Pixar is a mixture of Hollywood and Silicon Valley (Steve Jobs was the CEO and investor for many years, and Pixar grew out of Lucasfilm, and was a technology company for most of it’s life). They focus incessantly on the story for the first 2.5 years of this time – recording the whole film using hand drawn sketches and only when/if they get the story right, do they invest in the very costly 3d animation for which they are known.

They also allow for a certain amount of honest creative tension. While the director has the final say, the Pixar brain trust watches early screenings (of hand-drawn sketches with employee-recorded voices) and they “duke it out” with each other for ideas on how to make the story better. According to Stanton, after some painful disputes, they almost always emerged with a better story, which really has been the key to Pixar’s success I think. I could continue writing about Pixar forever, since it's such an interesting company, but will have to leave it at that!

We also had David E. Kelley visit our Entertainment Industry class. He was the creator of such hit television legal dramas as The Practice, Ally McBeal, and the more recent Boston Legal.

I won’t say much about his visit, except that it was also very insightful about the creative process in general and how television works in particular. Two things he said that surprised me?
1) that James Spader didn’t want to work with William Shatner at the beginning of Boston legal (though this changed quickly when they started working together), and
2) the head of the TV network programming (I think it was ABC) thought that the show ‘Lost’ was the “biggest piece of shit” he’d ever seen and he only let it go on the air because he had to contractually (the same executive later happily took credit for what became one of the biggest successes in the networks history).

Sign Off: The Last Entry

This is probably my last entry of the Sloan academic year in this blog. It’s been great fun writing this blog, even when it’s done in the middle of the night before an important exam.

I’d like to remind everyone for posterity that these have been my own personal impressions and rants of a thirty-something software entrepreneur who decided to go back to school and relive his high-school dream of attending Stanford University.

Several of next year’s Sloan’s have told me that they heard about the program or decided to join the Sloan program at Stanford because of my blog (or maybe it was despite my blog?? – just kidding!). For those of you who’ve been reading it regulary, I thank you and feel free to drop me a note any time.

From now on, I’ll be heading back to the world of work, dipping my toe in Venture Capital, and continuing to work on my organization, BayView Labs.

As for the blog, I’m going to go back to writing about entrepreneurship, zen, personal growth, and of course, the movies!

So what did I learn about succeeding in the business world in business school?

Well, speaking of the movies, perhaps the best way to sum up what I learned in business school is also in fact the best way to sum up my class about the Entertainment Industry.

This line, which was quoted to us by both David E. Kelley and our professor (Oscar winning documentary filmmaker Bill Guttentag), was from the book “Adventures in the Screen Trade”, by William Goldman.

Goldman summed up his own experiences in Hollywood with the very simple line: “Nobody knows anything!”

Stanford Business, #9, I Have a Dream... of Approaching Midterms and Dysfunctional Study Groups

Time is flying fast, and we are almost to our midterms – only two weeks to go. This is no doubt raising some concerns and fears within the business school in general, and the Sloan program in particular (more on some of the rising tensions later).

So, what’s our week like?

Monday is our Excel day (we have two class-dose of financial modeling with Microsoft Excel). Tuesday is our “hard science day” – with Finance in the morning and Economics in the afternoon. I say hard science, but honestly I personally have some concerns about whether economics is such a hard science and not really a social science disguised as a hard science. Sometimes, when i'm not sure what direction the supply and demand curves should go, it kindof seems like a social science ("anthropology?") that's basically concerned with an imaginary tribe of people called “rational” people (rumored to exist?), an imaginary group of producers, called "profit-maximizing firms" (also rumored to exist) , and what these two groups might do in an imaginary place called "the free market".


On Wednesday we usually don’t have any official “classes”. You might think we have the “day off” – but not really. Usually there is a dizzying array of activities planned for us on Wednesdays – some of it by the Sloan GSB program itself, and some of it by our study groups (speaking of study groups, I think we are starting to see some real drama in the study group realm– see later in this post). Last Wednesday we had the lunch with the CEO of Skype. There is usually a Career Development Workshop on Wednesdays for self-funded Sloans, and those of us in study groups usually work on our finance assignments, which are due on Thursday. Next week we have our Silicon Valley Study trip on Wednesday.

On Thursday, it’s Finance and Economics again. And on Friday we have what I like to think of as our touchy feely day. On Friday, we have two doses of our OB class. I’m not even sure what the class is called in reality; we just refer to it as OB.

So, what is OB, really??

OB stands for Organizational Behavior. At Stanford, this seems to be the “discipline” (or rather, the umbrella) under which all so-called soft stuff – leadership, interpersonal dynamics, communication skills, teambuilding, HR – gets dumped. It's just OB.

I like to think of it as a way for academia to talk respectably about interpersonal dynamics and touchy-feely stuff without actually calling it that. By calling it “Organizational Behavior” instead, it lets Stanford GSB still maintain that everything is being researched rigorously and thoroughly as a “field of study” rather than a bunch of interesting ideas about how people behave in groups.

In some ways this has been the most “fun” class thus far. Last week, we watched video clips from the movie, 12 Angry Men (the old one, with Henry Fonda). We were discussing influence and how, in the movie, the jury starts out as 11-1 for a guilty verdict. He gets them, through many techniques, one by one to reconsider, and by the end it is 11-1 on his side for a non-guilty verdict. I won’t tell you what happens at the end (If you haven’t seen this movie, it’s a great one to watch). Basically the whole movie takes place in the jury deliberation room. Henry Fonda’s character is masterful in how he unfolds his doubts about the case to the rest of the group.

I Have a Dream … of an iMac?
This week our OB class sessions were about goal-setting and effective communication. On this second point, we watched the complete video of Martin Luther King’s “I have a dream” speech from 1963. It is interesting, says Professor F., who teaches the class, that many of us know the last few minutes of this speech, but few, if any of us, have watched the speech in its entirety. I don’t think there was anyone in the room who had read or seen the whole speech.

He gave us a transcript of the speech and we watched Martin Luther King deliver it. I don’t have to tell you that it was a masterful speech; but afterwards we analyzed it to see what techniques he used in his speech that made it very effective. Here’s some of what we found:

· Analogies. MLK used analogies and metaphors very effectively, talking about the manacles of segregation and the chains of discrimination. He also spoke extensively about the metaphor of a check being given to the African American community when the Emancipation proclamation was issues in 1860’s by Abraham Lincoln, and how that check was bouncing. There were many, many more.

· Integrating the Setting. The speech was given in front of the Lincoln Memorial in Washington DC at a very large rally. MLK did a very good job of integrating this setting, starting by talking about Lincoln, alluding to the famous Gettysburg Address, and mentioning the Emancipation Proclamation (for our international readers, this was the proclamation at the end of the US Civil War made by President Lincoln which freed the slaves in the south). He also brought in the US Declaration of Independence and Constitution indirectly, quoting “life, liberty, and the pursuit of happiness”, and “we hold these truths to be self-evident, that all men are created equal”, all the while with Washington DC as his backdrop.

· Identifying a Common Purpose. One of the things that MLK did in his speech was to talk about racism as not a problem just of the “south” (technically, southeast) but of all Americans. There were lots of references to the North and states which were not part of the south (California, Colorado, New Hampshire) in an effort to cast light on the speech as affecting an American issue and not just a regional issue.

· Repeating Key Concepts. MLK repeated certain phrases over and over again, which made them stick. In fact, Professor F. pointed out, that a few of his repeated lines basically captured the whole speech, including the progression of the speech: “100 years later”, “Now is the time”, “Never be satisfied until”, “I have a dream”, “Let Freedom Ring”.

· Building Momentum and Creating a Sense of Urgency. The speech started out very logically, and with MLK speaking softly and slowly. As the speech went on, as the metaphors became more colorful, we saw him speed up and start raising his voice.

After watching the MLK speech, we watched another example of effective communication, this time of Steve Jobs when he rejoined Apple computer. It was a precarious time for Apple, and as usual, Jobs did a masterful job of presenting the iMac as being better than most, if not all, computers out there.

He focused on the issue of speed. First he showed a chart comparing the speed of iMac vs. a Compaq PC. Then he presented a slide showing the speed of iMac in relation to other Pentium computers out there. Finally, to hammer the point home – he showed a demo of an animation running head to head on a Compaq PC and on an iMac. Let’s just say that the demonstration was pretty effective -- the Compaq computer was limping along with the animation barely moving, while on the iMac, the animation was blazing along.

Now as I said the demo was pretty effective communication, though perhaps a bit contrived. As a software guy, there could have been any number of reasons why a particular animation ran slowly on the PC rather than the Mac. If some of those conditions had been reversed, it could have been the Mac that was running painfully slow compared to the PC. That’s what marketing is all about, I guess.

Those of you NOT in business school will probably see right away the irony of showing and evaluating these two pieces of effective communication one after the other. One was about a social issue of staggering importance, while the other was pretty much only of staggering importance to the shareholders of a given corporation, albeit an iconic one. One was about social justice, while the other was about technological prowess.

Don’t worry, those of us in Business School see this irony too (at least I hope some of us do!) Or maybe we don’t. Maybe to b-school students, these are both, well, simply good examples of OB.

Midterms are Approaching

As the midterms are approaching very quickly, I can sense a general level of nervousness in the class rising, particularly as we struggle with finance, modeling, and even economics – have we learned enough to pass the midterms? Are our study groups being effective? What is a Net Present Value, anyways, and why do I care?

We’ve started having “Modeling for Poets” sessions (aka remedial modeling) and “Finance for Poets” (aka basic finance) sessions each week. The finance sessions are scheduled very conveniently at 8 am in the morning.

