Starting Up and Starting Over

01 Dec 1996

Starting Up and Starting Over

HBS Entrepreneurship in the Postwar World

What is it about HBS that has produced such a steady stream of remarkable entrepreneurs whose endeavors have changed American life in the postwar decades? The creative impact of the case method, as noted earlier, should not be underestimated. But in addition to that key element, there have been a number of developments during the School's history that have helped create and stimulate a climate favorable to entrepreneurship at Soldiers Field.

The Business School's first Dean, Edwin F. Gay, while a student of economic history in London in the 1890s, grappled with the question of whether the landlord, the entrepreneur, or the worker contributed most to England's prosperity. Later, as HBS Dean, Gay's primary duty was to prepare his students for their role in the administrative organization that was emerging as the business model in America. Yet Gay remained concerned about the role of innovation within such a structure.

In the 1930s and 1940s, Deans Wallace B. Donham and Donald K. David oversaw significant research on the importance of innovators to business. Much of this material was published in the Harvard Studies in Business History series and is still drawn on for use in business history courses today.

The first HBS course designed specifically to teach entrepreneurial management - The Management of New Enterprises - was introduced in 1947, one of several HBS initiatives undertaken to address the unique circumstances presented by the cessation of global conflict.

The end of World War II saw a massive invasion of America's own shores, with wave upon wave of returning veterans - along with their civilian countrymen - eagerly anticipating the fruits of peace and the comforts of "the good life," including consumer products and services.

But joy over the war's conclusion was tempered by lingering economic fears: one poll indicated that nearly half of all Americans expected that within a decade, another depression would devastate the country. With the health of the peacetime economy now the nation's top concern, Harvard Business School took a leadership role to promote, in word and deed, the salutary effects of entrepreneurship.

In keeping with that objective, in October 1945, Professor Sumner H. Slichter, the first HBS-based professor to be named a University Professor, wrote an article for Fortune magazine, a particularly influential voice for business ideas in that premass-media era. Titled "More Job Givers Wanted," the article made the case for entrepreneurship in no uncertain terms.

"Jobs do not simply exist," Slichter reminded his readers. "They are created by alert, imaginative, and resourceful men who discover or think that they have discovered opportunities to sell something at a profit. These opportunities are exploited by adventurous investors who are willing to risk large losses in order to make large gains. A community in which everyone attempted to make a living by getting on someone else's payroll would be a community of unemployed."

As it happened, many of the young men and women returning home from war were in complete agreement with Slichter. By one measure - a series of Air Force outprocessing interviews conducted in 1945 - the number of veterans intending to join large corporations barely exceeded those hoping to start their own business. But when asked what they hoped to be doing ten years in the future, more than 40 percent of the veterans said they wanted to have their own business, while the number wanting to work in a large corporation shrank to a mere 12 percent. Thus, for much of the postwar population, eventually starting one's own business was clearly a significant part of the American Dream.

"Everyone wanted to get out of uniform and stop being a number, and they wanted to have something of their own to show for themselves," recalls Air Force veteran and HBS professor emeritus Myles L. Mace. Mace himself had detected a groundswell of impending postwar entrepreneurialism among his fellow GIs, based on conversations with them during his service in the Pacific. Back at Soldiers Field in 1946, Mace, with the backing of Dean David, set up a course to meet the needs of enthusiastic but too often ill-prepared entrepreneurial aspirants.

Mace's course, The Management of New Enterprises (MNE), was initially offered as a second-year elective in 1947 and saw one hundred students enroll. According to the course catalog, MNE was designed "to center attention on the opportunities, risks, and management problems involved in establishing and operating new enterprises. The course is intended primarily for students who contemplate going into business for themselves." The first course devoted to entrepreneurship established at HBS, MNE, in various incarnations, remained a fixture in the elective MBA curriculum for two decades.

In 1948, Harvard's Research Center in Entrepreneurial History was established. The intellectual leaders of this scholarly group were Joseph Schumpeter, the Harvard economist, and Arthur H. Cole, a professor of business economics at Harvard and Librarian of Baker Library. Schumpeter is remembered for the notion that the individual entrepreneur, engaging in a kind of "creative destruction" that continually revolutionizes and revitalizes the economic structure, is the essence of capitalism. Conceived as an interuniversity body, the Center drew many distinguished scholars during its ten-year existence.

"Schumpeter and Cole helped define both the 'who' and 'what' of entrepreneurship," says Sarofim-Rock Professor Howard H. Stevenson. "Their scholarly focus was on the background of the entrepreneur and the accomplishments of the enterprises that the great business leaders had created. The Center's work has left us a rich legacy of business documents, archives, and research that help shape our modern understanding of business development."

