An M.B.A. will help you run an established business, but it can't provide the real-world experience needed to run a start-up. A look at when an M.B.A. comes in handy.
Take it from experienced company builders: an M.B.A. can be really helpful. Sometimes
A Master's in Business Administration helps most when your company is well established, according to a recent Inc. fax poll of seasoned company builders with M.B.A.'s. But business-school training isn't much help during the start-up stage. Most respondents agreed that business school taught them little about the process of establishing a new business--finding sources of capital, recruiting and hiring employees, scrambling to make that all-important first sale, and learning how to outmaneuver larger competitors.
"You do a lot of grunt things in starting up," says Michael Stopka, who graduated from Roosevelt University's business school in 1988. Stopka is now the chief executive of Design Toscano, in Chicago and Arlington Heights, Ill., a maker of European-art reproductions for the house and garden that has projected 1997 revenues of $13.5 million. He says, "For things like 'The employee is sick, the heater's broken,' the kind of things you face in starting up, the M.B.A. is not much help."
Brad Cary agrees that what he learned at business school wasn't particularly relevant during his company's start-up period. "There is nothing in business school that prepares you to deal with customers, invoices, or managing cash flow when money is tight," he notes. Cary graduated from the Wharton School of Business at the University of Pennsylvania in 1989 and now runs CIBT Inc., a provider of support services for international travel and business based in McLean, Va., with projected 1997 revenues of $12.5 million. "They teach you wonderful schemes for sweeping cash flow between accounts to maximize returns, but what if you don't have anything to sweep? That's more often the case. What do you do when you have to meet payroll and pay the landlord?"
In fact, too much attention to business-school topics may be detrimental to the health of a new enterprise, say some executives. Among them is Fay Wu, chief financial officer of Castek Software Factory, a $12-million information-technology management company in Toronto. She served as a vice-president at Citibank before giving in to the entrepreneurial itch. "You can sink an entrepreneurial company by using some of the classic business-school tools," she contends. Take capital-cost-budgeting techniques, for example. As Wu recalls, laborious scholastic effort went into painstakingly calculating the different fiscal pressures created by a variety of capitalization sources. "For a start-up," Wu notes, "it doesn't matter what the capital costs, you are going to need what you can get." Entrepreneurs could fall victim to analysis paralysis if they waste time calculating capital costs according to the algorithms Wu learned in York University's M.B.A. program. "You'd eat up the little capital you might be lucky enough to get," she figures.
What he was taught in business school "was too academic-oriented" for starting a company, says Bill Grainger, who graduated from the executive-M.B.A. program at Vanderbilt's Owen Graduate School of Management in 1988. Grainger is the founder of National Safety Alliance Corp., a third-party administrator of substance-abuse testing programs in Nashville, with projected 1997 revenues of $11 million.
"Most business schools recognize research and publications, not real-world experience," he says. "We had a half semester on Federal Trade Commission stuff, but unless you're Microsoft, or some kind of monopoly, you really never have to worry about the FTC. That was a waste of time." Meanwhile, Grainger recalls, "no one ever came in, sat down, and went through contracts."
Dealing with failure, Lorne Merkur says, a mostly verboten subject at business school, would be a welcome addition. Merkur, who graduated from the University of Toronto School of Business in 1984 and now runs Merkur & Sister AdWear, in Toronto, a company with projected 1997 revenues of $2 million, says, "I'd love a course where some CEOs who've been through bankruptcy come in and talk about what went wrong."
"They don't do a good job of dealing with that," agrees Art Dodge III, CEO and president of Dodge-Regupol Inc., in Lancaster, Pa., a company that makes recycled-rubber products and has projected 1997 revenues of $30 million. "All your human-resources classes are about motivating employees, goal setting, things like that. But how do you recognize a bad decision, kill it, bite your tongue, and move on? You've got to be able to make mistakes quickly, find out, and get out of them quickly. They teach you a lot about how to be a success but not what to do when something goes wrong--when you fail, which you are going to do."
Despite the lack of enthusiasm for an M.B.A.'s usefulness during the start-up phase, 9 out of 10 survey respondents said they would recommend an M.B.A. program for would-be entrepreneurs. At later stages of company building, they agreed, the analytical skills learned at business school are extremely valuable when it comes to understanding broader issues, such as planning, strategic marketing, and resource allocation. The most helpful courses cited by these CEOs--finance, accounting, and marketing--focused heavily on analytical tools.
