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of Global Business

NOVEMBER 2003

TheDarkSideof Global Business

Meet Best-Selling Business AuthorERIC TYSON, MBA ’89

Japan’s Debt Doctor KAZUHIKO TOYAMA,MBA ’92

TheDarkSide

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Faculty News & Pubs 26

Faculty Research 28Gaming of pharmaceuticalpatents > Portable phone numbers benefit consumers >Pitching ideas Hollywood style> When should you sell the factory?

Newsmakers 32Who’s in the news: A roundupof media mentions.

Class Notes 35

Alumni Resources 50

Debt Doctor 12Kazuhiko Toyama, mba ’92,is charged with resuscitatingJapan’s ailing companies.by bill snyder

Social Entrepreneurship 14Business and engineering stu-dents tackle affordable lightingsolutions in an environmentclosely resembling a startup.by bill snyder

1

F E A T U R E S

16 Global Business EthicsAn alumnus offers a cautionary tale of corruption and other dangers in today’s business environment.b y g r e g g m a r s h a l l , m b a ’ 9 4

22 Eric Tyson for Dummies A deep interest in numbers and finance and a desire to helpthe average investor led Eric Tyson, mba ’89, to author aseries of “Dummies” books in areas of personal finance.b y e dwa r d w e l l e s

22

november 2003 • volume 72, number 1

26

About This Issue 2

Dean’s Column 3

Spreadsheet 4What’s Up: News about the gsb and its graduates.

Economics 8Gerald Meier has helped definethe field of development eco-nomics over nearly six decades.

People 11Micheline Chau, mba ’76 Ben Nemo, mba ’98

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D E P A R T M E N T S

COVER: Mark Hooper

14

cont

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about this issue

Igniting Innovationafter midnight on february 10, 1953, my mother leaned over the bed and whispered orders to get up. You could tell by her tone thiswas no time to dally. The wind that had piled snowdrifts up against thenorth side of our house was now blowing embers from the burning barntoward us. In the next few hours, I learned that we had lost not just thebarn but all of our cattle and four sheep. My father’s hands were badlyburned from trying to open the barn doors. He could not because theanimals stampeded against them. The great Chicago fire allegedly beganwhen Mrs. O’Leary’s cow kicked over a lantern; in our case, the culpritwas a ewe with new lambs.

I was reminded of these fires when reading the story on page 14about the new Social Entrepreneurship Startup course in which studentsdeveloped rechargeable lights for communities without electricity. This

may be the age of high tech, but for more than 1 billion people, Bill Snyder reports, “turning onthe light, if it’s possible at all, still means lighting a smoky, dangerous kerosene lamp.”

After World War ii the u.s. Rural Electrifica-tion Administration spread light rapidly acrossthis country. As a child in the fifties, I took electri-cal power for granted and expected no corner ofearth to be too remote for electrical wires. If you

read Fred Rose’s story on page 8 about Professor Jerry Meier’s half-cen-tury career teaching economic development, I think you will find it wasnot only the children of that era who made optimistic assumptions. By1965, however, Meier was beginning to chronicle problems with imple-menting large-scale industrial development plans in the many places withmostly agricultural economies. While rural electrification clearly aidedthe transition of the American postwar economy and places like Taiwansuccessfully followed suit, the models did not work across the board.

The implementation of many ideas does not progress as smoothly as we hope, which is why the trial-and-error design of the Social Entre-preneurship course seems brilliant to me. The business and engineeringstudents involved learned to design led lights while collaborating witheach other, with manufacturers, and, most important, with people livingin the communities they hope to help. As a result, they learned that aproduct design and business model suited to one area of India is likely to fail in one area of Mexico.

I neglected to tell you that the 1953 fire was caused not by a danger-ous kerosene lantern but by an electrically powered heating lamp. Notlong after the fire, my family joined other plains farmers in planting shelterbelts of trees, a new university-initiated plan. With this protectionfrom gale winds, cattle and sheep no longer needed to be herded into a barn during a blizzard. That’s the meandering way the world changessome of the time.

E D I T O R

a quarterly publication for

alumni/ae of the stanford university

graduate school of business

PUBLISHERCathy Castillo

EDITORKathleen O’Toole

ASSOCIATE EDITOR, CLASSNOTES EDITORGale Sperry

PRODUCTION MANAGERArthur Patterson

ART DIRECTION & DESIGNSteven Powell

CONTRIBUTING WRITERSAnne Field; Gregg Marshall, mba ’94;Marguerite Rigoglioso; Frederick Rose; JoyceRouston; Bill Snyder; Ed Welles; Janet Zich

COPYEDITINGHeidi Beck, Lila Havens, Kate Kimelman

PREPRESSPrepress Assembly, San Francisco

PRINTINGGraphic Center, Sacramento

STANFORD BUSINESS Published quarterly (February, May, August, November) by theStanford University Graduate School of Business(issn 0883-265x). © 2003 by the Board ofTrustees of Leland Stanford Junior University. All rights reserved. Printed in the United States.Periodicals postage paid at Palo Alto, ca.

POSTMASTER Send address changes to editorial office: Stanford Business, News and Publications, Graduate School of Business, Stanford University, Stanford, ca 94305-5015(phone: 650.723.3157; fax: 650.725.6750;email: gsb_newsline@ gsb.stanford.edu).

SUBSCRIPTIONS For nonalumni — $10/year in the u.s. and u.s. possessions and Canada; else-where $12/year. For faster delivery outside theu.s., add $14 per year to subscription payment.

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CONTACTS For subscription information, permis-sions, and letters to the editor, contact our editori-al office: Stanford Business, Graduate School ofBusiness, Stanford University, Stanford, ca 94305-5015; email: gsb_newsline@ gsb.stanford.edu

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MAGAZINE WEB SITE

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2 STANFORD BUSINESS NOVEMBER 2003

02.Editor's Letter 10/6/03 3:14 PM Page 2

STANFORD BUSINESS NOVEMBER 2003 3

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by dean robert l. jossdean’s columndean’s column

Thanks for a Record-Breaking Yearyou may already know, our financial model leans heav-ily on alumni giving. Every September, we start the yearwith the need to raise $15 million to $20 million inannual giving to balance our budget. We depend onyour annual support as well as endowment incomefrom gifts made by alumni in years gone by to cover 45percent of our $91 million annual operating budget—a much greater percentage than other schools, whichtypically depend on alumni giving to fund only 10 to20 percent of their budgets. This is in large part because

of our decision, made in close consultation with ouralumni four years ago, to remain small and of high qual-ity—to offer the same experience you and I had as stu-dents here in earlier years. This has meant resisting amajor expansion of the full-time mba student body oradding on company-paid, part-time executive mba pro-grams as some of our peer schools have done.

We have taken important steps in the last year toenhance revenues and rein in costs. We have greatlyexpanded our offerings of short-course executive edu-cation programs, which produce important revenue forthe School. This year we raised tuition 9 percent to$36,252—near the top of the range of similar schools.We also trimmed parts of the operating budget withoutcompromising academic quality.

I want to thank each and every alumna and alumnuswho supported the School this past year—in both largeand small ways—through either participation or giv-ing. Our goal is for you to engage with the School in a variety of ways to keep your gsb connection alive andstrong—whether it is through our Lifelong Learningonline newsletter and research resources or participa-tion in alumni seminars, reunions, recruiting, orienta-tion, student mentoring, admissions interviews, or theclassroom. Keep up your involvement. We need younow and even more in the future for the gsb to contin-ue its leadership and impact. ■

Earlier this fall,as i reviewed our 2002–03financial year, which closed August 31, I wasstruck once again by the commitment and gen-erosity of our alumni.

This was evident to me in a variety of ways. In 2003,a record-breaking 37 percent of our mba alumni con-tributed to our annual giving campaign, which providesus with essential, unrestricted funds with which to oper-ate the School. This represents a steady increase since1999, when the participation rate hovered around 30percent. And at 37 percent, our cur-rent alumni giving activity exceedsthat of nearly all our peer schools.Naturally, I am very pleased andproud to see so many of our alumniengaged in supporting the Schoolfinancially and hope to see this par-ticipation continue to rise.

Other records were broken in thelast year too: The Class of 1977 set a25th reunion participation recordwith a 69 percent participation rate,beating a 13-year-old record by 7percentage points.

I also have been impressed by the sense of optimismand enthusiasm displayed by our last two graduatingclasses. Despite having to cope with uncertainties sur-rounding the difficult economic climate and job mar-ket, the classes of 2002 and 2003 each broke recordswith their class gifts. The Class of 2002 pledged$311,200, more than double and in some cases eventriple most of the class gifts in earlier years. Moreimportantly, 91 percent of the class participated, thehighest participation rate ever and a huge increase overprevious years. Not to be outdone, the graduating Classof 2003 raised $334,300 this year with a very healthy87 percent participation rate.

These recent classes have understood the fundamen-tal importance of strengthening our operating funds. Inthe past, graduating students have generously left theSchool with gifts that have been enhancements to thephysical plant, such as a new student lounge. But the2002 and 2003 classes earmarked their giving to helpsupport ongoing programs that are important to stu-dents. By working closely with staff members beforegraduating, they were able to commit expendable fundsto be used for budget line items. The monies from theClass of 2003, for example, will support Career Man-agement Center programs and needs. We are mostgrateful to our recent graduates for supporting the oper-ating budget by helping to sustain and enhance areasthat matter most to them.

Annual giving is critical to us because, as many of

We are most grateful to our recent graduates for supporting the operating budget by helping to sustain and enhance areas that matter most to them.

03.Dean's Column 10/8/03 10:12 AM Page 3

SATISFACTION: Ken Howell restored Boise’s historic Idanha Hotel.


SpreadsheetWHAT’S UP News About the GSB and Its Graduates

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Restoration and Renewal

Ken howell’s midlife crisis began after BusinessSchool graduation in 1967 when he realized there would beno more summer breaks. That led him to become a $350-a-month hired man on an Idaho ranch. Business School class-

es on operations and cases were useless, he discovered, when tryingto help 300 heifers deliver their first calves. In addition, his bride fromNew York City wasn’t thrilled about living in their 60-foot trailer. “Soafter calving and the last cutting of hay, we moved 30 miles to Boise.”

There, in a slim job market, he molded a new career. Howell devel-oped income property, emphasizing apartments and historical restora-tion. It took a while to realize that he loved this work, especiallyrenovating some of downtown Boise’s landmark buildings.

But it also took longer to accept that there was more to life thanwork. “Life is an endless unfolding,” the late John Gardner told How-ell’s classmates at their 25th reunion in 1992. “An endless process ofself-discovery, an endless and unpredictable dialogue between our ownpotentialities and the life situations in which we find ourselves.” Gard-ner, who joined the School faculty in 1989 to teach self-renewal andleadership, died in 2002.

“His remarks had a profound effect on me,” says Howell, whosaved a copy of the speech and reads it occasionally. It prompted himto “explore in many ways questions beyond vocation.”

(One of Gardner’s self-renewal speeches to gsb alumni is includedin a new book of Gardner’s writings, Living, Leading, and the Ameri-can Dream, edited by Gardner’s daughter Francesca.)

An Intuit-ive Ideain the mid-1980s, it was stillpossible to pluck pedestrianswho had never used a computeroff the streets of Palo Alto. TomLeFevre, mba ’74, who workedfor a software startup, cookedup an audacious idea: Intenton achieving ease of use for thecompany’s proposed accountingsoftware, he asked folks off thestreet to install the program andprint a check within 15 minutes.LeFevre then tested the prod-uct—what became Intuit’s high-ly successful Quicken—onmembers of the Palo Alto JuniorLeague. His was the “firstinstance of the usability testingthat later became a standard[software] industry practice,”according to a new book, InsideIntuit: How the Makers of Quick-en Beat Microsoft and Revolution-ized an Entire Industry, bySuzanne Taylor and KathySchroeder, both mba ’90.

Taylor is a marketing consult-ant who worked eight yearsat Intuit, a company that todayhas 6,000 employees. In 2001she became reacquainted withclassmate Schroeder, a market-

ing executive and writer, whenboth taught a Stanford continu-ing education course on market-ing. They decided to write abook about Intuit’s roller-coasterhistory and got permission fromIntuit cofounder Scott Cookto conduct extensive interviews.Besides LeFevre, Intuit’s firstvice president of marketing,other Business School alumsprominently mentioned in thebook are Ridge Evers, mba ’82,the maverick project managerfor QuickBooks, Intuit’saccounting software for smallbusiness; and Steven Aldrich,mba ’95, who founded Interac-tive Insurance Services, a Webbusiness that was merged intoIntuit but later sold.

Biggest PhD Classwith a shortage of busi-ness professors at businessschools looming worldwide,employers of future mba gradu-ates should be pleased to hearthat a record 29 studentsentered the Business School’sphd Program this fall. Normal-ly, the School enrolls a class of25 students.

Only 35 of 748 applicantswere offered admission thisyear, but more than 80 percentaccepted, said Professor KenSingleton, the incoming directorof the phd Program. Severalfactors may account for theincreased acceptance rate, hesaid. “First, the gsb has anexcellent faculty, and aspiringdoctoral students are oftenattracted by the opportunity to work with specific facultymembers. We saw this desireexpressed in numerous applica-tions this year.

“Second, Susan Gutierrez,who recently joined the doctoral

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Mark Battey, Steve Westly, and Paul Rosenstiel bonded over California’s bond problems.


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office as our fourth staff person,worked with faculty and gradu-ate students to enhance theexperiences of our admitted andwait-listed applicants duringAdmit Day,” an opportunity tomeet faculty, current students,and their prospective peers.

Finally, in a recent report, theAssociation to Advance Colle-giate Schools of Business predict-ed a national shortage of morethan 2,600 professors for busi-ness schools by 2012 unlessefforts are made to expand pro-grams. “Many of our graduatesare receiving job offers from topuniversities around the world, anot inconsequential considera-tion for prospective students intoday’s difficult job climate,” Sin-gleton said. Gutierrez said one of her goals is to make under-graduate counselors more awareof doctoral programs in businessschools and of the job market.

Alum Trio NegotiatesCalifornia Creditlast june three BusinessSchool alumni arranged thelargest ever one-day municipalbond sale to keep the state ofCalifornia from falling into aneven worse budget crisis. Newlyelected state controller SteveWestly, mba ’83, worked withchief deputy controller MarkBattey, mba ’84, and financialadvisor Paul Rosenstiel, mba’83, to organize the complexInternet auction. The event was over in an instant but took four months to arrangebecause of uncertainty sur-rounding the state’s deterior-ating financial condition.