Inspired by our discussion of goal-setting in our OB class, I think I’ll set a goal related to these early morning sessions. I will set a goal to make it to at least one of these “Finance for Poets” sessions (yes, the 8 am ones) sometime this term.

Speaking of OB, my goal is what Professor F. would label as a SMART goal, a popular acronym for goals which are set in a “good” way. S is for Specific: one session of Finance for Poets is specific enough– nothing vague about it; M is for Measurable: Well, so far I’ve made it to zero sessions so this is easy to measure; A is for Achievable: Yes I have occasionally gotten out that early so it is possible; R is for Realistic: well, not sure about this one- we’ll see; T is for Timetable: I have a clear timetable in this goal, by the end of this term.

Study Group Drama

Yes, I think as mid-terms approach, tensions are definitely heating up, and not only in our study group, but others as well. Tensions between morning and evening, all of whom have to agree on a time to meet. Between married, married with kids, and single Sloans, all of whom have to pay the same class dues, and who often have radically different schedules trying to coordinate a time to meet. Between those who think finance (or economics, or modeling) is easy and those who think it (they) is black magic and extremely difficult. Even between those who think certain classes are not being well taught and those who don't.

I have also heard from several people that their study groups are not working well. I originally posted the specifics of an incident from my own study group.


-----Incident Transcript and Interpretation Deleted-------


I've taken it out because it proved too controversial since it involved my taking serious offense at comments directed to me personally from a member of my study group about why our study group wasn't functioning so well.

The reactions from my classmates to this blog entry were perhaps even more interesting than the incident itself - ranging from:


· encouragement ("a little dirty laundry can go a long way", "thanks for saying what some are thinking but not saying", RESPONSE: thanks)

· genuine concern about our relationship ("Hope you and this other guy are going to get along", RESPONSE: we're going to get along fine; we had a very heated discussion today that did a lot of good for us both and will hopefully lead to a productive relationship over the next eight months of the school year)

· logical admonishments ("you really should have discussed it with your classmate before putting it in your blog", RESPONSE: thanks, a very good point in general)

· offense ("I'm shocked. can't believe someone would say that to you!", RESPONSE: neither could I at the time)

· censorship ("Please don't put anything in your blog that might make the GSB look bad or hurt recruiting for the Sloan program or that those recruiting from the Sloan program might read online"), RESPONSE: Call me crazy, but I think Stanford GSB's reputation is strong enough to be able to handle it; if it can survive a book called "Snapshots from Hell", my little blog isn't certainly going to tip the scales...

· a serious case of cold-shouldering from some of my previously very friendly and warm GSB Sloan classmates ("If I don't look at Riz today and don't say hello to him, maybe he'll know that I don't approve of him putting stuff that happens between him and his classmates into the blog"). WARNING TO FUTURE BLOGGERS: yes, this is part of the joy of personal blogging, especially if, like me, you don't always follow the party-line that everything is always hunky dory... I read one blog that took place at a prominent business school (!) from a few years ago; the blogger quit in October, because "it was just too controversial" to continue. We'll see how long this one lasts - even this revised entry is likely to generate its share of controversy!

Interestingly, the most encouraging and helpful reaction was from our study group. The incident and our subsequent discussion led us to one of the more open and most productive study group sessions we've had in a while, with broad agreement about how to move forward.

So, ironically, our study group at least, is likely to be well prepared for the approaching mid-terms!

Stanford Business, Entry 7: New Study Groups, Philosophy, Desert Survial and Jack Welch

So, last week we officially ended our pre-term. This was an important milestone for us, as many of us in the Sloan program hadn't been to school for many years. Despite the fact that it wasn't officially graded, we learned a lot about how to work in Study Groups, about business school generally, and about Micro(MicroEcon, not MicroSoft, though the CEO of Microsoft did visit this week - will post more about that in my next post), Strategy, and Managerial Accounting specifically (see previous posts for specifics of what we learned in these classes).

I was personally excited about the end of the pre-term because it meant that we would shift to a more normal schedule: instead of starting class in the morning each day, some days would be off (well at least Wednesday would be our day off), and on most days class wouldn't start until 10 am! Yahooooo! (Wasn't that what customers of Wamu said in their commercials? Turns out Wamu went bankrupt this week - more on the financial crises and what our professors have to say about it later).
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Those of you following this blog will know that i like to follow "engineer's hours", which don't seem to work so well at a business school full of the best-and-brightest-early-risers. By "bright-and-early-risers" I mean those who don't follow engineer's hours - for me, I'm usually asleep at 8 am; Given that I probably didn't get to sleep until 2 am, that would mean i'm just finishing my sixth hour of sleep. For some business school students, 8am seems to be "mid-day", meaning they have been up for at least 3 hours.

Last Wednesday, on the last day of the pre-enrollment bootcamp, we had farewells from all of our three professors (actually one of them, our economics professor, is going to continue in the fall term - but as for the other two, that was it).



Someone in the class had the idea that we should give the profs a little gift as a token of our appreciation. This was a brilliant example of an idea starting at the grass roots level reaching fulfillment at a blistering pace. From an email that was sent out on Tuesday, by Wednesday someone in the class had bought three bottles of wine as appreciation for each of our professors: A Chilean wine, a French wine, and an Argentinian wine. Then we had our Chilean fellow, our French fellow, and our Argentinian fellow present the wines to each of the professors.

So what else has happened happened last week? Here are some highlights:

New Study Groups



As I mentioned before, our Study Group was just starting to hum by the third week of pre-enrollment. But then, suddenly, and without warning, just as classes ended on Wednesday, new Study Group assignments were sprung upon us!

At least that's how it felt - in actuality, we knew that this was coming. Despite our occasional hiccups, I realized that I was going to miss my initial study group. We'd gotten to know each other well. We had even become forgiving of each other's idiosyncrasies and learned (for the most part) how to channel these unique qualities into getting the best result for the group. (Err, except when we had to survive in the desert, which didn't go so well - see section on Half Moon Bay retreat below).

I figured that the new group might also be willing to work out some compromise so that we weren't meeting at the crack of dawn every single day. Anyways since we had a few days before class began (thursday was our retreat; friday was a free day, the weekend was free, and classes didn't start until monday). Well the weekend wasn't really free since as usual in Business School, we had both readings and problem sets for the first day of class.

As soon as the study group assignments were handed out, most of the students left to enjoy some sun and relaxation after what seemed like a very long pre-term. Just as I grabbed my bag to leave the room, I was informed that our study group was going to meet there and then!
Well, I figured, Business School is about efficiency, after all, so I put aside my toughts of r&r and went to the Study Group meeting, figuring that at least this meant we wouldn't have to meet on Monday. And at least one other member of my group, a Marine biologist with multiple degrees from Stanford already, had told me that she also was a night person, so the two of us might have some sway with the rest of the group members.

The group met for a while, but we accomplished only one cooncrete thing: Our first "official meeting" was going to be at 8:30 am on Monday morning before our first class. And we were all expected to have done our reading and homework before the meeting.

Sigh. My endless quest for a laid back study group goes on.

The old doubts started to creep back in; I looked out the little tiny window in our study group room, literally and metaphorically gazing "across the street", wondering if there wasn't a spot in an engineering class which began at 3 pm meeting only once a week with my name on it... Actually I had already decided to audit a computer science class (it would be a shame to spend this whole year and Stanford and not take advantage of the incredible engineering and comp sci departments). And it was scheduled to start at 4:15 pm on Tuesday ; not that I'm counting, but that would be more than seven hours later than our study group meetings. Ahh! Engineers hours.



Poets, Quants, and a Philosopher


In biz school (at least at Stanford), students are often grouped into poets (those with liberal arts education), and the quants (those with more financial, numerical, or engineering background). I should fit nicely into that second category, the quants, given my degree in computer science from MIT, but somehow I don't.

Poets had trouble with quantitative subjects and wanted to spend time talking about issues. That sort of fit me, as I definitely enjoyed the class discussions more than the actual material that was being covered . But I didn't have problem with quantitative subjects, other than being motivated to sit in class for hours on end. Quants could solve quantitative problems easily, but had problems with soft mushy wordy subjects. That kinda fit me too - except that I kind of enjoy soft, mushy, wordy subjects.

In fact, I don't have a problem with either kind of subject; I just have trouble getting motivated to get to class on time, day after day. I remember in elementary school one of the determinants of our grade was "attendance" - those who attended class automatically got a better grade than those who didn't. I didn't always find this fair, if we ended up learning the same things, but as an elementary student you're taught to respect the adults point of view. When I got to MIT, it was like having a straitjacket removed. I could go to class when I wanted; skip it when I wanted; as long as I passed the exams, I could pursue my extra-curricular activities with vim and vigor.

Believe it or not, Business School is a little bit like elementary school in this regard. In almost all of our classes, attendance is graded. If you don't attend, you're not participating - and you can lose up to 20% of your final grade on this.

Despite the lack of structure during my undergraduate days, when I'd first graduated with a bachelors, I had been a very motivated young man. I remember showing up for work at my very first startup, a company called DiVA (spun out of the MIT Media Lab), at 8:30 am wearing a suit hoping to make a good impression. No one was there. I couldn't even get into the office so I sat down outside the front door. In fact, around 10 am, people started to wander in, and were wondering why I was wearing a suit (was I a customer? was I interviewing for a job?).

In Business School, the exact opposite was happening. I would show up at 10 am, a few minutes late for class, wearing jeans and whatever shirt I could find as I scrambled from my dorm (which several of my b-school colleagues have pointed out is usually the same two shirts, again and again). In this case, everyone else had already been jogging, had discussed the homework, kissed their wives (or husbands) goodbye, dropped off the kids at school, eaten breakfast, and reviewed today's case study, all before I had even gotten out of bed!

