International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

Copyright c Collin Starkweather 2007. All rights reserved.

Contents
I International Business Management
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1 Business Ethics and Social Responsibility 1.1 Culture and Ethics . . . . . . . . . . . . . . 1.2 Corporate Corruption . . . . . . . . . . . . 1.3 The United States . . . . . . . . . . . . . . 1.4 Japan . . . . . . . . . . . . . . . . . . . . 1.4.1 Political and Business Scandals . . . 1.4.2 Women in the Workplace . . . . . . 1.4.3 Lobbying by Japan . . . . . . . . . 1.5 Europe . . . . . . . . . . . . . . . . . . . . 1.5.1 Bribes and Corruption . . . . . . . . 1.5.2 Women in the Workplace in Europe 1.6 Ethical Concerns in China . . . . . . . . . . 1.7 Corporate Social Responsibility . . . . . . . 1.7.1 Corruption and the FCPA Revisited . 1.7.2 Response to Social Obligations . . . 2 Operations and Productivity 2.1 Dening Operations Management . . . . . 2.2 What Operations Managers Do . . . . . . . 2.3 The Service Sector . . . . . . . . . . . . . . 2.4 Trends in Operations Management . . . . . 2.5 The Productivity Challenge . . . . . . . . . 2.5.1 Productivity Variables . . . . . . . . 2.5.2 Capital . . . . . . . . . . . . . . . . 2.5.3 Management . . . . . . . . . . . . . 2.5.4 Productivity and the Service Sector 2.6 Social Responsibility . . . . . . . . . . . . . 3 Operations Strategy in a Global Environment 3.1 Developing Missions and Strategies . . . . . 3.1.1 Mission . . . . . . . . . . . . . . . 3.1.2 Strategy . . . . . . . . . . . . . . . 3.2 Issues in Operations Strategy . . . . . . . . 3

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4 3.2.1 Research . . . . . . . . . . . . . . . 3.2.2 Preconditions . . . . . . . . . . . . 3.2.3 Dynamics . . . . . . . . . . . . . . Strategy Development and Implementation . 3.3.1 Identify Critical Success Factors . . 3.3.2 Build and Sta the Organization . . 3.3.3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83

3.3

3.4

4 Project Management 4.1 Project Planning . . . . . . . . . . . . . . . . . 4.1.1 The Project Manager . . . . . . . . . . 4.1.2 The Work Breakdown Structure . . . . 4.2 Project Scheduling . . . . . . . . . . . . . . . . 4.3 Project Controlling . . . . . . . . . . . . . . . 4.3.1 PERT and CPM . . . . . . . . . . . . . 4.3.2 Network Diagrams . . . . . . . . . . . . 4.4 Determining the Project Schedule . . . . . . . 4.5 Slack Time and Identifying the Critical Path . . 4.6 Variability in Activity Times . . . . . . . . . . . 4.6.1 Probability of Project Completion . . . 4.7 Cost-Time Trade-Os and Project Crashing . . 4.8 A Critique of PERT and CPM . . . . . . . . . 4.9 Using Microsoft Project for Managing Projects 5 Forecasting 5.1 What is Forecasting? . . . . . . . . . . . . . . 5.1.1 Types of Forecasts . . . . . . . . . . . . 5.1.2 The Strategic Importance of Forecasting 5.2 A Seven Step Forecasting System . . . . . . . . 5.3 Forecasting Approaches . . . . . . . . . . . . . 5.3.1 Qualitative Forecasting Methods . . . . 5.3.2 Quantitative Forecasting Methods . . . 5.3.3 Measuring Forecast Error . . . . . . . . 5.3.4 Adjusting for Trend . . . . . . . . . . . 5.3.5 Seasonal Variations in Data . . . . . . . 5.3.6 Associative Models . . . . . . . . . . . 5.4 Monitoring and Controlling Forecasts . . . . . . 5.4.1 Adaptive Smooting . . . . . . . . . . . 5.4.2 Focus Forecasting . . . . . . . . . . . . 6 Design of Goods and Services 6.1 Goods and Services Selection . . . 6.1.1 Product Life Cycles . . . . 6.1.2 Life Cycle and Strategy . . 6.1.3 Product-by-Value Analysis

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CONTENTS 6.2 6.3 Generating New Products . . . . . . . . . . . . 6.2.1 Importance of New Products . . . . . . Product Development . . . . . . . . . . . . . . 6.3.1 Product Development System . . . . . 6.3.2 Quality Function Deployment (QFD) . . 6.3.3 Organizing for Product Development . . 6.3.4 Manufacturability and Value Engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 83 83 84 84 84 85 86

II

Entrepreneurship

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7 Introduction to Entrepreneurship 91 7.1 Characteristics of the Successful Entrepreneur . . . . . . . . . . . . 92 7.2 Are You Ready? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 7.3 Setting Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 8 Finding an Idea 97 8.1 Youve Got an Idea. Now What? . . . . . . . . . . . . . . . . . . . 99 9 Dening Your Market 101 9.1 Finding Your Niche . . . . . . . . . . . . . . . . . . . . . . . . . . 101 9.2 Redening and Expanding Your Niche . . . . . . . . . . . . . . . . 104 9.3 The Mission Statement . . . . . . . . . . . . . . . . . . . . . . . . 104 10 Market Research 109 10.1 What Am I Researching, Exactly? . . . . . . . . . . . . . . . . . . 110 10.2 Research Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 10.2.1 Sources of Secondary Research . . . . . . . . . . . . . . . . 111 11 The Business Plan 11.1 Preparing to Put the Plan 11.1.1 Your Audience . . 11.1.2 Look and Feel . . 11.1.3 Some Style Points 11.2 The Plan Contents . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125

Together . . . . . . . . . . . . . . . . . . . . . . . .

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12 Presenting the Plan 12.1 The Presentation . . . . . . . . . . . . . . . . . . 12.2 Some Suggestions . . . . . . . . . . . . . . . . . . 12.2.1 Do It Until You Get It Right . . . . . . . . 12.2.2 Know Your Outline Thoroughly . . . . . . . 12.2.3 Be Familiar With All Equipment to be Used 12.2.4 The First Minute is the Most Important . . 12.2.5 Take Notes . . . . . . . . . . . . . . . . . 12.2.6 So What? . . . . . . . . . . . . . . . . . . 12.3 After the Presentation . . . . . . . . . . . . . . . .

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6 13 Inventory Control 13.1 Inventory and Cash Flow . . . . 13.2 Tracking Inventory . . . . . . . . 13.3 Computerized Inventory Control 13.3.1 Inventory Turnover . . . 13.4 Inventory Accounting . . . . . . 13.4.1 Buying Inventory . . . . 13.5 Suppliers . . . . . . . . . . . . . 13.5.1 Dealing with Suppliers . 13.5.2 Payment Plans . . . . . 14 Hiring Employees 14.1 How to Hire . . . . . . . . 14.1.1 Job Analysis . . . . 14.1.2 Job Description . . 14.1.3 Advertising the Job 14.1.4 Finding People . . .

CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138

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Part I

International Business Management

Chapter 1

Business Ethics and Social Responsibility

Business ethics and social responsibility are topics that every business person will be confronted with at some point in their career, whether they are a small business owner who runs a restaurant or a multinational corporation like Microsoft or Lenovo. As multinational corporations become more prominent, they become increasingly important not only as a business entity, but as leaders in the community. Likewise, small business owners are leaders in their community whether they intend to be or not. For multinationals, business ethics becomes more problematic as multinationals cross cultural boundaries. What may be perfectly acceptable to one culture may be abhorrent to another.

1.1

Culture and Ethics

Side Note 1.1.1 (Conicting Cultural Values) Ask the class whether they can think of cultural values that are perfectly acceptable in one part of the world but not in another. Married women are considered to be acting against the teachings of the Koran if they work outside the home. Furthermore, in some Islamic nations, such as Saudia Arabia, they are not allowed to drive or go out in public without covering their hair or face. Homosexuality is acceptable in Scandinavia but oensive in many other parts of the world. 9

10

CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Child labor is considered abhorrent in the U.S.A. and Europe but a commonly accepted practice throughout the developing world. Prison labor is also considered improper in the U.S.A. Note that during the industrialization of the U.S.A., child labor was widely used.

Which brings us to the subject of this lecture: Ethics. Denition 1.1.1 (Ethics) The study of morality and standards of conduct.

1.2

Corporate Corruption

Side Note 1.2.1 (The Importance of Cultural Dierences to Business) Understanding cultural dierences is very important for doing international business: 1. Why is corruption an important business issue? See sidenote 1.2.2. 2. How do cultural perceptions inuence international management when Easterners do business with Westerners? Westerners do not understand guanxi. It is much harder for a Westerner to know when to trust a Chinese person than for a Chinese person to know when to trust another Chinese person. Because of this, Western business people may not initially trust their Chinese counterparts. This is something Chinese business people should be aware of. In general, it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. However, there is a perception in the West that Chinese are hard-working and smart. 3. What aspects of Western culture make it dicult for Chinese people to do business with Western people? Are Americans perceived as being too focused on money? Are Chinese people inclined to trust Westerners? Westerners and Easterners build trust in dierent ways. For example, Easterners tend to trust people after observing a pattern of consistent behavior. Westerners rely more on contracts, which are more strictly enforced in the West. Because guanxi is less important in the West, business people put less emphasis on socializing and are more comfortable doing business with others they do not know well or do not personally like.

1.2. CORPORATE CORRUPTION

11

Westerners from dierent countries can be quite dierent. For example, Scandinavians are typically highly trustworthy1 but Italians are less so. Of course, these are all generalizations and individuals may dier significantly from their cultural aliations. Side Note 1.2.2 (Corruption) Corruption is of concern for business people because It increases risk. In the wake of Enron, WorldCom, and Tyco, investors in the United States had to reevaluate the risk associated with owning stock. If business leaders cannot count on other business leaders and public ocials to act in a fair and consistent way, they must factor additional uncertainty into their calculations. It increases the cost of doing business. A bribe is a business expense that goes to no productive purpose and decreases prots. Executives who steal from their company do so at the expense of prots which would be realized by shareholders. The impact of corporate corruption in the United States has been Increased costs in the form of the Sarbanes-Oxley (SOX) Act, which requires strict monitoring and verication of nancial information. On a macroeconomic level, it is simply inecient. Resources are diverted from more productive uses (such as building buildings) to less productive uses (such as conspicuous consumption by corrupt ocials or business leaders). Denition 1.2.1 (Bribe) A price, reward, gift, or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge, witness, voter, or other person in a position of trust.2 Though things are improving, China continues a battle against corruption. In the words of a Beijing correspondent for The Economist magazine, . . . there are few if any issues which aect and infuriate so many in China as corruption. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty ocials.[6]
1 The Scandinavian countries composed 4 of the top 6 and 5 of the top 8 countries perceived as least corrupt in the 2005 Transparency International Corruptions Perception Index. Source: texttthttp://www.transparency.org/policy research/surveys indices/cpi, September 20, 2006. 2 Source: http://www.dict.org, September 20, 2006.

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CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

1.3

The United States

The United States has recently been rocked by a number of scandals in the business community. Enron In December 2001, corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U.S.. WorldCom reportedly had over $63 billion in assets prior to bankruptcy.3 Several Enron executives have since been sentenced to jail for fraud and other charges. WorldCom Following the Enron scandal, WorldCom declared bankruptcy in July 2002, succeeding Enron as the largest bankruptcy in U.S. history. WorldCom reportedly had over $103 billion in assets prior to bankruptcy.4 Bernard Ebbers, the former CEO of WorldCom, was convicted of fraud and conspiracy and sentenced to 25 years in jail. Tyco The CEO of Tyco, Dennis Kozlowski, was accused of looting the company to fund a lavish lifestyle, including a $2 million birthday party for his wife. He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. While western developed economies often cite a high ethical standard, scandals such as Enron, Parmalat, Worldcom, Qwest, and Tyco make it clear that even western developed economies have signicant ethical shortcomings. Side Note 1.3.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron, the SarbanesOxley Act (SOX) was passed in the U.S. specifying rigorous reporting requirements for corporate nancial statements and requiring the CEO and CFO to approve and declare accurate public nancial statements. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. These regulations can impose signicant costs (in the form of reporting burdens) on multinational rms operating in the United States. There is currently debate as to the eectiveness of the regulations relative to the costs. Side Note 1.3.2 (Cultural Heritage in the U.S.) My cultural perspective is probably based as much on my familys Scandinavian heritage as my upbringing in the United States. In Scandinavia, a high value is placed on honesty and personal integrity. See sidebar 1.2.1.
3 Source: 4 Source:

http://www.bankruptcydata.com/Research/15 Largest.htm, March 17, 2007. http://www.bankruptcydata.com/Research/15 Largest.htm, March 17, 2007.