The stage was set in January,

when Governor Gray Davisannounced a $38 billion budgetdeficit. California needed toborrow $11 billion to getthrough the summer—a hugeloan in the municipal bond mar-ket even under the best of cir-cumstances, according toRosenstiel, who is a partner inmunicipal bond investmentbank E. J. De La Rosa & Co.But California was falling out offavor with bond market partici-pants concerned about thegrowing deficit. The state suf-fered downgrades of the creditratings on its debt in Decemberand again in February.

Because the Securities andExchange Commission limitsthe amount of lower ratedshort-term notes that managersof money market funds maybuy, Westly explained, “it wasclear to us that the state, on itsown, was not going to get thecredit rating it needed to sell allthe notes.” So the state’s teamnegotiated “nearly around theclock for several weeks,” hesaid, to convince seven commer-cial and investment banks toprovide a form of credit supportfor the one-year notes in orderto raise the credit rating.

The notes sold on June 11with 10 investment banks pay-ing an average rate of 1.13 per-cent. Just a month later, afterthe state missed its deadline topass a budget, California’s creditrating was dropped to nearlyjunk bond status by Standard & Poor’s, and interest rates onstate bonds jumped sharply.

GENERALTotal Applications 5,089Enrollment 374Women 35%Minority 21%International 32%Students with Advanced Degrees 9%Median Years of Work Experience 4.0

SCHOOL/GEOGRAPHIC REPRESENTATIONU.S. Institutions 95Non–U.S. Institutions 50Countries (including the U.S.) 45

UNDERGRADUATE MAJOREconomics 99Engineering 87Business 57Behavioral Sciences 55Humanities 38Applied Sciences 24Mathematics 14

TOP 5 INDUSTRIESFinancial Services 22%Consulting 19%High-Tech 10%Nonprofit/Government/Education 9%Manufacturing (non High-tech) 5%

MBA ‘05Student Profile:

NEW FACES: Incoming studentsKristin Ostby and MauricioPlaschinski joined classmates during an icebreaker this fall.

Source: MBA Admissions office

FOR THE RECORDHigh Schoolers StudyEntrepreneurial Ideasinstead of hiring themselvesout for summer jobs, some BayArea teenagers have becomeentrepreneurs as a result ofsummer education sessionscalled BizCamp, organized bythe National Foundation forTeaching Entrepreneurship(nfte) and held at the BusinessSchool.

Carlos Montenegro, BizCamp2002 participant who enteredSan Francisco State this fall,earned about $4,000 from his djbusiness and recently produced anew music cd called SF’s BestKept Secret. He was named the2003 Young Entrepreneur of theYear Award winner.

For the past three summers,Bay Area teachers looking formore experience in developingclassroom programs in entrepre-neurship have come to campusa week ahead of 9th to 11thgraders who then arrive forclasses and to work on businessplans for companies they haveenvisioned. Each BizCamp cli-maxes with a competitionjudged by volunteer businessleaders.

The national organizationbehind the programs, nfte(www.nfte.com), is dedicated tocreating a greater understandingof the free enterprise system,to improving the quality of stu-dents’ lives, and to helping themdream for the future. Summerprogram sponsors are the MyersFamily Foundation, the nasdaqEducational Foundation, andMerrill Lynch.

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cases during the 2002–03 aca-demic year. For a listing ofcases, see http://gobi.stanford.edu/cases/default.asp

Preseason Camp for NFL Executives“we get so segmented.We don’t get to look at otherareas such as marketing, tvdeals, and revenue-sharing,”said the football player turnedteam executive. Martin May-hew of the Detroit Lions’ frontoffice was praising the network-ing and business acumen hepicked up last summer at theBusiness School’s first executiveeducation program for theNational Football League andthe nfl Players Association.

The one-week, custom-designed Program for nfl

Managers included executivesfrom all 32 league teams, repre-sentatives of the nfl frontoffice, and members of the play-ers association, including activeplayers Troy Vincent, RobertPorcher, and Ryan McNeil. Inaddition to sessions led by gsbfaculty, the group heard fromPaul Tagliabue, nfl commis-sioner; Gene Upshaw, playersassociation executive director;and some team presidents andgeneral managers.

The June 22–28 program was codirected by ProfessorGeorge Foster and Lecturer BillWalsh—formerly head coachand general manager of the SanFrancisco ’49ers and a formerStanford head football coach.

It grew out of an expertise insports management developedfor the Stanford mba Programthrough the collaboration ofFoster and Walsh. “We wantedto deepen the core businessskills of the participants andgive them a greater appreciationof all aspects of the nfl, theclubs, and the players associa-tion,” Foster said. ■

SpreadsheetDemand for Cases Upin the past year, nearly100,000 copies of cases writtenunder the supervision of Stan-ford Business School facultywere purchased or downloadedfor use in classrooms andboardrooms around the world.

The majority of Stanfordbusiness cases are distributednationally through HarvardBusiness School Publishing,where sales of Stanford casesrose more than 28 percent toabout 89,500 copies. The caseon Southwest Airlines writtenby Charles O’Reilly III contin-ues to be the leading seller,including more than 10,000copies sold in the past year.

In addition to those sales,cases written for the School’sCenter for Electronic Business

and Commerce (cebc) are dis-tributed without charge online.Statistics are sketchier for elec-tronic users, but Web use statis-tics show that for the month ofJune, nearly 7,000 copies of 10cebc cases were downloaded.

Demand is met by theSchool’s Case Writing Officeheaded by Margot Sutherland,which produced about 80 new

Entrepreneurship Conference 2004: Building for the Long RunSATURDAY, FEBRUARY 21, 2004

AT THE GSB

An all-day event with panelists and speakers focusing on the what/how/who of starting sustainable businesses.

Registration will open in January 2004. Please go to http://econference.org for details.

5

04-06.SS SB-sp 10/9/03 4:10 PM Page 6

For brochure and application materials, contact:

Bruce McKern, Director, Stanford Sloan Program

Graduate School of Business

Stanford University, Stanford, CA 94305-5015

Telephone: 650.723.2149 Fax: 650.725.4070

Email: [email protected]

Web site: www.gsb.stanford.edu/sloan

Application deadline: February 15, 2004

The Stanford Sloan Program is a full-time master’s degree program in

general management for executives with at least eight years’ experience

and high potential for senior-level positions. Its principal objectives are to

develop a top management perspective; increased appreciation of the global nature of

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07.Sloan ad 10/6/03 3:43 PM Page 7

Business studies usually dwell on success,but for over 40 years economist Jerry Meierhas taught thousands of Stanford students tofocus on failure.

Meier—more formally Gerald M. Meier, the Kono-suke Matsushita Professor of International Economicsand Policy Analysis, Emeritus—has brought a pioneer-ing passion to economic development and guided gen-erations of students through some of its stormiestdebates. Starting in 1957, Meier coauthored what isbelieved to have been the first economic developmenttext in the United States. Early in his Stanford tenure,he introduced one of the first economic developmentcourses to the mba world.

Nobel Laureate Joseph Stiglitz calls Meier a leadingfigure in the evolution of development economics. “Hispublications over an extended period have helped definethe field,” Stiglitz says. “It’s a credit to Stanford’s busi-ness school it has had such a fine development econo-mist on the faculty.” Adds John McMillan, professor ofeconomics: “Because of Jerry’s efforts, the gsb is per-haps unique among business schools in its longstand-ing focus on development.” McMillan succeeded Meierlast spring in teaching courses in the subject.

Monica Brand, mba ’97, recalls that Meier some-

times rowed against the business school mainstream.“In the environment of the late 1990s where the para-digm of the day was excitement about dot-coms andthe Internet, Professor Meier succeeded in making eco-nomic development interesting through his passion andhis intellectual rigor,” says Brand, who is senior direc-tor of research and development for accion Interna-tional, a not-for-profit institution with developmentprograms worldwide. She says Meier’s style was part ofhis strength: “His lightheartedness and witty sense ofself-deprecation were unique in a topic where peopletend to be preachy.”

Meier’s courses built on the classic economic analy-sis of Adam Smith, David Ricardo, and John Stuart Mill,and of more recent theorists to derive an understandingof the forces in underdeveloped economies. His 1957textbook, Leading Issues in Economic Development, coau-thored initially with Harvard economist Robert E. Bald-win, was translated into seven languages, and theinfluential text was used to teach several generations ofeconomists. McMillan recalls reading the work as anundergraduate in New Zealand. “It remains far fresherin my memory than any other textbook I read at thattime.”

In the summer of 2003, the evolution of developmenteconomics was very much on Meier’s mind. Deeplytanned at 80 years old, he lounged in khaki shorts, atennis shirt, and sneakers, with a baseball cap pointedjauntily skyward. Outside, palm trees baked in the sunof the campus. Inside, the air-conditioned conversationturned to his latest project, a history of developmenttheories, and Meier tapped a foot-high stack of manu-script pages on his desk labeled Economic Development:Biography of a Subject. After a decade, the manuscriptis finished, but the subject certainly isn’t. “I call the finalchapter ‘An Unfinished Biography,’” says Meier. Hemight as well call the book “Present at the Creation,”for Meier was witness to the very beginnings of themodern discipline.

The climate at Oxford University was far different in1949, when as a Rhodes Scholar, a young Meier attend-ed a lecture on the economics of poor countries, by HlaMyint, later a leading figure in development theory. Inthe late 1940s, Europe’s colonial empires were crum-bling. Political independence was around the corner forsome of the poorest economies in the world. Yet howwould the postcolonial economies of Africa and Asia

by frederick roseeconomics

Biographer of Development EconomicsAfter 50 years of teaching the sometimes preachy subject of development,

Jerry Meier’s self-deprecating approach continues to appeal to students.


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Pictured here in the 1980s, Meier has taught economicdevelopment to Stanford students for nearly 40 years.

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to the International Monetary Fund and theWorld Bank were so firmly lined up behindfree-market advocacy that the remedialregime of private industry, tariff removals,and tight monetary policy became known asthe “Washington consensus.”

“The eighties were very hard,” Meierrecalls. By 1988, he asked in a researchpaper the essential question, “Do develop-ment economists matter?” Meier concededthat cherished theoretical assumptions of

the discipline had long since passed. “Ifdevelopment economists are now to havemore influence,” he wrote, “the subject ofdevelopment economics must move beyondneoclassical economics.” The often-naivenotion that governments always acted in thepublic interest had been crushed time andagain. Meier admitted that without manysimplifying assumptions, developmenteconomists’ jobs would grow far more com-plicated. However, “we must open theblack box of the state,” he wrote. Publicbureaucracies must be analyzed, as shouldinterest groups. Sociological insightsshouldn’t be overlooked, nor should vari-ous political factions.

“Do Development Economists Matter?”and other Meier papers were on the mark.In the 1990s, the deeply rooted inadequaciesof the “Washington consensus” approachwere amply demonstrated in Argentina’sinstability and its subsequent economicplunge in 2002. And, true to Meier’s callback in 1988, development economics hasmoved past its singular concentration onone-size-fits-all free-market fixes toward amore realistic and encompassing multidisci-plinary approach.

Looking back on it all—the analysis ofrising and falling theories, the success andfailure of half a century of development,and the passing of those lessons on to gen-erations of students—Jerry Meier shakes hishead. “I don’t know what value my careerhas been, if any, but certainly I would sayit’s the teaching that I most value.” ■

stand on their own two feet? What wouldencourage their growth? Those were hugequestions. “It was a subject of enormouspromise,” Meier says. “It became a passionof my life.”

The subject spread, but the content wasalways in flux. There was at first enormousoptimism that new insights of economicscould greatly facilitate the postcolonialworld’s emergence into a wealthy future.Theories focused on the “big push,” as itwas known, which called for huge capitalinvestment in an underdeveloped region—asteel mill, auto plant, or similar suddenindustrial intervention. The factory’s outputcould be exported to pay for the plant. Thenew facility was to foster a network ofdomestic suppliers who would boost thenation’s economy. Or that was the plan. Itwas a disaster.

Economists went back to the drawingboard. Through much of the 1950s, moreelaborate theories of “national policy”called for broad restructuring. Central, stateplanning was needed, it was argued, not outof doctrinaire demands for socialism butout of urgent need to reverse the plight ofthe poor. In time, grand restructurings, too,would fail.

Meier spent much of the 1950s teachingand writing, first at Williams College, wherehe introduced development economics tothe United States, then at Wesleyan Univer-sity. “I took it everywhere I could,” hewould later say.

His had been a meteoric career to thatpoint, with visiting appointments at someof the world’s most prestigious institutionsand tenure at Wesleyan. He was not yet 40years old. Then he undertook a year ofresearch at Stanford. There was no aca-demic attachment to the University at thetime but by the end of that year, 1962, theMeier family had come to like Stanford andPalo Alto. Their neighbor, the late EzraSolomon, began wooing Meier to join theBusiness School.

The recruiting worked, although not aseasily as its perpetrators might have thoughtnor on quite the terms that Meier expected.It would be more than a year before theMeier family—Meier; his wife, Gretl; andthree boys, soon to be four—permanentlymoved west. “I came to Stanford because Ihad young children,” Meier has said. TheBusiness School’s dean, the late ErnestArbuckle, persuaded the Meiers to take achance—on a limited term appointment. “Igave up tenure and I came here on a three-year deal,” Meier says. “Terrible,” he addswith a grimace.

Meier didn’t teach a course in develop-ment economics until a student petitionedArbuckle. Over time, student travels andmore attention to international economiesspurred demand for the subject.

It was the subject itself that was in trou-ble. Meier early on was concerned about theweaknesses of centrally planned develop-ment schemes. In a prescient 1965 workingpaper, he cautioned that consultants’ use ofspiffy economic modeling and linear pro-

gramming might wow client governments inunderdeveloped nations but that “subse-quent experience has too often been sober-ing.” Market pricing and allocation werebeing tossed aside in favor of central plan-ning, and agriculture too often was neglect-ed in favor of industrialization, Meier wrote.

