Ahead of the Curve (32 page)

—YVON CHOUINARD, FOUNDER
OF PATAGONIA, TO THE
HBS BUSINESS OF THE
ENVIRONMENT CLUB,
2006

In the car park of the St. Moritz Toboggan Club in Switzerland, the home of the Cresta Run, there is only one reserved parking spot. It is for a fabled German bobsledder who coaches first-timers down the jaw-rattling ice chute, and is marked with a homemade sign that reads “Guru.” At Harvard Business School, as in St. Moritz, there was but one true guru. The Guru was urgent in everything he did. Despite a bad right leg, he walked fast, leaning away from the weight of his battered, bulging brown leather briefcase. Other professors would slink into the classroom, hang their jackets in a nook, and wait for the students to file in. The Guru had an entourage who swarmed the room before he arrived like a presidential security detail. One of his assistants set two cans of Diet Coke on his desk, his caffeine ration for the next two hours. He needed them like baseball players need amphetamines to stay awake during long, hot days in the field. His uniform was a blue woolen blazer, light gray trousers, and a silk tie, though he put on a suit for visiting heads of state. His once-blond hair was whitening now and worn swept across his head, a frosting of elder statesmanship. His pale blue eyes stared out from behind clear horn-rimmed glasses. When he became excited, you thought his eyeballs would burst through his lenses and clatter to the floor like marbles.

“So what explains Finland’s success in telecommunications?!”

He strode up and down the steps in the classroom, his arms turning like a windmill, his trousers covered with chalk dust. This was the fourth time he had asked the question, but he was still unhappy with the answers.

“Come on. What explains this small Scandinavian country’s becoming the dominant player in this field?”

Michael Porter was an all-state high-school basketball player, and it was easy to imagine him in one of those old-fashioned uniforms, eyes darting, the ball bouncing rhythmically beneath his hand, slashing his way up and down a basketball court in New Jersey, where he grew up, directing the action from beneath a mop of blond hair, turning his back to a defender and then flicking the ball over his opponent in a perfect arc, like Pistol Pete Maravich. After high school, he attended Princeton, where he played NCAA golf and earned his BSE in aerospace and mechanical engineering in 1969. He then brought his game to the study of business at Harvard, earning his MBA in 1971 and his Ph.D. in 1973. He was now one of seventeen University Professors at Harvard, the highest academic position available, and one of only two at the business school. (The other was Robert Merton, a finance professor who won the Nobel Prize in 1997 for his work on valuing stock options.) The
Times
of London ranked Porter as the most important business thinker in the world. His official biography listed honors ranging from Catalonia’s Creu de St. Jordi to Nicaragua’s José Dolores Estrada Order of Merit, not to mention a slew of honorary doctorates and academic honors from around the world. The only thing missing was a Nobel Prize, which, if everything went to plan, could not be too far away.

Porter began his career thinking about companies and the way they compete. His ideas were the basis for the RC strategy course. These days, he was applying himself to entire countries and regions. He was advising the government of Libya on a program of national economic regeneration, while his latest book was about reforming America’s healthcare system. In his spare time, Porter served on company boards and as senior strategic adviser to the Boston Red Sox. He gave the impression that no problem was so vast or slippery that it could not be attempted with the pitons, ropes, and pickaxes of a Porter analysis. It turned out to be a wonderfully optimistic way to think about the world, and exactly what I needed at this point in my MBA experience.

Porter’s class was the only one at HBS for which you had to apply. Some people groused and said they would never “kiss the ring” as if Porter were the pope and we mere supplicating sinners. I had no such problem. In my application letter, I said I was keen to learn about applying what I had studied at HBS to problems larger than those of companies. I had grown up in the United Kingdom where I had witnessed the extraordinary influence of economic policy in creating the European Union and helping to bring an end to the civil war in Northern Ireland. But I had also seen how a rotten set of economic policies had destroyed Burma, my mother’s home. I wanted to discover more about business as a driver of social progress. Roughly half of the applicants to the course were accepted, and I was delighted to be one of them.