1.4. JAPAN

13

1.4
1.4.1

Japan
Political and Business Scandals

Japan has been beset by both political and business scandals. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. Moreover, the political scandals do not appear to have been fully acknowledged and addressed. Hodgetts et al. cite the example of the chief prosecutor in Tokyo who was transfered to a remote city after an investigation into exhorbitant entertainment spending by private rms on public ocials. Better known is the case of Japanese banks, which was insuciently regulated and took on too much risky debt and did not write o bad loans in a timely manner. This resulted in several banks being technically bankrupt [5, p. 58]. Side Note 1.4.1 (The U.S. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U.S.. Savings and loan institutions, also known as thrifts and which function like banks, were not as highly regulated as banks, and as a result made high risk investments in the late 1980s and early 1990s. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. The government was compelled to provide public money to bail out the institutions. 5

1.4.2

Women in the Workplace

Sexual harassment has also become an issue in Japan. This is exacerbated by the fact that There is a discrepancy in perceptions of gender in Japan, with many men of the opinion that women were just biding their time until they marry and have children, Many men do not understand why sexual harassment constitutes a problem, Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a signicant nancial penalty. Likewise, women have a dicult time being taken seriously, with many women nding their employment opportunities constrained. Side Note 1.4.2 (Sexual Harassment in the United States) Behavior considered socially acceptable elsewhere in the world may not be considered socially or legally
5 Source:

http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2 2.pdf.

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CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

acceptable in the United States. Furthermore, sexual harassment lawsuits result in signicant penalties (e.g., in the millions of dollars) to those who are successfully prosecuted. It is considered a very serious issue, and for most public institutions and many large corporations, considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace. Hodgetts et al. cite two cases in which foreign rms operating in the U.S. have paid substantial penalties as a result of sexual harassment or discrimination based on race, gender, or other issues. Denition 1.4.1 (Sexual Harassment) The denition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature constitutes sexual harassment when submission to or rejection of this conduct explicitly or implicitly aects an individuals employment, unreasonably interferes with an individuals work performance or creates an intimidating, hostile or oensive work environment. This denition has been further elaborated: Sexual harassment can occur in a variety of circumstances, including but not limited to the following: The victim as well as the harasser may be a woman or a man. The victim does not have to be of the opposite sex. The harasser can be the victims supervisor, an agent of the employer, a supervisor in another area, a co-worker, or a non-employee. The victim does not have to be the person harassed but could be anyone aected by the oensive conduct. Unlawful sexual harassment may occur without economic injury to or discharge of the victim. The harassers conduct must be unwelcome. Side Note 1.4.3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace. Are women with equal qualications as men given equal pay and position? Take a show of hands, yes or no.
6 Source:

http://www.de2.psu.edu/harassment/legal.

1.5. EUROPE

15

1.4.3

Lobbying by Japan

Japan spends more money lobbying in the U.S. than any other. Many people who are paid signicant sums to lobby for Japan and Japanese rms are former highranking U.S. politicians. Denition 1.4.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere, with the purpose to inuence their votes; in an extended sense, to try to inuence decision-makers in any circumstance.7 Note that lobbyists do not have any formal power. They only have the power of persuasion. Side Note 1.4.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues?

1.5
1.5.1

Europe
Bribes and Corruption

Although most western European countries are not ranked highly on Transparency Internationals poll of corruption (Italy, at 40, is the notable exception), with most in the top 20 among over 150 countries included in the survey, their attitudes towards bribery when working in foreign markets diers from that of the U.S.. Hodgetts et al. cites a study in which Europeans managers who were polled were much less likely to refuse to pay a bribe (or perceive it as unethical) than their American counterparts. Side Note 1.5.1 (Is Paying a Bribe Unethical?) Do you consider it unethical to pay a bribe if it is necessary to do business? Take a show of hands, yes or no.

1.5.2

Women in the Workplace in Europe

France and Germany While legislation exists to guarantee equal treatment and equal opportunity for women in both France and Germany, men are disproportionately represented in management positions, particularly in upper management. Although women have entered the workforce in large numbers in recent decades, there seems to be a glass ceiling due to social factors.
7 Source:

http://www.dict.org.

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CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

Denition 1.5.1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization. 8 Side Note 1.5.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands, yes or no. For those students who think so, what are the factors that contribute to the glass ceiling? The perception among men of women in the workplace? Educational opportunities for women? Potential for networking? Do you think that the status of women in the workplace is improving or will improve? Great Britian Things are generally considered better for women in Great Britian due to Women have been more proactive in setting up organizations in Great Britian. More British companies have actively sought to recruit and promote women into management. Discrimination lawsuits are more commonplace in Great Britian, though compensation is limited relative to lawsuits led in the U.S.. Side Note 1.5.3 (Why Would a Company Actively Recruit and Promote Women?) Ask the class why a company would actively recruit and promote women even if not required to do so by legislation. One possibility is that highly qualied and talented women are being underpaid and placed in positions that underutilize their talents. Companies may be able to recruit more qualied women than men at a given wage level if they promote the company as taking a proactive stance on gender.

1.6

Ethical Concerns in China

MNCs see China as a place of tremendous opportunity, but there is a perception that there are risks and ethical considerations.
8 Source:

http://careerplanning.about.com/library/glossary/bldef-glassceiling.htm.

1.6. ETHICAL CONCERNS IN CHINA

17

Side Note 1.6.1 (Opportunity in China) Why do others consider Chinese to present greater opportunity than other places? A very large population administered by a central government which can grant access to a wide variety of markets, A relatively stable government, and A recent history of rapid economic development. Ethical considerations include 1. Child labor, 2. Prison labor, 3. An increase in crime and illegal business activities, 4. Piracy and counterfeiting (see sidenote below), 5. International corporate spying problems, 6. An opaque legal system, 7. Bribery and other forms of corruption. Side Note 1.6.2 (Piracy and Counterfeiting) Present sidenote at [5, p. 64]. Lack of action from Beijing may result in tit-for-tat retribution from the United States and others. Side Note 1.6.3 (Corporate Spying) Hodgetts et al. [5, pp. 6364] take note of A case in which an industrial spy from China was caught trying stealing cultures from Amgen for a drug with $1.5 billion in sales annually. Another case in which a Chinese spy in Hong Kong was caught evesdropping on U.S. executives. Yet another case in which software from a U.S. company in Boulder was stolen and sold to a Chinese company. Note that for every corporate spy that is caught, there are undoubtedly many others that get away with it. An activity related to corporate spying is the breaking of agreements by Chinese companies who go on to appropriate patents or capital from foreign rms. Often, it is dicult for foreign rms to navigate the Chinese legal system in the case of a dispute.

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CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

Side Note 1.6.4 (Corruption) Though things are improving, China continues a battle against corruption. In the words of a Beijing correspondent for The Economist magazine, . . . there are few if any issues which aect and infuriate so many in China as corruption. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty ocials.[6] See also sidenote 1.2.2.

1.7

Corporate Social Responsibility

Denition 1.7.1 (Corporate Social Responsibility (CSR)) The actions of a rm to benet society beyond the requirments of the law and the direct interests of the rm. Side Note 1.7.1 (Ben & Jerrys) Review Ben & Jerrys mission statement. Ben & Jerrys ice cream company is considered a model of a socially responsible company in the U.S.. Other companies, such as Whole Foods, a grocery chain, give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a xed percentage of their prots to charity depending on which charities are most supported by their customers. See http://www.benjerry.com/our company/our mission/index.cfm for more detail. Denition 1.7.2 (Nongovernmental Organizations (NGOs)) Private, not-for-prot organizations that seek to serve societys interest by focusing on social, political, and economic issues such as poverty, social justice, education, health, and the environment. Denition 1.7.3 (Nongovernmental Organizations (NGOs)) Private, not-for-prot organizations that seek to serve societys interest by focusing on social, political, and economic issues such as poverty, social justice, education, health, and the environment. Prominent NGOs include Save the Children (provides support for the children aicted by poverty and malnutrition), Oxfam (a confederation of charitable organizations that support the alleviation of poverty, provide relief in the event of humanitarian disasters, and promotion of social equity), CARE (promotes community development, such as education and health care, and emergency relief in the event of humanitarian disasters),

1.7. CORPORATE SOCIAL RESPONSIBILITY

19

World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species), Conservation International (promotes environmental conservation), and Rainforest Action Network (RAN). Both political groups and businesses are inuenced by NGOs. For example, Hodgetts cites a case in which Citigroup (recall that Citigroup is one of the 10 largest MNCs in the world as of 2003) divested from certain nancial projects identied by RAN as harmful to the environment. Side Note 1.7.2 (Why Would a Company Listen to an NGO?) Why would a company take actions that could impact its prots to satisfy an NGO? Good press and free advertising, To prevent a boycott or other consumer defections, And, last but note least, executives may actually feel that it is the right thing to do. Executives are people, too. Even socially responsible executives would consider the bottom line when making decisions, as executives of publicly traded companies are ultimately responsible to their shareholders.

1.7.1

Corruption and the FCPA Revisited

Hodgetts et al. note that while U.S. rms are constrained by the FCPA with regards to bribery and other corrupt practices,9 U.S. MNCs do not appear to have been signicantly impacted. In fact, many feel that it has had a net benet, as it gives the U.S. rms a reason to refuse to pay bribes. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery, but does not outlaw payments to political party leaders. Side Note 1.7.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. In 2005, China ranked 78 out of 158, with a score of 3.2. A 10 indicates squeaky clean while a 0 represents highly
9 Hodgetts et al. note two executives for Lockheed Martin were actually ned a substantial amount of money ($20,000 and $125,000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament.

20

CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

corrupt. 5.0 is considered to be the borderline at which countries are considered to have a problem.10 Corruption is certainly not endemic to Asia. Singapore is number 5 with a score of 9.4, slightly better than Sweden. Hong Kong is number 15, with a score of 8.3, better than the U.S. and Germany at 7.6 and 8.2 respectively. Moreover, the United States and Europe have recently been rocked by corporate corruption, with scandals such as Enron, WorldCom, Tyco, and Parmalat resulting in investors losing billions of dollars. Important: Although it is widely cited, note that the Transparency International Corruption Perceptions Index is just that: An index of experts perceptions, and not based on hard data. It cannot be considered to be based on a scientic survey. Side Note 1.7.4 (Some Opinions) Personally, I think corruption will diminish as China economically develops for several reasons: 1. As more state-owned businesses become privatized and the size of the middle class increases, more Chinese will own stock in companies. These shareholders and their representatives will demand greater nancial transparency and more disciplined corporate governance to mitigate risk. 2. With greater nancial transparency, malfeasance and diversion of corporate funds becomes increasingly dicult. 3. With more disciplined corporate governance, companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. 4. The government is actively addressing the issue of corruption. It is a dicult problem to solve, but most important rst step is to recognize that there is a problem. The government recognizes that it is an issue and is taking action.

1.7.2

Response to Social Obligations

MNCs are under increasing pressure to contribute positively to communities, societies, and the environment. Commitments that many MNCs have signed on to, such as the U.N. Global Compact, specify standards and codes of conduct in domestic and global operations. Side Note 1.7.5 (Table 3-1: Principles of the Global Compact) The U.N. Global Compact species 10 principles which MNCs should abide by: 1. Support and respect the protection of international human rights,
10 http://www.infoplease.com/ipa/A0781359.html,

July 1, 2006. Scandinavian countries

are at the top of the list.

1.7. CORPORATE SOCIAL RESPONSIBILITY 2. Ensure that MNCs are not complicit in human rights abuses,

21

3. Freedom of association and recognition of the right of collective bargaining (i.e., the right for unions to exist), 4. Elimination of all forms of forced and compulsory labor, 5. Elimination of child labor, 6. Elimination of discrimination with respect to employment and occupation, 7. A precautionary approach to environmental challenges, 8. Undertake initiatives to promote greater environmental responsibility, 9. Encourage development and dissemination of environmentally friendly technologies, and 10. Business should work against all forms of corruption, including extortion and bribery.