As the Research Center in Entrepreneurial History began to flourish, its success was being paralleled in the HBS curriculum by entrepreneurial course development. The Management of New Enterprises course of 1947 was joined in the 1950s by Small Manufacturing Enterprises (SME), taught by Frank Tucker and W.A. Hosmer. In 1970, MNE essentially merged with SME and became a new course - Management of Small Enterprises - with one section focusing on the startup phase (taught by Professor Patrick Liles) and the other on operational problems and strategies (taught by Professor Dick Dooley). Dooley went on to pioneer the Smaller Company Management Program (now the Owner/President Management Program, or OPM), which focused on entrepreneurial and family-held businesses. For his part, Liles became an expert on venture capital and the entrepreneur.

In the 1970s and 1980s, as HBS intensified its research and curriculum development in the area of entrepreneurship, the discipline began to attain a level of professionalism that firmly anchored it in the School's mainstream, a process due in large measure to the leadership of then Dean John H. McArthur and the efforts of Professors Howard Stevenson and William Sahlman. (The work of these two men and their colleagues in expanding entrepreneurial studies at HBS will be examined in detail in the next issue of the Bulletin.)

At HBS, entrepreneurship increasingly came to be viewed as a way of managing, rather than as an exclusively economic activity or a business trait driven by a certain psychological makeup. This broader definition and the understanding that entrepreneurial activity is both practicable and desirable within the existing larger organization have been significant HBS contributions to the emergence and evolution of entrepreneurship as a fully accepted discipline in both the academy and the world of practice.

Upon leaving Soldiers Field, HBS-trained entrepreneurs have excelled both as progenitors of startup enterprises and as prime movers in the transformation of small or medium-sized companies into corporate giants. In this role, since World War II, they have had a remarkable impact on the American economy. Significantly, much of this activity has been recorded in numerous cases, research, books, and articles that have educated and influenced generations of students and practitioners around the globe. From the classroom to the boardroom, HBS and its alumni have been an essential part of the entrepreneurial engine that drives this country and the world.

Handholding and Strong Medicine: HBS and the Consulting Industry

As a young lawyer with degrees from both Harvard Law School and Harvard Business School, Marvin Bower (MBA '30) believed that a new kind of professional organization, equipped with legal and business expertise, could successfully devote itself to providing objective advice and solutions to companies experiencing management problems.

In 1933 Bower joined a small Chicago firm of "management engineers," a phrase coined by the firm's founder and namesake, James O. McKinsey. When McKinsey left the company a couple of years later, Bower helped lead it to a position of international growth and stature.

To a great extent, Bower - who began the practice of hiring MBAs directly out of business school - is responsible for creating the entire management consulting industry. Long popular with Harvard MBAs, consulting experience provides many of the School's graduates with the opportunity to gain expertise before going off on their own - a postbusiness school program, as it were, for aspiring entrepreneurs.

Some of the prominent HBS alumni among the many who had an early hand in establishing important firms in the management consulting field were Bruce D. Henderson (MBA '41) of the Boston Consulting Group, John Diebold (MBA '51) of the Diebold Group, and Richard Vancil (MBA '55) of The MAC Group. Another venerable firm was Cambridge's own Arthur D. Little, Inc. (ADL), founded in 1886 and today a leader in management consulting and technical problem solving for industry. In 1949, ADL hired John Magee (MBA 6/'48) to help it expand into the new field of "operations research"; during decades of subsequent service as ADL's president and chairman, Magee led the firm into the modern era of consulting.

At one point in the mid-1950s, ADL called in Philip Donham (MBA '33), a Booz Allen consultant and son of former HBS Dean Wallace Donham, to help ADL determine its own future direction; Donham liked ADL and stayed on with the company. He would later gain some measure of fame as the man who twice achieved the non plus ultra of consulting outcomes - advising two different corporate leaders to fire themselves in order to improve their companies.

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OPM: Executive Education for Entrepreneurs

The Owner/President Management Program (OPM) is an HBS executive education offering with a unique requirement for its participants - OPMers (who attend one three-week session per year for three years) must be both significant owners as well as the CEO or equivalent of their company.

"With its approximately 2,300 graduates, OPM has been an important force in the education of entrepreneurs at HBS," says HBS professor Norman A. Berg, OPM's faculty chairman. "The program is devoted entirely to training practicing entrepreneurs and is the most distinctive entrepreneurial offering of any kind anywhere."

The predecessor of OPM, the Smaller Company Management Program (SCMP), was started by Professor Arch R. ("Dick") Dooley in the early 1970s to meet a need unfulfilled by other HBS executive education programs. As it became clear that ownership made a difference in the attitudes and goals of the participants, the ownership requirement was instituted (and the program's named changed) when Professor Martin V. Marshall took over in the early 1980s.