Even harder (and more disturbing) than attending classes, I can't seem to stop my mind wandering to the philosophical underpinnings of what the heck we're really trying to accomplish in business school. Rather than try to figure out the marginal cost curve which yields maximum output for a given set of resources (a company, or even a country), I found myself questioning the assumption (made on the very first day of econ class) that a country is best off when they have made maximum utilization of their resources from an economic point of view. I have met many friends from other countries (who were not in business school) and it wasn't always clear to me that we were much better off. I remember talking to a woman from Cape Verde a few years ago, and she went on and on about how much happier people in her country were than we are here in the US. This is despite the fact that we have such a significantly higher "standard of living" than say Cape Verde.

In strategy class, rather than simply analyzing what made a company successful, I found myself wondering whether strategy can really be taught simply by talking about successful companies in the past (the case method, which was first pioneered by Harvard Business School and is now used pretty heavily by Stanford, though we also use textbooks heavily in our other classes). When we studied WIP (work in progress inventory accounts) in accounting, I couldn't help but start thinking about how the accounting system seems to have been built entirely for manufacturing firms, and how services firms, software firms, and Internet firms aren't really well represented by the current accounting system - shouldn't somebody be redesigning the system to reflect the new reality?


Another example: George Parker, a former Dean of the Sloan program at Stanford, and a well known finance dude, laid out for us the fundamental structure of the financial services sector, partly in response to the current financial crisis. As a result of his talk, it would be natural to start thinking about the mechanics of the interest rate, how banks and investment bank works and what interest rates should be charged. He divided the world into 1) people who save money (you, me, our friendly neighborhood corporations, and governments) and 2) people who need money (you, me, our friendly neighborhood corporations), and how this created the need for banks in the first place.

He pointed out that the average 3% margin of banks between what they paid for capital (what they pay us for depositing savings) and the inherent mismatch of needs between the providers of capital (we want to be able to pull out our money short term, with no risk) and the recipients of capital (who want to borrow money for as long as 30 years, and have inherent risk in the projects they invest in), he told us that some shakiness was inevitable.

Rather than thinking about the equity/debt ratios and what interest rates were sustainable to maximize profits, I found myself wondering about the stability of the whole financial services sector altogether, in the very long term. Was it really sustainable to have two parties with such different interests mediated by a bank who owes us our money back every time we ask for it, but never actually has all that money available? Was the financial system, based the idea of cost of capital (represented as i or r in our finance equations) really sustainable, in the long run, or were "runs on the bank" unavoidable, even inevitable? WaMu's recent crash (the biggest bank failure in history) underscores this.

There are other financial systems that don't rely on interest as the key motivator (the Islamic financial system, for example, does not allow charge for money). Is it possible to have an economic or financial system where interest (the cost of capital) is not the sole, end all, be all. But it's not clear to me that the Islamics system is inherently any more stable either - since they just change the word profit for "interest" and charge about the same as the "prevailing current interest" rate, just calling it something else.

But business school students aren't supposed to be philosophers! We're supposed to be here to get skills and perspective that helps us to get ahead in our careers, and make more money, not question the fundamental nature of the subjects we're studying. So on to career advancement and skills training!


Incompetent Jerks and Lovable Fools in the Desert


On Thursday we had a field trip to Half Moon Bay for a "team-building" retreat. The bus was going to leave from Littlefield arch at 8:30 am. Sharp. By the time I got there, I learned that some of my classmates (who'd gotten to know me well) were already taking bets to see how late I'd be and if I'd miss the bus and have to drive to Half Moon Bay on my own. Oops! Sorry to disappoint, guys, but on that day, I made it on time (there were even a few students who showed up after me).

So what does one do on a "team-building" retreat from arguably the top business school in the country?

The presenter started out by talking about interpersonal skills and how important they were. She brought up the classic consultant (and MBA) tool, the two by two matrix - divided into quadrants. Along the horizontal axis was "interpersonal skills" and along the vertical axis was interpersonal skills. The people in the top right quadrant (Lovable, Competent Heros, or some moniker like that) were people everyone wanted to work with. The bottom left quadrant (Incompetent Jerks), were people that no one wanted to work with because they didn't know what they were doing and they were hard to work with.

The two tricky quadrants were the upper left - "Competent Jerk" is someone who is very good at what they do, but has bad interpersonal skills, and "Lovable Fools", those people who have good interpersonal skills and get along with everyone, but aren't very good at what they do. She asked us how many of us would like to work for one or the other. Quite a few raised their hands under working for "Competent Jerks", with some people giving an explanation that at least that way they'd learn something, even if thier boss was a jerk. In fact, she continued, when people are asked this question in a survey, a large percentage answer "Competent Jerks". But when people are observed actually choosing people to work for, they almost always favor working for "Lovable Fools" rather than "Competent Jerks". This was interesting.

We spent the morning talking about interpersonal skills and qualities that different people in the class had. This consisted of an exercise where we each had a number of cards - each colored differently and each with a "personal quality" on them - for example "does well under pressure", "is a diligent worker", "speaks his mind", "gets things done methodically", "is a visionary", etc., and we had to hand out the cards to people in our class if we thought the card didn't describe us, but described someone else. I won't get into specifics but I think we were all surprised how well (or not so well) our classmates knew us.

Half-moon bay is a nice little beach on the other side of the hills that define the western edge of Silicon Valley. During lunch a few of us went on a walk along the beach while our Marine biologist gave us a tour of the little aquatic life that lives near the seashore. "I may not know much about balance sheets," she quipped after pointing out the different kinds of snails and barnacles that lived there, "but I do know alot about fish!". Somehow I don't think that's going to help her through businesss school, but it sure was a lot of fun! (except for the time when I tired to touch a sea enenemy, something I didn't even know existed 24 hours earlier, and it squirted me; hopefully it was just water it sprayed on me!).

In the afternoon, we divided into our old study groups and had to face the highlight of our trip to Half Moon Bay, a group test: The Desert Survival scenario. We were all on a plane (let's suppose). Let's also suppose that we crash-landed int he Sonoran desert (that's south of Arizona near the Mexico border). Let's further suppose that the pilot and copilot were killed in the crash, but miraculously, we are all OK. Let's one-more-time suppose that we have a series of items - including a parachute, a swiss knife, a topcoast, a mirror, a quart of water each, salt tablets, and on and on - and it is the goal of the group to come up with rankings of items by importance. I found myself thinking that this scenario was written well before the iphone was out; I would just do a GPS lookup of where we were and call someone to pick us up.

iPhone-less, the sole determinant of our survival would be our rankings of the importance of each item. We were revealed at the end to the the rankings of a "survival expert", our team would either survive or die in the desert, depending on how close our rankings were to his rankings.

Needless to say, most teams died on the desert! Ours was particularly bad, and my own score was more than particularly bad (though there might have been one person in our whole class who scored worse than I did!).

The trick happened to be the two most important items - I somehow ended up ranking them both last. Our group mostly agreed on our rankings, though we had a few disagreemetns. One member of our group insisted that the most important item (i won't tell you which one it is, since you might want to go thru this exercise yourself) was among the most important, we (myself included) didn't listen to him! Oops!

This situation, one person who is in a minority, disagreeing passionately with the group, who is too far gone to listen, seems to come up again and again.


I thought we'd learned our lesson about this. But this week, in our first OB (organizational behavior) class, it happened again, in our new Study Groups. All the members of my study group agreed on one position, except one of us - in this case it was me -- passionately disagreed with the group.

In both situations, the desert scenario (where I was with the group) and the OB scenario (I'll describe the actual scenario in my next blog entry), where I was the dissenter, it turned out that the dissenter ended up being the person who was "most right" and the group ended up being "most wrong". This was an interesting result- in both cases, neither of us had the data or votes to back it up, we were operating on what is one of my favorite topics, intuition.

One of our team members, John, said that in his real life job (in the construction industry), when one of his team members disagrees very passionately about something, he usually takes the time to really hear that person out and understand why they feel so strongly. But neither he nor I nor the rest of our group did that in the desert scenario, beacuse we thought we were pressed for time and had agreement from the other group members. Maybe the wisdom of crowds isn't as great as it's cracked up to be!



Jack

In the movie industry, whenever someone says "Jack" in a knowing way, they all know who's being talked about: Jack Nicholson, the famouse movie star who has won multiple best actor Oscars, and who has a personality that is recognizable wherever he goes.

In businesss school, when someone says "Jack" in a knowing way, they are also talking about an easily recognizable celebrity - in this case, Jack Welch, who was CEO of General Electric for many years, and considered by some to be among the greatest of American CEO's. Though John Q. Citizen might not recognize Welch, John Q. BusinessSchoolStudent certinaly does. Even though Welch retired a few years ago from the CEO slot at GE, he is a recognizable figure in the business section of the bookstore and on financial news programs on TV.

We studied a case in Strategy class on General Electric, and reviewd what happend during multiple CEO's ending up on Jack Welch, who many consider one of the most visionary CEO's of his time. One of the elements of his vision for GE was that they be #1 or #2 in every industry they were in - and that sometimes meant selling businesses which were profitable but couldn't get there, or buying into other businesses which were already there. This vision also originally led to a process of "de-staffing" early on during GE's days.