It was a classic Meier cautionary step,notes Stiglitz, now a Columbia Universityprofessor. “Jerry is somebody who broughteminent good sense to development eco-nomics.” By the 1970s, the shortcomings ofearly economic development hardly neededspotlighting. Rampant inflation in LatinAmerica sent economies there spinning.Development schemes to replace imports inunderdeveloped countries with domesticgoods had fostered inefficient, tariff-pro-tected factories throughout the developingworld. Monetarists of the Chicago Schoolcrowed that market forces were ignored andthat money supply issues had been over-looked in favor of boosting output.

By the 1980s, theories had tilted fartoward free-market structures. A centrist,Meier again argued that things had swungfar past a sensible balance. In his latest work,the biography of economic development, hecomplains that “instead of pursuing thegrand theories and general strategies of thefirst generation of development economists,the second generation was now almostmoralistic, dedicated to virtuous policiesbased on neoclassical (market) economics.”But in these Reagan years, institutions rang-ing from the White House to the Treasury


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“Because of Jerry’s efforts,the GSB is perhaps unique among business schools in its longstanding focus ondevelopment.”

08-09.Meier 10/9/03 4:15 PM Page 9

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Behind the ScenesMICHELINE LIM CHAU, MBA ’76

Micheline chau’s road to the top of the entertainmentindustry was, in her own word,circuitous. As a 16-year-old

Singapore schoolgirl, Micheline Lim foundherself halfway around the world at Welles-ley College in Massachusetts. Four yearslater she took her bachelor’s degree in English to Stanford, where she earned hermba and, incidentally, met her husband,classmate Armand Chau. Now she is sec-ond in command at Lucasfilm Ltd., knownworldwide as the home of the Star Wars andIndiana Jones series.

“I had very little real-world experiencebefore I went to b-school,” Chau recalls.She learned on the job. Over 15 years sheworked in retail, restaurants, venture capi-tal, financial services, and software. In 1991when Lucasfilm was looking for a chieffinancial officer with diverse experience,Chau’s roundabout route served her well.

Early this year founder and chief execu-tive George Lucas announced he was unit-ing what had been four companies into one.Lucasfilm Ltd., the film and television pro-duction company, would now includesound and visual effects, interactive soft-ware, and licensing and merchandising.Lucas tapped his cfo as chief operating offi-cer of the restructured company.

“My job is mostly strategic,” Chau says.“It’s to provoke, to ask the right questions.


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I spend a lot of time with the business unitheads thinking about how we can bestorganize their businesses and the enterpriseas a whole. We mbas are taught that careertrack is important,” she says, “that it’s allabout what’s my next job and what’s mynext step up the ladder. But I think what’sreally important is to find a place that fitsyour skills and values and then to be pas-sionate about it.

“Lucas has the old-fashioned values thathave gone missing. Everybody here is fam-ily. Everybody succeeds on merit. I think thechallenge for us is to keep those valuesgoing. As we grow, we can’t forget wherewe came from.” —janet zich

Hi Tech to HamburgersBEN NEMO, MBA ’98

Are you toasting it twice?”Ben Nemo asks another BurgerKing employee who is holding sour-

dough bread. Classmate J. J. Ramberg isvideotaping the scene for a tv news segmenton former dot-commers in their 1998 mbaclass. She has left the Internet frenzy for areporting job with cnn Financial News, andNemo has escaped from Silicon Valley toBurger King’s corporate headquarters inMiami, where he is manager of u.s. prod-uct marketing. On this summer day, he isout in a restaurant, however, because “inthis business the little decisions we makecan throw off operations and impact thecustomer.”

Nemo came to the Business School frominvestment banking in New York and Brazilwith the idea of joining a consumer brand,but the Internet boom waylaid him. Shortlyafter graduation some classmates were col-lecting seven figures from investors, andthose who weren’t were asking each otherwhy. “I felt I was going to miss out on mychance not only to make money but to havean impact at a young age,” he recalls. “Itgave me a lot of anxiety to see success storiesabout my classmates in the newspapers.”

So he joined an Internet startup—a LosAngeles company with two short lives. Thefirst published free Web home pages. “Thatmodel fizzled because a lot of competitionemerged, and so we tried to reshape our-selves as an application service providerhosting software for companies that didn’twant to buy it.” The challenge was to “fig-ure out how to stay alive in a dynamic envi-ronment,” he says, which was fun, buteventually he felt limited by the intangibili-ty of envisioning how a business might work.

Friends like to tease him about flippinghamburgers, he says, “but everyone canrelate to our products, and I love seeing thebrand on street corners and talking to cus-tomers in our restaurants.” Burger Kingmeasures sales performance and check aver-ages every day in 8,000 domestic restaurantsand keeps a close watch on competitors too.“It’s really nice,” Nemo says with hard-wonappreciation, “to be able to see an immedi-ate impact of what you do.”

—kathleen o’toole ■

people

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11.People 10/7/03 9:25 AM Page 11

When one of japan’s leading manufac-turers of printing equipment filed forbankruptcy in 2001, many people wroteoff the company. After all, Tokyo-based

Akiyama Machinery Manufacturing Corp. had emergedfrom a previous bankruptcy just eight years before, andthe faltering Japanese economy wasn’t likely to supplymany potential buyers.

But an Akiyama customer, fearful that it would loseits major supplier, looked to turnaround specialist Cor-porate Directions Inc. and its president, KazuhikoToyama, for help. Toyama studied the company andagreed that it was worth saving. The 43-year-old Stan-ford mba helped structure an unusual deal that led to apurchase by Shanghai Electric, a leading Chinese com-pany employing more than 100,000 people.

It was a risky and imaginative solution. But it paidoff. Akiyama is once again a profitable company.

Now Toyama is facing a much bigger challenge, onethat puts his reputation as a corporate er doctor square-

ly on the line. In April, he was named chief operatingofficer of the Industrial Revitalization Corp. of Japan(ircj), a new government agency charged with helpingto salvage at least some of the approximately $320 bil-lion in bad loans that are crushing the banking system.Backed by a government guarantee of 10 trillion yen(u.s. $86 billion), the ircj has five years to guide debtorcompanies back to economic health.

The ircj will buy the loans of selected debtor compa-nies at a substantial discount—what Toyama describesas a haircut—and revitalize them by restructuring theiroperations and, if necessary, their management.

Sound like a bank bailout in a fancy wrapper? Toya-ma denies it.

“This is not like the s&l crisis in the United States,”he told Stanford Business. “The problem has spread farbeyond the financial sector.” Overburdened by debt andhampered by outmoded employment policies, Japaneseindustry has been underinvesting for years, Toyama said.“It’s a disease that we needed to treat 12 years ago.”

Japan’s Debt DoctorFaced with resuscitating the nation’s debtor companies, Kazuhiko Toyama, MBA ‘92,

brings past success and an understanding of market forces to the task.

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For Toyama, a father of two, one of theworst symptoms of the disease is the lack ofopportunity for young people—unemploy-ment among Japanese in their late teens and early twenties now stands at about 10percent. And many more young peoplework part time or hold one short-term jobafter another. This state of underemploy-ment has become so prevalent the Japanesehave coined a new word to describe theseworkers: “freeter,” a combination of theEnglish word “free” and the German word“arbeiter” (laborer).

“Our mission is to save the heritage ofindustry for the future. The tradition ofpassing on know-how and technology fromgeneration to generation is dying,” Toyamasaid.

The fix won’t be pain free for creditors,managers, or employees.

Asked about his strategic view of therecovery, Toyama frequently talks aboutCarlos Ghosn, who took over as ceo ofNissan in 1999 when the automaker wasdeeply in debt. Ghosn transformed a $5.5billion loss in fiscal 2000 to a $2.7 billionprofit the next year. He trimmed billionsfrom Nissan’s $20 billion debt and boostedthe stock price 30 percent. But to do so, hecut 23,000 jobs in a country where lifetimeemployment is the norm, closed factories,and ended decades-old contracts with sup-pliers, according to Bloomberg News.

“The question is,” Toyama said during aBloomberg panel discussion in early July,“within five years how many Nissans canwe create?”

Substantial numbers of employees ofcompanies rescued by ircj may well findthemselves unemployed, he acknowledgedduring his discussion with Stanford Business,adding that those who lose jobs “are leav-ing situations where they are no longerneeded, but [they] might have anotherchance for life fulfillment in a revitalizedeconomy.”

Still, the sacrifice will be a shared one.Case in point: Kyushu Industrial Trans-portation Co., a bus company with a $480million debt that is one of the ircj’s firstrehab cases. The agency expects creditorsto eat a substantial portion of the debt andmanagement to step down.

Toyama’s rise to prominence is no sur-prise to those who knew him at Stanford.“He’s smart, he’s serious, he’s assertive,”said Jeff Donnelly, a 1992 Stanford mba

who remains in contact with his classmate.Donnelly, now a general manager at semi-conductor equipment maker kla-Tencor,recalled that other students, particularlythose from Japan, looked to Toyama forleadership.

While at Stanford, the two men jointlydeveloped a paper contrasting Japanese andSilicon Valley management styles. AlthoughToyama’s English is excellent (he lived inAustralia for part of his childhood), he con-vinced Donnelly that a native speakershould do the actual writing. The episodeilluminates an important facet of Toyama’scharacter: His ego is strong. Many businesspeople in their thirties would be embar-rassed to concede that some of their skillsare less than perfect, but Toyama realizedthat reaching his goal was more importantthan losing a bit of face.

The paper got a good grade and 11 yearslater, “a lot of what we said still rings true,”Donnelly said.

Toyama passed the bar and received alaw degree from Tokyo University in 1985,but like many successful Japanese business-men, he had little interest in becoming alawyer. “People of my generation [andsocial class] had few options other thanbeing a salary man,” he said. But being awhite-collar worker for one company forhis entire career was not the life Toyamawanted.

His training in law helped Toyama landa job in Tokyo with the Boston ConsultingGroup. He then joined Corporate Direc-tions, a business consultancy, and saw theneed for a more focused education. WhyStanford? “I was very much attracted by thegsb’s environment, particularly its closenessto Silicon Valley and its background of hightech/it and traditions of entrepreneurship,”he said. The good weather, golf course, andproximity to San Francisco didn’t hurteither, Toyama added.

When Sadakazu Tanigaki, minister incharge of industrial rehabilitation, namedToyama chief operating officer of the newlycreated ircj, his reputation as a turnaroundartist alleviated some of the concerns aboutToyama’s comparative youth. After all,many high-ranking Japanese officials arenearly twice his age, and Toyama has neverled a large industrial or financial enterprise.

One argument in favor of his appoint-ment: Toyama’s success with Akiyama.

Akiyama International Co., as it is now

called, is already profitable, according to arecent story in the Washington Post. It hastrimmed production costs by 15 percentthrough aggressive bargaining with suppli-ers. It has instituted a merit-based pay sys-tem that eliminated perks for senioremployees while creating opportunities foryounger ones, the Post reported.

Moreover, the turnaround demonstratedthe kind of unconventional thinking thatwill be needed to make ircj a success.

World War ii left a bitter legacy that stillplagues economic cooperation betweenAsia’s economic superpowers, and turningover a Japanese company to Chineseinvestors is virtually unknown. Moreover,poorly run Akiyama was sinking under amountain of debt related to overexpansiondespite its reputation for technologicalexcellence. But Toyama, whose father wasa printing company executive, was right.The business was worth saving.

With the ircj now up and running, it’sbecoming clear that Toyama will need everybit of the strength of character that im-pressed his friends at Stanford. The ircj hasa very high profile, and rumors about itsdecisions frequently spark action on thestock market. Mitsui Mining Co., for exam-ple, jumped 21.7 percent in one day onreports that the company might get supportfrom Toyama’s agency. The government isso worried about leaks and the potential forserious conflicts of interest within the bodythat all meetings are videotaped, telephoneconversations are recorded, and a memberof the public prosecutor’s office is attachedfull time to the ircj, Toyama said.

The ircj gets a good deal of scrutiny inthe Japanese press, and Toyama will getplenty of criticism if it appears that he iswasting the mountain of cash entrusted tohim. In fact, some Japanese business ana-lysts worry aloud that the agency will cre-ate “zombie” companies—organizationsthat are alive only because of the infusionof public money—and do little to make theeconomy more competitive.

But Toyama sounds supremely confidentwhen he describes his plans and says he actsfrom a sense of duty. “I’m a Japanese citi-zen; I share the sense of crisis, and like ourparents’ generation we have to sacrifice forthe future.” ■

Bill Snyder is a San Francisco–based writer forTheStreet.com.

“Our mission is to save the heritage of industry for the future. The tradition of passing onknow-how and technology from generation to generation is dying.”

12-13.Toyama 10/6/03 3:54 PM Page 13

Turn on the light. For most of us, it’s sec-ond nature. Electric lighting is clean, safe, andrelatively cheap. But for more than 1 billionpeople in underdeveloped countries, turning

on the light, if it’s possible at all, means lighting asmoky, dangerous kerosene lamp.

A groundbreaking partnership between StanfordUniversity’s Social Entrepreneurship Startup and the non-profit Light Up the World Foundation (lutw) is work-ing to bring safe, affordable lighting to people in China,India, and Mexico. And in the process, 21 students inbusiness and engineering are learning invaluable lessonsabout product development, market research, andapplied engineering that would be hard to duplicate ina traditional classroom.

In 10 short weeks, a team of Stanford students,helped by volunteer advisors from private industry,developed three business plans (one for each country)and prototypes of three led-based lamps bright enoughto read or work by at a fraction of the cost of conven-tional incandescent lighting or kerosene lamps.

All the prototypes are inexpensive to manufactureand maintain, durable, and, most significantly, ultraef-ficient. That’s because leds, or light-emitting diodes,produce nearly 50 times the amount of useful light perdollar of a conventional bulb and up to 200 times moreuseful light than a kerosene lamp, according to EvanMills of the Lawrence Berkeley National Laboratory,who acted as an advisor to the project.

Looked at another way, 90 percent of the energy usedto power a standard bulb produces heat and 5 percentproduces light. An led works roughly the opposite.

by bill snydersocial entrepreneurship

LED Lamps Light the Way for Social EntrepreneursThe lamp itself is a small part of the class project, which requires

developing a business plan to spread and sustain the technology.

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Moreover, leds, which are solid-state cir-cuits made of semiconductor material, aredurable—able to last for as long as 40years. And it is much easier to use inexpen-sive lenses to focus light produced by anled (think point source) than a standard orfluorescent bulb.

