Lessons From the Roadside

In an excerpt from their new book, three economists share what they learned about small businesses in America.

June 10, 2014

| by Stanford GSB Staff


After an economics conference in Boston several years ago, the three of us — all business professors — had a bit of time to kill before our flights home, so we decided to hit the road. That trip was just the first in a series of road trips in which we met with small-business owners, collected the stories of the strategic business problems facing small businesses, and then showed how the frameworks we teach in our MBA classes apply.

On one trip, we traveled to Pensacola, a fast-growing city on the western edge of the Florida Panhandle, to visit the leadership team of CollegeFrog, a tech startup trying to transform college recruitment and hiring in the stodgy world of accounting.

We found this visit to be particularly enjoyable because it allowed us to make accountant jokes. Accountants are the only group who make economists seem exciting, so we have to take our shots when we can. CollegeFrog’s Jeff Phillips began the meeting by outlining the company’s business model: “It’s a Web-based application. Half of it is a jobs board; think for college students and entry-level jobs. The other half is an applicant-tracking system that automates many of the steps of recruitment and eliminates waste.”

“Ninety percent of the people hired each year in the accounting industry are straight from college,” his colleague Frank White continued, “and our goal is to streamline the recruiting process. Everybody knows the Big Four accounting firms; they are the absolute masters of college recruiting. But there are five or six thousand accounting firms in the country, and we want to take what the Big Four do and bring it to the next five thousand.”

“We collect résumés from students and build a totally searchable database,” CollegeFrog’s James Hosman added. “Suppose a firm wants somebody who has Beta Alpha Psi experience, which is the accounting fraternity. They can search for that once they’re a subscriber.”

“Wait,” Paul said. “There’s an accounting fraternity?”

“Imagine the parties,” Mike quipped.

“So many accounting jokes,” Jeff said through a strained smile, obviously having heard all of them thousands of times.

If a college senior wants to get a job as an accountant, he or she (note: most new accountants are women) sends her résumé to the firms she knows. Colleges help with placement as well, often publishing a book of students’ résumés and sending it out to local firms. On their end, accounting firms looking for employees typically visit a few local schools and do a day of on-campus recruiting. This process leaves much to be desired, however, since both sides may miss out on good matches by searching too narrowly. Using online search, CollegeFrog is trying to make it easier for both sides to find each other, especially if they are not in the same geographic area. To do this, however, they need to do two things: They need to attract accounting firms to post jobs, and they need to induce aspiring accountants to post their résumés.

Jeff described the Facebook-like plans at CollegeFrog. “We are trying to become the network for accounting talent in college. We are becoming the expert on the recruiting process in this industry. The idea is once that network effect kicks in — once we have enough students and enough firms — then it will be the place everybody comes because that’s where everybody else is. We think there’s value in that network itself.”

During our time on the road, many business owners told us they are “on Facebook” trying to develop a brand presence through social media. But CollegeFrog is one of a smaller set of companies that are using Facebook as a model for developing entry barriers. Facebook protects its market position by utilizing what economists call a “network effect.” Consumers are attracted to Facebook partly by the service itself, but even more by the size of the network of other users. What good would it do any of us to post banal commentary and silly pictures on a timeline that none of our friends can see? It’s a wonderfully virtuous cycle: The more people who go to Facebook, the more people want to go to Facebook.

For Facebook, network effects generate the ultimate entry barrier. Once Facebook became established as the leading social networking site, it became difficult for others to acquire users and enter the market. After all, who would choose to join a brand-new site with no friends to find? Entrants face a network-effects conundrum: In order to attract users, you must first have users, so it’s practically impossible to get going.

Network effects are not exclusively the province of Internet businesses. Consider shopping malls. Stores want to open in malls that have a lot of shoppers, and shoppers want to go to malls that have good stores. If there is a well-established mall in an area, it is difficult for a new mall to make inroads. Why should a store open there instead of taking advantage of the critical mass of shoppers at the existing mall? The network effects at work here are somewhat more subtle than in the Facebook example. Shoppers go where the other shoppers are not because they value the presence of other shoppers directly, but because a critical mass of shoppers helps attract stores. It is precisely this indirect effect that CollegeFrog hopes to exploit: A critical mass of accounting students will attract firms and vice versa.

Should CollegeFrog limit itself to the accounting market and to new college graduates? If the network effects work for accounting, they should, in principle, also be relevant for teachers, engineers — the whole hiring market, really. But just as Facebook spread its network slowly from one college to another and, after some time, to the broader public, CollegeFrog is trying to create strong networks one market at a time.

Jeff explains, “We got some very good input from one of our advisers early on, who said, ‘You guys really need to develop your product in one industry, focus on that industry well, own it, and then expand into other industries.’”

When we met with CollegeFrog, they were at a crucial point in their growth. They had just sent out bills to their initial subscribers and were waiting to see whether anybody would pay them. Had they hit the critical mass of students where the firms felt they had to be part of it? If so, they could start reaping the benefits of the network they had developed and watch it grow. Better yet, they could start thinking about other markets besides accounting. But we had bad news for the guys at CollegeFrog — there’s already a well-established system for hiring PhD economists.

Excerpted from the book Roadside MBA by Michael Mazzeo, Paul Oyer, and Scott Schaefer. © 2014 by Michael Mazzeo, Paul Oyer, and Scott Schaefer. Reprinted by permission of Business Plus. All rights reserved.

Michael Mazzeo is an associate professor of management and strategy at Northwestern University’s Kellogg School of Management. He received from Stanford his PhD in 1998 and his AB in 1991. Paul Oyer is the Fred H. Merrill Professor of Economics at Stanford GSB. Scott Schaefer holds the Kendall D. Garff Chair in Business Administration and is a professor of finance at the University of Utah’s David Eccles School of Business. He earned a PhD from Stanford GSB in 1995 and a Stanford BAS in 1990.

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