Sunday, October 05, 2008

Stanford Business, Sloan #8: Top 9 Things I Learned in School Last Week

Yes the official term has started – not just for us, but for all Graduate Students and Undergraduate students on campus. We’re now officially two weeks into the Stanford “Fall Quarter”. Stanford uses a Quarter-based system – so there are three quarters in the “school year” – Fall, Winter, and Spring. The summer quarter is, well summer and not an official part of the school year – not sure if this system is used in other countries as well.

Here are some of the top things I’ve learned in the first two weeks:

1. Monty Hall is a Genius. On our first “official day of class”, we had a double-dose of our Modeling class (see previous post about the modeling workshop we took in pre-term). In our very first class, Professor M. played a version of Monty Hall’s game show. Not that many of us had actually seen the show, Let’s Make a Deal, which is an classic American TV show that involved contestants choosing a door from three potential doors. One of the doors had some cool prize behind it like a New Car! Others had nothing.

As many of you may know, this game comes down to probability – it’s pretty easy to figure out what the probability is of something being behind door #2 when you first start the game (1/3, assuming the other doors don’t have prizes between them ). After the contestant had chosen a door (say you had chosen door #2), Monty would usually (according to Professor M., since I don’t remember the show at all) reveal what’s behind one of the other doors (usually an empty one, say door #1) and then let you choose whether to switch from your selection (door #2) to the other, unopened door (in our example, door #3). Should you switch? This is an interesting question and it comes down to probabilities.

The probability isn’t what you would think it is. This is so commonly gotten wrong that academics have a name for it: The Monty Hall Paradox (do a search on Google, our professor told us and you’ll see almost a million hits). Now how many TV game show hosts have academics name a phenomenon after that? Not many, forcing me to conclude that Monty must have been a freaking genius.

2. Stanford really is the center of Silicon Valley. Many of my classmates will know that during the pre-term, I sort of became infamous for saying, “OK, but how does that apply to software or internet companies?” The pre-term content was very “big company” and “traditional industry” based, and I was beginning of to wonder if b-school wasn’t going to be all like that.
Luckily, now that the term has started, I see that’s not the case – in fact, there is probably so much software and entrepreneurship stuff going on at Stanford, that it’s difficult to keep track of it all. In the first two weeks, we had: 1) a co-founder of Siebel Systems (Pat House) come talk to us about the experience of starting Siebel and growing it into a billion dollar software company, 2) Steve Ballmer, who dropped out of Stanford Business School back in 1981 when he joined Bill Gates at Microsoft and is now CEO of Microsoft, and 3) The CEO of Skype (another Stanford GSB alum) talked to us about his experiences. Ballmer was in what they call the “View From the Top Series” which is open to the full business school. The other two came to our special Sloan TMS series, which makes the event much more intimate (there are only 57 of us, compared to over 600 b-school students total).

2a. Bill Gates was Paranoid and had a pretty Persuasive Dad. Steve Ballmer, the current CEO of Microsoft talked about a lot of things (how Microsoft’s strategy adapts, how he sometimes underestimates people that have different leadership styles than he or Bill Gates had, as a Detroiter how he looked down on Cleveland – something I could relate to since I grew up in Detroit,, etc.), I found the most interesting part of his visit was when he spoke about his decision to quite Stanford Business School and join Microsoft. He remarked that he was having a great time at Stanford ( “I learned a little here,” he quipped, “But man the Golf course is Great at Stanford!”).

Steve was doing pretty well at the GSB, and it came time for him to find a summer job. His old buddy from Harvard, Bill Gates, had started a small software company called Microsoft in Seattle, and Bill was trying to convince him to leave b-school and join the very young company. Steve made it sound like he had offers from top tier consulting companies (Booz-Allen maybe? I can’t remember the specific companies) and investment banking companies. He told all of them and his friends that he was considering an offer from a very small software company – this was back in the early eighties and everyone thought he was either crazy or just saying that to get leverage with the “real firms”. Even Steve’s father (who was dead-set on him going to Harvard and already thought he was crazy for going to Stanford b-school) thought he was nuts. Bill asked Steve to have dinner with BG’s father, which we were all surprised to hear seemed to be BG’s strategy when he wanted to convince people of something in those days.

