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Wednesday, April 13, 2011

Experiential entrepreneurial education

I am now just recovering from the weekend I spent with the three SJSU teams at the 47th Annual International Collegiate Business Strategy Competition. Our teams did very well — two firsts and a second — surpassing the total (if not the batting average) of our two 2008 teams.

The experience of coaching the ICBSC teams for the past six years has made me a true believer in the value of simulation in business education. In fact, I among several strategy faculty this month discussing how to include simulation in SJSU’s planned revision of the undergraduate B.S.B.A. curriculum.

I believe that the ICBSC experience is also a great one for prospective entrepreneurs. It’s hard for me to separate out the intercollegiate competition from the underlying software (the Business Policy Game), but from my own startup days I recognize degrees of realism in the simulation that we don’t otherwise have in the undergraduate or graduate curriculum.

The BPG backstory is not particularly entrepreneurial. The student team (typically 4-6 people) is taking over as the new executive leadership of a 2-year-old publicly traded (!) company, and you have five years (20 quarter) to growth the business and do a better job than your competitors in terms of stock price, net income. profitability ratios and other elements of what looks a lot like the “Balanced Scorecard.”

However, the way the simulation plays out is very entrepreneurial. Despite having revenues of $10 to $30 million a year, the “executives” have no staff: if anything is going to get done, it gets done by the team members.

There are also immovable deadlines: whether a decision is optimal or not, the game follows the maxim of one of my former entrepreneurial mentors: “any decision is better than no decision.” (Would that I’d followed that more often).

On Saturday, members of one of my MBA teams said that their ICBSC final presentation reminded them of working in a startup — editing the slides for their presentation literally as they walked into the room to give their required talk to the judges. (Alas, this approach was not as effective as the other SJSU team that had started their talk earlier).

However, the most important point is one that generalizes to any simulation for entrepreneurship students. I ask my students to write business plans, and I give them feedback on what parts of their plans are good and bad. But they see this as just my opinion, and sometimes they’re right.

In a simulated business competition, the computer is telling them what’s working and not working, at many different levels. Perhaps their new product is selling well, but their margins are too low due to high input costs or limited pricing power.

The simulation comes as close as we can to providing feedback of the market in terms of meeting a payroll and getting to positive cash flow. Believe me, all of the teams have etched into their heads that “cash is king” and the importance of keeping cash inflows ahead of outflows. (One rival did so badly that they had to sell both factories to cover their bills, leaving them only one quarter away from closing operations.)

Some people say that the way to educate prospective entrepreneurs is to have them run actual businesses. There’s a value to that, but I think that’s more something they should do in high school in Junior Achievement than necessarily in college.

The problem is that these student businesses are just that. Yes, you learn how to get customers and cover costs, but unless you’re Michael Dell, they’re just a student business. (Even Ralph Rubio waited five years after graduating to start his fish taco stand.)

For would-be tech entrepreneurs, the challenge is more daunting. yes you can start an iPhone app business or a software consulting business, but most tech business require more capital (and typically some seasoned management) to pull off.

After years of coaching these teams, I think there’s an event more fundamental difference: we learn more from failure than we do from success. Our teams this year made mistakes — a few huge ones — and I suspect those mistakes will stick with them a long time.

I still remember spending $250k of our retained earnings on a product that failed, taking with it the company’s retail software operations. (Fortunately, we refocused the business and got lucky when customers jumped in our lap five years later.)

Are we ready to have lots of student businesses fail, and fail big? Or will we give them so little resources that they fizzle out quietly before they can lose to much money?

In that regard, the simulation competition may distort the lessons that could be gained in a classroom setting. In the ICBSC competition, if two teams grow their company from $10m to $30m/year (with 10% net margins) only one can be a winner. In the real world, both management teams get nice houses, nice vacations and happy investors.

More seriously, the 5th place teams give up because they have no chance of winning, rather than trying to do the best by the employees, managers and investors. So in the classroom setting, I would give a bonus for winning, but in the end grade the students on how well they ran their business rather than how well they did versus competitors.

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