The class seemed very energized by this discussion about GE and about Welch in particular. After the discussion, the professor showed us a clip of Jack speaking at some conference. The professor said it was the most "geniuine" clip he'd seen, even though it's fairly old. Jack talked very passionately about how many people in corporations have trouble coming to grips with a six letter word: Reality. He spoke exuberantly about how corporate staffs (in big companies) don't make anything, don't sell anything,a nd they should be there primarily to support the field and how often they don't, and how companies need to be restructured for that.

Like the rest of the class, I found this talk inspiring, up to a point. Then later, as I was wandering around campus, the philosopher in me came out,and I began to wonder what I really thought about Jack Welch, his philosophy, and the culture of adoration that's gone up around him. Something was nagging at me and I couldn't quite articulate it until later.

Note: if you read on, you might be exposed to heretical views on being acorporate CEO and might, like I am in danger of, be excommunicated from the religion of American Business School Students.

So let me start by saying that I agree that Welch was a wildly successful CEO who brought in profits. And even an effective leader. But I guess i get a little unsettled when they talk about Welch being a visionary for American business.

It strikes me that "Being #1 or #2 in every industry you're in" isn't much of a vision. It's more of a performance measure. It's kind of like going to college and saying my vision of college is to get an A or B in every class I take. And if I can't get an A or B, then I'm going to drop the class. And I'm only going to take classes where I can get an A or a B. Sorry guys, but that's not a vision - that's a grade point average.

It also struck me that Jack was a great operator but not much of a visionary about the business units themselves, which seemd to have no rhyme or reason why they were part of GE except Welch's three circles (which didn't strike me as showing any kind of real understanding of the new or old technology or markets that GE was in), just how each was performing.

OK, granted I'm operating on limited information, of course. And no doubt, Jack is a "great" guy who knows how to squeeze every penny of performance out of the people that work for him; I just disagree that he's much of a visionary [of course when the Business Inquisition gets to me, I may change my mind on all these philosophical topics, and get back to making profits, yeah!].

Speaking of a vision of a grade point average, I have a vision too: that i'm not going to get A's or B's in my classes unless I stop spending all my time writing and get back to studying!

Stay tuned for more on the first week of the official term, the arrival of the MBA's and the undergrads onto the Stanford campus, and the house that Software Built. Coming Soon to a blog near you!

SPECIAL DISCLAIMER: the opinions and experiences recounted in these blog entries about my year at Stanford Business School for the Sloan Program are my own personal observations and ranting. This blog is not endorsed by either the Stanford GSB or by any of my fellow Fellows.

Stanford GSB, Entry 6, Microeconomics: What we Learned in Pre-Term

In the Sloan program at Stanford, we don’t have to buy textbooks. Why not? They’re provided as part of the program – it’s one of the many perks of paying beaucoup bucks to Stanford.

As I left my dorm room on the first day of class, I was in a rush. I took a cursory glance at the various textbooks that we’d been given, and grabbed the only one I saw that had economics prominently written on it. I didn’t notice until I pulled it out during econ class that it was for the wrong class; the book was for Macroeconomics rather than the class we actually had that day, Microeconomics. (OK, perceptive ones will notice that this obviously means either I didn’t do the reading we were supposed to do before the first day of class, or I read the wrong book; I'm not saying which one is true).

Since I’ve already given you an overview of our Strategy class, let’s talk about Microeconomics. This brings us (not because it is a sequitor, but because this is where the class actually began) to two questions:

Question #1: What’s the difference between Micro and Macro?
Question #2: Why is it that Economists can never agree on anything?

Read More...

On the first day of class, Professor Flanagan was introduced as our Microeconomics teacher (incidentally he’s also going to be teaching us Macro in the real-term so we’re going to get to know him well). He was an older, skinny gentleman, with angular features and a commanding but friendly demeanor and a soft voice. He used no projection equipment, but wrote everything on the whiteboard.

On the second question, he told us about a large number of famous quips about economists and their inability to agree on, well, anything, really. At least that’s the public perception. As a member of the public, I am inclined to agree.

I remember Rudi Dornbusch, who was a famous economist that taught at the Sloan School (MIT, not Stanford), telling us about a president (may have been Truman too, can't remember) who complained that he never seemed to be able to find a “one-handed” economist.

This was a problem only because all the economists he did find would begin with “On the one hand, blah blah blah”, and then after some time, they would inevitably continue with: “But, on the other hand, blah blah.”

Professor Flanagan gave us what may be an actual Truman quote, who once complained that if you lined up all the economists in the world end-to-end, they would never reach a conclusion!

But them’s just jokes, right?

Economists aren’t really like that, are they? Actually, Professor Flanagan pointed out to us, that there was surprisingly little disagreement between economists about Microeconomics – the disagreements tended to be about Macro-economic issues, which affect the economy as a whole: unemployment, monetary policy, economic growth, etc.

Our class during the pre-term, Microeconomics, was concerned with markets at the level of a firm selling products or services (called the supply side) and an individual or household as a buyer of these products or services (the demand side).

In general, we are concerned with three questions in Micro: How much should a firm or industry produce? How should it be produced? And for whom to produce it?

Since economists generally agree on these, the class should have been fairly non-controversial, right? Not exactly. Professor Flanagan explained to us that politicians will make it look like there’s disagreement on issues where most economists tend to agree.

Economics and public policy is a broad subject, of course. But Flanagan told us that when studied with economics, the policies that governments follow to affect the market almost always end up creating unintended consequences. These consequences often reduce (or even remove) whatever benefits the policy was intended to produce. These examples, such as the “War On Drugs” (more on this example later in this post), provided much of the more colorful moments in this class.

The disagreements usually come up because of the difference between what economists call normative vs. positive economics.

On the one hand, Normative economics is about making judgmental statements and calls. You can identify a normative statement about economics when someone uses the word “should”. As in “We should raise the minimum wage”, or “We should cut taxes”.

On the other hand, Positive economics refers to evidentiary statements and deals strictly with the facts, or at least with standard, agreed upon economic theories. "At a higher price, consumers will buy less of X" would be a positive statement, at least as far as economists are concerned (if it is true and can be domenstrated). They don’t mean it as in positive in the sense, which is the opposite of negative.

Words and Words: If Shakespeare were an Economist
As you may have noticed, economists tend to have their own definitions for words that we think we already know the meaning of. We learned this very quickly.

For example here are just a few terms which mean one thing in everyday terms, and mean something else or very specific to economists. Here are just some examples:

Short term.

The short term has a specific meaning in economics: is when one element of supply (capacity) is usually fixed.

Elasticity.

Elasticity in econ specifically means the percentage change of one thing in response to a percentage change in another thing. More commonly, this commonly means elasticity of demand, which means the percentage at which quantity changes when there is an effective change in price.

Rent.

I still don’t know what the economic definition of this is, but trust me, it’s different from what you and I think of as rent.
Positive. This, as mentioned above, has nothing to do with positive vs. negative. It’s positive vs. normative. Confused? Reread above.

Perfect Competition.

Again, another term with a very specific meaning in econ. It means when a market has many competitors with no differentiated products, such that no one single player has the ability to set the price.

Profit.

We usually think of profit as sales minus expenses. In economics it means total sales minus total economic cost. What’s total economic cost? I’ll give you a hint: it includes more than just what we think of as cost. It includes the normal rate of return (and maybe even opportunity cost).

Normal Rate of Return.

We might “normally” think of this as the interest rate, which is the return you can get on your money by putting in the bank (theoretically). Not exactly in econ. In economics it means the normal rate of return for capital in a given industry. It’s another kind of abstract term among many abstract economic terms.

Opportunity Cost.

We usually think of this as something else we could be doing. Again, econ has a more specific definition: the cost of the next best alternative.

Marginal.

In everyday speak we might think of something as “marginal” if it is small and not enough to make a difference. Marginal in econ means “extra”. Marginal cost is the cost of adding one additional unit of production. Marginal revenue is the revenue that comes from selling an additional product.

Average Cost.

We usually think of average cost as: take the total costs of producing products and dividing by the number of units. That is actually “average total cost” in economics. There is average variable cost, average marginal cost, average marginal variable expialadocious costs. Actually, I made that last one up, but you get the idea.

Should I go on? The point is that I could go on, perhaps even ad infinitum. If it’s Saturday night and you have nothing better to do, you can start reading your econ book and find all kinds of different definitions for words we use in everyday language. It’s called economics.

Which bring us to perhaps the most important question related to Economics.

What do economists know, really?
Professor Flanagan insisted to us that there were only two things economists really know. I suspect he meant this in non-literal sense; if this was literally true, perhaps the class could have been a lot shorter. Nevertheless, he was quite adamant about this point. The two things are:

• That Supply and Demand are equal
  

• That Marginal Revenue equals Marginal Cost
  

We spent a lot of time talking about demand curves and supply curves. Where they meet, the so-called equilibrium is the point where supply equals demand. This is the price and quantity set by the market.

The arguments that they use for both points are variations of the original, well known “invisible hand” argument put forward by the Scotsman Adam Smith some 230 years ago.

Let’s suppose you start at a point where supply and demand aren’t equal. There will be either a shortfall or a surplus of supply, affecting the price of the product. If there is a shortfall, then the price will go up, increasing profit. More firms come in to the market, eventually pulling the price back to equilibrium.

Similarly if there is too much supply, the price will come down, increasing demand for the product, and the market reaches equilibrium again (eventually!).

This argument has been part of the public understanding of economics long enough that it's not too controversial. What about the second point, that marginal revenue equals marginal cost?

Well this point is a little more “subtle”. Flanagan says that “subtle” is what academics say when something is actually difficult.

I’m an engineer by training, (“A Quant”, as they call it in business school, vs. a “Poet”, someone whose undergrad degree was in liberal arts), and we usually say something is “non-trivial” when it’s difficult.