22

CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

Chapter 2

Operations and Productivity

This course is called International Enterprise Management. While some aspects will focus on the international component of the name, much of it will focus on the enterprise management component. In business parlance, another name for enterprise management is operations management.

2.1

Dening Operations Management

Denition 2.1.1 (Operations Management) Operations management, often abbreviated OM, is the set of activities that creates value in the form of goods and services by transforming inputs into outputs. Note that the denition refers to both goods and services. As China develops, the ecient production of services will become more important. Side Note 2.1.1 (Heizer Company Prole: Hard Rock Caf) Review Heizers e company prole of the Hard Rock Caf [1, pp. 23]. e Hard Rock Cafs are in most major cities in the U.S. and Beijing. In total, e they have restaurants in 38 countries. They typically combine heavy merchandizing with the restaurant operation. They have also expanded into compelementary operations, such as hotels, casinos, etc.. 23

24

CHAPTER 2. OPERATIONS AND PRODUCTIVITY Based on my limited and personal observations, in the U.S., the food is considered by many to be mediocre and overpriced. People generally go for the atmosphere. Most Americans are familiar with the Hard Rock Caf and among the e younger generation, a signicant percentage have eaten in a Hard Rock Caf at least once. e I have eaten there, and I was disappointed in the experience. The prices were high, but I did not consider the menu to be much more than standard sports bar fare. The Hard Rock Caf was once considered edgy in the United States e and built a reputation on unique atmosphere and attitude. However, it is now so widespread that it is no longer considered edgy and so corporate that any attitude it may have no longer derives from the rock and roll world that was its origins. So management must not focus more on product quality and continuing to draw customers despite a dierent image and diering customer perceptions than it originally had. In the prole, Heizer states that we look not only at how Hard Rocks managers create value, but also how a variety of managers in other industries do so.

The Hard Rock Caf will be discussed further throughout the course. e Functions within organizations are typically divided between three categories: 1. Marketing Generates the demand, or at least takes the order for a product or service. 2. Production/operations Creates the product. 3. Finance/accounting Tracks how well the organization is doing, pays the bills, and collects the money. Our study of operations management will have four focus areas. 1. OM is one of the three major functions of an organization and is related to all other functions. So we focus on how people organize themselves for productive activity. 2. We will study how goods and services are produced. 3. We will try to understand what operations managers do so that we can potentially become better operations managers ourselves.

2.2. WHAT OPERATIONS MANAGERS DO

25

4. OM is one of the most costly aspects of an organization. We will focus on improving OM functions as a key to increasing protability and enhancing service to society. Side Note 2.1.2 (Organization Charts) Review Heizers 3 sample organization charts [1, p. 5], known commonly in the U.S. business community as org charts. Every organization with more than a few employees has an organization chart. They are often sources of conict among management, particularly when job titles are not clear, as the org chart determines executives authority and, more generally, place in the heirarchy.

2.2

What Operations Managers Do

Operations managers focus on the four functions of the management process: 1. Planning, 2. Organizing, 3. Stang, and 4. Controlling. To accomplish these functions, operations managers make decisions. OM decisions have been divided into ten categories by Heizer [1, pp. 67]. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions. Denition 2.2.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design, quality, process design, location selection, layout design, human resources and job design, supply-chain management, inventory, scheduling, and maintenance. Side Note 2.2.1 (Ten Decision Categories) Review Heizers 10 decision categories [1, p. 7]. 1. Service and product design What good or service should we oer? How should we design these products? Design typically determines the lower limit of cost and the upper limit of quality.

26

CHAPTER 2. OPERATIONS AND PRODUCTIVITY 2. Quality management Who is responsible for quality? How do we dene the quality? The customers quality expectations must be determined and a quality assurance process must be put in place. 3. Process and capacity design What process and what capacity will these products require? Process decisions commit management to specic technologies, quality, personnel use, and maintenance and determine much of the cost of a product or service. 4. Location Where should we put the facility? Location decisions are crucial. Poor location decisions may overwhelm other eciencies. Discuss Active.coms location decisions and Matt McAdams a posteriori assessment of the choices. 5. Layout design How should we arrange the facility? How large must the facility be to meet our plan? Involves materials ows, capacity needs, personnel levels, technology decisions, and inventory requirements. 6. Human resources and job design How do we provide a reasonable work environment? How much can we expect our employees to produce? Human resources decisions are critical to all aspects of success. Personnel costs are a signicant part of most production or service processes. 7. Supply-chain management Should we make or buy this component? Who are our suppliers and who can integrate into our e-commerce program? Managers must consider quality, delivery, innovation, and price. Mutual trust between buyers and suppliers is crucial. 8. Inventory, material requirements planning, and JIT (just-in-time) How much inventory of each item should we have? When do we reorder? Inventory decisions must follow from customer and supplier considerations, production scheduling, and human resource planning. 9. Intermediate and short-term scheduling Are we better o keeping people on the payroll during slowdowns? Which job do we perform next? Feasible and ecient production schedules must be determined.

2.2. WHAT OPERATIONS MANAGERS DO

27

10. Maintenance Who is responsible for maintenance? When do we do maintenance? Maintenance is one aspect of decision-making that is often overlooked and can contribute signicantly to costs. Reliability and stability of systems depends on well-planned maintenance schedules. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. Denition 2.2.2 (Just in Time) Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. The process is driven by a series of signals, or Kanban, that tell production processes to make the next part. Kanban are usually simple visual signals, such as the presence or absence of a part on a shelf. When implemented correctly, JIT can lead to dramatic improvements in a manufacturing organizations return on investment, quality, and eciency. New stock is ordered when stock reaches the re-order level. This saves warehouse space and costs. However, one drawback of the JIT system is that the re-order level is determined by historical demand. If demand rises above the historical average planning duration demand, the rm could deplete inventory and cause customer service issues. To meet a 95% service rate a rm must carry about 2 standard deviations of demand in safety stock. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. A related term is Kaizen which is an approach to productivity improvement literally meaning continuous improvement of process.1 Side Note 2.2.2 (A Little History) Review Heizer gure 1.3 Signicant Events in Operations Management [1, p. 8]. Eli Whitney (1800) is credited for popularizing interchangeable parts, which relied upon standardization and quality control. Frederick W. Taylor (1881) introduced science to management and is known as the father of scientic management [1, p. 9]. He also believed that management is responsible for Matching employees to the right job, Providing the proper training, Providing proper work methods and tools, and
1 Source:

http://en.wikipedia.org/wiki/Just In Time %28business%29, February 14, 2007.

28

CHAPTER 2. OPERATIONS AND PRODUCTIVITY Establishing legitimate incentives for work to be accomplished. Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. Recently, major contributions have come from the eld of information sciences.

Denition 2.2.3 (Information Sciences) The systematic processing of data to yield information.

2.3

The Service Sector

As economies modernize and production is sucient to guarantee a basic level of food, shelter, and other essentials for its citizens, services become increasingly important. In the U.S., the economy transitioned from agriculture to manufacturing around 1900. Manufacturing was dominant until about 1950 or so. Today, services account for over 70% of U.S. economic output. Side Note 2.3.1 (Development of the Service Economy) Present Heizer gure 1.5 [1, p. 11]. In most western economies, the services sector is by far the largest employer. In some service industries, such as retail, average wages are below average2 in the U.S.. However, for others professional occupations, such as the legal profession or computer services in the nancial industry, the wages are considerably above average. Denition 2.3.1 (Services) Those economic activities that typically produce an intangible product. The U.S. Bureau of Labor Statistics denes services to include [1, p. 9] Repair and maintenance, Government, Food and lodging, Transportation, Insurance, Trade,
2 The

average national private industry wage.

2.3. THE SERVICE SECTOR Financial, Real estate, Education, Legal, Medical, Entertainment, Other professional occupations.

29

Side Note 2.3.2 (Dierences Between Goods and Services) There are a variety of important dierences between goods and services which result in dierences in the way they are managed. Services are typically intangible. Services are often produced and consumed simultaneously. This is important insofar as there is no inventory. Services are more often unique. Legal advice is rarely identical for two clients. Services have a high consumer interaction. Consumers interact with those providing the service. Services have inconsistent product denition. Services are often knowledge-based. Therefore it is dicult to automate. Services are often dispersed. Customers seek services through local intermediaries. Note that many goods include services and many services include goods.3 That is, when going to a restaurant, you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you. When buying a computer, the purchase price may include installation services, a support contract in case you have problems or training to familiarize you with the features of the computer. Hospital care includes both health services and goods, such as pharmaceuticals or medical supplies, used in your treatment. Denition 2.3.2 (Pure Service) A service that does not include a tangible product.
3 Services that do not include a good as a component are called pure services. See denition 2.3.2.

30

CHAPTER 2. OPERATIONS AND PRODUCTIVITY

2.4

Trends in Operations Management

We talked a little about the history of operations management in sidenote 2.2.2. Globalization has been having a dramatic impact on operations management and in the future, it will continue to strongly impact the eld. Trends that Heizer and Render identify [1, p. 13] for the future of operations management include Global focus Due to decreases in transportation and communications costs, operations managers are increasingly responsible for innovations that move ideas, parts, and nished goods rapidly, wherever and whenever needed. Just-in-time performance Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. Supply-chain partnering Shorter product life cycles as well as rapid changes in materials require more participation by suppliers and long-term relationship building by operations managers. Rapid product development The life span of products is decreasing and the need to rapidly develop and bring to market new products is consequently increasing. Mass customization With increases in technical capabilities and customerlevel information management, brought about in part by the internet, the next step in product development involves customizing products according to the customers preferences. Empowered employees With the rise of services and knowledge products, operations managers are responding by moving decision making to the individual employee. Environmentally sensitive production Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. Operations managers are being challenged to produce biodegradable, reusable, or recyclable products or to minimize packaging and other wasteful production steps.

2.5

The Productivity Challenge

One of the operation managers primary challenges is improving productivity. This can be done by producing more output with a given level of inputs or reducing the level of inputs used to produce a given level of output. Denition 2.5.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor, capital, or management).

2.5. THE PRODUCTIVITY CHALLENGE

31

Denition 2.5.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). Denition 2.5.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Also known as total factor productivity. Denition 2.5.4 (Total Factor Productivity) See denition 2.5.3. In order to improve productivity, an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. Side Note 2.5.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company, the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization. Side Note 2.5.2 (Example: Calculating Productivity) Present Heizers example 2 [1, p. 15]. Collins Title Company has a sta of 4 working 8 hours per day at $640/day and overhead of $400/day. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day, but overhead is no $800/day. Labor productivity with the old system: Labor productivity with the new system:
8 titles per day 32 labor-hours

= 0.25 titles per labor-hour = 0.4375 titles per labor-hour = 0.0077 titles per labor-hour = 0.97 titles per labor-hour

14 titles per day 32 labor-hours 8 $600+$400 14

Multifactor productivity with the old system: Multifactor productivity with the old system:

titles per day

$600+$800

titles per day

Measuring productivity is not always a straightforward activity. Potential problems include Quality Quality may change while the quantity of inputs and outputs is constant. Consider todays computers versus those from the 1970s.

32

CHAPTER 2. OPERATIONS AND PRODUCTIVITY The rst computer ever used had no internal memory. (It used audio tapes for memory storage.) The screen had only one color, green, and was about the size of my hand. There were, of course, no word processors, spreadsheets, or other commercial software available. If you wanted the computer to do something, you had to write a program from scratch. Exogeneous factors External elements may cause changes in productivity which the operations manager or other factors in the system under study is not responsible for. For example, in Cambodia, the public provision of electricity is highly variable. The electricity often goes out in the middle of the day and the current may vary in strength. If the public electricity provision increases in quality, it may improve productivity. Units of measure There may not be appropriate units of measure. Not all cars are the same. A Toyota Corolla is a much dierent car than a Porsche 911 Turbo. This can be a particular problem in the service industry, where quality and other factors vary widely or the level of service provision includes items dicult to measure, such as convenience or safety.

