Stanford GSB: Stanford Business May 2000

Stanford Business

May 2000, Volume 68, Number 3

Throwaway Companies

Haim Mendelson photo

Companies of work teams will come and go to fill specific needs, says Haim Mendelson.
Photograph by Mark Robert Halper

LARGE, VERTICALLY integrated corporations that control the entire value chain are breaking down into smaller firms that perform discrete portions of the business process, Professor Haim Mendelson told CIO magazine. In a story exploring the workplace of the future, Mendelson forecast that there will be three types of companies: those that focus on knowledge and develop products and services; those that focus on physical production; and those in the distribution business.

The changes will produce a demand for virtual companies of workers who come together temporarily to fill specific needs. "You can't really form a group of people that will satisfy next year's demand," he said.

This new style of creating work groups also has some problems. Individuals recruited into a virtual company "do their job, then they may continue into a couple of other generations of the product and then move on to another activity. The problem is, if we have a product created by a large number of components, what do you do if a component fails?"

Playing and Winning the Dot-Com Game

AREYOUGAME.COM rose to the occasion during its second Christmas season, a year that saw many e-tailers unable to cope with customer demand. The firm that sells more than 1,500 traditional game titles was founded in 1998 by Bob Moog, MBA '84, as a retail outlet for University Games, a game manufacturer Moog founded in 1985. According to the San Jose Mercury News, one reason that AreYouGame.com didn't attract more business than it could handle was that it had advertised only in selected markets outside the San Francisco Bay Area to try to control demand. During the peak season all 18 employees, including Moog, pitched in to answer phones, check the Web site at odd hours, and keep the toys moving out the door.

For Moog, it was the end of a hectic year that included a stint running Toysrus.com, a Web-based operation for the retailer. The arrangement fell apart after a few months as the traditional retail business struggled to figure out how to accommodate an online presence.

Team-Building Unlocks the Box

HAVING EMPLOYEES DRIVE Formula One race cars, attend cooking school, or wear propeller beanies around the office may seem like just more Silicon Valley craziness. But Business School professor Charles O'Reilly says seemingly bizarre corporate rituals like these may actually help employees link as a team and form emotional bonds. In its profile of Christos Cotsakos, the unorthodox CEO of online brokerage E-Trade, Business Week asked O'Reilly for some observations. "If you're open and honest with each other, you're more willing to propose things that are out of the box," said O'Reilly.

Sticky Issue for Big 5

IN AN OP-ED PIECE published in the Los Angeles Times, Senior Lecturer Kirk Hanson, MBA '71, explored the sticky issue of whether partners in auditing firms violated rules by investing in companies they were hired to audit. Hanson was responding to a report commissioned by PricewaterhouseCoopers (PWC) exploring whether the firm was in conflict.

One problem, said Hanson, is that in the current era of mergers and acquisitions, who owns what changes frequently. A firm that the company had no financial interest in a week ago may acquire or be acquired, creating a conflict tomorrow. Accounting firms themselves contribute to this conflict. The former Big 8 accounting firms are now the Big 5, thanks to mergers.

"PWC and its competitors merged because they believe that there are economies in having larger firms. Then let them accept that there are also costs, and among them are the broader restrictions on personal investments of their partners. The conflict of interest rules, as written, serve a critical function and must be preserved," Hanson wrote.

Small Wins Add Up to Big Change

GENDER DISCRIMINATION "is built into the fabric of organizations," argues Debra Meyerson, PhD '89. So when organizations want to help women advance, they should stop looking at the glass ceiling and look instead at the whole organization. Meyerson, a member of the Simmons College faculty and visiting associate professor of OB at the Business School, and her coauthor, Joyce Fletcher, attracted wide media attention with an article urging firms to make a series of small adjustments to their organizations' cultures.

They cited the case of an investment bank that found that its interview process tended to screen out women and other nontraditional candidates.