Headed by professors Bill Behrman andDavid Kelley of the School of Engineeringand James Patell of the Graduate School ofBusiness, the Social Entrepreneurship Start-up course was inspired by and builds on thework of David Irvine-Halliday, the founder

of lutw. Irvine-Halliday, a Scottish-born Canadianelectrical engineer, hit on the idea of using led tech-nology to replace kerosene lamps while trekking in theHimalayas in 1997.

Within three years, 134 homes in four regions of themountainous country were lit using battery-poweredleds recharged by a mix of solar, pedal, and hydro-electric power. And because Irvine-Halliday believesthat economic development projects will spread andsustain lighting technology more efficiently than give-aways, he helped start Pico Power Nepal, which nowbuilds led lamps in a small factory in the countryside.

The problem Irvine-Halliday, and then the team atStanford, set out to solve is rather like an iceberg. Themost visible part of the solution, the lamp itself, turnsout to be only a relatively small part of the whole. Con-sider the power source: Is the community on the elec-tric grid at least part of the time—if so, a battery and aconventional recharger might do the trick. If not, pedal-powered generators might work—but only if there areenough people in each user community to justify theexpense and share the labor.

These solar-powered LED lights were designed

by a team of business and engineering students

with input from industry experts and potential

users in other countries.


14-15.Patel 10/9/03 4:24 PM Page 14


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dents who were developing a solution forMexico found that earlier attempts by thegovernment to bring solar-powered lightingto the countryside had failed and tarnishedresidents’ image of solar power.

What shape should the lamp be? Shouldit hang from the ceiling or sit on a table?Should it be a task light—a reading lamp,for example—or should it provide more dif-fused light across a larger space? Settle allthose questions and that still leaves thequestion of price, including the billfor materials and the cost of assem-bling them into a finished product.

To make the job manageable, thespring quarter class was dividedinto teams for each country. Somestudents concentrated on engineer-ing tasks, others on business- ormarket- oriented tasks, but “therewas a tremendous amount of cross-fertilization,” said Patell. And atremendous amount of preparatoryresearch.

Like students in any university class,project members spent countless hours onthe Internet and in the library to ferret outbasic information about conditions in thethree target countries. Consider India, the

second most populous country in the world:Between 150 million and 300 million peo-ple are without electricity; as many as80,000 rural villages are not connected tothe power grid; many areas on the grid havepower for just six to seven hours a day.

But this project needed significantamounts of primary research as well, andStanford’s position as a preeminent institu-tion of learning opened many doors.

Behrman contacted the Indian govern-ment and was able to arrange a meeting witha cabinet-level official, who in turn intro-duced the project to a number of non-governmental organizations and localacademics. And those contacts enabled thestudents to work with villagers who becamevital sources of information and feedback.

One Indian, Bharatsinh Patel, is an agri-cultural worker in semirural Gujarat. Patel,who has 11 people in his family, is on thegrid, but power is off much of every day.

Although kerosene costs only 30 cents aliter, his average fuel expenditure for back-up lighting accounts for as much as 4 per-cent of his monthly budget—a seriousproblem for a man who only earns $300 to$600 a year. What’s more, Patel spendsmore precious cash buying disposableflashlight batteries.

The solution: the $20 Mighty Light.Looking a bit like an iron, the led-basedMighty Light can be carried like a flashlight,

hung by its handle to light a room, or set ona table. It runs on two aa batteries that pro-vide around four hours of light when fullycharged. It has a built in photovoltaic (solarpower) panel that will charge the batteriesin a little more than seven hours and costsabout $10 to build.

The business plan: Light Up the Worldinitially will act as a virtual manufacturer,subcontracting manufacture to a thirdparty. Once the product and business con-cept has been proven, lutw will throw thedesign open to competing manufacturers toproduce and distribute the product.

The foundation initially will support thesales channel with marketing and promo-tion activity and handle inventory. But inthe long run, lutw’s goal is the creation ofa self-sustaining local infrastructure thatwill build, distribute, and sell the lamps.

At times the class resembled nothing somuch as a Silicon Valley startup, with stu-dents pulling pizza-fueled all-nighters whilethey struggled to finish an iteration (eachprototype had about 10) for the next day’scritique. Their audience was a tough one:experts from companies including ideo, thePalo Alto, Calif., industrial design companywhose credits include the first mass-pro-duced computer mouse and the Palm vii;and Solectron, one of the world’s largestcontract manufacturers, plus designers andengineers from other firms and universities.

The advisors heeded the advice of theproject leaders to be supportive but critical.“Eventually, we established a rule that theexperts had to say one nice thing for every

nasty thing,” said Stanford’s Patell. Actual-ly, the critiques were a lot less bruising thanthose in the real world. Nevertheless, theywere taken very seriously. “It’s a lot betterfor us to find mistakes here than to havesomething fail in the field 6,000 milesaway,” Patell added.

Prototypes of lamps and business planswere sent regularly to the target countries forfeedback. Villagers used the lights for sever-al days and were then debriefed by lutw

representatives who sent the informationback to Stanford for incorporation into thenext round of product development.

By mid-June, the team had settled upontwo light designs, the MightyLight and theMightyTorch. At about $7.30, the Mighty-Torch looks like a flashlight, contains threesmall leds, and is powered by one aa nimhbattery, recharged by a photovoltaic panelon the side. Its intended use? Task lightingfor poor people without electricity in anycountry.

Neither of the solutions is perfect. “Theydon’t have to be,” said Patell. “What wewant to do is produce something that a non-profit can show to a group of investors andget their attention.” Similarly, the businessplans are closer to proposals than econom-ic blueprints.

Five students spent two weeks of thesummer deepening their research in India.“The experience has been too inspiring tolet go,” said Matthew Scott, mba ’03. Stu-dents are continuing to work with theFoundation to develop plans for a full-scalepilot project beginning spring 2004.

Others will move on—to jobs or newacademic challenges. For all, it was a mem-orable 10 weeks. “I got to combine myinterest in technology and business withsocial entrepreneurship,” said Scott. “Itopened my eyes to the world of develop-ment.” ■

Industry and design experts worked with

students from initial concept to demonstration

models of several different LED light designs.

At times the class resembled nothing so much as a

Silicon Valley startup, with students pulling pizza-fueled all-nighterswhile they struggled to finish

an iteration.

14-15.Patel 10/6/03 4:03 PM Page 15

C16 STANFORD BUSINESS NOVEMBER 2003

CONSIDER THIS: Fortified with your freshly awarded MBA you arrive in a small

but rapidly developing country to close a U.S. $52 million infrastructure sale and

oversee its implementation as the country manager of a Fortune 100 company. >

The client is a government-owned utility, and the project has been three years in

the making. Your firm has spent over $2 million supporting the sale and won out

in fierce competition over six eager, well-funded, and otherwise similar competi-

tors from North America, Europe, and Japan. The decision maker on your deal is

a government minister. You’ve yet to meet due to the honorable minister’s fren-

zied campaigning for parliamentary elections to be held in less than one month,

P H O T O G R A P H B Y M A R K H O O P E R

The Labyrinth ofGlobal Ethics

ALUMNUS GREGG MARSHALL OFFERS A CAUTIONARY TALE OF CORRUPTION

AND OTHER DANGERS IN TODAY’S BUSINESS ENVIRONMENT.

16-20.Corruption-Final4AP 10/7/03 3:21 PM Page 16

SSOUND FAR-FETCHED? Scenes like this one in which I was thefreshly minted mba are repeated daily in capitals around theglobe. It is difficult to write about, especially with names, becauseoften there is no way to prove your version of events. However,many of us working in the global economy know that corruptionand fraud are endemic and remain the biggest challenges facingbusiness people working outside the richest countries. Recentheadlines suggest there also was plenty of corruption fueled bygreed during the bubble economy of the nineties in the UnitedStates, perhaps on a scale that dwarfs the common gouging andextortion of the developing world. That has been written about inother issues of this magazine and is beyond my expertise becauseI have been living and working abroad for 21 of the past 25 years.

Stories like the one about the minister’s request, in addition to raising the specter of corruption, typify the significant cross-cultural pitfalls that confront people working in social and legalenvironments outside their home country or other countriesthey know well. And that, in our current era of full-throttle global-ization, is greater and greater numbers of business people every-where.

I’ve asked myself and others over the years why certain kindsof corrupt practices are so popular in poorer countries. In 2000,then Microsoft ceo Bill Gates spoke to business leaders in thePhilippines about his vision for a better world, and how theinformation technology industry is making that world possible.The first question during the discussion that followed was pene-trating. “In the Philippines,” said one executive from a major

information technology company, “a major-ity of the population does not have adequateshelter, food, clothing, or health care. Howis it going to provide that?” To Gates’s cred-it, he replied that these things are indeed pri-orities and that information technology canonly really help people whose basic needsare covered. He has since donated an enor-mous chunk of his personal fortune to afoundation dedicated to improving livingstandards in the developing world.

Some observers to the discussion withGates took the position that corruption isnot a large problem in the United Statesbecause Americans have evolved a broadsocial agreement that it is not an acceptablepractice to bribe people in order to get whatyou want. Several hundred years of rapideconomic growth have demonstrated thatwin-win transactions in which everyone isentitled to their income and margin lead tothe fastest economic growth and largest dispersion of wealth. In addition, the eco-nomic, social, and ethical cases against corruption are clear and well understoodeverywhere, including in the developingworld. Politicians and business leaders arekeenly aware of the role it plays in distort-ing trade by increasing costs, slowing pro-curement processes, and therefore renderingmany projects unprofitable at best anduneconomic as well as shoddy at worst.

However, in many cultures people’sbehavior conflicts with these beliefs: Broadsocial agreement recognizes that individualscan and even should ask for payments on the side in keeping with the significance of the goods or services they are delivering.Official policy drawn up by highly articulategovernment officials to help their countrycompete for global capital condemns sidedeals but cannot quickly overturn centuries-old norms and personal habits. Nor, as in theexample of Gates, are those policies thoughtby many business people or officials to helpput food on their own tables.

In places with few resources and slimprospects, people believe in taking what theycan get, when they can get it, because theopportunity might not come their way again.In lands of plenty, people have faith in risingprosperity; life does not seem so tenuous.

But resources are scarce and alwaysfleeting in poorer countries. For this reason,corrupt business practice remains common


G L O B A L E T H I C S

so you’re delighted when his private secretary phones and instructs

you to come over immediately. As you rush out the door your local

assistant pulls you aside and warns you to be careful. Careful? Yes.

The minister was part of a group of which some members were

arrested overnight and charged with homicide in the beating death

of an opposition party official in a far-off northern province. >

Moments later you’re seated opposite the minister in his unreno-

vated British colonial chambers. It’s mid-afternoon, but the cur-

tains are drawn. A single lamp barely glows in a far-off corner. The

room reeks of whiskey; the minister is drunk. But he wastes no time.

“I would like you to sponsor $100,000 of campaign posters,” he says.

“We need the funds for printing immediately. We would like you

to be able to carry out your project. I’m sure you can understand.”


Dand shows no signs of abating. Why is this so? Despite wide-spread reform in places around the globe over the past decade,populations are increasing quickly in many poorer countries, andreal incomes have actually dropped in a number of places overthe past several decades. In such places, when people have a clearshot at money, they take it.

DOES THIS MEAN THAT WHEN IN ROME, you should always do asthe Romans do? In general, yes, because it’s the best way for anoutsider to succeed like an insider. But definitely not in the caseof corruption. If you acquiesce to our minister’s request for cam-paign assistance, you will have violated the u.s. Foreign CorruptPractices Act (fcpa) of 1977. This law, drawn up in the wake ofa large scandal involving commercial airliner sales in Japan, pro-hibits Americans from bribing foreign government officials towin business. For a while this law placed Americans at a distinctdisadvantage to their competitors from the European Union,who until 2000 could deduct from corporate taxes bribes paidto win business as a legitimate business expense.

As a sign of how severe this issue has become, it is now stan-

dard practice for u.s. companies to require American employeesoperating offshore to sign an acknowledgment of the fcpa and tobe warned that any potentially illegal activity by the employee willbe reported by the company itself to law enforcement officials.

But what is the actual state of play beyond u.s. borders? Thefcpa does not prohibit the payment of commissions, agent per-centages, finder’s fees, or the like to private individuals, and inthe quarter-century since the fcpa’s passage, many government-owned companies around the world have been privatized. Thisremoved government officials from moral hazard, but they havebeen replaced by other decision makers who also frequently viewforeign companies as milk cows.

The response by many—if not most—u.s. companies work-ing in corrupt environments is in fact to team up with a localpartner, a sales agent, or representative, or to subcontract por-tions of a project through local entities that do the dirty work ofplacating powerful people who hold their hands out.

As these kinds of arm’s length transactions are not prohibit-ed by the fcpa, they have become usual and customary. Typi-cally, a local agent receives some percentage of revenue on a

Are Your Papers in Order, Sir?CORRUPTION IS NOT THE ONLY WAY to be placed in harm’s way whenoverseas.You may—wittingly or not—break any number of laws andfind yourself before the bench. An American journalist recently wastried in Indonesia for breaking immigration law and sentenced to 40days in jail and barred from the country for a year.His crime was enter-ing Indonesia under a tourist visa. Indonesian immigration lawrequires working journalists who plan to report from the country toapply for a press visa, and they take this very seriously. Press visasare frequently denied, especially for access to a war zone like Acehin North Sumatra.A defense based on ignorance,especially when youare filing dispatches while on a tourist visa, rarely wins such a case.Through the Internet it is now possible to review online many coun-tries’ laws and their implementing regulations,even those of the mostfar-flung.You’ll be expected to have done your homework and to keepyour documents on hand and in order.

Other perils are similar to those you would face in the UnitedStates. Don’t discount these, because Murphy can and will strikewhen you least expect it. Chances are, for example, that you will trav-el in an automobile no matter where you go on business.Your risk ofgetting into an automobile or other accident that causes serious injurymay be lower in much of Europe than the United States, but it is cer-tainly higher in the developing world. If you suffer a serious personalinjury in a poor country, you may not receive adequate medical atten-tion even at the nation’s best facility nor safe blood if you require

a transfusion. In some countries drivers are automatically arrested if they cause a fatal accident, and in others, particularly remote areas,they may be beaten or killed on the spot by angry locals, particularlyif a child’s life is lost in the crash. Always travel with insurance thatguarantees immediate medical evacuation in case of emergency toa location with world-class medical facilities. Try not to be the driverin unfamiliar places.And obtain a policy rider that pays for legal assis-tance wherever you may be.