Says Berg, "Considering OPMers' diversity - ages from 30 to 65, some with Ph.D.s, others without high-school diplomas, half from outside the United States, and in a wide variety of businesses ranging from $3 million to hundreds of millions in sales - the bonds they develop with each other and the program are remarkable. Their entrepreneurial intensity is matched by their sense of loyalty to OPM."

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It Don't Mean a Thing If You Ain't Got that Green:
HBS and the Birth of Venture Capital

Without the financial wherewithal to make it happen, a great business idea is nothing. No one understood this better than the HBS alumni who pioneered the venture capital industry. Decades ago, these individuals played a major role in creating fledgling companies that in turn shaped cutting-edge industries and helped make America's entrepreneurial economy the envy of the world. As HBS professor Howard Stevenson declares, "HBS alumni created today's venture capital industry."

In 1946, HBS professor Georges F. Doriot helped found one of the nation's first public venture capital firms, American Research & Development Corp. (ARD), to provide capital to "creative men with the vision of things to be done." ARD was involved with nearly fifty companies in areas such as computers, food processing, electronics, and oil-field equipment.

After Doriot came an HBS deluge, with dozens of HBS venture capitalists making a special mark, along the high-tech corridors of Boston's Route 128 and California's Silicon Valley, across the nation, and eventually around the world. Some of the firms they backed include Apple Computer, Biogen, Digital Equipment Corp., Fairchild Semiconductor, Genentech, Intel, Prime Computer, Tandem Computers, Tandon, and Teledyne.

But for every injection of venture capital, at least an equal number of entrepreneurs has probably turned to other resources such as savings, "angels," or even dear old Mom and Dad. Consider, for example, the tale of Thermo Electron's George N. Hatsopoulos and Peter M. Nomikos (MBA '55) as they struggled to scrape together the cash to start what would eventually become a multibillion-dollar company.

Recalls Nomikos, "My good friend George, who was an MIT student, had invented a compact and effective device for converting heat directly into electricity without any moving parts. In April 1955, over dinner at HBS, we conceived the idea of forming a company to exploit his invention, a thermionic converter known as a 'thermo-electron engine.' We needed $50,000 - where would we get the money?

"My late father, Markos, and George's late uncle, Costas Platsis, were bridge partners, so we convinced Costas to lobby my father for startup capital. To our surprise, the money was forthcoming almost immediately. Years later, after Thermo Electron was already a great success, we learned that after reading our business plan, my father, who knew nothing about thermionics, had said to Costas: "'Listen, Costas, I will give them the $50,000. They will lose it. Then George will go back to teaching at MIT, and my son will concentrate on the family shipping business. They will both benefit, and it will be a small price to pay for an important lesson.'"

Things, of course, turned out quite differently. And Peter Nomikos notes that as the growing venture needed ever-increasing funds, his father loyally stood by and continued to give his financial support far beyond his initial largesse.

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The Startup as Buildup

There's more than one way to be an entrepreneur. Some HBS alumni took existing businesses and radically transformed them. Jesse Philips (MBA '39), for example, bought a small manufacturing firm in 1957 and parlayed it into a diversified billion-dollar corporation. Similarly, Robert Cizik (MBA '58) developed Cooper Industries, a one-product manufacturing company, into a $6-billion multiproduct enterprise.

In some cases, to accommodate the sheer grandeur of their vision, other entrepreneurs shaped new business and organizational models. Consider the role of Roy L. Ash (MBA 6/'47) in the emergence of the modern American conglomerate.

In 1953, Ash and Charles B. ("Tex") Thornton purchased a West Coast microwave-tube manufacturing company with $3 million in annual sales. Because they felt only a large company would be equipped to enter an era of new technology, with creative bond-and-stock packages the two men raised capital sufficient to embark on an ambitious program of acquisitions. The result was Litton Industries, Inc., an electronic products and systems manufacturer that in its first twelve years increased sales by 30,000 percent. It was said at the time that Litton had reached $1 billion in volume faster than any company in U.S. history.

Ash, Litton's president, was keenly aware of the links between entrepreneurship and technological progress. He saw the work of his company as bringing together two elements of enormous significance. "One of these elements," he said in 1966, "is modern technology, which has progressed more in the past twenty years than in the sum total of previous history. In the next ten years, it will surpass even that growth.

"The second element," he continued, "is the voracious industrial and consumer appetite for this technology applied to everyday use. Our business, then, is the fusion of the technical resources of this era with society's increasingly insistent needs."

Especially for the high-tech entrepreneurs of the decades to come, these were prescient words indeed.

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