Why don’t we just say that it’s difficult? Beats me.

The Marginal Way
As for the second point, Marginal Revenue = Marginal Cost, we had a case study about Continental Airlines related to this point. The team presenting it did a good job with supply and demand and marginal cost and marginal revenue curves. The question was whether Continental airlines should continue certain routes if these routes were not profitable?

The trick is how you define the word “profitable”.

The Marginal Revenue (I’m sure you remember what this means from the definitions above) is the additional revenue from selling one more product. The marginal cost is the additional cost of adding/producing one more product (or providing one more unit of service, like a flight).

The Average Total Cost tells you if you have made a profit on all the units sold thus far.

The Average Variable Cost tells you if you are making a profit on the next unit (if it’s less than Marginal Revenue).

The Marginal Cost tells you the cost of the next incremental unit. Professor Flanagan explained that if Marginal Cost is less than Marginal Revenue, then adding another unit will add some contribution to your overall profit. If Marginal Cost is less than Marginal Revenue, then you will be adding a loss onto your overall profit by producing and selling the next unit.

The subtle point is that it’s possible that by selling another unit, you will still be unprofitable because the Average Total Cost may still be less than the average sales price. However, if MR > MC (Marginal Revenue is greater than Marginal Cost) then you are contributing to the total profitability, even if it means you are only helping the company reduce its loss.

Back to the Scotsman’s invisible hand: If MR <> MC, then you’ll want to keep producing units, because you will be contributing to your profit. How many more should you produce?

Up to the point just before MR < MC.

What point is that? You guessed it, the point where Marginal Revenue is equal to Marginal Cost, and that’s why the economists “know” that this is true.

Does that make sense? If not, pay a hundred grand to attend Stanford Business School, and Professor Flanagan will explain it quite well, I assure you.

Real Economists Draw Curves
The way we reached some of these conclusions is by drawing Supply and Demand curves. Economists love to draw Supply and Demand curves, and after many days of sitting still watching our professor draw them, I have to say, they are quite useful, though it’s still a bit of a mystery how such a simple drawing can convey so much information.

Economists draw a simple graph with a horizontal and a vertical axes. Then they draw one line which slopes downward, say the red line. And the draw one line which slopes upward, say the blue line. Where the red line and the blue line meet is called the equilibrium point.

If you look closely you’ll notice that the curves aren’t curved at all. They are just lines sloping upwards and downwards. This means that you could just draw a big X on the board and refer to its two lines as being the “supply" and "demand" curves, and you'd generally be correct.

What does a simple picture like this, which even a five year old could draw, reveal about the markets?

Plenty, if you’re an economist.

Take a graph with only a single line sloping downwards (the “red line” above). Economists might say that this to represents the demand curve of an individual. Why does it slope downwards? Because of the principle of diminishing marginal utility. When the professor asked us this, one of our classmates answered without hesitating: “You eat one In-and-Out Burger, it tastes really good. The next one doesn’t taste quite so good. By the sixth burger, you’re sick of them and don’t want any more.”

This is because quantity is on the horizontal axis and price is on the vertical axis. A downward sloping curve shows a lower price as the quantity increase. According to this principle, an individual is willing to pay less for each additional unit of something – whatever that something is. The proper economic term is “widgets and gidgets”.

Turns out this same principle applies not only for individual, but to aggregate market level supply and demand curves.

It also turns out that the same graph can be applied to the labor market if you change the vertical axis to be “wages” and the horizontal axis to be “employment”. I’m pretty sure as we get into macroeconomics the same X will represent something entirely different, but still prove equally useful.

Vouchers, Price Controls, and Heroin, Oh My!
Professor Flanagan, who won an award from the previous Sloan class for his teaching, has plenty of experience with public policy. His discussions of what an economist think of certain government or political policies provided part of the “fun” of this class. The other “fun” was usually provided by the study groups doing their cases.

It turns out that Professor Flanagan was on the President’s Council for Economic Advisors a long time ago. One of our classmates commented: “Wow, I didn’t realize this guy was so famous and well known. And here is teaching us basic freshman economics – I wonder how he puts up with that?” The answer is probably that he likes what he does, which is a good thing for us.

As for policy discussions, to illustrate the point of “unintended consequences” I mentioned earlier, he presented us the example of The War on Drugs:

In fighting this “War”, the US government is focused intensively on the supply side of the equation - in fact, our efforts are almost exclusively focused at getting the “bad guys” - drug dealers. We do very little, comparatively on the demand side of the equation – in reducing the demand for drugs.

If we follow this scenario out logically using supply and demand curves, as the government gets some heroin dealers, then supply goes down in the short term. Once supply is restricted, and if demand doesn’t change, this only led to an increase in the price of heroin. (Same number of people want it, less of it to go around). And since the number of people who are addicted to heroin hasn’t changed, how do they go about getting the extra money for it? Any ideas?

Increased crime, says Professor Flanagan, is one of many unintended consequences of the government’s policies in the War on Drugs. This was an eye-opener for me. Perhaps the politicians need to not just hire, but actually listen to economists like Bob Flanagan.

He had many more examples of government policies, including the gas tax or a vice tax, and the unintended consequences of these policies, from an economic point of view.

The rest of the color came from each of our study groups, who were required to present on one of the cases using the tools of microeconomics to understand what happens to supply and demand. The issues were (from what I can remember off-hand) things like Vouchers for Education, Price Controls, Food Shortages, Mergers, Monopolies, the Congestion Tax in London, and so on.

The case presentations started out as very simple PowerPoint slides, accompanied with drawings of Supply and Demand curves on the whiteboard. But each group learned from the last one, and presentation quality steadily increased throughout the pre-term. By the end, we had professional looking supply-and-demand curves in the PowerPoints, and some groups started to use skits to illustrate the ideas to make them more interactive. Pretty soon, YouTube videos started to be appear in the presentations to make them more fun and interesting (which they did).

For example, in the case about Mergers, the XM / Sirius satellite merger was discussed, and a YouTube clip was used to show the news reports of when the merger was finally approved. To top it off, we actually had someone in our class who was working for XM at that time.

On the case about monopolies, they actually showed the trailer from the Hollywood movie, “There will be Blood”, about a Texas oilman, to show how a malevolent monopolist acts. On the case involving the congestion tax in the city of London, actual video clips of news reports about the results of the tax were shown.

This is one of the things that’s pretty interesting about going to b-school today rather than 10 years ago. The availability of these video clips makes it much more fun to be in class. Especially since economics can be a little dry on its own, except of course when Professor Flanagan brings up what he now affectionately calls “Our Old Friend” (because it keeps coming up again and again, and again): the Elasticity of Demand.

Let’s play Monopoly
Many of the principles of Micro we learned seem to apply only to markets where there was perfect competition (again, see the definition above). A perfect market relies not only on competitors not being able to do anything to affect the price of their product; they aren’t even able to differentiate their products in any way. It also relies on perfect information in the market (an unlikely scenario in any market).

Commodities are as close to a perfect market as we get, but it’s not clear to me that’s even a perfect market. Does a perfect market really exit? Maybe not.

But towards the end of the pre-term, Professor Flanagan began to relax the restrictions on the markets we were learning about and moved to “imperfect competition". A market with imperfect competition market is one where products have differentiation, have some influence over how much they sell their products for, and can respond to the competition.

I could be wrong, but it seems to me there’s a simpler name for “imperfect competition”: it’s what we call the real world.

Surprisingly, when this restriction was reduced, the basic principles we’d learned - supply and demand, marginal this and average that - continued to apply reasonably well even in imperfect markets.

To illustrate this, we went to an extreme example: Monopolies. The monopolist also faces a demand curve - which means that fewer consumers will buy their product at higher prices, and more will buy at lower prices. Ignoring our old friend, the Elasticity of Demand for the moment, where will the monopolist set his price?

The morning of this lecture, I was very tired, having stayed up late the night before (must have been doing the readings for econ, though it’s more likely I was blogging or playing on Second Life). I was on the verge of dozing when Professor Flanagan began to talk about monopolies. Of the many reasons why monopolies arise, one is that governments mandate that only one firm is allowed to serve an area, as in utilities.

I don’t know how or why but in my half asleep state, I began to see images of nuclear power plants, and this brought me to images of the The Simpsons. Those of you who have watched the Simpsons at some point (which practically includes the entire population of the US, I think, since it’s one of the longest running prime-time TV shows), will know that Homer Simpson, the lovable clown, works at a nuclear power plant just outside Springfield, USA.

I don’t know why, but an image of Homer’s boss, the unscrupulous monopolist, Mr. Burns, flashed into my mind as Professor Flanagan talked on about monopolists. Mr. Burns is an older gentleman, very skinny with angular features. I opened my eyes and for an instant (only or an instant mind you), our professor (if he took off his glasses) was the spitting image of Mr. Burns! I jolted awake, half expecting our professor to tap his fingertips together and say in the very measured soft voice of Mr. Burns, “Now we have a monopoly. Excellent!”

Now, in reality Professor Flanagan’s personality (who is a nice, friendly guy quick to smile and laugh) is nothing like Mr. Burns (who is a ruthless monopolist trying to make money by squeezing the residents of Springfield). Maybe it was my half-dazed state, but the physical resemblance was uncanny, if only for that moment. If nothing else, it kept me awake during the rest of the discussion about Monopolies!

Which brings us back to the earlier question, where will the monopolist set his price and how much will he produce?