If you travel abroad on business, and certainly if you live and workabroad, you will want to entertain yourself after hours. While manyurban areas in the developing world are far less dangerous than ahandful of notorious city neighborhoods in North America, someseemingly harmless amusements can land you in the morgue.A SouthKorean diplomat was found dead last year in one of Asia’s favoritefleshpots. He had been drugged in a bar, robbed, and dumped by theside of the road, where he asphyxiated in his own fluids.

Stories of expatriates who try to score illicit drugs locally are alsolegion. Hundreds are in jails around the world serving sentences upto life, and in a number of jurisdictions—including many rich coun-tries—the mandatory penalty for drug possession or use is death.Youdo not want to end up in a poor country’s hoosegow. Conditions arefrequently so crowded you may not be able to lie down to sleep. Inmany such places food is provided to inmates by their families or notat all. The U.S. government can and will do little to help. — GM ■


THE RESPONSE BY MANY COMPANIES WORKING IN CORRUPT ENVIRONMENTS

IS TO TEAM UP WITH A LOCAL PARTNER, A SALES AGENT, OR REPRESENTATIVE, OR

TO SUBCONTRACT PORTIONS OF A PROJECT THROUGH LOCAL ENTITIES THAT DO THE

DIRTY WORK OF PLACATING POWERFUL PEOPLE WHO HOLD THEIR HANDS OUT.


S

contract, perhaps 5 to 25 percent of revenue on a deal’s suc-cessful completion. What happens to that money is the agent’sdecision alone, but there is plenty of incentive to get the dealdone. Not surprisingly, in many places where use of local rep-resentatives is common practice, accounting and reporting stan-dards are also lax, cash is still king, and brown bags changehands regularly.

Theoretically, the payment of bribes and kickbacks happensout of sight and out of mind. Yet Americans working abroad inlarge companies often find themselves caught between compa-ny pressure to achieve quarterly revenue and profit goals, thelong arm of the law, and their own beliefs about the deleteriouseffects of bribery in the short and long run. Agents offer theprospect of closing successful business deals and creating plau-sible deniability before the law.

Running afoul of the fcpa is nothing, however, comparedto what can happen if you get entangled in a dodgy legal sys-tem. The case of Jude Shao, mba ’93 (reported in the Augustissue), is not unusual in most of the world’s jurisdictions. Shaois imprisoned near Shanghai and serving a 16-year sentence fortwo tax-related offenses, crimes he denies committing. He saysa tax auditor offered to return his import company’s books anddrop an audit if the company posted a $60,000 bond. Shao sawthe offer as a thinly disguised demand for a bribe and refused.Many postcolonial countries labor under remnants of legal sys-tems put in place by their former occupiers early in the last cen-tury, and in others the legal system is a rubber stamp forwhatever political or ideological decision already has been madeby people in power. Shao was not granted what are consideredbasic protections against judicial abuse, including the right toprepare and conduct his own defense; to confront his accusers;to have access to records—including his own—that would bearon accusations made against him; to outside legal counsel andrepresentation; to appeal; and perhaps most important, to bejudged by his peers rather than a judge who may or may not beimpartial. As an entrepreneur, he also did not have the resourcesor clout of a large multinational company behind him that couldbring immediate pressure at high levels to secure his release.

SO, IF YOU ARE THE ONE seated in front of the minister lookingfor campaign finance, how do you react? And how will this allunfold? If you blow him off—big temptation—you will havecommitted a social faux pas sure to ripple out and stigmatizeyou with future customers. Inside your own company, you maybe perceived as having blown a major deal, even though youdid the right, ethical thing. Patience is often the wisest counsel.First, ask for his. Say you will have to check with your prede-cessor on what was promised and also notify your superiors of this urgent need. Take your leave graciously, and always besoft-spoken and polite. Not many world cultures are con-frontational. Besides, you need to stall only for a month. Theminister, his reputation soiled, will be voted out of office at theelection. In his place comes a reform-minded young technocrat.Unfortunately, he decides to rebid your project, and the wholecycle starts again. ■


G L O B A L E T H I C S

ABOUT THE AUTHOR

Gregg Marshall,

MBA ’94, lives in

Singapore and is Asia

managing director

for Network365, a

Dublin, Ireland–based

mobile payment solu-

tions provider. He was

formerly a U.S. diplo-

mat and consular

officer and has

worked outside the

United States for 21

of the past 25 years.

MAKE ANMAKE ANIMPACT


C l a s s e s o f

We’re planning a very special reunion weekend in the spring of 2004

for the classes of 1989, 1994, 1999, and 2003, who will be celebrating

their 15th, 10th, 5th, and 1st reunions. Join us for two dynamic days at

Stanford and a chance to reconnect with the Business School. There will

be wonderful opportunities to catch up with old friends, spark ideas for

the future, and have an all-around great time. Make your plans now

for April 30-May 1, 2004, and watch for more details online.

April 30April 30--May 1, 2004May 1, 2004S

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More information:More information:

https://alumni.gsb.stanford.edu/reunionshttps://alumni.gsb.stanford.edu/[email protected][email protected]

Spring Alumni r e u n i o n s

21.Spring 10/7/03 9:06 AM Page 21

Early life lessons led him to a careerin finance for the masses. By EDWARD WELLES

Eric Tyson for Dummies

PHOTOGRAPHS BY Beth Perkins

EERIC TYSON HAS a B.S. from Yale and an MBA from

Stanford Business School, but his biggest life lesson

occurred back in junior high school when his father, an

engineer, lost his job. “It was a difficult family time,”

he recalls. Compounding the angst, Tyson’s father had

been dispatched with a lump sum from his retirement

plan, which he promptly plowed into the stock market.

As the older man set about trying to chart, time, and

trade the market, his son, then 12, took a different tack.

Eric did a science fair project on the variables that influ-

enced the stock market. His conclusion? Unlike his

father, an investor shouldn’t try to overanalyze the mar-

ket. It will only impoverish you. Better to buy good

stocks for the long term and relax. >>>


22-25.Tyson-Final4AP 10/6/03 4:27 PM Page 22

WWHILE TYSON’S FATHERWHILE TYSON’S FATHERWHILE TYSON’S FATHER eventually landed a new job, the meaningof that memory did not escape his son. “I’ve seen a lot of family mem-bers and friends struggling to make the right financial decisions,” he now recalls. The case of his father “was one of many examples ofotherwise well-educated people making bad financial decisions.”

That experience, as it turned out, would set Tyson, now 41, onhis future course in life. His deep interest in numbers and person-al finance developed to the extent that he accompanied his fatherto the local library to pore over Value Line reports while his peerswere out playing ball with their dads. Later, as a budding man-agement consultant between college and business school, heworked with clients in the financial services industry. After grad-uating from the Business School in 1989, he opted to become apersonal financial counselor, charging clients on an hourly basisfor advice.

The sum total of that training is a quiet self-confidence when thesubject is money. “I have a pretty good sense of the financial issuesthat people are struggling with and how toget them the right answers,” says Tyson. It’san assessment now shared by countless oth-ers who have heeded his advice and madeTyson one of the most widely read authorson personal finance that you may well neverhave heard of.

In the past decade he has written or coau-thored eight books in the “Dummies” se-ries, bearing such titles as Personal Financefor Dummies, Investing for Dummies, and Home Buying for Dum-mies. Tyson’s books, many of them now in their second and thirdeditions, have sold more than 4 million copies. At one point in 1999he boasted no less than four books on BusinessWeek’s best-seller list.

Kathy Welton, a 1978 Stanford graduate and Tyson’s longtimepublisher at idg Books, recalls the response to his books as “phe-nomenally positive.” At one point idg had an entire office filledwith reader response cards clipped from the books. Welton, whoread much of that correspondence, says she was struck by the rangeof enthusiastic readers, from college students to corporate cfos,eager to snap up Tyson’s next offering. “Eric’s very good at connect-ing with the needs of his audience,” she says. “He’s passionate aboutwhat he does, and he doesn’t talk down to people.” Welton addsthat the publishing genius of Tyson’s books lies in how the range ofthe audience fits that of the works themselves. They can either beread cover to cover in one sitting or get pulled from the shelf timeand time again as reference sources. The result, says Welton, is trustand comfort. “Eric’s books give people the feeling that they can takecontrol of their financial lives.”

Typical of his books is how Tyson’s plainspoken prose turnsdense and often potentially boring information into something thatis not just readable and digestible but surprisingly educational. (Inone example, he publishes a graph illustrating how a reduction inhousehold spending of $1,000 per year—just $83 per month—addsup to savings of $680,000 after 40 years.) What comes through inthe information Tyson proffers is a common sense available to any-one willing to listen. “I don’t have an ax to grind or anything to

sell,” he explains. “All my energies are channeled into making thebooks useful.”

While the rich will always be able to afford skilled, well-paid ad-visors to protect their wealth, Tyson says, the middle class is muchmore vulnerable because it lacks access to competent, disinterestedadvice. He notes that most people offering financial advice have aparticular product to sell that subsequently will earn them a hand-some commission. “The financial planning profession leaves a lot tobe desired,” he says. “I think that any transaction—like most finan-cial transactions—that creates a potential conflict of interest iswrong.” It is in this basic—and often overlooked—sense that Tysonbelieves that no one is really looking out for the financial well-beingof most Americans. His books are meant to change that.

ERIC TYSON ARRIVES FOR OUR MEETING at a local greasy spoon inhis hometown of Weston, Conn., where he orders a cup of tea; nocream, no sugar. Dressed in a turtleneck and jeans, he blends easilyinto the no-nonsense setting of scuffed linoleum and plastic furni-ture. He converses in a sympathetic manner that is immediately asengaging as it is calming. The money shrink is most definitely in.

Weston is one of those power, New York metro suburbs; Cheevercountry on steroids. It’s 10 a.m., and Tyson’s peers have long sincehopped the train for the Big City and the Big Bucks. The scene seems

fitting as Tyson, the quiet iconoclast, has chosen not to follow theherd—even though he has had his chances.

After earning his b.s. from Yale in 1984, Tyson stepped onto thefast track, working as a budding management consultant with Bain& Co. That stint segued to b-school at Stanford, which he entered in1987 with the expectation that he would return to the consultinggame that much smarter and that much better paid. But Tysonpassed on the brass ring. Instead, he went underground, relativelyspeaking, and taught a continuing education class at night in Berke-ley while slowly building a client list of everyday people seekingcommonsense advice about money.

Jim Collins, mba ’83, who also has spent time on the best-seller listas coauthor of Built to Last and author of Good to Great, taught Tysonat the Graduate School of Business, and he has since followed Tyson’sprogress up the best-seller lists. “Eric has taken a very democratic ap-proach in wanting to contribute to the well-being of the averageAmerican,” says Collins. “He has chosen to follow that passion all theway along. It’s an unusual path for a Stanford mba to take.”

Tyson, it seems, regularly has opted for the less orthodox routesince his stock market project back in junior high. In 1991, he con-tacted another folk hero of democratic capitalism, the creator of thediscount brokerage industry, Charles Schwab, mba ’61. “I justwrote him a letter to tell him what I was up to and because I admiredwhat he was doing,” Tyson recalls. About a month later his phonerang. It was Schwab’s secretary: “Hello, I have Chuck on the line.”Schwab, as it turned out, told Tyson he liked what the younger manwas doing and wanted to meet and pick Tyson’s brain, as some of

E R I C T Y S O N F O R D U M M I E S

While the rich will always be able to afford skilled,well-paid advisors to protect their wealth, Tyson says,the middle class is much more vulnerable because it lacks access to competent, disinteresteddisinterested advice.



Schwab’s customers were actually seeking more financial servicesfrom the firm than just low commissions on their stock trades. Onemeeting led to another, and before long Tyson was being offered a job in Schwab’s marketing department. But again, he passed upthe security, the big desk, and the view to pursue his own path.“There were other things I wanted to do,” he says simply, explainingthat what he had in mind was more calling than career.

Fate subsequently rewarded Tyson for following his muse whenhe landed work doing benefits and financial counseling for employ-ees at idg Books in Foster City, Calif. idg at the time was becomingincreasingly well known for its tongue-in-cheek, and hot selling,Dummies series of books aimed at the burgeoning ranks of peopleensnared in love-hate relationships with their personal computers.Soon enough, the light bulb went on. Isn’t money just as mysterious,as maddening, and as ubiquitous as the pc? And didn’t Tyson’s seriesof lectures sound very much like chapters in a book?

idg signed Tyson to write Personal Finance for Dummies. Publishedin 1993, it was the first noncomputer book in the series. It has sincesold more than 1 million copies and is now in its fourth edition.

MEETING THIS BEST-SELLING AUTHORMEETING THIS BEST-SELLING AUTHOR in the flesh, you quickly under-stand that his success is nearly the antithesis of faddishness. He ex-udes awareness and sincerity, leavened with sufficient irony to savehim from self-righteousness. The big numbers generated by his Dum-mies books impress him far less than the deeper meaning of those

sales. “I make my living off the financial illiter-acy of Americans,” says Tyson, his tone appre-ciably more rueful than triumphant.

His is, above all, a soothing voice on aperennially loaded, and taboo, subject. (Tysonpoints out that more couples argue overmoney than they do over sex.) The man maybe sincere and sensitive, but that doesn’t makehim a worrier. Call him a happy contrarian al-ways in search of perspective. “The last threeyears have been a real wake-up call for a lot ofpeople,” he says in gauging the frail health ofthe current economy. The recession is as se-vere as that of the early seventies. But havingsaid that, Tyson adds this would be the wrongtime to get out of stocks, the hot housing mar-ket is not a bubble, and, no, Social Securitywill not go bust when boomers start retiring indroves.

Tyson’s main money concerns are reallydeeper—and yet, strangely, more everyday.

“Spending and consumption are such a big part of our culture,” helaments. “People entrap themselves financially by getting caught upin buying things they don’t really need or can’t afford.” He recallsfrequent counseling sessions in California where clients confessedtheir auto-related anxieties to him. “People would tell me that theircoworkers would say to them, ‘Your car is trashing the parking lot.’People are shamed into buying things they can’t afford,” he says,shaking his head.

