The Stanford Graduate Supply Chain

Spending thirty years of your academic life at Stanford almost allows one the title of campus historian by default. As a professor of Management Science and Director of the PhD program, Evan Porteus has witnessed the growth and influence of Stanford firsthand. Eyemine spoke to Porteus to get his views on the origins of Stanford's success as well as the recent popular interest in operations systems.

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Eyemine: One aspect of the articles we are interested in exploring on the Campus and Company section of our website is the mentorship that a world-class university like Stanford provides. I am curious to know: why Stanford? What is it about the Stanford Graduate School of Business as well as the campus in general that fuels Silicon Valley? Is it geography or is it something else? I'd like to capture your understanding of the spirit.

Evan Porteus: I have been in conversations with people who have had the same question. I have heard people talk about it; I know there are some articles and people who have studied it. But I have not done any serious study of the question, so my comments are strictly anecdotal and informal. The question often starts off in the following form: Why not around, say, the University of Illinois or maybe back east around Boston? They have scientists, money--all these kinds of things. Clearly some similarities do exist, but it isn't quite the same.

Some of the explanation goes back to Stanford's origins. It's not that old, a little over 100 years. When it was founded, Mr. and Mrs. Stanford went to Cornell and asked them how to set up a university. Cornell, for one, was coed, and it was practical; they had engineering and so on. Most of the best-known universities at that time were ivory tower places that were purposefully disconnected from the rest of the world. Right from the beginning the Stanfords wanted to provide a practical education. As I recall, for example, in the very beginning there was a requirement that students take drafting.

Then I would say Fred Terman, who was provost here in the 1950s, can be identified as having a big influence on the modern shape of Stanford University. He believed that there should be a marriage of interests between academics and industry. He set things up. He helped encourage the Stanford Industrial Park. Hewlett and Packard both were closely connected with him. Here, brilliant young people were encouraged to go into something practical, rather than only academics.

The other thing he did was to try to hire professors with practical connections. He strongly encouraged them to run their own businesses in engineering, biology and so on. For most universities this is a modern development, but he started it very early on. These are infrastructure, unique-to-Stanford, possible explanations.

There are some other aspects that are different from other parts of the country. One of them is the California culture of the Gold Rush. We have this thing about it being OK to get rich quick. The 49ers came here to do that, whereas in some parts of the country and the world it is not OK to try to get rich quick. That can hamper how things get set up.

Another thing has to do with the immigrant population, with its diversity. California has established a very strong kind of meritocracy in the sense that people come in and it doesn't matter much what their background is: ethnicity, sexual preference, or whatever. If they know what they are doing and have a good idea, fine. So there are fewer barriers and somewhat more of an open meritocracy in California than other parts of the country. Why here instead of Southern California? Probably there is something to do with the Hollywood influence, but who knows? Maybe there is a first mover advantage where somebody gets going and a network develops around them.

I believe that others have identified the west coast culture of openness as being important. When there are lots of people here who have this Gold Rush mentality--another part of it is youth--the culture is one of open flow of information. People within an established company (such as the people at Fairchild who developed the early semiconductors) would identify a technological development that they felt was not going to be pursued effectively in their current company. So, they'd decide to start their own company--and the cycle repeats. The idea is that the more people around who are doing similar things implicitly create a stimulating melting pot of ideas. Now even people from different firms do it.

One last thing that occurs to me is that this is cultural. In Europe and the east coast the tradition is to have your employees sign non-disclosure agreements and then make sure they can't do anything. The culture is Don't share information unless you have to. They can't go off and start their own companies or use an idea. Probably people here sign non-disclosure agreements but either nobody enforces them or they are too difficult to enforce.

Eyemine: That's exactly where I wanted to take this conversation. For so long the Valley has been fueled by engineers and programmers, which largely is still true, but what we are seeing in the last two years is the students coming out of Stanford, particularly, that are carrying around the weight, the rolodex, and the alumni network. I wonder if it is just the opportunity and the strong economy or is there a whole different aspect of the level of competitiveness? Is it that much harder to get into Stanford and is it much more encouraged to be the risk-taking entrepreneur? Also, have you changed your curriculum to accommodate this recent generation of business school students at Stanford?

Porteus: I don't think it is that much harder to get into Stanford. It is by far the hardest business school to get into, but it has been for a long time and that hasn't really changed. As an aside, in a Business Week survey rating of business schools, Stanford has never done better than third or fourth. We have never done that well, which is interesting because it is a very influential publication.

Regarding the curriculum, we are a research-oriented institution. Scholarly research is something we really want to do and we want to be the best academic business school in the world. When we teach our courses we want to have people look at issues in an academic, deep way rather only presenting how things are done but not why. We want to put them into a deeper or larger context. The school gets driven by these interests.

Years ago it was real estate. There wasn't really a paradigm for real estate so we started offering more courses in real estate. It's still not a very standard academic discipline, but we now have professors doing deep analysis in real estate, so that's pretty nice. Then it was entrepreneurship. We have a Center for Entrepreneurial Studies and we have a lot of people with practical roots in that initiative. This fall we will have an initiative with electronic commerce. The thing about having initiatives is that it is a way of focusing efforts of different people doing research and teaching together in a coherent flow rather than traditional departments.

Personally, I did my PhD in inventory theory over 30 years ago and then for quite a number of years--after I had military service and I worked at Rand Corporation for a year in Southern California--I hardly pursued inventory as a research topic because it seemed kind of boring and people would lose interest right away. A bunch of us in our group did similar things. Then big changes occurred. The first thing was the Japanese just-in-time production system with Toyota and it really got the attention of the Americans. Here the strategic advantage was created due to operations. You couldn't call it anything else; they were just doing it right and doing things better in a way that the American auto manufacturers weren't. Typically, people responded by blaming them for copying and so on, but that brought a lot of interest to our area where people were realizing that operations could, in fact, be a source of competitive advantage.