2.5.1

Productivity Variables

Operations managers typically divide productivity variables into three categories: 1. Labor, 2. Capital, 3. Management. Denition 2.5.5 (Productivity Variables) In operations management, the three factors critical to productivity improvement labor, capital, and the arts and science of management. Labor In the U.S., about 10% of the annual improvement in productivity is due to increases in labor productivity. Labor productivity has increased due to Better-educated,

2.5. THE PRODUCTIVITY CHALLENGE Better-nourished, and Healthier workers as well as A shorter work week. The primary variables for improving labor productivity include 1. Basic education appropraite for an eective labor force, 2. Diet of the labor force, and

33

3. Social overhead that makes labor available, such as transportation and sanitation, and 4. In developed nations, maintaining and enhancing the skills of labor. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. Side Note 2.5.3 (The State of Education in the U.S.) Present Heizer gure 1.8 [1, p. 16], About Half of 17-Year-Olds in the U.S. Cannot Correctly Answer Questions of This Type. In the U.S., there is considerable concern over teaching of basic skills such as mathematics to grade school children. Heizer notes that 38% of American job applicants tests for basic skills were decient in reading, writing, and math. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. What is the area of a 4 6 meter rectangle.4 4 square meters 6 square meters 10 square meters 20 square meters 24 square meters 2. If 9y + 3 = 6y + 15 then y = 1 2 4 6 3. Which of the following is true about 84% of 100?
4 When

presenting this question, draw the rectangle on the blackboard.

34

CHAPTER 2. OPERATIONS AND PRODUCTIVITY It is greater than 100 It is less than 100 It is equal to 100

At the university level, however, U.S. graduate programs and the students they produce remain the best in the world.

2.5.2

Capital

Capital investment in the U.S. has increased at about an average of 1.5% after allowances for depreciation. Note that there is a trade-o between capital and labor in most industries, and the cost of capital depends on interest rates.

2.5.3

Management

Management is used to ensure that labor and capital are used eectively and eciently. According to Heizer [1, p. 17], management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. Side Note 2.5.4 (Management as an Input) Because this is a course in business management, and because the author of the textbook is writing about operations management, management is considered as a separate input. Note that in classic economic analysis and other areas of business, management is not always identied separately from labor as an input. Developed economies (also known as post-industrial economies) require trained, educated, and knowledgeable employees and operations managers are responsible for ensuring that technology, education, and knowledge, as well as capital, are utilized eectively. Denition 2.5.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge.

2.5.4

Productivity and the Service Sector

Historically, in the U.S., productivity in the service sector has not increased as rapidly as with the production of goods. Diculties arise because service-sector work is

2.6. SOCIAL RESPONSIBILITY 1. Typically labor-intensive (e.g., teaching), 2. Frequently individually processed (e.g., investment advice),

35

3. Often an intellectual task performed by professionals (e.g., medical diagnosis), 4. Often dicult to automate (e.g., a haircut), and 5. Dicult to evaluate for quality (e.g., the performance of a law rm). Low-productivity activities, such as cleaning, food preparation, laundry service, and child care, have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward. Side Note 2.5.5 (Service Productivity in the U.S.) Productivity is highest in the U.S. in both overall and service productivity. Heizer notes [1, p. 18] Retailing in the U.S. is twice as productive as in Japan,5 The U.S. telephone industry is twice as productive as Germanys, and The U.S. banking system is about 33% more productive than Germanys.

2.6

Social Responsibility

As discussed in chapter 1, operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering prots and eciency. These challenges include such issues as Maintaining a clean environment, Keeping the workplace safe, General ethical behavior concerning issues such as child labor and corruption. These demands come not only from the managers personal ethic, but from customers, government agencies, watchdog groups such as NGOs, and other stakeholders. We will discuss this challenge in more detail throughout the course.

5 In

Japan, legislation protects shopkeepers from discount retailers.

36

CHAPTER 2. OPERATIONS AND PRODUCTIVITY

Chapter 3

Operations Strategy in a Global Environment

We will now discuss globalization within the context of enterprise management. There are a variety of reasons to expand domestic operations into the international arena. The following reasons proceed from the most tangible to less tangible reasons. 1. Reduction of Costs Many multinationals take advantage of lower labor costs overseas as well as take advantage of tax and tari benets for foreign operations. The World Trade Organization (WTO) has reduced average taris from 40% in 1940 to 3% in 1995. In the U.S., Canada, and Mexico, NAFTA (the North American Free Trade Agreement) seeks to phase out all trade barriers. In Mexico, maquiladoras allow manufacturers to only be taxed on value-added operations. Other prominent free trade agreements include APEC (between Pacic rim countries), SEATO (Australia, New Zealand, Japan, Hong Kong, South Korea, New Guinea, and Chile), MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay) The EU (European Union) is also a major trading bloc. 2. Improve the Supply Chain Unique resources, such as expertise or raw material, can be used to improve the supply chain by locating in areas where these resources are prevalent. For example, Cutting-edge auto designers are keen to locate in Southern California. 37

38CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT Most shoe production takes place in South Korea and Guangzhou. Perfumers tend to concentrate in Grasse, France. 3. Provide Better Goods and Services For companies doing business in an international setting, an understanding of cultural dierences in preferences is needed to best meet customer needs. 4. Attract New Markets Expansion into foreign markets can Expand the life cycle of an existing product, Provide additional insights and opportunities, and Increase sales. 5. Learn to Improve Operations Firms can learn from ecient business practices in foreign markets. 6. Attract and Retain Global Talent By oering more employment opportunities, global organizations can attract and retain better employees.

3.1

Developing Missions and Strategies

A mission allows managers to tell employees where the company is going whereas a strategy tells them how to get there.

3.1.1

Mission

Whether large or small, I recommend that all companies draft a mission statement. Missions state the rationale for an organizations existence. Denition 3.1.1 (Mission) The purpose or rationale for an organizations existence. Side Note 3.1.1 (Mission Statements for Three Organizations) Review Heizer gure 2.2 [1, p. 28] which includes mission statements for three multinational companies: 1. FedEx, FedEx is committed to our People-Service-Prot philosophy. We will produce outstanding nancial returns by providing totally reliable, competitively superior, global air-ground transportation of high-priority goods and documents that require rapid, time-certain delivery. Equally important, positive control of each package will be maintained utilizing real time electronic tracking and tracing

3.1. DEVELOPING MISSIONS AND STRATEGIES systems. A complete record of each shipment and delivery will be presented with our request for payment. We will be helpful, courteous, and professional to each other and the public. We will strive to have a completely satised customer at the end of each transaction. 2. Merck, and The mission of Merck is to provide society with superior products and services invations and solutions that improve the quality of life and satisfy customer needs to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. 3. The Hard Rock Caf. e Our Mission: To spread the spirit of Rock n Roll by delivering an exceptional entertainment and dining experience. We are committed to being an important, contributing member of our community and oering the Hard Rock family a fun, healthy, and nurturing work environment while ensuring our long-term success.

39

Side Note 3.1.2 (Ben & Jerrys Mission Statement) Review Ben & Jerrys mission statement. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. Our mission consists of 3 interrelated parts: Product Mission To make, distribute & sell the nest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome, natural ingredients and promoting business practices that respect the Earth and the Environment. Economic Mission To operate the Company on a sustainable nancial basis of protable growth, increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. Social Mission To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally, nationally & internationally. Ben & Jerrys ice cream company is considered a model of a socially responsible company in the U.S.. Other companies, such as Whole Foods, a grocery chain, give customers the opportunity to donate to charity every time they go to buy groceries (and many do)

40CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT or donate a xed percentage of their prots to charity depending on which charities are most supported by their customers. See http://www.benjerry.com/our company/our mission/index.cfm for more detail.

3.1.2

Strategy

Strategy involves concrete steps by which a company can achieve its mission. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. Dierentiation They make their product better. 2. Cost leadership Providing cheaper products. 3. Responsiveness By providing timelier, more responsive products or services. Denition 3.1.2 (Strategy) How an organization expects to achieve its missions and goals. Denition 3.1.3 (Competitive Advantage) In operations management, the creation of a unique advantage over competitors. Side Note 3.1.3 (Sample Mission Statements) Present Heizers gure 2.3: Sample Missions for a Company, the Operations Function, and Major Departments in an Operations Function. Note that mission statements are used not only at the company-wide level, but can be used at the department level and even at the project level. Dierentiation Producers can try to compete based on providing a product or service that is unique in some way. Dierentiation can arise from anything that the customer may value about a product or a services, be it Product features, The look and feel of the product, Availability of complementary products, Interoperability with other products, Training,

3.1. DEVELOPING MISSIONS AND STRATEGIES Product delivery or installation, Repair and maintenance or warranty services.

41

Denition 3.1.4 (Dierentiation) In operations management, distinguishing the oerings of an organization in any way that the customer perceives as adding value. Many service providers focus on experience dierentiation, such as Disney with its theme parks and the Hard Rock Caf and other theme restaurants. In China, KTV e tries to dierentiate itself from competitors by providing a more exciting karaoke experience with more advanced equipment and ashier karaoke rooms. Denition 3.1.5 (Experience Dierentiation) In operations management, engaging the customer with the product through imaginative use of the ve senses, so the customer experiences the product. See also denition 3.1.4.

Competing on Cost For producers of commoditized products or services, price is perhaps the most important competitive dimension. Denition 3.1.6 (Low-Cost Leadership) In operations management, achieving maximum value (expressed in terms of quality and price) as perceived by the customer. Low-cost leadership does not imply low value or low quality. Often providers of low-cost products achieve their competitive advantage by taking advantage of facilities, management techniques, or technologies to reduce costs. Wal-Mart has been very successful in competing by driving down overhead and distribution costs.

Competing on Response Competitive advantage in responsiveness relates to ability to be Flexible Being able to match changes in a marketplace For example, Hewlett-Packard has achieved an advantage by being able to provide a product with a life cycle of months and dramatically change design and volume in a short time frame.

42CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT Reliable Being able to provide consistent products or services with minimal risk to the customer. FedExs motto is an example of a company who is trying to compete on the basis of reliability: Absolutely, positively on time. Quickness Quickness can refer to speed in design, production, or delivery. In the U.S., Dominos Pizza specializes in pizza delivery and at one time guaranteed that your pizza would be delivered to your home in 30 minutes or less. Pizza Hut also provided a guarantee that if you came to the restaurant for lunch and ordered a Personal Pan Pizza, you would get your pizza in 5 minutes or less. Denition 3.1.7 (Response) In operations management, the set of values related to rapid, exible, and reliable performance. Side Note 3.1.4 (Operation Managements Contribution to Strategy) Present Heizer gure 2.4 [1, p. 32]. This gure provides examples of strategic decisions and how they relate to the ten operations decisions discussed in sidenote 2.2.1. Side Note 3.1.5 (Example: Starting a Restaurant) Present Heizer example 1 [1, p. 34]. The example relates to the process design decision based on the mission statement, To provide outstanding French ne dining for the people of Chicago. Several alternative options are presented.

3.2

Issues in Operations Strategy

In forming a strategy to achieve a stated mission, a manager should consider Research What researchers have identied as successful characteristics of operations management strategies. Preconditions Things that must be understood before a strategy is formulated. Dynamics How to deal with change as the strategy is confronted with changes in the operating environment. Each of these topics will be discussed in turn.

3.2. ISSUES IN OPERATIONS STRATEGY

43

3.2.1

Research

The PIMS (Prot Impact of Market Strategy) project by GE (General Electric) collected data from 3,000 cooperating organizations to identify characteristics of high ROI (Return on Investment) rms. They determined that high-impact OM decisions have the following characteristics: 1. High product quality1 2. High capacity utilization 3. High operating eciency2 4. Low investment intensity3 5. Low direct cost per unit4

3.2.2

Preconditions

At a minimum, when considering factors that inuence strategy development, an understanding is needed of 1. Strengths and weakness of competitors Including possible new entrants and Commitment of suppliers and distributors 2. Current environmental, technological, legal, and economic issues. 3. The product life cycle 4. Resources available to the manager 5. Integration of the OM strategy with the companys overall strategy

3.2.3

Dynamics

Strategy may need to be changed due to changes in an organization, including personnel, nance, technology, and product life cycle changes, and changes in the environment, such as the competitive environment, advances in technology, etc.. Side Note 3.2.1 (Strategy and Issues During a Products Life) Present Heizer gure 2.5 [1, p. 36]. Four phases of the typical product life cycle are given as well as where some current products lie on the life cycle.
1 Relative 2 The

to the competition. ratio of actual to expected employee productivity. 3 The amount of capital required to produce a dollar of sales. 4 Relative to the competition.

44CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT

3.3

Strategy Development and Implementation

Operations managers commonly use a SWOT (Strength, Weakness, Opportunities, and Threats) analysis to develop strategies. Denition 3.3.1 (SWOT Analysis) In operations management, determining internal strengths and weaknesses and external opportunities and threats. The operations managers job is a three-step process: 1. Identify a strategy and critical success factors, 2. Group the necessary activities into an organizational structure, and 3. Sta the organization with personnel that will get the job done. The purpose of this process is to 1. Implement an OM strategy, 2. Provide competitive advantage, and 3. Increase productivity. Side Note 3.3.1 (Strategy Development Process) Present Heizer gure 2.6 [1, p. 37], Strategy Development Process. The process of developing a strategy involves the following steps: Environmental Analysis, Determine Corporate Mission, then Form a Strategy.

3.3.1

Identify Critical Success Factors

A successful strategy must determine what factors are critical to success, then determine whether the organization does these things well (and, in particular, if the rm has a competitive advantage in these things) and where failures are most likely. Denition 3.3.2 (Critical Success Factors) In operations management, those activities or factors that are key to achieving competitive advantage. These critical success factors are used to develop a competitive advantage.

3.4. GLOBAL OPERATIONS STRATEGY OPTIONS

45

Side Note 3.3.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.2.1 as a checklist to determine critical success factors. Once CSFs are determined, an activity map can be used to link an organizations competitive advantage to the CSFs. Denition 3.3.3 (Activity Map) In operations management, a graphical link of competitive advantage, CSFs, and supporting activities. Side Note 3.3.3 (Activity Mapping of Southwest Airlines Competitive Advantage) Present Heizer gure [1, p. 39]. Southwest Airlines has a competitive advantage in providing low-cost airfares. The gure provides an activity mapping of the activities that relate to SWAs critical success factors. Red arrows critical success factors Blue arrows support activities

3.3.2

Build and Sta the Organization

Building a competent sta is one of the most important functions of an operations manager and is critically important to the success of his or her strategy. Recall the org charts in sidenote 2.1.2 as examples of how rms organize their activities.

3.3.3

Integrate OM With Other Activities

In order to achieve its strategy, OM activities are most productive when they are integrated with other activities such as marketing, nance, MIS,5 and HR.6

3.4

Global Operations Strategy Options

Scholars of operations management have identied four strategies for operations management in an international setting.
5 Management 6 Human

Information Systems Resources.

46CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. International strategy Often the easiest strategy, as exports require little change in operations and licenses often leave risk with the licensee. Also one of the least protable due to transport costs and little local responsiveness. See denition 3.4.3. 2. Multidomestic strategy Exporting management talent and processes but not necessarily the product. Typically characterized by subsidiaries, franchises, or joint ventures with substantial independence. Usually does not confer a cost advantage. See denition 3.4.4. McDonalds is an example of a country with a multidomestic strategy. Its menu reects the country in which it operates, with beer on the menu in Germany, wine in France, and hamburgers without beef in India. 3. Global strategy Not characterized by local responsiveness, but a good strategy for cost reduction when products do not need to be adapted locally. See denition 3.4.5. Texas Instruments is an example of a country with a global strategy. In the semiconductor industry, products do not need to be localized. 4. Transnational strategy Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a home country but can exist anywhere in the organization. See denition 3.4.6. Nestl is an example of a country with a transnational strategy. Although e it is legally Swiss, 95% of its assets and 98% of its sales are made outside Switzerland. Only 10% of its work force is Swiss. [1, p. 42] Denition 3.4.1 (International Business) A rm that engages in cross-border transactions. Denition 3.4.2 (Multinational Corporation (MNC)) A rm that has extensive involvement in international business, owning or controlling facilities in more than one country. Denition 3.4.3 (International Strategy) In operations management, a strategy that uses exports and licenses to penetrate the global arena. Denition 3.4.4 (Multidomestic Strategy) In operations management, a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. Denition 3.4.5 (Global Strategy) In operations management, a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities.

3.4. GLOBAL OPERATIONS STRATEGY OPTIONS

47

Denition 3.4.6 (Transnational Strategy) In operations management, a strategy that combines the benets of global scale eciencies with the benets of local responsiveness. Side Note 3.4.1 (Hodgetts Figure 1-1) Present Hodgetts gure 1-1 [5, p. 6]. Note that many companies that are well-known American brands are now making more money overseas than they do in the U.S., including Avon Chevron Citicorp Coca-cola Colgate Palmolive Du Pont Exxon-Mobil Eastman Kodak Gillette Hewlett-Packard McDonalds Motorola Ralston-Purina Texaco 3M Company Xerox

48CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT

Chapter 4

Project Management
Side Note 4.0.2 (Company Prole: Bechtel) Discuss Heizers company prole of Bechtel [1, pp. 4647]. The prole highlights the importance of project management in achieving competitive advantage. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. Project management involves three phases: 1. Planning Goal setting, dening the project, and team organization. 2. Scheduling People, money, and supplies are tasked to specic activities and activities are related to each other. 3. Controlling Monitoring of resources, costs, quality, and budgets. Plans are also revised to meet changes in time and cost demands. Side Note 4.0.3 (Project Planning, Scheduling, and Controlling) Present Heizer gure 3.1 [1, p. 49]. Side Note 4.0.4 (Personal Reections on Software Project Management) My experience in project management is primarily in the eld of software project management. Software engineering is one of the most challenging areas in project management because of the complexity of software development and the signicant amount of uncertainty associated with creating new algorithms or technical features. Even Microsoft, the largest software company in the world, regularly goes over schedule with agship development projects such as updates to Microsoft Windows. 49

50

CHAPTER 4. PROJECT MANAGEMENT

However, it is also an area in which there will continue to be high demand for qualied people. See also Heizer sidenote Project Management and Software Development, [1, p. 69]. Side Note 4.0.5 (Personal Advice on Project Management) Project management is a tricky profession. If you become a project manager on projects of signicant complexity, you will be confronted with a daunting task. You may be managing resources far in excess of your individual salary. Your job is to make things go smoothly and according to plan. In a sense, you are doing your job well if noone notices the project management. However, if things go wrong, it is very obvious and can be very costly. Moreover, you should always expect the unexpected. People will not come through with what they promised, things you thought were certain turn out not to be, and you will be forced to improvise.

4.1

Project Planning

While many projects are run within an existing organization, often times, a temporary project organization is formed to address a specic project. Denition 4.1.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. Project organizations work best when [1, p. 48] 1. Work can be dened with a specic goal and deadline, 2. The job is unique or somewhat unfamiliar to the existing organization, 3. The work contains complex interrelated tasks requiring specialized skills, 4. The project is temporary but critical to the organization, and/or 5. The project cuts across organizational lines.

4.1.1

The Project Manager

As alluded to in sidenote 4.0.5, project managers are highly visible in a rm and have signicant responsibilities. The responsibilities of project managers are to make sure that

4.1. PROJECT PLANNING 1. All projects come in on time, 2. The project is on or under budget, 3. The project meets its quality goals, and 4. People receive motivation and information necessary to do their jobs.

51

4.1.2

The Work Breakdown Structure

One of the rst tasks involved in project management is to gure out how to divide the project into parts with a work breakdown structure (WBS). Denition 4.1.2 (Work Breakdown Structure (WBS)) In operations management, dividing a project into more and more detailed components. Side Note 4.1.1 (Avoid Creating a WBS That is Too Detailed) A common error that inexperienced project managers make is to divide the project into too many tasks. When dividing a project into tasks, ask yourself Do I really need to spend the time to monitor each task I have identied? Does the failure of this task cause signicant problems completing the project on time or under budget or impact other tasks that cause problems? If the answer to these questions is no, you have divided the tasks too nely. For example, in a software engineering project, a web page takes about a day to build for an experienced team. In a project that includes allowing a user to enter personal information on a web page, a task that should only take a day or so, Build the user account input web page is a much better task division than 1. Complete graphic design for user account input web page 2. Review graphic design for user account input web page 3. Approve graphic design for user account input web page 4. Complete software architecture for user account input web page functionality 5. Review software architecture for user account input web page functionality 6. Approve software architecture for user account input web page functionality

52

CHAPTER 4. PROJECT MANAGEMENT 7. Write software for user account input web page functionality 8. Write software for user account input conrmation page functionality 9. Test software for user account input and conrmation web page functionality

A work breakdown structure contains tasks that decrease in size from top to bottom and is generally divided into the following levels: 1. Project 2. Major tasks in the project 3. Subtasks in major tasks 4. Activities (also known as work packages) to be completed Side Note 4.1.2 (Work Breakdown Structure) Present Heizer gure 3.3 [1, p. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. The actual WBS for Windows XP would, of course, ll hundreds if not thousands of pages. Side Note 4.1.3 (Reality Check: WBS) In reality, the work breakdown structure is not something you go to your oce to do in isolation. It arises from meeting and discussing the activities with engineering and technical sta as well as senior management. At the time you are creating the work breakdown structure, you should also take note of time and cost estimates given by your technical sta. They will be useful for project scheduling, which we will discuss next in section 4.2.

4.2

Project Scheduling

After dividing activities into a work breakdown structure (WBS), it is time to assign people and materials and estimate the time and perhaps the cost of various activities. Scheduling serves to 1. Show the relationship between each activity to others and to the whole project 2. Identify precedence relationships among activities 3. Encourage realistic time and cost estimates for each activity

4.2. PROJECT SCHEDULING

53

4. Make better use of people, moeny, and material resources by identifying critical bottlenecks in the project Side Note 4.2.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizers gure 3.4 [1, p. 51], Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. This will give the class an idea of the look and feel of a typical Gantt chart. Denition 4.2.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. Denition 4.2.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. Derives from the typical shape of a bottle, which becomes narrower as one approaches the neck of the bottle; said of roads; as, right by the bridge, the road bottlenecks. Gantt charts are perhaps the most widely used tool for ensuring that 1. All activities are planned for, 2. The order of performance is accounted for, 3. Activity time estimates are recorded, and 4. Overall project time is developed. Side Note 4.2.2 (Using Gantt, PERT, and CPM) Inexperienced project managers often feel the need to use Gantt, PERT, and CPM tools for every project management activity. Perhaps they imagine that they are not doing their jobs professionally if they are not. However, these should be considered merely tools to be used when they are useful by saving time or energy. MS Projects Gantt chart functions demand you assign employees, cost estimates, and other values to each activity. It can actually be quite time consuming to create and maintain Gantt charts, PERT and other formal documents. For smaller projects, I have found that simple spreadsheets or even just writing things down on a notepad (I typically use a separate notepad for each project to keep organized) is more productive than using Gantt . PERT and CPM help answer questions such as When will the entire project be completed?

54

CHAPTER 4. PROJECT MANAGEMENT What are the critical activities or tasks in the project that is, which activities will delay the entire project if they are late? Which are the noncritical activities the ones that can run late without delaying the whole projects completion? What is the probability that the project will be completed by a specic date? At any particular date, is the project on schedule, behind schedule, or ahead of schedule? On any given date, is the money spent equal to, less than, or grater than the budgeted amount? Are there enough resources available to nish the project on time? If the project is to be nished in a shorter amount of time, what is the best way to accomplish this goal at the least cost?

4.3

Project Controlling

Project control involves monitoring resources, costs, quality, and budgets of projects. Control programs typically produce reports detailing 1. Cost breakdowns for each task, 2. Total program labor curves, 3. Cost distribution tables, 4. Functional cost and hour summaries, 5. Raw material and expenditure forecasts, 6. Variance reports, 7. Time analysis reports, and 8. Work status reports.

4.3.1

PERT and CPM

Two methods, PERT and CPM, were developed in the 1950s for project control. Denition 4.3.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity.

4.3. PROJECT CONTROLLING

55

Denition 4.3.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. See also denition 4.3.3. Denition 4.3.3 (Critical Path) The computed longest time path through a network. See also denition 4.3.2. They both follow six steps: 1. Dene the project and prepare the WBS. 2. Develop the relationships among activities. 3. Draw the network connecting all of the activities. 4. Assign time and/or cost estimates to each activity. 5. Compute the longest time path, or the critical path, through the network. 6. Use the network to help plan, schedule, monitor, and ontrol the project. Side Note 4.3.1 (Reality Check: PERT and CPM) MS Project allows you to track relationships among activities and can produce either a Gantt or PERT chart from a single project data set. Moreover, it will do for you automatically much of what we will go through manually in this class. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts. Also, in my experience, Gantt charts are the go to visualization method for even very complex projects. Personally, I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management.

4.3.2

Network Diagrams

There are two approaches to visualizing activity networks: 1. Activity on Node (AON) and 2. Activity on Arrow (AOA). As the names describe, AON associates the activity with the node whereas AOA associates the activity with the arrow. Side Note 4.3.2 (Example: AON and AOA) Present Heizers gure 3.5 [1, p. 53].