Typical is Irving Levin, CEO of Renaissance Holdings Inc., in Portland, Oreg., who graduated from the University of Chicago Graduate School of Business in 1977. Levin, whose company projects 1997 revenues of $45 million, passed the "survival stage" many years ago. "Now," he says, "I have and need more formal structures, reporting requirements, and planning cycles." And that's when what he learned in business school started "filtering back."
Michael Stopka figures that an M.B.A. helps most when your company reaches about $12 million to $15 million in sales--"when you deal with higher-end issues." Stopka says he is able to make more reasoned judgments about his mailing list using techniques he picked up in his quantified-methods and analytical-modeling classes. "I'm mailing 7 million catalogs," he explains. "Every one I don't send saves me 56¢."
Tim Chen, who graduated from North Texas State University School of Business in 1980 and is now president and CEO of Keys Fitness Products, in Dallas, draws on his schooling in finance to help him make key decisions about operations. For example, Chen tries to hit his company's break-even point by the middle of each month. "We never spend more than we make," he says of Key Fitness, whose 1996 revenues were $51 million.
"No matter what your role in a business, you have to understand the numbers," says Fay Wu. The ability to assess the market and estimate product life cycles in a persuasive and replicable way, she says, underpins much of the success of her company. The sales pitch at Castek relies heavily on showing the numbers to prospective customers. "The stuff I learned in business school has a direct application here," she says.
In addition to understanding financial-management and -analysis tools, some successful entrepreneurs point to other benefits of their years in business school.
For Art Dodge III, who graduated from the International Institute for Management Development in Lausanne, Switzerland, in 1984, attending a European university was crucial. Dodge, long interested in international business, specifically wanted to attend a non-U.S. school. "In Europe, unlike in the United States, the entire curriculum is globalization. The European school gave me a tremendous leg up on anyone going to an American school," he contends.
"At the end of the day," concludes Martin Smoler, the key question is always, "Are you going to be able to make money?" Knowing which tools you can use to answer that question is a key benefit of a formal business education, says Smoler, a 1971 graduate of the J.L. Kellogg Graduate School of Management at Northwestern University. As president of $3-million American Echo Inc., in Kansas City, Mo., which makes echocardiography positioning systems, Smoler is often asked if he can make custom products for individual accounts.
"You can make anything," he notes, "but you have to allocate engineering resources. Will it be cost-effective when you do it? Because of business school, I know how to do that kind of thinking."
BRAD CARY: President of CIBT Inc., a provider of support services for international travel and business with projected 1997 revenues of $12.5 million
M.B.A.: University of Pennsylvania, The Wharton School of Business, 1989
FAVORITE COURSE: Marketing Strategy, taught by Professor Barbara E. Kahn
"In that class we played a simulation game whose purpose was to teach us that unexpected events could happen. Our game was focused on a consumer product, and we got a sales forecast with which we made certain strategic decisions. But then a competitor emerged with another product that stole market share from us, and we missed our forecast. The game teaches you to focus and forces you to realize that every decision you make will not necessarily be the right one--it's a humbling experience."
MARTIN SMOLER: President of American Echo Inc., a maker of echocardiography positioning systems with projected 1997 revenues of $3 million
M.B.A.: J.L. Kellogg Graduate School of Management, Northwestern University, 1971
FAVORITE COURSE: Marketing Management, taught by Professor Philip Kotler
"The majority of people in the world think of marketing as something synonymous with sales. They think it's a skill based on being charming and having good interpersonal relationships. Kotler taught me that marketing was much more scientific; that it could be organized in a concise way; that it could be broken down into pieces, and then you could determine how those pieces worked together. Just as there are rules to geometry and algebra, there are rules to marketing--Kotler brought marketing to that level."
To find out how experienced company builders viewed their M.B.A. education, Inc. sent a fax survey to 180 Inc. 500 alumni, attendees of Birthing of Giants (seminars hosted by the MIT Enterprise Forum, the Young Entrepreneurs' Organization, and Inc.), and Entrepreneur of the Year winners who had M.B.A.'s. The survey was developed with the help of advisory-board members Jim Collins, operator of a management laboratory in Boulder, Colo.; Scott Cook, chairman of Intuit Corp., in Mountain View, Calif.; Larry Mohr, at Mohr, Davidow Ventures, in Menlo Park, Calif.; Ruth Owades, president and CEO of Calyx and Corolla, in San Francisco; Robert Sullivan, director of the University of Texas IC 2 Institute, in Austin, Tex.; and Ed Zschau, a professor of entrepreneurship at Harvard Business School, in Cambridge, Mass. Research assistance was provided by Margherita Altobelli, Beth Gunn, and M. Patricia Singer.