Tyson recently experienced that firsthand when he walked intohis local Volvo dealer intent on buying a used car. “The salesmankept trying to put me into a lease, and I kept telling him I wanted a secondhand car,” Tyson recalls. “Finally, he looked at me and said,‘What are you, a socialist?’”

After moving East five years ago to be nearer relatives as he andhis wife, Judy, an educational consultant, started a family, Tyson de-liberately bought a modest house. “I knew I could afford somethinglarger,” he says, “but I wanted to have my mortgage paid off prettyquickly.” He spends plenty of time with his 7-year-old twin sons andanother son, age 5, but life is more than just attendance at a full slateof Little League games and family dinners. Tyson, ever the savvyquant, has lent his skills to the local community. Even with childrenin the school system, he opposed a recent expensive renovation ofthe local schools because he felt it would not measurably improveeducation while further jacking up already high local propertytaxes. Tyson’s side lost. In the wake of a fight that Tyson calls “divi-sive,” he has offered pro bono financial counseling to some local sen-iors on fixed incomes who might be forced to move because of thehigher taxes.

Focusing his perspective on the right pressure points in order tomake a real difference seems almost a Tyson trademark, and hisDummies success isn’t about to dull that drive. Tyson’s next literarygoal amounts to the self-help equivalent of scaling Everest. “I wantto write a book that helps people break bad financial habits,” hesays. To prepare, he has been reading the scientific literature on com-pulsive and addictive behaviors. “There’s a lot out there that hasbeen written on this subject, but no one has really translated it intolayman’s language,” he says. Given Tyson’s track record as the manwho demystified money for the masses, he seems as good a bet asany to do just that. ■

Tyson has had as many as fourbooks on Business-Week's best-sellerlist at a time.The books he has authored orcoauthored havesold more than 4 million copies.



faculty news

Labor Economist Shaw Joins Faculty

Economist Kathryn L. Shaw, whoseresearch focuses on understandingthe sources of productivity gainswithin firms, has been appointed the

Ernest C. Arbuckle Professor of Economicsat the Business School. Shaw, who served onPresident Clinton’s Council of EconomicAdvisers from 1999 to 2001, comes to Stan-ford from Carnegie Mellon University,where she won two teaching awards andserved the university as chair of the facultysenate.

Shaw is also a research associate of theNational Bureau of Economic Research andcoprincipal investigator for a study financedby the Alfred P. Sloan Foundation on the“international differences in the businesspractices and productivity of multinationalfirms in advanced capitalist countries.” Herresearch emphasizes the role of innovativehuman resource management practices, andshe has been among the leading researchersin developing the new subfield of “insidereconometrics,” which uses data from with-in firms to study the impact of humanresource practices.

In addition to Shaw, the Business Schoolhas appointed six new tenure-track facultymembers. They are Kenneth W. Shotts, anassociate professor, and assistant professorsManuel A. Amador, Jerker C. Denrell, Yonca

Ertimur, Wesley R. Hartmann, and Mark T.

Soliman.

Shotts, whose field is political economics,holds a courtesy appointment in the Schoolof Humanities and Sciences. He earned hisdoctorate from the Business School in 1999and has been an assistant professor atNorthwestern University and a visitingscholar at the Woodrow Wilson School atPrinceton. His research interests includeelectoral institutions, political leadership,and political economy, including statisticalanalysis of voting patterns.

Amador was awarded the Solow Prize forGraduate Student Excellence in Teachingand Research at the Massachusetts Instituteof Technology, where he received his doc-torate in economics this year. His researchinterests include international economics,macroeconomics, and political economy.

Denrell’s field is organizational behavior.He earned a doctorate in economics from

the Stockholm School ofEconomics in 1998 and hasbeen a visiting scholar sinceat Oxford, the WhartonSchool of Economics at theUniversity of Pennsylvania,and the Stern School of Business at NewYork University. He has published researchon the economics of strategic opportunityand radical organization theory.

Ertimur, the coauthor of several recentarticles on market responses to corporateaccounting, received a doctorate from NewYork University this year. Her research inter-ests include financial reporting and disclosureand the role of stock analysts as informationintermediaries.

Hartmann, whose interests are market-ing and industrial organization, received adoctorate this year from ucla. He is study-ing the intertemporal effects of consumptionon demand and the societal effects of con-ditioning prices on past purchases.

Soliman, a certified public accountantwho has worked as an auditor and seniorfinancial analyst, completed a doctorate atthe University of Michigan this year. Finan-

cial statement analysis, includingpro forma earnings, and account-ing information and valuationare his research interests.

Hau Lee has been named the2003 recipient of the Harold

Larnder Prize given by the Cana-dian Operational Research Societyto an individual of internationaldistinction in operations research.Lee lectured on the evolution ofsupply chain management at theorganization’s June conference in Vancouver. Lee is the ThomaProfessor of Operations, Infor-mation, and Technology at theBusiness School, and he codirectsthe Stanford Global Supply ChainManagement Forum.

Sonya Grier is one of the inau-gural class of scholars in

a fellowship program to fosterresearch related to nationalhealth. Grier, assistant professorof marketing and the FletcherJones Faculty Scholar at the Busi-ness School last academic year, isone of 18 scholars awarded theRobert Wood Johnson Founda-tion Health and Society Scholars

Fellowship. In September, she began thetwo-year fellowship at the University ofPennsylvania, where she will research issuesat the intersection of marketing and health.

Cited for his study of business tax reformand for leadership of one of Australia’s

major banks, Dean Robert Joss was awardedin June the Centenary Medal—presented bythe Australian government to citizens whohave made major contributions to the nation.

Joss, who holds dual u.s. and Australiancitizenship, spent six years as chief execu-tive officer and managing director of West-pac Banking Corporation, one of Australia’slargest banks. He also was a member of apanel that made recommendations for changesin Australia’s business taxation system.

In 1999 a report authored by Joss andtwo other business leaders appointed by theAustralian government issued a sweeping


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Kathryn Shaw, who joined thefaculty as a tenured professorof economics, formerly servedon President Clinton’s Coun-cil of Economic Advisors.

26-27.FN 10/9/03 4:44 PM Page 26

ACCOUNTINGMarket Effects of Recognition and DisclosureMary E. Barth, Greg Clinch,and Toshi ShibanoJournal of Accounting Research (Vol. 41, No. 4), december 2003

ECONOMICSU.S. Midwest Gasoline Pricing and the Spring 2000 Price SpikeJeremy Bulow, Jeffrey Fischer,Jay Creswell, and Christopher TaylorEnergy Journal (Vol. 24, No. 3)july 2003

Short-Term Economic Incentives in New Product DevelopmentAntonio DavilaResearch Policy (Vol. 32, No. 8)september 2003

Equity Market Liberalization in Emerging MarketsPeter Blair HenryFederal Reserve Bank of St. Louis Review (Vol. 85, No. 4) july/august 2003

How Markets Are Like FootballJohn McMillanAcross the Board (Vol. 40, No. 4)july/august 2003

Fear of FeedbackJay M. Jackman and Myra StroberHarvard Business Review (Vol. 81, No. 4)april 2003

FractionalizationA. Alesina, A. Devleeschauwer,W. Easterly, S. Kurlat, and

Romain WacziargJournal of Economic Growth (Vol. 8, No. 2), june 2003

A Global Newton Method toCompute Nash EquilibriaSrihari Govindan and Robert WilsonJournal of Economic Theory (Vol. 110, No. 1), may 2003

FINANCELiquidation RiskDarrell Duffie and Alexandre ZieglerFinancial Analysts Journal (Vol. 59, No. 3)may/june 2003

HEALTH ECONOMICSEmployment-Based Health InsuranceIs Failing: Now What?Alain C. EnthovenHealth Affairs (Vol. 22, No. 4)july/august 2003

Is More Information Better? TheEffects of “Report Cards” on HealthCare ProvidersDavid Dranove, Daniel Kessler, Mark McClellan, and Mark SatterthwaiteJournal of Political Economy (Vol. 111, No. 3), june 2003

MARKETINGShould Espoir Take Its New BrandingInitiative Global?P. M. Thompson, Jennifer Aaker,H. Manwani, S. Clift, and M. KotabeHarvard Business Review (Vol. 81, No. 6), june 2003

Buying, Bidding, Playing, or Compet-ing? Value Assessment and Decision

Dynamics in Online AuctionsDan Ariely and Itamar SimonsonJournal of Consumer Psychology (Vol. 13, No. 1/2), 2003

OPERATIONSSupply Chain Challenges—BuildingRelationshipsS. Beth, D. N. Burt, W. Copacino,C. Gopal, Hau Lee, R. P. Lynch, and S. MorrisHarvard Business Review (Vol. 81, No. 7)july 2003

Incentive Efficient Control of a Make-to-Stock Production SystemErica L. Plambeck and Stefanos A. ZeniosOperations Research (Vol. 51, No. 3) may/june 2003

ORGANIZATIONAL BEHAVIORIn the Bud? Analysis of Disk Array Pro-ducers as a (Possibly) Emergent Orga-nizational FormGlenn Carroll, David G. McKendrick,Jonathan Jaffee, and Olga Khessina Administrative Science Quarterly (Vol 48), 2003

Size (and Competition) AmongOrganizations: Modeling Scale-BasedSelection Among Automobile Producersin Four Major Countries, 1885–1981Glenn Caroll and Stanislav DobrevStrategic Management Journal (Vol. 24) 2003

Vicarious Learning, Undersampling ofFailure, and the Myths of ManagementJerker DenrellOrganization Science (Vol. 14, No. 3)may/june 2003

Virtualness and Knowledge in Teams:Managing the Love Triangle ofOrganizations, Individuals, andInformationTerri L. Griffith, John E. Sawyer,and Margaret A. NealeMIS Quarterly (Vol. 27, No. 2) june 2003

The Determinants of Team-BasedInnovation in Organizations—TheRole of Social InfluenceD. F. Caldwell and Charles O’ReillySmall Group Research (Vol. 34, No. 4)august 2003

POLITICS/PUBLIC POLICYA Behavioral Model of TurnoutJonathan Bendor, D. Diermeier, and M. TingAmerican Political Science Review (Vol. 97, No. 2), may 2003

Playing with House Money: PatriotDollars ConsideredJohn FerejohnCalifornia Law Review (Vol. 91, No. 3)may 2003

The Unintended Consequences ofthe ’91 Civil Rights ActPaul Oyer and Scott SchaeferRegulation (Vol. 26, No. 2) summer 2003

STRATEGIC MANAGEMENTThe Effect of Information on ProductQuality: Evidence from RestaurantHygiene GradeGinger Zhe Jin and Phillip LeslieQuarterly Journal of Economics (Vol. 118, No. 2), may 2003

faculty publicationsfaculty publications

call for major changes in business taxes in the nation. Many of these recommenda-tions were later adopted into law. Joss alsois credited with refocusing Westpac duringhis tenure as head of the bank by modern-izing and streamlining operations, andrestructuring the bank’s culture to empha-size teamwork, customer focus, open com-munication, and community support.During his tenure, the institution’s shareprice rose 375 percent.

Global corporations may be evolving fromhierarchical structures toward networks

of related affiliates, says Sloan Programdirector and faculty member Bruce McKern.As the editor of a new book, Managing theGlobal Network Corporation, McKern bringstogether field studies and theoretical workconducted by a group of researchers.

“The environment of global business istoday far more complex and competitivethan it has been in the past, and this hasforced global firms to be more flexible andfaster on their feet,” he says. They have

devolved more responsibility and account-ability to managers of business units, andleaders of these units have adopted more lat-eral management processes, which empha-size individual responsibility at all levels.

Prompted by an explosion in cross-bor-der strategic alliances, joint ventures, andmergers, the research was commissioned byMcKern during his tenure as president ofthe Carnegie Bosch Institute. It deals withthe strategies of global network corpora-tions, their organizational evolution, andtheir operating processes. It also coversinnovation and knowledge transfer, inte-grative processes and socialization, adapta-tion of strategy and firm evolution, and theroles and competencies needed by managersin networked global companies. McKernsays he agrees with other researchers in thebook who say that the “organization man”view of the international manager is beingreplaced with the “individualized corpora-tion” view, in which managers are relative-ly autonomous actors sharing a commonvision of the corporation’s future.

What dollar value will the market puton an improvement in a product fea-

ture? A research paper coauthored by theBusiness School’s Seenu Srinivasan says thatsome customers who are on the fence interms of purchasing the product should beweighted more heavily than others. Theresearchers also give a formula for the mar-ket value that when compared against themarginal cost is instrumental in decidingwhether the im-provement is profitable.

The paper “How Much Does the Mar-ket Value an Improvement in a ProductAttribute?,” by Srinivasan and Elie Ofek ofHarvard Business School, has received theJohn Little Award from the Marketing Sci-ence Society for the best marketing articlepublished in the journals Marketing Scienceand Management Science during 2002. Thesociety is part of the Institute for OperationsResearch and the Management Sciences.Srinivasan is the Adams Distinguished Pro-fessor of Management and director of Stan-ford’s Strategic Marketing ManagementExecutive Program. ■


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Gaming of Pharmaceutical Patents

Generic drugs are often much lessexpensive than their brand-name counter-parts. So, while it’s in the interest of the public for generic manufacturers to get their

products to market as quickly as possible, it is not in theinterests of the companies that first developed the drugsand hold the original patents. The 20-year-old Hatch-Waxman Act has been remarkably successful in increas-ing the number of generic drugs on the market by easingthe Federal Drug Administration (fda) approvalprocess for generics.

Hatch-Waxman also provides the mechanism forresolving pharmaceutical patent disputes when a gener-ic manufacturer believes that it can manufacture a bio-equivalent product that does not infringe on the originalpatent or when it believes that a patent is invalid. But in recent years some major pharmaceutical companieshave settled such patent disputes by simply paying man-ufacturers of generics to stay out of the market. Othershave taken advantage of loopholes in the act to game thesystem and even tie up potential generic entrants for manyyears. In June, the Senate voted overwhelmingly in favorof a bill targeting these abuses.

The recent Hatch-Waxman cases and settlements, andwhat to do about them, are the subject of a recent paperby Jeremy Bulow, the Richard A. Stepp Professor of Eco-nomics, who was chief economist on the Federal Trade

Commission (ftc) during the Clinton administration.While he was at the ftc, the commission began

to vigorously contest Hatch-Waxman settlements.Economists felt strongly that if antitrust laws exist, thenfirms should not be able to buy off potential competi-tors, and they argued that pharmaceuticals were anantitrust concern. “With the possible exception of hightech, the pharmaceutical industry has contributed moreto human welfare in the past 50 years than any other.That is why the efficient, competitive functioning of thismarket is so important,” wrote Bulow.

