What Knowledge is Useful? > People
Howard Stevenson on entrepreneurship
I lucked out on several things. One was Paula Duffy had done some work on the alumni survey and said, "You ought to look at this." And I got in with her, and we started to look at the alumni survey, and discovered that there were a lot—that we weren't the West Point of capital, and we were actually the incubator of entrepreneurship. That when you looked at the numbers, entrepreneurship was a much more likely career than being the Chief Executive of a Fortune 500 company.
Now of course, that's pretty easy, because if you think about it, there were 500 Fortune 500 companies. About a third of them were family-controlled, so that makes 375. If you say they turn over every six or seven years, that means there are only 50 slots to be Chief Executive of a Fortune 500 company, and we graduate 900 students a year. Therefore, we're going to disappoint 850 out of 900 students, even if we got all of the available slots, and we don't. So the numbers just don't work.
And then people discover, "Let's see. It's more fun. I make more money." And by the way, when you looked at that survey in 1983, you discovered they had more money, they had more fun, they never wanted to retire, and they were more likely to have a stable family life. So tell me what again it is about being moving up the corporate ladder that's so good. So Paula was one lucky thing.
And another was a chance phone call from a guy named Bob Reese. And Bob is a very interesting promoter who told me a story, and I just loved his story, and went down and wrote the case. And then as we thought about the case, it actually led to the sort of construction of the—at that point it was the five differentiations, it's now six—between the entrepreneur and the manager. . . . .
Commitment to opportunity, timeframe of commitment, control over resources, the way of managing, the way of compensating. . . . .
It was clear that the personal—personality model was stupid. I mean, I knew too many people that were not cut out of the same cloth. You had all the work of the famous study of that 43 percent of the entrepreneurs were first-born, failing to note that 43 percent of the population is first-born. So you had a bunch of stuff that sort of made clear that it was nonsense. You know, things like locus of control. You know, I'd been through the achievement, McClellan. And so that was nearer with the T groups, and you had all sorts of things. You'd study those and you said, "These are really interesting, but they don't seem to be endogenous, so let's think about whether there are other things."
And then you started to say, "Well, aren't these really consistent?" I mean, I like the consistency. That being on one side of the matrix was consistent, and being on the other side of the matrix consistent. But there were forces that drove you, naturally, from one side to the other with success. And the question is how do you—how do you keep going?
You know, this, you got into—I don't remember when In Search of Excellence was written.
'80, I think.
'80. And I remember looking at that and saying, you know, "Who would ever write a book recommending that you manage by staying in your office being all things to all people, managing with blind consistency at all times?" You go through these nine points and you say, "I can't imagine ever writing a book that would recommend the opposite of these things." So—"But he sold a couple million copies, so there must be something here that is driving companies to do things that are really stupid."
And so the behaviors seem to pop up as something you ought to ask: how do we maintain more entrepreneurial behavior? How do we reward it in companies, because everything that is the opposite of Peters and Waterman was certainly what seemed to be practiced? . . . .
Secondly, it was clear that you had to find a way to attract young people, who were more theoretically oriented, to the subject. And so we sort of coined the term, "Entrepreneurship is not what you study, it's where you study." Because the whole notion was to try to get people to see that there were really cool problems here that were subject to well-disciplined research. And maybe if you studied these cool problems instead of writing the 99th study of the capital asset pricing model, and looking for an event study, you could actually say something about an important problem. So that was an opportunity.
The actual quantif—or the codification of the five parts of the differentiation occurred one night at Symphony, when Bill was sitting next to me and said, "I've got to give a speech in Detroit. What is—what should we be—what should I say that's different about entrepreneurship?" And I drew that out on a symphony program. It wasn't a, you know, it got refined, and I worked with David Gumperts to write the article. And the rest, as they say, is sort of history. . . .
Well, really the capsule is entrepreneurship is about the pursuit of opportunity beyond the resources you currently control. But I think that the—and that's sort of the general theme and definition of entrepreneurship we use.
But I think the biggest lesson in the R and R case is done right you can make risk disappear. You know, the way you teach that case after several times is you start to say, "Isn't the game business risky?" And everybody agrees it is. And then, "Is it risky for Bob?" "Yes." "Why?" "Well, he's got a lot of work to do, and there's a short timeframe." "Well, how much work does he have to do?" And you list all the players he has to get on board.
Then you simply say, "Okay, what does he need from them, and what is he willing to give?" And you go through that, and at the end you come back and say, "You told me this was risky. Who took risk here? Did Alan Charles, the game designer?" "Well, yes, he did. He specked his time." "Well, was he well-rewarded for specking his time?" "Oh, yeah. He made ten times as much as he would if he'd taken the commission up front." "Oh, so he was paid for -- how much risk did he actually take? Did he have to have a complete package together before Bob could sell it?" "No, he actually probably put the concept together in a weekend with a mockup, and he didn't have to do the work until he and Bob had the" -- and you go through the list, and somebody says, "Well, how about Sam Kaplan, the guy that put up the money?" I said, "Well, when did he put up the money?" "Oh, only after the orders were in." "Oh, so he didn't have to put any money at risk until he had orders. All he was doing was financing work capital for firm sales (to high) credit. Did he take any risk?" "Well, no." And you go, "Well, how about the manufacturer's rep? Are they taking a risk?" "Well, no, they're going to that -- they're doing that trip anyway to K-Mart. Well, actually, do they get any benefit of having this product?" "Well, yes they do because they don't have a product in this hot category called trivia. And if they walk in -- and by the way, K-Mart can't get it because it's on allocation. So he can offer them a hot category product with high probability of delivery at a time when they don't have it. And then he's giving—oh, about the poor schlep at the Bloomingdales? What does he get?" "He gets a full page ad in TV Guide for nothing." "How much does he have to order?" "No minimum quantity." So let's see, he gets $86,000 worth of advertising for nothing, and all he has to do is order $12,000 worth of games. Do you think this is a hard deal to explain to his boss even if he sells none of them?"
So you go through and you say, "Well, now who took the risk?" And the answer is nobody took the risk, because each of the people were doing what they would do anyway. And Bob simply allocated the risk to where, in fact, the diversification of the risk was helpful to them in their economic return. And he happened to skim off an extra two and a half million dollars, back when that was real money.