The course was called Microeconomics of Competitiveness, though that makes it sound less interesting than it was. What it really dealt with was the big, gnarly question of how to spur economic development at local, regional, national, even continental levels. It was about how you coordinated business and government, schools and universities, road-builders and everyone, really, in a society to pull themselves up the economic ladder. Porter’s analytical approach began with what he called the diamond. This was a way of assessing the quality of an economic environment by putting all the forces that affected it into four separate buckets and analyzing how they helped or hindered one another to create a good environment for business. It allowed you to get beyond the natural advantages of any particular economy—large oil reserves, for example—and start to understand the causes of sustainable competitiveness. You took a country, region, or city and looked at the rivalry between companies, the demand from consumers, the availability of skilled labor or capital, and the supporting network of industries. Each corner of the diamond could be unpacked and investigated, but overall it allowed you to see through to the potential sources of competitive advantage. Porter believed that the fundamental unit for thinking about competitiveness was not the individual company or sector but the “cluster.” To understand the success of Wall Street, for example, it was insufficient to credit the banking talents of a few executives, or the organizational setup at a few firms. You had to look at the presence of so many firms and financiers working in such a tight space, all the terrific universities in and around New York City turning out gifted graduates, the proximity of first-rate corporate lawyers, the courts and the legal framework, the exchanges, the Federal Reserve Bank of New York, the range of other businesses and corporate headquarters in the city. Together they made Wall Street what it was. It was the strength of the cluster, not the individual firm or sector, that mattered, and the strategist aiming to spur economic progress should work to develop every part of the cluster.

At the core of Porter’s thinking was the belief that competition was the engine of productivity growth and that every business, town, or country should be seeking out a competitive advantage and developing it. But he had evolved this into something more humane than it first sounded. The cases we studied ranged from Finland to Rwanda to the slums of St. Louis. Porter was willing to address himself to any problem, however hopeless. He was not just another business school professor trying to figure out how to drive an ever-wider wedge between cost and willingness to pay. He was taking the best of HBS and applying it in areas too often starved of such intellectual horsepower. In the Rwandan case, for example, we studied a country that after the genocide of the mid-1990s had to rebuild from next to nothing. But by the end of the class, and after watching a video of the country’s president, Paul Kagame, who had come to speak to a previous year’s class, we had laid out a detailed strategy for Rwanda to build its competitive advantage through scientific education and lightweight exports, which could be flown out of the country rather than having to take the dangerous land routes to the ocean. Was it implementable? Well, it was a start.

Porter’s class consisted of forty MBA students and forty students from the Kennedy School of Government. While the MBAs would waltz into class in T-shirts, having walked through the tunnels linking the buildings on campus, the Kennedy School students arrived stomping snow from their boots, their faces raw from the wind lashing the Charles. The gulf between the business and government students was also apparent in how we approached the class. The HBS students would opine authoritatively, working solely from data in the case, while the Kennedy School students would squirm under Porter’s questioning and then come up with big, broad remarks such as “this is the problem when business and government work together.” But Porter’s goal was to meld the cultures and approaches of the two schools by pushing us on, urging us to consider how we would revive the Estonian economy or expand a washing machine business in Latin America. In the washing machine case, we were discussing whether the business should try to survive in the face of low-cost Asian competition when I put my hand up and was called on. I said the owner of the business should sell out now. He was not playing to his competitive advantage. It was the right answer for the business school. But Porter stared at me, folded his arms, and looked around the class. “Who thinks he should sell?” A student from the Kennedy School raised her hand and said that perhaps the owner of the business should keep going and that if Latin America was ever to have a home-grown appliance business, it needed to persevere and not sell out at the first opportunity. This was what Porter had wanted to hear—not my blinkered, manufactured MBA answer. I had been thinking solely of the competitiveness of the business, not of the people, country, and region it represented. I should have known better. Had I built a washing machine manufacturer from the ground up in Costa Rica? Had I defied all the odds to spend twenty years building factories, hiring employees, and developing a supply chain and marketing strategy? No. But I felt comfortable enough advising the founder to sell out rather than try to build something he and his country could be proud of. This was why people hated MBAs. Too much cost-benefit analysis, too little humanity.