56

CHAPTER 4. PROJECT MANAGEMENT

Side Note 4.3.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizers examples 12 with gures 3.63.8 [1, pp. 5455]. Table 3.1 gives sucient information to describe the network. Follow with example 3 and gure 3.9 [1, p. 56].

4.4

Determining the Project Schedule

Once we have identied all of our activities, their dependencies, we must use time estimates of each activity to determine the overall schedule for the project. We do this with a critical path analysis with involves a 2-step procedure. 1. Forward Pass Uses the earlierst start time (ES) rule and earliest nish (EF) rule to determine the earliest times that activities can be completed. Earliest Start Time Rule: If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. If an activity has multiple immediate predecessors, its ES is the maximum of all EF values of its predecessors. In other words, ES = max{EF of all immediate predecessors}. Earliest Finish Rule: The earliest nish time of an activity is the sum of its earliest start time and its activity time; that is, EF = ES + Activity time. 2. Backward Pass Uses the latest nish time (LF) rule and latest start time (LS) rule to determine the latest times that activities can be completed. Latest Finish Time Rule: If an activity is an immediate predecessor for just a single activity, its LF equals its LS of the activity that immediately follows it. If an activity is an immediate predecessor to more than one activity, its LF is the minimum of all LS values of all activities that immediately follow it; that is, LF = min{LS of all immediate following activities}. Latest Start Time Rule: The latest start time of an activity is the dierence of its latest nish time and its activity time; that is, LS = LF Activity time. Denition 4.4.1 (Critical Path Analysis) In project management, analysis used to determine the project schedule. See also denition 4.3.3.

4.5. SLACK TIME AND IDENTIFYING THE CRITICAL PATH

57

Denition 4.4.2 (Forward Pass) In project management scheduling, the step that identies all the earliest times that activities can be completed. Side Note 4.4.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.3.3 and Heizer gure 3.10 [1, p. 57], Notation Used in Nodes for Forward and Backward Pass. Then complete Heizer example 7 gure 3.13 [1, p. 61] based on table 3.3 [1, p. 60]. Note that activities A, C, E, G, and H have no slack time and cannot be delayed without delaying the entire project. These are called critical activities. Also notable is that if the total time of the project needs to be reduced, the time devoted to one of these activities must also be reduced.

4.5

Slack Time and Identifying the Critical Path

After we have calculated start and nish times we know the slack time for each activity. Slack time is just Slack = LS ES or Slack = LF EF . Denition 4.5.1 (Slack Time) In project scheduling, the free time for an activity, or the amount of time an activity can be delayed without delaying the entire project. The critical path is one that Begins at the rst activity in the project, Terminates at the last, and Includes only critical activities (see sidenote 4.4.1). Note also that if we delay each activity by the amount of slack that activity has, we may delay the project as a whole.1 When several noncritical activities appear successively in a path, they share total slack. If an activity2 does not impact the slack time of any other activity, it is said to have free slack. Denition 4.5.2 (Total Slack) In project scheduling, the time shared among more than one activity. Denition 4.5.3 (Free Slack) In project scheduling, the time associated with a single activity.
1 For example, in the example in sidenote 4.4.1, if we delay activities B and D by one week each, we cannot complete the project in 15 weeks. 2 For example, activity F in sidenote 4.4.1.

58

CHAPTER 4. PROJECT MANAGEMENT

4.6

Variability in Activity Times

We have so far assumed that the activities will take a xed length of time. However, the time required to complete an activity is often uncertain due to supply problems, unexpected complexities, technical considerations that were unknown at the time the project schedule was drawn up, etc.. In PERT, three time estimates are used: 1. Optimistic time The shortest amount of time an activity will take 1% of the time 2. Pessimistic time The longest amount of time an activity will take 1% of the time 3. Most likely time The most realistic estimate of the time required to complete an activity. Side Note 4.6.1 (Reality Check: Time Estimates) We dene the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. In reality, we do not. Eectively, in most cases, the project manager pulls the number out of the air based on their experience managing related activities. Denition 4.6.1 (Optimistic Time) In project scheduling, the best activity completion time that could be obtained in a PERT network. See also denitions 4.6.2 and 4.6.3. Denition 4.6.2 (Pessimistic Time) In project scheduling, the worst activity completion time that could be obtained in a PERT network. See also denitions 4.6.1 and 4.6.3. Denition 4.6.3 (Most Likely Time) In project scheduling, the most probable activity completion time that could be obtained in a PERT network. See also denitions 4.6.1 and 4.6.2. Denition 4.6.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. Beta distributions have two free parameters, which are labeled according to one of two notational conventions. The usual definition calls these alpha and beta, and the other uses = 1 and = 1 . The beta distribution is used as a prior distribution for binomial proportions in

4.6. VARIABILITY IN ACTIVITY TIMES

59

Bayesian analysis. The above plots are for various values of (,) with = 1 and ranging from 0.25 to 3.00.3 The domain is [0,1], and the probability function P (x) and distribution function D(x) are given by (1 x)1 x1 ( + ) = (1 x)1 x1 B(, ) ()()

P (x) =

(4.1)

where B(p, q) and (p) are given by (p 1)!(q 1)! (p)(q) = (p + q) (p + q 1)!

B(p, q) =

(4.2)

The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1, p. 62]. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. The variance of the activity time is Variance = [(b a)/6]2 . Side Note 4.6.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1, p. 63] for activity F based on optimistic, most likely, and pessimistic times of 1, 2, and 9 weeks. The expected activity time for activity F is 3 weeks5 and the variance is 1.78 weeks.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic, most likely, and pessimistic times of 1, 4, and 7.

4.6.1

Probability of Project Completion

If we assume that 1. Total project completion times follow a normal probability distribution and 2. Activity times are statistically independent
3 Source: http://mathworld.wolfram.com/BetaDistribution.html http://mathworld.wolfram.com/BetaFunction.html, February 21, 2007. 4 See denition 4.6.4. 5 t = a+4m+b = 1+4(2)+9 = 18 = 3 weeks 6 6 i h i6 h 2 (91) 2 6 Variance = (ba) = = 64 = 1.78 6 6 36 7 4 weeks. 8 1.00 week.

and

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CHAPTER 4. PROJECT MANAGEMENT

then the total project completion time will simply the the sum of variances on the critical path
2 p = Project variance =

(variances of activities on critical path)

(4.3)

Denition 4.6.5 (Variance) For a single variate X having a distribution P (x) with known population mean , the population variance var(X), commonly also N written 2 , is dened as 2 i=1 P (xi )(xi )2 for a discrete distribution with 2 N possible values of xi and P (x)(x )2 dx for a continuous distribution. See also 4.6.6.

Denition 4.6.6 (Standard Deviation) The standard deviation is the square root of the variance.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time, two standard deviations approximately 95% of the time, and within 3 standard deviations approximately 99.7% of the time. See denition 4.6.5.

Side Note 4.6.3 (Example: Project Variance) Review Heizer example 9 [1, p. 64]. Note that the standard deviation of 1.76 weeks implies that the project will exceed the expected completion time by more than 1.76 weeks approximately 16% of the time.10

Determining Project Completion Time for a Given Condence Interval A common question is, What is the probability that a project will take more than X time to complete? This can be answered by consulting the normal tables and using Z-values to estimate the answer based on the variance we showed how to calculate in section 4.6.1.

Side Note 4.6.4 (Using the Normal Table) Pass out Heizer Appendix I [1, pp. A2 A3] Normal Curve Areas. Review Heizer example 10 [1, p. 65] and gure 3.16.
9 For 10 See

more information, see http://mathworld.wolfram.com/StandardDeviation.html. denition 4.6.6.

4.7. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability O the Critical Path

61

Note that while we have focused on the critical path, if certain activities o the critical path take the pessimistic time estimate or more to complete, it may result in the project being delayed.

4.7

Cost-Time Trade-Os and Project Crashing

What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon, and if you become a project manager, you will doubtless experience one or both of these eventualities many times in your career. Project crashing is the name given to the process of rushing a project to completion. When crashing a project, we need to ensure The amount by which an activity is crashed is, in fact, permissible and realistic, The shortened durations will actually enable us to nish the project on time, and The total cost of crashing is as small as possible.11 Denition 4.7.1 (Crashing) In project management, shortening activity time in a network to reduce time on the critical path so total completion time is reduced. Denition 4.7.2 (Crash Time) In project management, crash time is the shortest duration of an activity. See denition 4.7.1. Denition 4.7.3 (Crash Cost) In project management, crash cost is the cost required to complete an activity in the shortest time possible. Since activity completion times are typically shortened by adding resources, the crash cost is typically higher than the normal cost. See denition 4.7.1. Crashing a project involves a four step process: 1. Step 1 Compute the crash cost per week. Assuming linear costs, Crash cost per period = (Crash cost Normal cost) (Normal time Crash time) (4.4)

11 Since crashing a project often involves adding additional resources to activities, we want to do so in the least cost mannger possible.

62

CHAPTER 4. PROJECT MANAGEMENT 2. Step 2 Find the critical path(s) in the project network. 3. Step 3 If there is only one critical path, select the activity on this critical path that Can still be crashed and Has the smallest crash cost per period. Crash this activity by one period. If there is more than one critical path, select one activity from each such that Each selected activity can still be crashed and The total crash cost per period of all selected activities is smallest. Then crash each activity by one period. Note that one activity may be on several critical paths. 4. Step 4 Update all activity times. If the due date has been reached, stop. If not, go to step 2.

Side Note 4.7.1 (Reality Check: Project Crashing) As common as projects falling behind schedule or deadlines being moved up is upper managements insistence that a project be completed in less time than a project manager estimates. As a project manager, you should be very wary of such pressure. If you accept the challenge and try to rush the project to please upper management, they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic, as the negative impact on your career of tactfully pushing back against management is usually much less than the negative impact of a signicant project delay or cost overrun. At times this may be politically infeasible. If you nd yourself needing to rush a project, the advice given in this section should be helpful. Side Note 4.7.2 (Example: Crashing a Project) Present Heizer example 12 [1, pp. 6769] including table 3.5 and gures 3.183.19.

4.8

A Critique of PERT and CPM

There are both advantages and disadvantes to PERT. Advantages Especially useful for large projects

4.9. USING MICROSOFT PROJECT FOR MANAGING PROJECTS Straightforward and not mathematically complex Graphical tools help perceive relationships quickly and easily Critical path and slack time analysis very helpful

63

Project documentation and graphs identify who is responsible for various activities Applicable to a wide variety of projects Useful in monitoring both schedules and costs Disadvantages Project activities must be clearly dened, independent, and the relationships stable Precedence relationships must be specied Time estimates tend to be subjective and are subject to fudging by managers12 The danger of too much emphasis on critical paths. Noncritical paths should be closely monitored as well.

4.9

Using Microsoft Project for Managing Projects

Present programs 3.13.7 [1, pp. 7074] with gures demonstrating MS Project functionality. Note that most project management textbooks refer to MS Project as the software of choice for project management. It is perhaps the most widely known and featureful project management software available. However, it is relatively expensive and the features are so numerous and complex, they are often overkill for small- to mediumsized projects. There are a variety of alternatives, including open source software that is free. Information on Achievo can be found at http://www.achievo.org. Information on dotProject can be found at http://www.dotproject.net. Information on Planner can be found at http://live.gnome.org/Planner. You may also refer to http://en.wikipedia.org/wiki/List of project management software for a list of project management software or ask Dr. Starkweather about his impression of various alternatives.

12 Recall

sidenote 4.7.1.

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CHAPTER 4. PROJECT MANAGEMENT

Chapter 5

Forecasting
5.1 What is Forecasting?

Business is inherently unpredictable. Part of the job for business leaders is to make good decisions with limited information. Denition 5.1.1 (Forecasting) The art and science of predicting future events. Part of good decision-making comes from years of experience. However, even the best and most experienced managers need to use mathematical forecasts to supplement their intuition. Side Note 5.1.1 (Heizer Company Prole: Tupperware) Review Heizers company prole of the Tupperware [1, pp. 8283]. Forecasts are classied by the future time horizon it concerns: Short-range forecasts Generally less than 3 months. Tend to be more accurate than medium- or long-range forecasts. Also uses dierent methodology, primarily mathematical techniques. Useful for Purchasing, Job scheduling, Workforce levels, Job assignments, and Production levels. Medium-range forecasts Generally between 3 months and 3 years. Useful for 65

66 Sales forecasting, Production planning and budgeting, Cash budgeting, and Analyzing various operating plans.

CHAPTER 5. FORECASTING

Long-range forecasts Generally more than 3 years. Generally deals with more comprehensive issues than short-range forecasts. Useful for Planning for new products, Capital expenditures, Facility locations or expansion, and Research and development.