The answer, surprisingly to me (but not to economists) is the same as before: he will produce up to the profit-maximization point where Marginal Revenue equals Marginal Cost, and will stop there. Whatever quantity is equated with that price is the amount that the monopoly will produce.

What the bleep do we know, really?
This is all nice, in theory, but does this actually happen in the real world? Does Supply=Demand and does Marginal Revenue=Marginal Cost, or are these more concepts and principles which help to guide the market?

Do perfect markets exist? Perfect information, I’m pretty sure, doesn’t exist. Entry or Exiting a market requires a significant amount of resources and rarely happens easily, as we know from our Strategic Management class, because of barriers to entry. And is there really such a thing as a “normal rate of return” which is different in each industry?

These questions started nagging at me early on in our economics class, as I struggled to try to apply the material we were learning to business (at least apply it in my head). No doubt everything we learned will apply in a general sense about how consumers buy from producers. But would it apply specifically to a situation any of our companies are likely to come up with?

It seems to me that in the real world, companies are entering and exiting markets and adjusting supply and trying to figure out what the heck demand really is for a product. It seems to me that the only way to figure this out is through trial and error, since there is no way to know exactly how many people will buy car X at price Y. If General Motors could have figured out the demand for hybrid cars, perhaps they would have reduced the supply of SUV’s and increased the production timeframes of their hybrid cars years ago and not have lost more money than anyone else over the last year.

Similarly, if “Marginal Revenue = Marginal Cost” is the profit maximization point then firms should stop producing there. I don’t know of any public companies who choose to not to produce any more products. Which means that they must not be at this point yet, or if they’ve crossed it, then they’re reducing supply.

Maybe the two things that economists know should come with an asterisk and two additional comments:

1. Supply and Demand, while theoretically equal, are rarely actually equal. Rather, the market is in constant motion trying to get to that equilibrium point.
2. Marginal Revenue rarely equals Marginal Cost. But firms are in constant motion trying to get to (or get back to) this profit-maximizing point.

Those are my two cents worth of contribution to the field of Microeconomics. But then, what the hell do I know? I’ve only had 12 days of Microeconomics class, and it wasn’t even graded!

Excellent!

SPECIAL DISCLAIMER: the opinions and experiences recounted in these blog entries about my year at Stanford Business School for the Sloan Program are my own personal observations and ranting. This blog is not endorsed by either the Stanford GSB or by any of my fellow Fellows.

Stanford GSB, Entry 5: The Second Week: Study Groups, Blue Angels, and Russians

We are now two weeks into classes (Two weeks and One Day since I’m posting this on Monday Night) – that means our “pre-term” is almost over (it’s actually only two and half weeks long), and after some wrap-up activities this week, we’ll move into the real “term” next week, when we’ll have grades and everything.

So here are some notes and observations about the second week. I’ve already given an overview of what we’ve learned in Strategy in my posting over the weekend – click on the link to entry 4 to the right if you’re interested in learning more about that class. I’ve promised to do the same for Microeconomics and Managerial Accounting, but I seem to keep getting distracted with reading assignments and study group meetings and what Professor Flanagan, our Economics professor, calls “merriment and diversions” - so will get to it eventually.

Read more!

#1: Our Study Group(s) Finally Seem to be Humming Along.

Each of the study groups seem to have settled into a pattern in the second week (this is good news, since there are only three weeks in the whole pre-term). During the first week, I heard many complaints about Study groups (no, I’m not telling who complained about whom, that’s confidential); By the second week most of the groups had gotten beyond the initial shock of having to negotiate with each other and started plowing through the large amount of reading and started working on the two group assignments we each had to present.

For example, my study group, after some negotiation, agreed to have some evening sessions in addition to the morning sessions, in order to balance the burden between the “night people” and the “morning people” (Yes, this took a little negotiation, and it’s still on-going!). We even ordered pizza in the GSB building at our first evening session – Round Table Pizza (a California chain with California-type prices - it cost us like $60 for two large pizzas – outrageous. It took me like 10 minutes to explain to the guy on the phone that GSB wasn’t an apartment building).

To counteract all the reading, we are assigning individual chapters to group members, who are responsible for creating summaries so that not all of us have to read every single chapter before every single class. (Oh wait-a-minute, our professors might be reading this blog, so what I really meant to say was that each of us is doing all of the readings assigned by our professors before every single class!)

We’ve also gotten to know each others strengths and weaknesses pretty quickly. For example: B. is great at presenting and PowerPoint, but not so experienced at accounting, L. is great at accounting and Excel but doesn’t like presenting so much, V. is really good with IRR and NPV, but likes to “discuss” strategy A LOT and thinks that 1 hour in the morning is not enough to discuss a single strategy case, while P. likes to keep our strategy discussions short and takes great notes on the whiteboard, but doesn’t like to create notes about the econ and accounting reading, J. is a good all around mediating force in the group, and, along with H., is pretty good at economics, and I’m, well, you’ll have to ask them! Though I certainly win the award for showing up late at most early morning study groups. [NOTE: names have been abbreviated to protect the innocent].

We’ve also gotten to know about each other’s personal circumstances - a few of us are married and have kids, while another needed to go out and buy his Porsche the morning of our case presentations (turns out the seller flaked out on him that day so we he was part of the presentation after all - this Porsche, if he buys it, might appear in the blog again this year I'm sure). Two of us (including yours truly) are still entrepreneurs with international businesses while at school (mine is in Pakistan, while the other is in Russia), so we often have to keep u with late night calls to our companies.

Despite all these differences, or perhaps because of them, we’ve all been willing to listen to each other and support each other [for the most part, except for the occasional yelling match like the one which broke out at one of our 7:45 am meetings one day last week – I’m sorry I can’t tell you any much more about that since I was still in bed asleep dreaming about the reading I had done late the night before ].

So the good news is: The Study Groups are finally working!

Now, for the bad news: Now that we’ve all gotten to know each other and have good habits forming in our study group, guess what? The pre-term is about over and we’ll have to form entirely new study groups and will have to go through this entire process again with the new groups starting next week. Doh!

#2: The Pressure is Off, For the Moment.

Each Study Group had to make two presentations based on “cases” – one for Managerial Accounting and one for Microeconomics. These presentations created the only “real” pressure during this pre-term (though there is lots of imagined pressure given all the readings and problems that were assigned to us, believe you me).

My study group did both presentations on Thursday, and since these were the only formal assignments we had to “hand in” during this pre-term, we’re effectively done. If you saw us on campus last weekend, or see us this week, and if we’re looking kind of relaxed, it’s not just the California weather…it’s cause we’ve already handed in our assignments and oh yeah, the pre-term isn’t graded anyways!

In general, the Sloan Fellows are a co-operative group, rather than a competitive one, at least from what we’ve seen so far. The program is designed to encourage a feeling of “we’re all in this together” from study group level up to the level of the entire class of Fellows, including the families and partners. We’ve had (at least) two alumni of the program speak to us thus far – one was a Sloan ’87 graduate who will be teaching the entrepreneur workshop later in the fall, and the other was John Foley ’97 (see the section below titled “I want to Fly Jet’s, Sir!”). They both told us how the class banded together and helped each other out. In John’s case, the class decided as a group that they would have an explicitly defined mission of “leaving no one behind”.

This is probably true of the two-year MBA’s as well, since they also are taught collaboratively to work in study groups (though we'll find out about them soon enough; they're just starting to arrive on campus this week).

But it seems that not all grad schools are like that. I heard a story from a friend of mine about one of the nation's top law schools. He said that many law school students are very competitive, because of their student rankings, and he offered up the following story: A law student that he knew, in his third year, he was ill and missed class one day.

I found this story unbelievable. So I asked him again to make sure I’d heard him right and if it was true. He insisted it was. This seems to me (to put it politely) just plain silly. I don't know if it's true or not, but if it is, then: NOTE FROM A GRADUATE BUSINES STUDENT TO GRADUATE LAW STUDENTS: Live a little.

#3: The Mind Meld has Started.

Those of you who watch Star Trek will recognize the term “Mind Meld” – but no I don’t mean that we are putting our hands on pressure points on each others faces and establishing telepathic links (though maybe there’s a little bit of that going on, I couldn’t really say) – what I mean is that the classes are starting to meld together in interesting ways.

This is one of the neat things about business school that wasn’t always present in undergrad – since the classes are all about different aspects of the same thing (business), there is definite area of overlap on the edge of each class.

In the second week of business school, we’ve started to see this already – in the Managerial Accounting Case our study group presented, we had to deal with issues of elasticity of demand, a concept from our Microeconomics class. In Econ, we have already started to deal with fixed costs and variable costs, concepts which we are heavily exploring in our accounting class. In Strategy, we started to deal with issues of Total Average Cost and Marginal Cost, which we learned about in Econ.

This is actually kind of neat, though having the curriculum so inter-related means that we can’t really blow off any of the existing subjects. In fact, our same professor from Microeconomics is going to be teaching us Macroecnomics soon enough, so I guess we have to pay attention.

#4: “I Want to Fly Jets, Sir!!”

So on Friday, at the end of our second week of class, we had a motivational talk from John Foley, who was a Stanford Sloan Fellow in 1997.

John is also an ex-member of the Blue Angels – yes that’s the Navy fighter group that does acrobatic air-shows around the country and the world. They fly F-18’s in very close formation, sometimes upside down, creating a dazzling display of technical and human prowess in their air-shows. John was there, along with some of his class members from the class of ’97, to talk to us about maximizing our experience in our year at Stanford.

After doing a stint doing VC work in Silicon Valley (he did graduate form the program back in 1997, during the dot com boom, after all) he is now a motivational speaker who shows video clips of the Blue Angels and uses lessons about how they achieve such high performance as part of his talks.