When Steve arrived in Seattle, he stayed at Bill G’s place, because they didn’t have enough money for a hotel. One thing he remembered was that Bill had little scraps of paper littered all over his apartment. On them, he had a list of all the employees and their salaries. “Bill was paranoid that Microsoft would go Bankrupt, so he kept writing these pieces of paper to make sure there was enough money in the bank to make payroll.”.After a few weeks of this crazy life, Steve decided that maybe he should return to B-school rather than stay at this crazy little company. He had already told Bill that they needed to hire like 18 more people, but BG was so paranoid about the company going out of business that he wasn’t enthused about “spending all that money”.

When Steve told him he was ready to leave, Bill returned to his old tactic: He told Steve to have dinner with his (Bill’s) father before making a final decision. I guess it worked. Steve never returned to b-school (though they’re thrilled to have him back now), and the rest is history…

2b. The House that Siebel Built. Patricia House and Tom Siebel left Oracle to start a new software company dedicated to enterprise customer relationship management, Siebel Systems.. Pat spoke to us and told us this story. It was an interesting story in many ways, as was the Q&A afterwards. Siebel is a well known success story from the nineties, they defined one category of Enterprise Software, CRM (which is a term Pat told us they made up and convinced others to use). Siebel is also well known because near the end (after staggering growth in the nineties and going public) they sold the company to Oracle.

But there were a lot of things about the story I didn’t know. One thing I didn’t know was that they got an office in East Palo Alto (which was the murder capital of the world at the time, according to Pat) because they had no money. For 18 months, people flocked to work for them without pay because they already had a successful track record in the software industry in Palo Alto.

A company NOT built by engineers. For one, the founding team didn’t have any technical people. This means that what they were innovating was not really a new technology, but a business process. For that reason, the way they went about it was almost completely different from most tech startups I’ve seen. They built a 700 page product specification and roadmap after extensively interviewing customers about what their sales-related needs were. They recruited 4 customers to pay like $1 million each in order to be early adapters of their software. They didn’t take a dime of VC money in the beginning. They convinced George Shaheen, CEO of Andersen Consulting, to put his own money in and that tied them to a large implementation partner for their very large deals. They talked to CIO’s who had spent tens of millions of dollars on custom mainframe business systems built by firms like Andersen to spend a million dollars on their new CRM software. In many ways, their culture – a sales oriented culture, a very professional culture – dress up every day, was a key to their success (she used the word “insubordination” at one point in her speech talking about subordinates, which honestly I don’t think I’ve ever heard anyone outside the Military use). This was the culture of AC and many large companies to whom enterprise software was being sold. Although their product had many innovations, particularly using client/server technology where only standalone desktop or custom mainframe apps had been used in the past, it didn’t strike me as an innovation culture, but rather an “execution” culture.

While this contributed to their success, my thoughts are that it may also have been a part of Siebel’s downfall, since the general perception in Silicon Valley was that they had missed the big new wave of Software-As-A-Service over the web that started at the end of the nineties (led by one of their main competitors, which started to displace the need for costly enterprise systems like Siebel. By the time they sold, many people in the Valley thought that Siebel was on its way down.

It was almost like SalesForce was doing to Siebel (using web technology and a new model to displace costly client/server) what Siebel had done to the mainframe players (using client/server to displace costly mainframe systems). This last part was not something she talked about (in face she pooh-poohed Salesorce as a small niche player) – but the shift to the new model is pretty undeniable for the rest of us.

2c. One of the Best First Acts in Business History. Last week we had Josh Silverman, who is the CEO of Skype, which is completely owned by eBay. He made the statement that Skype had one of the best first acts in business history – no one can argue that – they’re up to 300 million users (yes that’s more than Facebook) and have built a great brand and a great technology. But it seems like they’re now treading into waters that involve the big telecom companies and that seems to be their new challenge. Josh was the founder of evite, another brand that most internet savvy people have heard of. He talked a lot about that experience, and how they probably sold too early. Of course evite was founded in the nineties when expectations were sky hi for companies like that – I remember those days well.

Josh spent a lot of time talking about leadership challenges since he joined eBay and how he handled them (he ran, another ebay acquisition, before taking over Skype). One of these included all of the direct reports of the new CEO resigning before he even took over as CEO. Ouch! Did business school help him?

He said that he got a lot out of his experiences at Stanford GSB, though what he used were mostly the touchy-feely aspects of leadership. If as CEO, he said, you’re using things like your accounting or finance class, then you’re probably micro-managing. Josh was an Arjay Miller scholar, which meant he got very good grades in b-school, which brings me to the FOAM.