More recently, supply chain management started getting hot. You started seeing those words in TV ads and newsprint. Inventory theory is at the heart of supply chain management. That invigorated my research in that area. My students and I are now looking at other areas of supply chain management. One issue is getting multiple firms to work together and set up contracts and incentives in such a way that they act in their own self-interests while still operating to help the whole chain, because now we see we have chains competing rather than firms. Again, going back to the European and east coast method, the traditional marketing approach is to protect your information. You don't share. Even though you are only part of a supply chain, you keep everyone out. Quite a bit is lost when you do that.

Twenty years ago the great careers were in finance and marketing. MBA students with the best grades were not the most successful in business. Operations was a backwater. If you went into operations, that was the end of it. That has really turned around. Top performing MBA students now get lucrative offers and do extremely well in business. If they are going to be involved in starting and running a small business, they must know about all the important functions that must be carried out. In particular, the success of a company is closely connected to how well the company executes on an operational level. I think this trend will continue, rather than be seen as a fad.

If you look at (Louis) Borders starting Webvan, what did he do? He spent his time figuring out how to run a huge warehouse, four times as large as any normal warehouse. This is an operational advantage. He has the economies of scale and has figured out how to do it and that is what people have to do. Some Internet businesses, to a certain extent, still have not mastered the attention to detail to execute. They think all they need is a good interface and a good website, but there are a lot of aspects of the supply chain that need to be done well.

Eyemine: I would like to ask you about that. One of the things every executive summary has to include when we pitch to fundraise is the exit strategy. Are you hoping for a merger and acquisition or an IPO? There are various schools of thought in the Valley. There are certain VC who are thinking big business, built to last, which is great, but then the other extreme is you have people writing plans, getting as much money as possible--the burn rate is phenomenal--and it is in the hope of selling technology or the company as soon as possible, which gets back to these MBAs. Do they ever have the time and the capacity that you are talking about, operations and implementation, to ever get to that level of that capacity of implementation if they know that their entire exit strategy is to sell in two years?

Porteus: Yeah, I think they do. Not everybody has that ability, but they have to demonstrate that it can operationally work, that the business plan actually does work. Borders came to a conference that I was at and talked about Webvan's business plan. Because they don't have retail stores, that part of the cost is dramatically lower. It's way more than the delivery cost, so if they can deliver on it in terms of what the plan is, it will be incredibly successful. But, nobody is going to really buy it until they prove it is successful.

Something else like Peapod, where someone is going into a regular store and buying it for you, that isn't more efficient. All you are doing is paying someone to do work for you, a service. With Webvan it is a whole different way; you are bypassing some of the cost.

For these other business plans to work, even if they are going to be bought out, they have to demonstrate it works on a certain scale, so maybe they will do it in the Bay Area. Then it is just a question of do you replicate it and turn it into a independent company or let a larger scale company buy it out and do the replication itself?

Eyemine: What do you see as the trademark of the Stanford Graduate School of Business student? Since it seems everyone wants to come to Stanford, everyone wants to work in the Valley, hit the next eBay or Amazon.com, etc., is the evolution of the incoming student so much more profound two years down the road or is this really the ability to come and be with great colleagues and network? Porteus: I don't have the answer in this regard. I do think that there are certain cultural phenomena that exist and influence. The culture of the school is entrepreneurship, startups, and we are getting to the point where people don't even finish their two-year degree. They go through one year, they start working for a startup in the summer, and they can't afford to come back to school, the opportunities are too good. That's a new phenomenon. We'll probably have to deal with that, but that is the extreme version.

Eyemine: Is it a growing phenomenon?

Porteus: I haven't seen the statistics, but I hear more people talking about it.

Eyemine: We have certainly heard about it. Do you think that there is a self-fulfilling prophecy of Stanford business school students to become the next entrepreneurial generation of movers and shakers?

Porteus: It is a little bit of the chicken and the egg. It breeds on itself just as Silicon Valley does. I think the factors that make a place like Stanford stand out are the culture and a lot of students coming in who are interested in the same thing, so it is easy to match up with other people who have similar interests. You do a lot of talking outside of class and many discussions in class are in the context of starting a new business. There is something about this critical mass where this is the neat thing to do. You have to be very qualified to get in so it is a desirable network; there is no question about that. It speeds things up, so you can go from an idea to implementation much more quickly than you would have some years ago.

However, this next generation of movers and shakers is intricately tied to science and engineering. The usual pattern for starting a company is to get a good technology idea from engineering, you get somebody from the business school who can manage the organization, and maybe add a few other people. I am not really sure if the idea can come from business school students who are not engineers and don't really understand the technology. I am a little skeptical of that, frankly. Maybe it can happen, but my personal thought is the right way to start is with the strength of a technological idea, coming from engineering or the sciences, and then adding people who understand management.

Eyemine: You mentioned earlier the example of Japanese automobile production methods giving others a new appreciation for what you do. What have you been doing to update yourself to what you are learning around you?

Porteus: It's nice to do research that people are interested in. We are following what is happening in practice and often think, Do we have a theory to explain why that is happening, to understand the boundaries of it, think about whether it is going to go beyond that or whether there's a natural dividing line between when you should use it or when you shouldn't? It naturally spawns a lot of interesting research questions and we step back and try to analyze those in a rigorous, analytical way.

Evan Porteus is Professor of Management Science and Director of the doctoral program

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