In fact it turns out that the Blue Angels fly these umpteen-ton, umpteen-million dollar jets within 3 feet of each other– yes that's 36 inches (for our international friends, that’s about a meter) apart. A direct quote: “I don’t think what the Blue Angels do is dangerous, it’s just unforgiving”. I’d say it is extremely dangerous but no doubt a very good example of high performance. I happen to be a student pilot and I wouldn’t feel comfortable if there was another plane within 300 feet of me, let alone 3 feet!

John’s speech was a mixture of inspirational stories, videos of the blue angels flying, and applying some of the principles he learned there and in his year as a Sloan Fellow. The Blue Angels, he explained, were the top one-tenth of the top one-tenth of one percent when it came to jet pilots (I believe it given some of the things they have to do). He drew the analogy that we (the Sloans at Stanford GSB) were like them in a way, the top one-tenth of 1 percent (I don’t know about this; Once you get into the real world and away from structured hierarchies like med school, law school, and the military, I don’t think you can rank people so easily). Regardless of where we fall on the map, his point was that for people that are already top performers, whether fighter jet pilots, top athletes, or in the business world, a 1% improvement can make a world of difference. That was a very interesting point I had never really thought about before.

Sometimes, though, high performance can only come with the right amount of teamwork. We saw video clips not only of the Blue Angels flying, but of how they prepare for their flights. They do an extensive briefing which includes a visualization of every part of the flight; it was pretty interesting. Being a student pilot myself, this made sense to me. They make sure that each part of their flights are coordinated, with what they call a center-point for each maneuver, and verbal and visual marks that they can look at to see if they and there colleagues are off – because at the speeds they go – over 1000 miles an hour, and the distances between them, even a few inches can be a very costly mistake.

How did he deal with all of the reading that the GSB students have assgned? His answer was: "Yes, It's a lot of reading". Then after a pause, with a knowing smile: "If you bother to do it."I thought I detected a wink and a nod there about the necessity of doing all the reading that's assigned to us.

Another element of his personal story that I found interesting was that he wanted to fly F-18’s ever since he was very young, but at each stage of his career, he seemed to get de-toured. They didn’t let him into the Air Force because of some technicality. Then later, in college, he joined the Marines. At first they didn't take his wanting to fly jets seriously, but then they sent him to flight training. After his flight training, they wouldn’t let him fly F-18’s because he was too young. He ended up going on what were considered not very great assignments. But each detour led to its own set of interesting experiences. In fact, one of those diversions, he happened to be on the USS Enterprise (no, not Star Trek, in this case the aircraft carrier) in the Indian Ocean when the movie Top Gun was filmed. He said that he’s actually one of the fighter pilots shown on the aircraft carrier at the very beginning of the movie. I found this to be very interesting because I believe that sometimes we get to where we want to go not by following the normal path, but by following what seem like diversions but turn out to be integral parts of our individual paths to success.

OK, OK, so for the Trivia Pursuit purists, I quoted the wrong 1980’s military movie in the title of this section (“I Want to Fly Jets, Sir” was actually spoken by Richard Gere in “An Officer and Gentleman”, and not Tom Cruise in “Top Gun”).

One thing I noticed is that John probably wasn’t as used to making presentations in front of international groups – he sometimes came across as, well, an American military guy who’s gone into business trying to “pump up” the troops. While this works great in a sales convention in the good old U.S. of A., that aspect of it might not have worked so well in a group that is more than one third international (don't get me wrong, the talk was quite successful overall).

In Example: In one of the videos he showed from his visit to Russia, a Russian pilot was tapping him in the chest, a bit aggressively, saying “Me Pilot, You Pilot”. He took this to mean that the guy was challenging him and when he took the Russian pilot up in his F-18, he did some intense maneuvers, intending to impress on him that our pilots have the “Right Stuff” too. This he proceeded to do by going into a 6-G climb (maybe it was 4-G or 9-G, I can’t really remember), in which the Russian went unconscious for a moment. This struck me as a little over the top and completely unnecessary, but he proceeded to tell us that after the flight he and the Russian pilot, who was a "hero of the Soviet Union", proceeded to be great friends. John spent a lot of time with the guy’s family and they even went to the ballet together during his time in Moscow. The piont of his story was that a relationship could change quickly.

#5: A Russian Perspective

We happen to have more than one Russian in our class and it’s interesting to get their perspective on Americans. When I asked one of our resident Russians about the pilot episode, he said: “that Russian guy probably only knew one or two words in English, so he was probably just trying to be friendly, that’s all.” Oops.

In another example, this weekend, a few of us went out to see the new movie, Righteous Kill, with Al Pacino and Robert DeNiro, about NYC cops investigating a serial murderer. In the movie, there is a tough Russian who, despite having been shot nine times, is still alive, though hovering near death. One of the Americans is tyring to revive the Russian, and starts yelling a Russian word, Svoboda, over and over again, alternating it with what we think is the English translation, "Wake Up! Wake Up!".

Of course, we had one of our Russian classmates, Valeriy with us, who started laughing. The word they were repeating in the movie, Svoboda, had nothing to do with “Wake Up”. He told us it means “Freedom” in Russian. *Sigh*, Hollywood gets it wrong, again.

But then again the Sloan program is pretty unique that way. We can get an international perspective from any major country simply by turning around and talking to someone from that country, since so many companies are represented in our class.

This really started to become apparent in the second week. When we did the case on Wal-mart, we were able to turn to our Korean and Japanese and Chilean friends to find out why Wal-mart’s strategy didn’t work so well in those countries.

That is one of the things I really like about being at Stanford GSB in general, and the Sloan Fellows program in particular.

In fact, I think that is “Kruto”, which Valeriy tells me is the correct Russian translation for very “Cool”!

SPECIAL DISCLAIMER: the opinions and experiences recounted in these blog entries about my year at Stanford Business School for the Sloan Program are my own personal observations and ranting. This blog is not endorsed by either the Stanford GSB or by any of my fellow Fellows.

Stanford GSB, Sloan, Entry 4: So, What did We Learn?

So what exactly have we been doing the past two weeks? As I mentioned in my previous post, we had three classes during this pre-term period – Managerial Accounting (aka Basic Math), Microeconomics (aka Graphs), and Strategic Management (aka Lots of Talk).

For each class, let me attempt to give you an overview of:
1) What it’s like to attend this class
2) What we’ve learned over the past weeks (not in detail, of course, you’ll have to pay mucho bucks to attend Stanford for that).
3) What (if anything) makes this class interesting, and what (if anything) really bothers me about this class. On this last point, I don’t mean “bothers me” in an everyday sort of way, but rather something about the overall subject which seems to give me a “nagging feeling” that while we’re learning what they’re teaching us, there are some things that are unsaid that are actually pretty important.

I'll start with our Strategy class and see how far I can get in this post:
Read more!

Strategic Management Class

This is one of the more popular courses we've taken so far, because of the free-wheeling nature of the discussion.

Professor Leslie walked into the very first class looking generally pretty relaxed. His Australian accent added to the casual nature of the classroom. He proceeded to tell us a little bit about his plan for the class: while the textbook (by Saloner, Shepard, and Podolny) would give us general principles, frameworks, and tools, the real medium for understanding strategy would be the cases themselves, of which we would read one each day.

During each class, Professor Leslie asks questions related to the case, and we contribute answers, dissecting the company that was described in the case and distilling out the features that made that company successful.

In our very first class, we were to have read a case about Equity Bank, a micro-finance bank in Kenya. These days, social entrepreneurship and micro-finance are part of the rage in business school. Ever since Mohammad Younas won the Nobel Prize for his work with Grameen Bank, this area has really attracted a lot of people.

According to Professor Leslie, many of the MBA students want to go into social entrepreneurship nowadays. Their reasoning is: if “I can make a lot of money and do good at the same time, I'm there."

While I think that social entrepreneurship is a pretty promising area, I’m worried that it’s becoming kind of a fad – with people jumping into it because it’s the “hot thing to do” – not because they are really committed to social development in the long term. This reminds me of how graduates rushed to investment banking in the 80’s, management consulting in the early 1990’s (when I graduated from my undergrad in 1992, working for McKinsey or such spinoffs was the hot thing to do), rushed to dot coms in the late 1990’s, and then back to banking and consulting in the early 2000s. Today it’s private equity and social entrepreneurship. What will it be in a few years?

It almost feels like the class is teaching itself because he is able to elicit the key points of the case. But of course, it’s not that simple at all, since Professor Leslie has a definite direction in his questions and points about each case that he wants to make.

Adding to the informality of the class is his general disarming ability to use everyday language (i.e. he talks like a real person, albeit with an Australian twist). On that first day, he declared, much to our surprise that “…we don’t really give a shit about Equity Bank, even though we were going to talk about it all day.” It was the characteristics of their strategy and the principles for their success that we were really interested in.

This would be true of all of our cases. So I’m going to give a quick summary of the cases that we studied and why (at least as far as I can tell why we studied them). Since all the cases are about real companies, you can look them up and find out about the strategy yourself if you want to follow along.


Case #1: Equity Bank of Kenya.
Why we discussed it: To see an example of optimizing an organization for serving the needs of a target market through culture.
What about it is important: One of the key ingredients to their success in Kenya was that they understood their local culture, and they tailored the organizational structure, bank policies for lending and opening accounts, and culture to serving their target market: who were the unbanked. For example, you could open a bank account without any collateral, just an ID card which is one of the few ID”s that Kenyans had. They had very little deposit requirements, and were very flexible on collateral when it came to loans. All of this allowed them to get huge growth rates vis a vis competitors like Barclay’s for a while. But now other competiors were starting to focus on this previously unbanked target market.
Why I think we really discussed it: micro-finance is hot – it wouldn’t do to not have one case about it.