3. Where’s the FOAM? Everyone else at the b-school who is not an AM scholar is referred to as FOAM – friends of Arjay Miller. FOAM is also the title of the Tuesday night social events that happen each week (there are no classes on Wednesday, though plenty of other stuff going on), which makes partying until the wee hours of the night more than acceptable for normally uptight b-school students. We had our first FOAM event last week, with what seemed like all 600 MBA’s attending, at the Blue Chalk in downtown Palo Alto. It was a typical college night out, and loads of fun. The MBA's know how to Party!

Honestly I felt a little old as a Sloan Fellow at this first FOAM event (the Sloans in general have more years work experience than the MBA's, which means that most of us are in our 30’s while most of the MBA's are in their 20's). Still, a small group of Sloans stuck it out until about closing time, so I guess we still know how to party, too! But, then again, the MBA events are fun precisely because there are so many younger people with a lot of energy (Not to mention the significiantly larger number of cute women in their twenties at these events!). On the other hand, the Sloan events are fun precisely because we have gotten to know each other so well through our smaller, more intimate program. Let’s see how these shake out as the school year progresses - stay tuned!

4. The Prisoners Dilemma. Our economics class began in the same way our modeling class did - all fun and games.

In particular, we started talking about "game theory" which is built on studying how people who are in collaborative or competitive situations behave in fictional "games". The most famous of these is the Prisoner's Dilemma: This is when two people who committed a robbery together are both arrested and then put in separate rooms. They are then told that the police have evidence against them and that if they squeal on the other person, then they can get a reduced (or no) sentence and go free. On the other hand, if they don't tell on the other person, and their partner squeals on them, then they,'ll go to jail for a long time while their partner goes free. Of course, if neither of them squeal, there is the possibility that they'll both go free.

What would you do in this situation? There is a cooperative solution (neither of them tell, which is best for both of them over-all), or two non-cooperative solutions (one of them tells on the other, or vice versa) and one not so great solution (both of them tell and both end up in jail). Turns out that these situations occur in business, though you can usually signal your intent based upon your public behavior, which is prohibited in a "True" Prisoner's Dilemma. The idea is that the one cooperative solution is best overall for both parties, but the competitive situation is best for one party and not the other, or in the worst case, it is a lose-lose for both parties. In fact, you can usually label each of the four quadrants as "win-win", "win-lose", "lose-win", "lose-lose". Of course, in the real world, a competitive situation can become worse if you can force yourself and the competitor into a lose-lose. The professor didn't think this approach was rational in the real world, so long as both firms were earning profits.

This led us to the idea of a Nash equilibrium. In game-theory speak, a Nash equilibrium is a point in the game where neither party can better their situation by acting unilaterally. I and others brought up that one party might do it anyway, going into a loss situation in order to drive the other competitor out. The professor again thought this was "irrational" behavior and wouldn't be adopted by profit-making firms.

Given that i'm a big fan of movies, I think a more intuitive description of a Nash equilibrium was given in the movie, A Beautiful Mind, about John Nash starring Russel Crowe (assuming we're talking about the same Nash, which I'm pretty sure is the case). In that scene, Nash and his grad school math-geek buddies are sitting at a bar when they see a group of young women, the most striking of whom is a beautiful blonde, while here less (but still) attractive friends are all brunettes. One of the engineers is going to ask the blonde out. Nash has a flash of insight - if none of them ask the blonde out, it's likely that they will all end up dancing with a girl - each one with one of the brunettes. If one of them asks the blonde out, he may be happier if she says yes, but if she says no, then he can't in good conscience go ask one of her friends to dance. And ditto for everyone else in the group. So the best point - the equilibrium is for none of his friends to ask the blonde out, and for all of them to ask one of the brunettes to dance.

Now OK this is a contrived scenario and it doesn't exactly strike me as a likely outcome in real life. But watch the movie and I think you'll understand what a Nash equilibrium is all about, and then ask yourself what you would do in such a dilemma?

5. The Engineer’s Dilemma and the Career Vision Workshop.
I confronted a whole different kind of dilemma this week. I call it the Engineer's Dilemma: I was up late (let's say 3 am) the night before our Career Visioning Workshop, which was to start on the dot at 8:30 am and went until noon. Needless to say I didn't make it to class at 8:30am. By the time I got up and got ready, it was almost 9:10. So I was confronted with my own dilemma: Do I go to class and get something out of it? Although I missed over half an hour, the class went on until noon so there was a lot to learn.