In addition, companies have taken advantage of twoprovisions in Hatch-Waxman. When a generic manu-facturer files an application to sell a drug, it makes oneof two claims: either that the generic does not violate anyof the patents the brand has listed in the fda’s OrangeBook of approved drugs or that the patents are invalid.The brand drug manufacturer is given notice of thisapplication and then files suit against the generic maker.Hatch-Waxman then prohibits the fda from approvingthe generic’s application for a minimum of 30 months,unless the generic wins a conclusive verdict first.

Some brands have added additional patents to theirOrange Book listing well after the litigation has started.So, for example, a company could have lost a case in dis-trict court and then—while appealing the decision—added a new patent to its list, thereby forcing a new filingby the generic and a restart of the 30-month clock. Paxil’sclock has been restarted five times in this manner.

The other provision is the 180-day rule, which holdsthat the first generic to file an application will get 180days of exclusivity as the only generic manufacturer ofthat product. The clock starts either when the genericenters the field or when a generic wins in appeals court.The trick there has been for the brand to pay off the firstgeneric to stay out of the market until the disputedpatents expire. If the brand does not file suit against a subsequent filer, the fda still cannot approve the sec-ond firm’s application because the 180-day clock neverstarts. This has been referred to as the “cork in the bot-tle” strategy.

Some drug companies have developed a more sophis-ticated smokescreen. Schering-Plough paid $60 millionto the generic company Upsher-Smith as part of a dealin which Upsher agreed to put off its efforts to intro-duce a generic and licensed one of its products to Scher-ing. Schering then argued that the $60 million was for the license for the product, and that the negotiatedpostponement of Upsher’s entry was based on the weak-ness of Upsher’s legal case. The economists involved inthe case were skeptical, to say the least.

Bulow supports an ftc proposal to allow brand-name companies only one 30-month stay when the firm

In recent yearssome majorpharmaceuticalcompanieshave settledpatent disputesby simply pay-ing manufactur-ers of genericsto stay out ofthe market.

Regulation

faculty research

28-31.Research 10/6/03 4:49 PM Page 28

claims patent infringement. He also suggests the 180-day exclusivity rule should be extended to the first com-pany that manages to get a product approved and tomarket, not the first to file an application.

Furthermore, he argues, generic drug companies thatmake any kind of deal involving postponing their entryinto the market should have to forfeit their right to anyexclusivity. “There should not be any cash paymentallowed unless a generic company can show that theamount it was given was less than the amount it wouldhave received from an outside party,” he says.

The stakes, says Bulow, are high. In one case, a brandwith annual sales of over $750 million kept a genericoff the market for over six years. But more importantare the implications for society. “If Coke and Pepsi wereto merge, the price of soda would go up, but the effecton the larger social welfare wouldn’t be particularlyimportant,” he says. “But artificial price increases forpharmaceuticals can have very severe consequences.”

The real function of generics is not to provide a supe-rior product but to make the patent laws work prop-erly by giving innovators exclusivity for a time. Ifcompanies with invalid patents are able to buy as muchexclusivity as those with strong patents, then the costto society of providing the strong patents with anygiven level of exclusivity will effectively be raised. Inthe long run it is likely that the patent laws will bedesigned to provide less protection for the companiesthat really deserve it. As a result, incentives for inno-vation would be reduced. “The bottom line,” Bulowconcludes, “is you should not get to pay your com-petitors to stay out of the market.”

—anne field

“Gaming of Pharmaceutical Patents,” Jeremy I. Bulow, GSB

Research Paper #1804, 2003. (http://gobi.stanford.edu/

ResearchPapers/Library/RP1804.pdf)

Portable Phone NumbersBenefit Consumers

W hen you think about having to changeyour home, business, or cellular telephonenumber, does a chill run down your spine and

through your pocketbook? Envision the hassles: havingto notify everyone in your phone book, change your sta-tionery, put a forwarding message on your old numberthat will expire. Or even worse: run the risk of losingimportant phone calls.

Such considerations are known as switching costs,and they are aggressively exploited by companies inareas such as computers, banking, telephony, andmore. The game is to lure you in with attractive intro-ductory offers and then zap you with higher rates, newfees, and fewer perks once you are so locked in thatswitching to a new firm would be a real pain in theneck—or the wallet.


Companies that can distinguish between new and oldcustomers will likely price their products and serviceshigher for the locked-in crowd, according to previousresearch. It hasn’t been clear whether a firm that can’ttell who’s who in its customer base—or one that hasbeen prohibited by regulation from engaging in pricediscrimination—will price higher or lower across theboard. Brian Viard, assistant professor of strategic man-agement, has found evidence to support the idea thatlower switching costs actually translate into lower pricesfor consumers.

Theoretically, pricing by discrimination-prohibitedfirms whose customers incur switching costs could goeither way, higher or lower, depending on the nature ofthe market, he says. “If there are enough new customerscoming into the market, firms will compete to grabthem and will therefore price their products or serviceslower overall. If, however, there aren’t enough new cus-tomers, then firms focus on exploiting the customersthey already have who are locked in and price higher.”

Viard’s study begins to fill in this research gap bylooking at 800-number pricing before and after suchnumbers became portable. “In May 1993, regulationspermitted customers to take their numbers with themeven if they switched telephone service providers,”Viard explains. “That significantly reduced switchingcosts for these customers, which were considerable inthe case of companies that relied heavily on 800 num-bers, such as American Airlines.”

By studying several hundred at&t telephone con-tracts with big 800-number users, Viard found that afterportability, the cost of 800 numbers fell. “This meansthat when switching costs were high, prices were high-er. Lower switching costs led to lower prices,” he says.“This is the intuitive answer, but theoretically it couldhave gone the other way. Again, if switching costs everled to lower prices, it would be in a high-growth mar-ket where there were lots of new customers. The factthat the 800-number market was growing quickly during this period means that this finding is very con-servative and that we can pretty much expect lowerswitching costs to lead to more competitive marketsacross the board.”

The significance of such research, Viard says, lies inits public policy implications. “If switching costs do leadto higher prices, regulators will want to institute rulesto reduce such costs for the consumer.” In fact, he notes,such a decision has recently come up in the cellular tele-phone industry. “The fcc has ruled that cellular com-panies must institute cell number portability byNovember,” he says. “Number portability will lowerconsumers’ switching costs, which my work suggestswill lead to lower prices. If the costs of portabilityimplementation are not too great and you care aboutconsumers, you should be in favor of it.”

—marguerite rigoglioso

“Do Switching Costs Make Markets More or Less Competi-

tive?: The Case of 800-Number Portability,” V. Brian Viard,

GSB Research Paper #1773, 2003. (http://gobi.stanford.edu/

ResearchPapers/detail1.asp?Document_ID=1774)

Consumer Pricing

If there aren’tenough newcustomers inthe market,firms focus onexploiting the customersthey alreadyhave who arelocked in.

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RO

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Pitching Ideas Hollywood Style

In the world of hollywood movies, themost important 20 minutes of a film may take placeduring the pitch meeting. The film Alien originallywas pitched as “Jaws on a Spaceship,” and that

image sold. What makes a studio executive or producer bite on

an idea? And what makes a successful pitch? Those aretwo of the questions raised by Rod Kramer, professorof organizational behavior at the Business School, andKimberly Elsbach, a professor at the University of Cal-ifornia, Davis.

Kramer and Elsbach wanted to study how organiza-tional decision makers assess the creative potential of others. “We could evaluate how engineers assess thecreativity of other engineers, but we thought pitching in Hollywood might be more interesting and attract alittle more attention,” says Kramer, a psychologist andone-time screenwriter.

What the authors found is that contrary to conven-tional wisdom, the studio executives who make the deci-sions to greenlight a picture in Tinseltown often have a real passion for films and are very smart when it comesto knowing what’s marketable. They’re experts at eval-

uating creativity, and their reputation rides on how wellthey do it. Yet the decision to buy an idea is made quick-ly—sometimes in a 20-minute meeting. “So I was inter-ested in how complex their judgments are and whatkinds of things they weigh,” Kramer says. “And then thequestions are what kind of writers are they impressed byand what kind of ideas attract their attention?”

For instance, what is it about the movie industry thatproduces both great films and disasters? “All of us whensitting in the audience think, ‘Who could have thoughtthis was a good idea?’” Kramer says. But the pitcher of that idea was probably very good at his work—andat persuading the catcher on the other end to buy it.

The researchers found that the more passionate theperson pitching the idea, the more effective he or she was.And the better the pitcher was at drawing in the personon the other side of the table, the more likely he or shewould succeed. “Our analysis of creativity assessment inHollywood pitch meetings suggests that judgments of creative potential involve two processes,” wroteKramer and Elsbach. “In one process, catchers catego-rize pitchers—using behavior and physical clues—into asmall set of relatively well-established prototypes basedon creativity or uncreativity.” In the other, catchers useclues about their engagement with the pitcher to evalu-ate whether the idea is creative and has merit.

“A lot of naive pitchers we talked to assumed whatwas important was for them to be passionate and to gettheir concept across clearly,” Kramer says. “That’simportant, to be on fire about an idea. But the otherthing was to what extent the catcher was engaged andalso felt creative.” Kramer says the second part of theprocess is a seduction. The catcher has to feel like he isdrawn in and contributing.

Kramer suggests that while much of the study wasindustry-specific to Hollywood, managers looking forcreative people would be wise to listen to employeeswho are passionate about their work and persuasive incommunicating ideas. “Although we focused on howexecutives in Hollywood evaluate new ideas, there aremany other areas—such as venture capital and productinnovation—in which success may depend on the effec-tiveness of the initial pitch. In many instances you havejust one shot at getting your idea across and it has to beright,” he says. The project fits in with his ongoingresearch into how organizations make decisions aboutallocating their time, attention, and money.

—joyce rouston

“Assessing Creativity in Hollywood Pitch Meetings: Evidence

for a Dual-Process Model of Creativity Judgments,” Kimberly

D. Elsbach and Roderick M. Kramer, Academy of Management

Journal, Vol. 46, No. 3.

What is it about themovie industrythat producesboth great filmsand disasters?

Marketing Ideas

faculty research

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When Should You Sellthe Factory?

It may not be as poetic as hamlet’s famousline, but to build or to buy is a question that becomesmore crucial for manufacturing executives every day.

Should your company keep control of its supply chainand manufacturing facilities when it needs to expand—and risk getting stuck with expensive capacity it can'tuse? Or should it outsource—and if so, to whom andfor how much?

In an economy that mercilessly penalizes inefficiency,outsourcing production seems like the obvious choice.Indeed, it often is, which is why contract manufacturingof electronics and pharmaceuticals has long since passedthe $100 billion-a-year mark. But solving the build vs.buy equation poses difficult strategic and tactical ques-tions for outsourcing original equipment manufacturers(oems), says Erica Plambeck, assistant professor of oper-ations, information, and technology.

In research with Terry Taylor of Columbia Universi-ty, Plambeck demonstrates that:• Outsourcing to contract manufacturers (cms) mayultimately harm some oems (and their market devel-opment) by reducing incentives to innovate. • Pooling manufacturing resources among oems issometimes a better strategy than outsourcing to cms. • Sophisticated new approaches to negotiating con-tracts between oems and cms can significantly improvemargins for both parties. • The classic manufacturing model is a vertically inte-grated firm; production is carried on in-house, alongwith activities that stimulate demand, such as r&d,product design, and marketing.

However, Plambeck notes, “because each firm fills its demand from its own production capacity, inef-ficiency in the use of capacity can result. For example,the pharmaceutical industry is characterized by longdevelopment cycles (roughly 12 years) and intense timepressure. Consequently, a company that wants to man-ufacture its own product must make a large capitalinvestment in a plant before the drug has completed reg-ulatory reviews. If the drug fails, the plant may have little value.”

One response: Separate demand creation from pro-duction—the essence of contract manufacturing.

The flaw in this response, Plambeck argues, existswhen the cm has much more bargaining power than theoem. “If the bargaining strength of the oem is suffi-ciently high, the level of innovation effort (and result-ing market size) will increase due to outsourcing. Onthe other hand, if the oem has little bargaining strength,then the oem—anticipating that much of the value cre-ated by his investment innovation will be expropriatedby the cm—will invest less in innovation,” she wrote.

This is occurring in the biologics industry as firmsdelay or kill drug development projects because pro-

duction capacity is scarce and they anticipate paying a very high price.

There is another alternative to going it alone. An oemcan retain production capacity by pooling resourceswith other similar firms through supply contracts or a joint venture. Although it has received less attentionin the business press, this type of outsourcing is wide-spread, Plambeck says. In electronics, the oem out-sourcing market in 2002 totaled some $115 billion, 53 percent larger than the cm outsourcing market.

For example, amd and Fujitsu last April set up a jointventure to produce flash memory. The new memorychip company, fasl llc, is an expansion of their jointventure that will enable the two to better compete withIntel in the competitive market.

After analyzing the results of outsourcing, theresearchers conclude that oems will innovate more whentheir manufacturing capacity is pooled. Here’s why:

First, for any fixed level of capacity, an increase inmarket size leads to a more efficient use of that capaci-ty. Therefore, pooling reduces production expenses,which encourages the oems to invest more in innova-tion. Second, innovation increases the expected marketsize and its variability because designers and marketersare likely to design more variations into the product.When capacity is pooled, the additional resources makevariability less risky.

Consider the problem faced by biopharmaceuticalcompanies. Manufacturing capacity is constrained, andthe lead time to build new capacity is three to five years,making negotiating an effective contract difficult. To solve this, Eli Lilly and other drug companies areentering supply contracts with Lonza, a biologics man-ufacturer. Contracts stipulate the start date (usuallyabout three years hence), the volume of fermentationcapacity to be purchased each week (though there issome flexibility), and a price per unit of volume.

Lonza estimates the size of the market for the drugand the therapeutic dosage requirement (hence the vol-ume of fermentation capacity that will be needed).

“Thinking ahead, understanding that a contract willbe renegotiated is key to a successful agreement,” Plam-beck said in an interview. “But if the parties fail to antic-ipate renegotiation, they will reduce the buyer'sminimum order to avoid overproduction.”