Product life cycles tend to follow four stages: 1. Introduction, 2. Growth, 3. Maturity, and 4. Decline. In the rst two stages, longer forecasts are needed.

5.1.1

Types of Forecasts

Organizations typically use Economic forecasts, Technological forecasts, and Demand forecasts. Denition 5.1.2 (Economic Forecasts) In operations management, planning indicators valuable in helping organizations prepare medium- to long-range forecasts. These may include ination rates, money supply, housing starts, and other economic indicators. See also denitions 5.1.3 and 5.1.4. Denition 5.1.3 (Technological Forecasts) In operations management, long-term forecasts concerned with the rates of technological progress. These concern rates of technological progress, which impacts purchases of new plant and equipment as well as development of new products. See also denitions 5.1.2 and 5.1.4.

5.2. A SEVEN STEP FORECASTING SYSTEM

67

Denition 5.1.4 (Demand Forecasts) In operations management, projections of a companys sales for each time period in the planning horizon. Also called sales forecasts, these drive a companys production, capacity, and scheduling decisions and serve as inputs to nancial, marketing, and personnel planning. See also denitions 5.1.2 and 5.1.3.

5.1.2

The Strategic Importance of Forecasting

We will examine the impact of product forecasting in 1. Human resources Anticipated demand is needed to estimate the need for Hiring, Training, and Layos. 2. Capacity Underestimating demand can result in Undependable delivery, Loss of customers, and Loss of market share. 3. Supply-chain management Accurate forecasts are essential for Good supplier relations and Ensuring price advantages for materials and parts.

5.2

A Seven Step Forecasting System

Heizer recommends the following seven steps for forecasting: 1. Determine the use of the forecast. 2. Select the items to be forecasted. 3. Determine the time horizon of the forecast. 4. Select the forecasting models. 5. Gather the data needed to make the forecast. 6. Make the forecast. 7. Validate and implement the results.

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CHAPTER 5. FORECASTING

Side Note 5.2.1 (The Most Common Errors in Forecasting Methodology) In my experience, the most common errors I have seen with forecasting involve: Trying to use regression analysis with too few observations. In one case, budgets for a department in which I worked were forecast based on a regression analysis with 3 observations. Using models that are more sophisticated than the users understanding. If you do not truly understand the mathematics, use something simpler. Many people try to apply ordinary least squares (OLS) regression techniques, based on a linear model, to inherently nonlinear systems. Lack of follow-up. After making a forecast, track the actual outcomes and compare them to the forecasts. If they do not match, gure out whether an improvement to the forecasting methodology can be made. Lack of sanity checking. Before you show your numbers to others, ask yourself if they make sense. On a number of occasions, I have seen otherwise competent people (including Ph.D. statisticians) embarrassed in front of a room full of people when presenting numerical results that dont actually make sense based on some simple logic checks. Lack of support for the forecasts. You should be able to explain how and why you arrived at each and every number that you forecast. If someone challenges your forecast and you do not have supporting logic or documentation, you will be unable to defend your numbers.

5.3

Forecasting Approaches

Forecasting can use a qualitative or quantitative approach. In practice, it is a bit of an art that mixes both. Any quantitative approach should be complemented with a qualitative reality check. Qualitative Methods Popular qualitative methods include Jury of executive opinion Often this method is used in combination with qualitative models.

5.3. FORECASTING APPROACHES Delphi method

69

Participants in the Delphi method include Decision makers, Sta personnel, and Respondents. The more independent your decision makers are from economic, political, or other incentives to over or understate demand, the more likely it is your results will be accurate. Sales force composite You would be surprised how accurate your sales force can be. However, be sure that the sales force is clear that their incentive is to be as accurate as possible. Sales people typically respond to incentives, and if they perceive there is an incentive to exaggerate, they will do so. Consumer market survey You will often nd that your customers will have incentives to inate their estimates of demand; for example, they may want you to think that they will be doing more business with you in the future to obtain price concessions today. Quantitative Methods Popular quantitative methods include Time-series models Naive approach Simply assumes demand this period equals demand last period. The simplest and easiest way to estimate demand. Useful as a starting point or sanity check for more sophisticated methods. See denition 5.3.8. Moving averages Simple, useful method if we can assume that market demands will stay fairly steady over time. There are three problems with moving averages 1. Increasing the size of n smoothes out uctuations better but makes the method less sensitive to real changes in data. 2. Moving averages cannot pick out trends very well. 3. Moving averages require more past data to work with than, say, the naive approach. See denition 5.3.9. Exponential smoothing More sophisticated than the naive approach or moving averages. Requires less past data than moving averages.

70

CHAPTER 5. FORECASTING Referred to as exponential because errors in past prediction exponentially reduce in importance. See denition 5.3.10. Trend projection Associative models Linear regressions

Denition 5.3.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand. See also denition 5.3.2. Denition 5.3.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision makers intuition, emotions, personal experiences, and value system. See also denition 5.3.1.

5.3.1

Qualitative Forecasting Methods

Denition 5.3.3 (Jury of Executive Opinion) In operations management, a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand. See also denitions 5.3.4, 5.3.5, and 5.3.6. Denition 5.3.4 (Delphi Method) In operations management, a forecasting technique using a group process that allows experts to make forecasts. See also denitions 5.3.3, 5.3.5, and 5.3.6. Denition 5.3.5 (Sales Force Composite) In operations management, a forecasting technique based on salespersons estimates of expected sales. See also denitions 5.3.3, 5.3.4, and 5.3.6. Denition 5.3.6 (Consumer Market Survey) In operations management, a forecasting technique that solicits input from customers or potential customers regarding future purchase plans. See also denitions 5.3.3, 5.3.4, and 5.3.5.

5.3. FORECASTING APPROACHES

71

5.3.2

Quantitative Forecasting Methods

Denition 5.3.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast. See also denitions 5.3.8, 5.3.9, 5.3.10, and 5.3.11. Denition 5.3.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period. That is, Ft = At1 where Ft is the forecast demand for the current time period and At1 is the actual demand last period. See also denition 5.3.7. Denition 5.3.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. Moving averages can be either simple or weighted. Simple Moving Average Mathematically, a simple moving average is given by demand in previous n periods Moving average = (5.1) n Weighted Moving Average Mathematically, a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.2)

See also denition 5.3.7. Denition 5.3.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function. Mathematically, exponential smoothing is given by Ft = Ft1 + (At1 Ft1 ) where Ft Ft1 At1 = new forecast = previous forecast = smoothing (or weighting) constant (0 1) = previous periods actual demand (5.3)

The smoothing constant, , generally ranges from 0.05 to 0.5. Higher values give more weight to recent data, and are appropriate to use when the underlying average

72

CHAPTER 5. FORECASTING

is likely to change, while lower values give more weight to past data, and are appropriate to use when the underlying average is relatively stable. When = 1.0, exponential smoothing is equivalent to naive forecasting.1 Forecasters often choose the smoothing constant that minimizes forecast error (see denition 5.3.12), such as the mean absolute deviation (see denition 5.3.13). See also denition 5.3.7. Denition 5.3.11 (Trend Projections) A time-series forecasting method that ts a trend line to a series of historical data points and then projects the line into the future for forecasts. See also denition 5.3.7.

5.3.3

Measuring Forecast Error

Once a forecast is made, it is good practice to compare the estimated value with the actual value as actual values become available. Denition 5.3.12 (Forecast Error) The forecast error (also known as forecast deviation) is dened as

Forecast error

= Actual demand Forecast value = At F t

See denitions 5.3.13, 5.3.14, and 5.3.15. Three popular measures are 1. Mean absolute deviation (MAD), 2. Mean squared error (MSE), 3. Mean absolute percent error (MAPE). Denition 5.3.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also denition 5.3.12.
1 See

|actual forecast| n

(5.4)

denition 5.3.8.

5.3. FORECASTING APPROACHES

73

Denition 5.3.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values. Mathematically, MSE is given by MSE = See also denition 5.3.12. Denition 5.3.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute dierences between the forecast and actual values, expressed as a percent of actual values. Mathematically, MAPE is given by MAPE = See also denition 5.3.12. 100
n i=1

(forecast errors)2 n

(5.5)

|actuali forecasti |/actuali n

(5.6)

5.3.4

Adjusting for Trend

There are a variety of ways to adjust forecasts for trends. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see denition 5.3.10) can be modied to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.7) or F ITt = Ft + Tt (5.8) With smoothing constants for the average and for the trend, Ft = (Actual demand last period)+(1)(Forecast last period+Trend estimate last period) (5.9) or Ft = (At1 ) + (1 )(Ft1 + Tt1 ) (5.10) The trend Tt is given by Tt = (Forecast this periodForecast last period)+(1)(Trend estimate last period) (5.11)

74 or

CHAPTER 5. FORECASTING

Tt = (Ft Ft1 ) + (1 )Tt1 where Ft Tt At

(5.12)

= exponentially smoothed forecast of the data series in period t = exponentially smoothed trend in period t = actual demand in period t = smoothing constant for the average(0 0) = smoothing constant for the trend(0 0)

To compute a trend-adjusted exponentially smoothed forecast, 1. Compute Ft , the emponentially smoothed forecast for period t using equation 5.10. 2. Compute the smoothed trend, Tt with equation 5.12. 3. Calculate the forecast including trend, F ITt , by the formula F ITt = Ft + Tt .

Ordinary Least Squares Regression analysis is also useful for predicting trends. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. It is also commonly called linear regression analysis.

y = a + bx where y is pronounced y hat and y a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case, time)

(5.13)

The values of a and b can be calculated with the formula xy ny x x2 n2 x

b=

(5.14)

5.3. FORECASTING APPROACHES where b x y x y n = the slope of the regression line = known values of the independent variable = known values of the dependent variable = the average value of x = the average value of y = the number of observations

75

Then a is given by a = y b. x The least squares method has several drawbacks. 1. Recall that the equation 5.13 assumes a linear relationship. 2. It cannot be used to predict too many periods into the future as the further into the future the prediction is made, the more uncertain it is. 3. Deviations around the least squares line are assumed to be random.

5.3.5

Seasonal Variations in Data

In most businesses, demand is seasonal. In the U.S., consumers often make fewer purchases of durable goods, such as cars and washing machines, during the summer months when it is common to take a vacation. Most businesses experience a surge in sales around Christmas. Denition 5.3.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. Although there are many methods to accomodate seasonal demand, we will examine one model, the multiplicative seasonal model, to account for seasonal changes in demand in our forecasting. The rst step is to calculate the seasonal forecast. We do that with a 5-step process. 1. Find the average historical demand for each season. 2. Compute the average demand over all months. 3. Compute a seasonal index for each season by dividing the historical demand by average demand. 4. Estimate next years total annual demand. 5. Divide this estimate of total annual demand by the number of seasons, then multiply it by the seasonal index for that month. This provides the seasonal forecast.