Or should I blow it off completely - which will save the embarrassment of going into the class late? After all, we found out (later that day) that the b-school professors are calling our Sloan class the "Tardy Sloan Class". (There's a word I haven't heard in a while - tardiness - another reason why b-school is kind of like elementary school, we get graded on attendance and tardiness!). Turns out I"ll be facing this dilemma alot more I think since our professors are not big fans of us walking in late to class...

So what to do? If you don't stay up late, or don't require much sleep, then you probably won't face this dilemma, but if you do, do you go to class or skip it?

I ended up going after all - partly because it sounded like an interesting workshop, and after all, we are paying Stanford quite a bit of money to be here and learn, not the other way around! In the real business world, paying clients can usually get away with showing up late, while those who get paid generally can't get away with this kind of thing! Call it the Golden Rule.

Turned out I wasn't the only one late - one of my Swiss colleagues showed up at the exact same time, and one of our other colleagues showed up half an hour later! Whew!

It turned out to be the right decision after all, and not because I wasn't the only one late. The workshop, taught by Andy, the director of the career office, was pretty interesting. It also revealed how Stanford, probably unlike alot of east coast schools, can be creative in "touchy-feely" ways. At one point in the workshop, we did a relaxation and visualization exercise where we imagined ourselves to be in an ideal career and personal situation some time in the future. I saw some very vivid imagery about where I might end up; in fact it reminded me of some Shamanic journeying that I have done in the past, where you journey into an "imaginary" future and bring back insights and energy to motivate yourself. The Journeys are based on techniques used by Shamans in indigenous cultures around the world. Of course at b-school, we simply call them "visualizations" and partner them with lots of "rational analysis" so that it doesn't come across as too sketch loosey-goosey!

6. Seeing the Trees from the Forest. One concept that we learned about which I think gets at the heart of business school thinking is the decision tree. When faced with multiple choices and unpredictable events, you draw a tree, starting at the present and branching out for each choice you have to make. For external events, you assign a probability to each branch as a potential outcome.

For example, in the Stanford Concessions case, you are a vendor who provides food at the Stanford football stadium and the biggest game of the year is coming up. In this case, it was when O.J. Simpson played for USC (yes, OJ was a football player before he becamse a celebrity on the run from the law), and USC was ranked number 1 (in the PAC-10, and perhaps in the coutnry). The only problem: it might rain that day, which would mean the crowd might be as small as 20,000. If it ended up being a bright sunny day, the crowd might be as high as 80,000. So, how much food to rder?

The key data was to use probabilities provided by historical data - the probability that it might rain might be 40%, meaning it was a 60% probability that it would be sunny, etc. (not the actual numbers). In the decision tree, you look at all the possible outcomes, and work backwards assigned each branch, all the way up to the initial choice, outcome values (usually $ amounts).

This is called the EMV (expected monetary value) and my initial impression is that it comes up again and again in our classes (we've already seen it in our economics, our organizational behavior, and perhaps even in our finance class).

My major problem with this approach is that it fosters a (false) sense of certainty. The probabilities are the key to the whole equation. If you assign the probabilites basedon historical data, you will get some results that tell you branch A or branch B is the rigth way to go. Definitively. Unfortunately, in the real world, it's highly unlikely in my opinion that the probabilities come up right - so simply caclulating what looks like the highest $ based on these is a way of thinking you have a "certain" answer in an uncertain situation. Let me give you an example of when this can go wrong.

7. To Race or Not To Race, that is the Question! In our Organization Bahavior class, out first task was to break into groups and take on the "Racing Case" as it's called. Each group had to decide whether to race or not to race in a formula one race on a given day. We were told we were having a great season, finishing in thetop 5 in over 50% of the races that we had run in. Unfortunately in 29% of the races we were in, the engine crashed. We stood to make *alot* of money if we finished in the top five in the day's race, including a million dollar sponsorship. If we didn't run in the race, then we were at a loss. Plus all of our engineers (except one) really wanted to go ahead with the race and it would be demotivating to everyone to not go ahead.

So, What to do?

Well, our first inclination was to use the data presented, including probabilities of finishing the race and our engine blowing up, to construct a Decision Tree and figure out the expected payoffs on each branch. The decision tree and EMV was very definitive in what we should do, but something didn't sit right with me. Everything in the decision tree was based on probabilities, and something in this situation reminded me of bad decisions made in the real world. In fact, the fact that the Decision tree was so definitive when in reality you just don't have that kind of certainty, made me suspicious.