If instead the initial agreement includes a larger min-imum order quantity and the understanding that thequantity may have to be renegotiated later, both partieshave more incentives to innovate, she said.

Using data and mathematical models, Plambeck andTaylor find that renegotiation significantly improvestotal expected profit for the cm and buyers when con-tracts are designed correctly in anticipation of renego-tiation. —bill snyder ■

“Sell the Plant? The Impact of Contract Manufacturing on Innova-

tion, Capacity, and Profitability,” GSB Working Paper #1750, 2002

(http://gobi.stanford.edu/ResearchPapers/Library/RP1750.pdf) and

“Renegotiation of Supply Contracts,” GSB Working Paper #1764,

2002 (http://gobi.stanford.edu/ResearchPapers/Library/RP1764.pdf),

Erica Plambeck and Terry Taylor.

Original equipment manufacturerswill innovatemore when theirmanufacturingcapacity ispooled.

Manufacturing

28-31.Research 10/6/03 4:50 PM Page 31


He Went Against the Grain and WonDuring the crazy stock boomyears, Seagate ceo Steve Luczo,mba ’84, was frustrated thatWall Street investors saw so lit-tle value in his company’s disk-drive business. The company’sstake in the software companyVeritas was actually trading at a higher value than Seagatestock. The solution, Luczothought, was to take the compa-ny private, but he would needinvestors besides himself whowere willing to go into a cyclicalbusiness. In August 2000, heidentified Silver Lake Partners, a venture capital partnershipthat invested $382 million. Twoyears later, according to Fortune,Silver Lake’s investment wasworth $1.8 billion when Seagatewas taken public again.

“Our business is an oddone,” Luczo said. “If you’rebehind in technology, theanswer isn’t that you cut

expenses or capital. It’s that you add expenses in the form of r&d and add capital. Thisisn’t intuitive to the guys buyingbottling plants and whatnot.”

Goldilocks’s New PlanIs Ju-u-u-ust Right Among the foreign food brandsfinding success in America isGoldilocks, a Filipino bakeryand restaurant founded whentwo sisters began baking cakesto go with fairy tales in 1966.Run now by their children,Goldilocks employs 4,000 in the Philippines, 25 in Canada,and 800 in the United States,where Mary-Ann Ortiz-Luis, sep’00, is vice president for finance.The daughter and niece of thefounders, she started work inthe bakery as a child but thenspent a decade as a pediatricianin Manila before the familybusiness drew her back.

Ortiz-Luis and several rela-tives decided to improve effi-ciency by centralizing theiroperations in Northern andSouthern California. All thegoods are baked and distributedto their stores and other retailoutlets such as Wal-Mart, Costco, and Marriott. “Thai, Chinese, and Japanese cultureshave been recognized, but notFilipino culture,” Ortiz-Luistold the Oakland Tribune. “If we can mainstream our brand,we can be recognized as a sepa-rate Asian entity.”

Seed Money to Sprout100 New SchoolsThe Bill and Melinda Gates Foundation recently gave $22million to the San Francisco–based NewSchools Venture Fund,cofounded by Kim Smith, mba ’98.

Smith, who also helped startTeach for America, said thegrant will be used as seed moneyto develop at least five chartermanagement organizations thatwill then be expected to create20 new public schools each overa decade, according to the SanFrancisco Business Times. “It’s anopportunity to build a systemwhere the governance, manage-ment, and the teachers, parents,and students come together,”Smith said. “It’s a charter envi-ronment, so everyone chooses tobe a part of it. In a public schooldistrict, it’s a struggle to get theconstituencies aligned.”

Late Trades Leave Trailin Mutual Fund DataAfter New York State AttorneyGeneral Eliot Spitzer announcedhis investigation of late tradingpractices in mutual funds, Stan-ford Business School facultymember Eric Zitzewitz decided tocheck one of his mutual funddata samples for evidence.What he found surprised him:evidence of illegal after-hourstrading in 16 of 104 mutualfunds. The results produced

a clamor among media wantingto interview him.

In one interview with CNBC, he was careful to pointout that he had no evidence thatthe fund firms themselves hadknowledge of illegal activity. “Itcould just be a broker was plac-ing these trades across a numberof firms, and they were sneakingthem in.”

In 2002, Zitzewitz studiedmarket timing in mutual fundtrades, a practice that is not ille-gal under most circumstances,but which permits day traders totake some profits at the expenseof long-term investors. The prac-tice was dramatic in internation-al funds because many of thefunds set their share price at 4p.m. Eastern time—or 14 hoursafter the Tokyo exchange closed,for example. That means fre-quent traders can gather infor-mation about the share pricebefore it is formally set.

Long-term investors lose morefrom the legal practice than theillegal one, Zitzewitz told CNBCand numerous other media whointerviewed him. “Market tim-ing costs the average shareholderin international funds about 1 percent of assets per year or $1 out of every $100. The latetrading costs about another nick-el, or $1.05 total,” he said.

Crossover ZeitgeisterJim Collins, mba ’83, is acrossover artist, according toNewsweek. By that the magazinemeans that his business bookGood to Great has developedmass appeal with more than 1 million hardcover sales. Thebook is about how 11 compa-nies transformed themselvesfrom good to great performers.Fortune asked Collins to write

NewsmakersWHO’S IN THE NEWS A Roundup of Media Mentions

Steve Luczo took his company offthe market with VC funding.

Eric Zitzewitz, assistant professorof strategic management, was interviewed by CNBC and others in September for his work on mutual fund trading practices.

HO

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Doctor’s Specialty:Ailing HospitalsIn just two years Dr. Andrew

Agwunobi, mba ’01, broughtone of Atlanta’s large privatehospitals back from the brink of bankruptcy, according to theAtlanta Journal-Constitution.Now Agwunobi, a native ofScotland is heading GradyHealth System, Georgia’s largestpublic hospital system. Gradyfaces a $20 million deficit, andin newspaper interviews andreports from county supervisormeetings, Agwunobi has pre-scribed structural changes thatinclude making more of the hos-pital’s operations transparent tothe public. “Sunlight helps tocure festering wounds that cov-ering up doesn’t help,” the doc-tor said.

Stop and Smell the GardeniasFragrance, texture, and soundare easily overlooked keys todesigning a spectacular garden,according to Stephen Suzman,mba ’74, the owner of SuzmanDesign Associates, a 20-year-oldSan Francisco Bay Area land-scape design firm. In an inter-view with the San Francisco


a cover story, “The 10 Greatestceos of All Time,” and laternamed him to its shortlist of five“zeitgeisters—people who havean uncanny ability to influencewhat others think.”

Venture Capital on RiseSilicon Valley’s pessimism hasgiven way to new venture capi-tal funds, according to a recentarticle in the Los Angeles Times.“It’s a great time for investing in early-stage companies thatwill mature in three to fiveyears,” said Larry Kubal, mba’82, managing partner ofLabrador Ventures. The firmrecently raised $100 million forits fifth investment fund—$10million more than its last fundlaunched at the end of 2000.

“In the bubble, all the vcs feltvery smart,” Kubal said. “Thenfor the last three years we all felt foolish. No one’s iq haschanged. Egos have. The pendu-lum always swings too far in the venture business.”

Do What You Do BestSince David Levin, mba ’87, tookover as ceo of privately heldSymbian Ltd. in London, thecompany’s operating systemsoftware has caught on with cellphone makers and consumers.“Meanwhile, rival Microsoft isstill having trouble getting trac-tion in a market it views as criti-cal to its future,” according toBusinessWeek Online. Levin credited his predecessors withdeveloping a strong product and said his contribution hasbeen “mostly a perceptual turn-around.” The company gave uptrying to make a “soup-to-nutsoperating system” for all hand-held devices, he said. “Nobodyknows yet what consumers real-ly want,” and Symbian hasfound it can keep 85 to 95percent of the computer codeunchanged as it accommodatesthe desires of different cell phonemanufacturers. Levin’s own pre-diction for the future? Smart cellphones are not replacements forpersonal computers, but they“will eat into the markets forcameras, games, and pdas.”

Chronicle in his flower-filled Cas-tro District garden, Suzman saidthat smell is the most primal ofour senses, and it evokes strongmemories. For example, theheavy perfume of gardenias inhis family’s Johannesburg gardenis one of his earliest memories.For noses in heavy San Franciscoshade, however, he suggestedDaphne odora and Rhododendronfragrantissima. If you live in thesun, try lemon verbena, scentedgeraniums, and freesias.

Companies SeekSeasoned Consultants In the wake of corporate scan-dals and a recession, firms areforcing management consultingfirms to rethink their businessmodel, Fortune magazineclaimed recently. That modelrelies on smart, young mbas togive strategy analysis adviceunder the supervision of part-ners who make bigger salaries.Today companies want smallerteams of more seasoned consult-ants, the magazine said, admit-ting it may be a temporarytrend. John Donahoe, mba ’86,worldwide managing director ofBain & Co., said that to satisfyclients’ demands for seasonedpros, the firm brought in 20

new partners over 18 months,some poached from competi-tors. Donahoe defended youngconsultants’ number crunchingskills, however. “Rather thansay we know the answer on dayone because we’ve done it fivetimes before, we’re focused ondeveloping customized strate-gies for our clients.”

The World’s Her StageWhy not supplement Holly-wood with Bollywood? That’swhat stage, film, and tv actressJennifer Siebel, mba ’01, hasdecided to do, according to the Times of London and theEconomic Times of India.

Siebel was in gossip columnsnot long ago for dating actorGeorge Clooney. They are justfriends now, she told Parade,because “our careers left littletime for a relationship.”

After business school, Siebelstudied at San Francisco’s Amer-ican Conservatory Theater, then moved to Hollywood,where she costarred in the television show Presidio Medand the film Waiting for Anna.

Siebel is breaking into produc-ing in India, where she said shealso plans to costar in a Hinglishmovie “about an American girlwho, after flying down to Indiaas part of a Survivor-type realityshow, loses her way.” ■

THEO

& J

ULI

ETJO

HN

SP

INK

He resuscitated a private hospital in Atlanta. Now Andrew Agwunobi is asked to do the same with Georgia’slargest public hospital system.

Actress Jen Siebel is now producing a movie in India.

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january 24: Latin AmericanConference

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FEBRUARYFEBRUARY

february 11: Arbuckle AwardDinner honoring Andy Grove,ceo of Intel Corp.

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FUTURE EVENTSFUTURE EVENTS

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For Lifelong Learning events,see https://alumni.gsb.stanford.edu/lifelonglearning/or call 650.723.4046

Also see the alumni online calendar at https://alumni.gsb.stanford.edu/events/calendar/

For details on Executive Education programs, see the advertisement on page 51 orwww.gsb.stanford.edu/exed

NOVEMBERNOVEMBER

november 2–7: ExecutiveEducation “Leading Changeand Organizational Review”

november 9–14: ExecutiveEducation “Finance andAccounting for NonfinancialExecutives”

november 21: Minority Per-spectives Day—mba open houseaddressing interests specific toprospective applicants of color

DECEMBERDECEMBER

december 12–24 (winterbreak): Student Study Tripsand Dinners on Break hostedby current students and alum-ni/ae for prospective mbaapplicants in selected interna-tional cities. Alumni/ae inter-ested in cohosting a dinnercontact [email protected]

march 17–19: Executive Education “Strategy for Nonprofit Organizations”

march 20–28 (spring break):Student Study Trips and Dinners on Break hosted bycurrent students and alumni/aefor prospective mba applicantsin selected international cities.Alumni/ae interested incohosting a dinner [email protected]

march 22–24: Executive Education “Advanced Negoti-ation and Deal-Making Strategies” in Dubai

march 28–30: Executive Edu-cation “Strategies for EffectiveDecision Making,” in Dubai

april 3: Future of ContentConference

april 4–9: Executive Educa-tion “Negotiation and Influ-ence Strategies”

april 7: Cool Products Expo

april 10: High Tech Conference

april 18–23: Executive Education Courses “CreditRisk Management” and“Advanced Negotiation Program”

april 25–30: Executive Education “Strategic Uses ofInformation Technology”

www.gsb.stanford.edu/exedPhone: 866.542.2205 (toll free, U.S. and Canada only) or 650.723.3341 Fax: 650.723.3950 Email: [email protected]

2004 Executive EducationG R A D U AT E S C H O O L O F B U S I N E S S

S TA N F O R D

General Management ProgramsStanford Executive ProgramJune 20 – August 3

Executive Program for Growing CompaniesFebruary 15 – 27 and July 18 – 30

Stanford – National University of Singapore Executive Program in International Management (in Singapore)July 25 – August 13

Executive Management Program: Gaining New Perspectives(at Stanford Sierra Conference Center)September 19 – 25

Financial ManagementCredit Risk Modeling for Financial InstitutionsApril 18 – 23

Finance and Accounting for the Nonfinancial ExecutiveMay 2 – 7 and November 14 – 19

Financial Management ProgramJuly 11 – 16

MarketingStrategic Marketing ManagementAugust 15 – 25

NegotiationNegotiation and Influence StrategiesApril 4 – 9 and October 17 –22

Advanced Negotiation ProgramApril 18 – 23

NEW!

Leadership and StrategyLeading Change and Organizational RenewalMarch 14 – 19 (at Harvard)October 31 – November 5 (at Stanford)

Corporate Governance ProgramJune 1 – 4

Managing Teams for Innovation and SuccessJune 6 – 11

Executive Program in Leadership:The Effective Use of PowerJuly 11 – 16

Executive Program in Strategy and OrganizationJuly 18 – 30

Mergers and AcquisitionsAugust 15 – 20

Human Resource Executive Program:Leveraging Human Resources for Competitive AdvantageSeptember 19 – 24

Nonprofit and PhilanthropyExecutive Program for Nonprofit LeadersFebruary 29 – March 12

Strategy for Nonprofit OrganizationsMarch 17 – 19

Executive Program for Nonprofit Leaders — ArtsJune 20 – July 2

Executive Program for Educational LeadersJune 26 – July 2

High Impact PhilanthropyAugust 1 – 6

Technology and OperationsStrategic Uses of Information TechnologyApril 25 – 30

AeA/Stanford Executive InstituteAugust 8 – 20

Managing Your Supply Chain for Global CompetitivenessAugust 22 – 27

CHANGE LIVES,CHANGE ORGANIZATIONS,CHANGE THE WORLD

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