I had recently visited a prominent journalist who was researching at the Kennedy School. We talked about the future of newspaper publishing, and he told me that newspaper owners would simply have to accept lower returns than they were used to. Instead of 15 to 20 percent, they would have to get used to 8 to 10 percent. And wasn’t that enough? His economic logic was driven by his desire that newspapers survive and not be destroyed by the rush of advertisers to the Internet. Before arriving at Harvard, I would have agreed with him. Of course that was the answer. Newspapers survive but make a little less money. What a perfect solution! But it was an emotional response. The rational one was different. And as he spoke, I thought, “if only you understood . . .” Margins don’t just fall a bit and then settle at a lower level. They could just fall and keep falling until there was no economic reason to be in newspapers at all. Business school had taught me a way of thinking about problems that was useful, often correct, but not always comfortable. I once asked a hedge fund manager in New York about the reckless way credit was sold to people who could ill afford it. I said they would be ruined. They would lose their homes and their possessions. Where were the checks on all this? Who was helping to teach people about responsible borrowing? What would happen to all these firms lending like crazy when people stopped paying back their loans? The hedge fund manager looked at me like I was a madman and said, “It’s just economic.” He meant that over time these borrowers would learn their lesson. The bankrupted lenders would be bought cheaply by other investors and turned around. The economic wheel would keep turning, no matter how many lives had been crushed against it. However true, it was also unpleasant. In Porter’s class, I realized that my response to the appliance company’s problem had placed me on the dark side. However technically correct an analysis might be, it could also be too rational. Achieving the balance between reason and emotion would never cease to be a challenge.

Jack Welch, the former head of General Electric, visited campus during the second year to promote a book he had written. He came to a packed Burden Auditorium to be interviewed by Rakesh Khurana, a professor who had criticized the cult of the superstar CEO, which Welch embodied. Khurana began one of his questions: “Business is too important an institution for us not to pay attention to its leaders—” Welch butted in. “No, it’s
the
most important institution. It all revolves around that. Government generates no revenues. Government lives off taxes generated by business and people that work in business. Don’t ever forget that.” How any businessman, not least the most fêted one of the past thirty years, could say this astonished me. Did he seriously believe that business could run without sound government? Were the two not mutually dependent? What about clusters? Was Welch’s narcissistic view representative of America’s corporate elite? And what of people who went into government after a Harvard graduate education? Were they just mugs? It was one thing to say government should be run more like business, with more efficiency and accountability. But to say that business was
the
most important institution seemed unhinged. It was the kind of view that could prompt a revolution. The great unwashed would punish Welch’s hubris by desecrating his homes and country clubs. Porter’s course, I found, was a useful counterweight to Welch. It showed that business was not the sole driver of a society and that it was possible to come out the other side, to have an MBA, to put competition at the center of one’s beliefs, and yet not be a completely heartless scumbag.

My fascination with strategy led me to take two more courses in the subject during this final semester. One was the most popular course in the elective curriculum, Advanced Competitive Strategy, with Jan Rivkin, a small, wiry South Carolinian with a badger’s brush of gray hair. Rivkin resembled a NASA rocket scientist of the 1950s or a member of Robert McNamara’s inner circle in the 1960s Department of Defense. His shirts and suits were perfectly pressed. Before the start of every class, he lined up three small bottles of apple juice on his desk to keep himself energized. His color-coded notes were laid out meticulously well before any of us arrived. His CV was a litany of academic scholarships and awards, and he had been a repeat winner of the teaching award voted on by students. He brought such intensity and enthusiasm to his classes, you felt obliged to return the compliment with preparation and thought.