I won't give away what we were supposed to do, but suffice it to say that decision trees are only as good as the percentages you plug in. In the real world, there is more uncertainty about probabilities and percetnages than there is on paper, so you have to do the best you can!

8. What is a Zero Coupon Bond anyways? No discussion of our first few weeks of class would be complete with discussing our finance class. Professor I., who was our finance teacher, wasn't much older than those of us in the class - in fact, probably younger than us, and this created an interesting dynamic. The material itself was cluttered with NPV (Net Present Value), IRR (Internal Rate of Return), PV, and covered interest parity.

I finally learned what a coupon and a zero-coupon bond were (a coupon isn't something that saves you money in finance, it is a periodic payment that a financial instrument makes; a zero copuon bond). My big impression of finance is that finance is the art of doing equations using r, the required rate of return. We learned how arbitrage can exist and how markets price thins based on the time value of money - there it is again, the interest rate. Well, rather it's the required rate of return that we plug into a given equation. Usually it's the yield-rate of zero coupon bonds plugged in. But this is why i find finance to be a bit of black magic. It isn't always clear what r will be over a period of time, nor what a required "rate of return" is. This differs by industry - in the tech industry, for example, we need 30% return on invested capital. Does this mean that a software investment that returns 30% is a good invesment?

No, not really, because software investments are so risky inherently that we need a 30% return over a portfolio. Since most software investments will fail completely (zero or negative return on investment), the ones that succeed need to return signficantly more than 30% return in order to get to the "required rate of return".

So, thus far, finance is all about the present value of a future stream of cash or payments and almost completely based on the prevailing interest rates, which might be different in different countires. Which brings me to the interesting question: If some students are required to pay the full Stanford tuition at the beginning of the year, while those with financial aid can pay only some of the money up front and some of it later, are some students paying more tuition than others, although we're both taking the same classes, given the time value of money, or r?

The answer, according to our finance equations is, Yes! How much more? Depends on the number you plug in for r.

9. Band on the Run. Every university has its traditions. Stanford has its, definately, though for the most part they seem to be undergrad traditions. One of the first ones a freshman sees when they get here is the "Band Run".

Now those of you who've heard of the Stanford band may know that they're a little "unusual" and in true Stanford style, don't "conform" to the normal ideas of a marching band. They don't wear uniforms, never march in a line, and generally do goofy things, like throwing up their instruments into the air. I was sitting next to a grad student who had just arrived from the University of Michigan at a grad student welcome picnic, when the Stanford "Band" appeared to play a few instruments (I would say a few "tunes" but that's really debatable). The grad student from Michigan, which has a very well-respected and well-uniformed and well-playing Marching Band, was horror struck. "What the hell are they doing?" she asked. "That's not a real marching band!".

I find the band pretty amusing. So back to the band run. On the first night of freshman orientation, the Stanford Band comes to a dormitory and starts "playing" their instruments from outside (quotes around the word playing for obvious reasons, for those of you who have heard the Stanford band play). The freshman rush out, along with the upperclassmen, and they form a gang that runs around campus to the next dormitory. There the band plays and hte rest of the undergrads yell and shout and generally make fools of themselves, dressed in funny clothes, until the next group of freshman come out of their dorms. This continues all over campus - and if you've ever been on a tour of Stanford's campus, you'll know it is the largest contiguous campus in the country with over 8000 acres, this can go on for quite a while. The large body of undergrads ends up at the Stanford Main Quad - a beautiful architectural area that usually has a peaceful, even serene feeling.

At this point (usually after midnight) the Band "plays" for another half an hour while the students generally party until about 1 am. As a grad student, I wasn't technically invited on the Band Run, but I tagged along anwyays jogging around campus with the mob (er, I mean, crowd) of undergrads. Unlike them, I ran out of steam well before 1 am, and hopped on one of the Golf Carts (who trail the crowd for those who need a little help) for the rest of the Band Run. Driving the Golf Cart was a member of the staff, who explained to me all about the Band Run and what it was about. Along the way, we picked up a few Dollies.

What are Dollies? No, they're not devices used for hauling furniture, but rather the proper term for Stanford's cheerleaders (Stanford, as I was reminded, doesn't have cheerleaders, just Dollies).

Does that Make sense? Not really? Oh well u must be getting old like me. Stay tuned for more interesting (or inane, depending on your point of view, Stanford traditions). I find them kinda fascinating since I wanted to come to Stanford for undergrad but ended up across the country in Boston instead, so I get to see a glimpse of what I missed out on!

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.

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