The bankers "changed the interview because they saw how they were screening for similar people, but that also raised bigger issues and made them question how they were evaluating people" throughout their organization, Meyerson told the Toronto Globe & Mail. The result was a series of "small wins" that tended to improve overall performance of the organization.

Venture Capitalists Take Center Stage

THEY HAVE PURSUED their art for decades in relative obscurity. Their names and firms were well known in business circles, but until recently, the average Business Week reader didn't know John Doerr from John Tesh. All that has changed, as journalists have begun to vie with one another to paint the most colorful picture of the darlings of the dot-coms-venture capitalists.

Fortune described "what it's like to be a red-hot venture capitalist at a time so extraordinary that it seems everyone and his cousin wants to be a VC." The piece told how John Mumford, MBA '69, of Crosspoint Venture Partners invested $15 million in Buzzsaw, a startup that intends to provide Web-based services for the construction and building industry. "He's been through some grisly years when he wouldn't have dared invest $15 million in such an embryonic company," observed the magazine. Mumford has invested in 29 startups this year and is currently raising another $600 million fund, said Fortune.

Tiny startups aren't the only area of interest to venture capitalists today. Fortune also described how Geoff Yang, MBA '85, put together a deal with Procter & Gamble to create a new firm called Reflect.com to sell a new cosmetics brand only on the Web. During the negotiations, Yang and his team from Institutional Venture Partners even traded their traditional khakis and sport shirts for suits for the Cincinnati powwow with P&G. When they arrived, they found the consumer goods executives had hung up their traditional blue suits and were wearing khakis for the occasion.

To interest Yang and his partners, P&G had to agree that Reflect.com would be more like a startup than a traditional subsidiary, a very unusual approach for a major corporation. "What energized us was that this was not just another e-tailing deal," Yang told the magazine. "They were going to do something no one's done before."

By the time the deal was under way, Yang had left IVP to become the cofounder of Redpoint Ventures, a new firm that pursues only Internet-related business. A profile of the firm in the San Jose Mercury News noted that Yang is the opposite personality to John Walecka, MBA '88, another Redpoint partner, known as an introverted expert in Internet infrastructure. Redpoint set a VC record, the Mercury noted, raising $600 million, the largest first fund of any VC firm to date. On the Redpoint team is Jamie Rosenberg, MBA '99, who is cruising the Los Angeles area for Internet opportunities that connect the entertainment industry and the Web.

Startup Braces for Success

DOT-COMS AREN'T THE ONLY startups attracting Business School entrepreneurs. For Zia Chishti and Kelsey Wirth, classmates in the MBA Class of 1997, their bright idea has turned into a multimillion-dollar company dedicated to straighter teeth. Align Technology, with 150 employees in Sunnyvale, Calif., has developed a system to realign teeth using a series of clear plastic retainers rather than the more commonly used wires and rubber bands. "We're doing the same thing that autos did to the horse-and-buggy industry," Wirth told the Wall Street Journal.

The technology appeals to adults who wouldn't consider wearing traditional metal braces. The paper reported that the concept of moving teeth with a retainer has been around since the 1970s, but earlier versions used rubber devices that caused problems.

The current version was created, according to the Journal, after Chishti lost his retainer and saw his own teeth start to shift out of place. He and Wirth wrote a business plan when they were students as part of an independent study course and soon were shopping for venture capital. By the end of last February, Align had trained 25 percent of the orthodontists in the nation and its technology was being used by 1,200 patients.

Sticking with the Game Plan

IN EARLY 1999, John Ballen, MBA '84, and cochair Jeff Shames faced a turning point for their firm, MFS Investment Management. Fortune reported that their top money managers, including John Brennan, MBA '85, were leaving to start a hedge fund. To try to keep the managers from jumping ship, Ballen and Shames faced the decision whether to make changes—such as starting a new fund—to Boston's oldest mutual fund company. According to Fortune, the two let their top managers leave and then promoted two company veterans. Preserving the firm's sense of cohesiveness paid off in healthy financial returns. "MFS isn't a one-man shop or a two-man shop," Ballen told Fortune.