Case #2: Capital One.
Why we discussed it: To show another example of how culture influences a successful strategy.
What's important about it: Capital One used heavy-duty analysis of data to find features of credit cards that were attractive to end users. One thing they did that was innovative was to combine the marketing and the credit risk departments together to optimize offers made to individuals based upon their credit history and any other information they could gather. Before Capital One, most credit cards were at the same fixed rate, without any variations. The ability to analyze data and make decisions based on what a particular prospect or customers needed was innovative in the banking sector in general. When Capital One introduced its balance transfer and low introductory nterest rate, its sales went through the roof, making it a major player in the US consumer credit market virtually overnight.
Why I think we really discussed it: The CEO is a Stanford GSB Alum, and this is a good example of a company that uses very analytical decision making.

Professor Leslie told us in this class that Business Schools in general, and Stanford in particular, likes to think that success can be taught using analytical frameworks and that it relies not just on “gut feelings and “instincts”, which is one of the reasons they really like to use the Capital One example. I’ve touched on this topic on the blog before and will again as it is very near and dear to me. In fact, I think that gut feelings and instincts probably played a very significant role in both the Equity Bank and Capital One cases. In Capital One, the CEO was out trying to get many banks to sign onto his ideas while they all told him he was crazy (according to the case, one banker threatened to throw him out of the window). After he finally got Signet Bank to fund his enterprise, it took a lot of “churning” of ideas ideas and markets and analysis before they came up with the one that worked. In fact, they were very close to having the plug pulled on their group because it hadn’t shown any results for a few years when the killer tactic happened.

This is an underlying issue that’s been nagging at me as I’ve arrived at Stanford Business School – can success really be taught? Especially in the case of corporate strategic decisions? Most entrepreneurs operate almost entirely on intuition. Most MBA’s try to operate on analysis. Is there a middle road between these? We’ll talk about this more in the year to come, I’m sure.

The next two cases introduced us to the concept of explorers (“innovators”) and exploiters (who do something so well that they are more efficient at it than others).

Case #3: Wal-mart
Why we discussed it: Wal-mart is the biggest and most successful retailer in the US (and perhaps the World).
What's important about it: In this case, we were introduced to the idea of organizations that optimized operations as a competitive advantage, and to the idea of an evolving strategy. When Wal-mart first started, they targeted in towns where many of their competitors didn’t have stores. This idea of targeting an underserved market is one pattern that has come out in many of our cases. Then as they grew, they virtually created the concept of “economies of density” – by having stores close enough to each other they could supply them once and for all. Finally, as they grew and started to appear in areas with competition, they started to get buying power from their suppliers, and this added to them being able to negotiate the lowest prices, as did their heavy investment in technology. Their distribution centers, delivery trucks, and inventory were far more optimized than their competitors. One issue that came up was about internationalization – they weren’t very good abroad. Since we had students in our class from Japan, Russia, UK, Korea, India, South America, and other countries, we were able to get perspective on the Wal-mart strategy in these other areas and why it didn’t seem to work as well.
What we really got out of it: Wal-mart, while doing some innovative things, is primarily focused on operating better. Many of their ideas were just copied from somewhere else (Sam’s club, for example, was a copy of earlier large membership type clubs) or out of necessity more than foresight. Even their innovative distribution strategy came about because no one was willing to spend time supplying them. This is a good question to ask in any organization: are you an innovator or an execution oriented organization (explorer or exploiter?)

Case #4: 3M
Why we studied it: 3M is a great example of a company that encouraged innovation.
What's important about it: The culture of this company for innovation, at least from the case, was very interesting. They started back in the early 1900’s and have had a large number of products invented in their labs. They even tell stories of people (engineers) who were told by management to shut down a project because it didn’t show promise, but who continued to work on it anyways. Well before Google, they introduced the idea of bootleg time – spending 15% of your time on a project outside your immediate scope of responsibilities. They even had a requirement that 25% of their revenues come from new products (products which had been introduced in the last five years). If you think of the size of 3M ($14 Billion at the time of the case”), this requires, in the words of Professor Leslie, a “staggering amount of innovation”.

As we talked about culture, we were introduced to the ARC framework describe din the text – A=architecture, R=routines, and C=culture. This is a framework for talking about how an organization is structured formally vs. informally. Professsor Leslie spoke to us about how architecture of an organization can be changed very quickly – with an email you can change who reports to who. But cultures are much more difficult to change because they are much softer and often implicit. 3M in particular had a culture of innovation that rewarded those people (usually engineers) who came up with bright new ideas that led to products. Of course this culture of innovation sometimes led them astray to be doing too many things and not doing some things really well.

That concluded our looking at the internal context of individual firms. In the second week, we started looking at industries rather than just at individual firms. This led to doing industry analysis using Michael Porter’s now famous five forces – Buyers, Suppliers, Substitutes, Barriers to Entry, and Rivalry. There’s a lot about these in the internet.

Most of business schools and teachers consists of slightly nerdy people, said the Professor, but Michael Porter has become somewhat of a “rockstar” among those who follow business school type guys. In this week we studied:

Shimano. We studied Shimano and the industry for high end road bikes. Shimano provide some of the key components used by Lance Armstrong in his bikes when he won all of those Tour De France victories. Shimano is also a great example of how one firm (a supplier in this case) can capture much of the value of an industry’s value-chain (what does value-chain mean? I’m not entirely sure but it has something to do with suppliers and buyers). Shimano, like “Intel inside” in the PC industry has developed a brand for their integrated set of components that fit into a Bike, and Bike Manufacturers basically all use the Shimano components (with some slight competitors). I knew nothing about the bike industry so this was an eye opening experience that one firm had caputred so much of the value from the High End Biking industry.

Rockwell. This was by far the most boring case – and I think that is the only statement that none of my classmates will argue. It was about the market for water meters in the 70’s and 80’s. This company had an innovation that they used to their advantage for slightly better and more durable water meters which were sold to munipicalities throughout the US. Despite many of us starting to yawn, Professor Leslie called this an almost “perfect” industry to make money – low supplier power (raw materials were the inputs), high switching costs, and a very cozy relationship between buyers (municipalities, of which there are many tens of thousands) and vendors. There was pretty significant barriers to entry as well. Turns out this was a very profitable industry, just not a very exciting one.

One interesting thing we discovered during this case was professor Leslie’s ability to estimate, based on the economies of scale, the number of likely serious competitors in a market. If you took the total market size, divided it by the costs and units produced by a Bronze foundry (which was an important barrier to entry for new firms) you likely came up with an oligopolistic structure.

Dell. We had a case about Dell computer and the rest of the PC industry from the late 80’s to the late 90’s, and some of the challenges faced by Dell and others in this industry, including players like Compaq, IBM, HP, and Sony. During this time period, Dell had lower prices than most and was perceived as better quality than most as well. This brought up the idea that all the many millions spent on branding could be part of the barriers to entry for other firms to get into the marketplace. We also look at how to estimate the margins and costs for individual parts of the manufacturing process.

Airborne Express. This case looked at the third largest overnight shipping company in the US, behind Federal Express and UPS. Airborne became successful by keeping their costs lower than either of the other two, and focusing in on a market that they felt was underserved: businesses of a certain size. By ignoring the consumer market entirely, and developing long term relationships they were able to focus in and be successful in this market. Airborne was also an example of a company with lower fixed costs but higher variable costs than its competitors- meaning they used people to do a lot of the sorting that Fedex used computer software to do. This meant airborne didn’t have to invest, like Fedex did, hundreds of millions of dollars in software.

Finally, on the last day of our first two weeks, we talked about internet companies – eBay, Google, Yahoo/Overture (which is what the written case was about) and Facebook, The concept that was introduced was the idea of DSIR (demand side increasing returns), better known as the network effect being a barrier to entry to others. The perfect example of this was eBay. Once it had a critical mass of buyers, the sellers wanted to go there. Once there was a critical mass of sellers, the buyers wanted to go there. Once buyers and sellers both spent a lot of time on eBay and built up reputations in each area, neither wanted to move.

The network effect requires there being a coordinated effort of people to really move off of one company’s platform and onto another. The case for the day was actually about Overture, an precursor to Google’s AdWords, which sold advertising based on keywords on searches. It was very successful in the early days, because it partnered with Yahoo and others to get the traffic. According to Professor Leslie the company’s expertise quickly became “how to receive checks and deposit them in the bank” because the money was flowing in so quickly. Of course Google extended the idea and perfected it, leaving Overture (and Yahoo, which acquired it) in the dust.

And this took us on a discussion of Facebook and the changing landscape of Social Networking and whether it has effective DSIR or not. I’ll have a lot to say about this landscape since I have some experience in social networking companies, but this post has already become very long. I guess we’ll have to leave what we learned in other classes for another day!

So I’ve said a lot about what we’ve learned. I like this class a lot – particularly the case and free discussion format. I’ll even venture that this has been my favorite class, thus far at the Stanford Business School.

However, the thing that’s been nagging at me is that we (and Business Schools in general) seem to be brilliant at analyzing a firms strategy and figuring out what their competitive advantage is – in hindsight. The question is by ignoring intuition and gut feelings, and doing the MBA-type analysis, are they really blinding themselves from being able to effectively study how firms create competitive advantage and future using foresight?

It’s a loaded question so I’ll leave it out there for now.

And once again this post has gone long, so i'll have to talk about the other classes in other posts...