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CHAPTER 5. FORECASTING

5.3.6

Associative Models

OLS With a Single Independent Variable We briey discussed ordinary least squares (OLS) regression analysis in section 5.3.4. We will use the same technique, but x will be something other than time. y = a + bx where y is pronounced y hat and y a b x = the dependent variable (e.g., sales) = y-axis intercept = the slope of the regression line = the independent variable (e.g., average local salary) (5.15)

Side Note 5.3.1 (Example: Using OLS) Present Heizer example 12 [1, pp. 106 107]. Note that making predictions of future demand involves also making predictions about the independent variable x. If there are published estimates you can cite (e.g., the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful. However, if you are uncertain about predictions of x, whatever uncertainties you may have transfer to your predicition of y. Standard Error of the Estimate The standard error of the estimate is a measure of the degree of accuracy of the estimate of y in a regression model. It is also called the standard deviation of the regression and, mathematically, is given by (y yc )2 n2

Sy,x =

(5.16)

where

y yc n

= y-value of each data point = computed value of the dependent variable = the number of data points

An equivalent formulation to equation 5.16 is y2 a y b n2 xy

Sy,x =

(5.17)

5.3. FORECASTING APPROACHES

77

Side Note 5.3.2 (Distribution About the Point Estimate) Present Heizer gure 4.9 [1, p. 107], Distribution about the Point Estimate of $600 Million Payroll. Note that the regression assumes a standard normal distribution about the estimate. Correlation Coecients for Regression Lines Denition 5.3.17 (Correlation Coecient) A measure of the strength of the relationship between two variables. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 r 1. The correlation coecient of variables x and y is given by r= See also denition 5.3.18. Side Note 5.3.3 (Examples of Correlation Coecients) Present Heizer gure 4.10 [1, p. 108], Four Values of the Correlation Coecient. Side Note 5.3.4 (Causation vs. Correlation) Correlation merely means that the values of two variables are historically related. It does not imply causation one way or the other, nor does it imply that they will continue to be related. Historically, the average length of a womans skirt and stock market prices in the U.S. have been correlated,2 with stock prices generally rising as skirts rise, but the relationship is coincidental. Certainly, changes in skirt lengths dont cause stock market prices to rise and vice versa. Other interesting correlations that have been identied over the years include banana prices and U.S. stock market prices as well as the winner of the Super Bowl, a football game played between two football conferences in the U.S.3 and the U.S. stock market. Even the Year of the Pig correlates strongly with the U.S. stock markets. Since 1935, in all but one Year of the Pig, the U.S. Dow Jones Industrial Average and Standard and Poor 500, leading stock indexes, has risen.4 . Denition 5.3.18 (Coecient of Determination) A measure of the amount of variation in the dependent variable about its mean that is explained by the regression equation.
the note in the margin accompanying Heizer example 14 [1, pp. 109]. football in the U.S. is monopolized by the NFL, or National Football League, which is divided into two conferences, the AFL (American Football Conference) and the NFC (National Football Conference). 4 Source: http://www.time.com/time/business/article/0,8599,1594488,00.html?xid=sitecnn-partner, February 28, 2007.
3 Professional 2 See

n [n x2 (

xy x)2 ] [n

y y2 ( y)2 ]

(5.18)

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CHAPTER 5. FORECASTING

The coecient of determination is simply r2 where r is the correlation coecient. (See denition 5.3.17.) It measures the percent of variation in the dependent variable (y) explained by the regression equation. It is commonly simply called R squared. For example, What was the R squared of your regression?

Multiple Regression Analysis In section 5.3.6, we discussed a means by which we can attempt to predict the value of one variable using the value of another. The same technique can be applied to use several independent variables to predict the value of a dependent variable. Adding additional independent variables as predictors, if they are indeed related to the dependent variable, results in additional predictive accuracy as measured by r2 .5 Denition 5.3.19 (Multiple Regression) A causal forecasting method with more than one independent variable. The multiple regression equivalent of equation 5.15 is given by y = a + b1 x1 + b2 x2 + . . . where y is pronounced y hat and y a x1 , x2 , . . . b1 , b 2 , . . . = the dependent variable (e.g., sales) = y-axis intercept = values of the independent variables = coecients of the independent variables (5.19)

Determining the values of a, b1 , b2 , etc. in a multiple regression analysis involves a complex formula which is beyond the scope of this class. In practice, you would use statistics software to calculate these values. Side Note 5.3.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1, p. 110], Forecasting Manpower with Multiple Regression at TransAlta Utilities. As the sidebar points out, often the most dicult part of building a multiple regression model is to pick the independent variables.
5 See

denition 5.3.18 and Heizer example 15 [1, p. 110].

5.4. MONITORING AND CONTROLLING FORECASTS

79

5.4

Monitoring and Controlling Forecasts

As mentioned in sidenote 5.2.1, one of the most common problems with forecasting is a lack of follow-up. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions, the forecasting methodology needs to be modied. Tracking signals are typically used monitor forecasts. Denition 5.4.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD). In other words,

(Tracking signal)

RSF E M AD (actual demand in period i forecast demand in period i) = M AD = |actual - forecast| n

where M AD =

(5.20)

A good tracking signal has about as much positive as negative error, though large errors may be a problem as well even if the positive and negative errors balance. Denition 5.4.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. The tracking signals should also be compared as they are generated against limits. If the tracking signals violate upper or lower limits, then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts. These limits are typically based on M ADs, which correspond roughly to standard deviations.6 One M AD is equivalent to 0.8 standard deviations, two M ADs to 1.6 standard deviations, three M ADs to 2.4 standard deviations, and 4 M ADs to 3.2 standard deviations. This means that the observed value should be within 2 M ADs abut 89% of the time, three M ADs about 98% of the time, and within 4 M ADs about 99.9% of the time. Side Note 5.4.1 (A Plot of Tracking Signals) Review Heizer gure 4.11 [1, p. 111].
6 Recall

denition 4.6.6.

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CHAPTER 5. FORECASTING

5.4.1

Adaptive Smooting

Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. Note that even with computer monitoring, changes need to be check with human eyeballs to ensure that the adjustments make sense. Denition 5.4.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.g., in denition 5.3.10) is automatically changed to keep errors to a minimum. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.

5.4.2

Focus Forecasting

Focus forecasting, which selects a model based on goodness-of-t to a data set, is based on two principles: 1. Sophisticated forecasting models are not always better than simple ones. 2. There is no single technique that should be used for all products or services. Denition 5.4.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. Side Note 5.4.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings, there has been much criticism of the approach to using models based on thier t to the data. Many feel that a model should be selected based on the logical relationship of the variables and that focus forecasting is a fundamentally awed in its approach. In your career, you must make your own decision as to how you select the forecasting models that you use. However, you should be aware of the criticism of focus forecasting. Side Note 5.4.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4.2 [1, p. 114], Summary of Forecasting Formulas.

Chapter 6

Design of Goods and Services

Many companies derive a competitive advantage by using product strategies to eciently produce a variety of products and/or services to meet changing customer demand or target specic consumer niches.1 Side Note 6.0.4 (Heizer Company Prole: Regal Marine) Review Heizers company prole of Regal Marine [1, pp. 122123]. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. They also use just-in-time production techniques, which will be discussed in detail later in the semester, time permitting. Product strategy2 denes the breadth of the product line and links product decisions to [1, pp. 124,128] Investment and cash ow, Market share and dynamics, Product life cycle, and The organizations capabilities. Denition 6.0.5 (Product Decision) The selection, denition, and design of products.
1 In this chapter, the word product will refer to both goods and services. Referring to services as products is common in the service industry. For example, insurance companies often refer to their policies, which, as an intangible, is a service, as products. 2 Recall sidenote 2.2.1 .

81

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CHAPTER 6. DESIGN OF GOODS AND SERVICES

6.1

Goods and Services Selection

Product decisions focus on creating a competitive advantage via Dierentiation Oering distinctly unique or high-quality products Low cost Providing quality goods and services at a lower cost than competitors Rapid response Executing rapid design and product development to respond to changing consumer demand

6.1.1

Product Life Cycles

Product life cycles can be divided into four phases: 1. Introduction, 2. Growth, 3. Maturity, and 4. Decline. Life cycles can be in the days or weeks (e.g., YouTube videos), months (e.g., clothing fashions), years (e.g., restaurants or nightclubs), or even decades.

6.1.2

Life Cycle and Strategy

Strategies change as products move through their life cycle. Product strategy involves determining the best strategy for each product based on its position in the life cycle. Introductory phase In the introductory phase, products expenses are often high for Research and development, Process modication and enhancement, and Supplier development. Growth phase Eective capacity forecasting is necessary. Maturity phase Competitors have entered or are entering the market, so high volume, low-cost, and innovative production is appropriate. Decline phase Investment needs to be minimized and resources need to be redeployed, often ruthlessly.

6.2. GENERATING NEW PRODUCTS

83

6.1.3

Product-by-Value Analysis

For rms with many products, a product-by-value analysis can identify the critical few products in which additional resources should be invested and the trivial many from which resources should be diverted. Denition 6.1.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the rm, as well as the total annual dollar contribution of the product.

6.2

Generating New Products

Most products have a limited life cycle, and if a company is to survive, it must regularly redesign existing products or bring new products to market. Denition 6.2.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. Ideas are not reviewed until after the brainstorming session. Brainstorming should be done understanding the following factors Understanding the customer is the primary issue in new-product development. Operations managers must pay attention to the market and needs and preferences of leading edge consumers. Economic factors, such as consumer incomes, are tied to product demand. Sociological and demographic change is also tied to product demand. Technological change often drives product innovation.3 Political and legal change can also bring about business opportunities.4 Side Note 6.2.1 (Example: Brainstorming) Lead the class in a brainstorming session. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12,500 or 100,000 yuan.

6.2.1

Importance of New Products

The need for companies to cultivate the ability to introduce new products cannot be overstated.
example, the development of cellular telephone technology or the internet. example, deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.
4 For 3 For

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For example, DuPont estimates that it takes 250 ideas to yield one marketable product [1, p. 128]. A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market. Side Note 6.2.2 (Percent of Sales from Products Recently Introduced) Present Heizer gure 5.2 [1, p. 128]. Many successful companies rely on sales from products introduced within the past ve years.

6.3
6.3.1

Product Development
Product Development System

Recall that product strategies link product decisions to cash ow, market dynamics, the product life cycle, and the organizations capabilities. Side Note 6.3.1 (Product Development Stages) Present Heizer gure 5.3 [1, p. 129]. Each stage should have an accompanying review to determine whether to progress or not.

6.3.2

Quality Function Deployment (QFD)

Quality function deployment (QFD) describes either of two processes: 1. Determines what will satisfy the customer and 2. Translates customer desires into a product design. Denition 6.3.1 (Quality Function Deployment (QFD)) A process for determining customer requirements (customer wants) and translating them into the attributes (the hows) that each functional area can understand and act on. The house of quality is a graphic technique for dening the relationship between customer desires and a product. Denition 6.3.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer wants to how the rm is going to meet those wants.
5 His

name is Gary Brosz and he was an engineer at Ball Aerospace.

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85

Side Note 6.3.2 (Example: House of Quality) Present Heizer example 1 [1, p. 130]. Building the house of quality involves six steps: 1. Identify customer wants. 2. Identify how the good or service satises customer wants.6 3. Relate customer wants to product hows.7 4. Identify relationships between the rms hows.8 5. Develop importance ratings.9 6. Evaluate competing products.10 Side Note 6.3.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. Note that it is not free or open source, as was the software described in section 4.9. See http://www.qfdcapture.com for more information.

6.3.3

Organizing for Product Development

In the West, there are three popular methods by which organizations undertake product development. 1. An organization is divided into departments; e.g., a research & development, design engineering, manufacturing engineering, and production departments. Fixed duties exist, which can be an advantage. Eective communication and coordination between separate departments can be problematic. More common in large, bureaucratic companies and organizations. 2. An operations manager is assigned as the product champion who takes the product through the organization from concept through production. 3. Product development is done by teams. Perhaps the most popular approach in the U.S.. Product development teams are also sometimes called design for manufacturability teams or value engineering teams.
6 For example, with product features. In other words, identify the rows of the house in sidenote 6.3.2. 7 In other words, create the columns of the house in sidenote 6.3.2. 8 These are given on the roof of the house in sidenote 6.3.2. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6.3.2. 10 The right-hand columns of the house in sidenote 6.3.2.

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CHAPTER 6. DESIGN OF GOODS AND SERVICES Use of these teams is often called concurrent engineering.11

In Japan, organizations are less structured and typically not divided into research and development, engineering, production, etc.. Denition 6.3.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. These teams often include representatives from marketing, engineering, manufacturing, purchasing, quality assurance, and eld service personnel. Some teams even include representatives from vendors. Denition 6.3.4 (Concurrent Engineering) In project development, use of participating teams in design and engineering activities. Side Note 6.3.4 (Personal Observations Regarding QFD) Quality function deployment (see denition 6.3.1) was implicitly included in the product specication phase of operations management at the companies I have worked for. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. My experience may not be indicative of management practices in general in the U.S., but my personal impression is that formal QFD practices are not widespread in practice. Side Note 6.3.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U.S., and I believe it is an incentive-compatible means to maximize the probability of successful development of a product because the success of the team is tied to that of the product. However, it can also be problematic because teams, because their fate is tied to a product, will often advocate for continuation of their project past the point that it is protable for the company.

6.3.4

Manufacturability and Value Engineering

Manufaturability and value engineering activities concern improvement of design and specications at the research, development, design, and production stages of product development. Denition 6.3.5 (Manufacturability and Value Engineering) Activities that help improve a products design, production, maintainability, and use. The goals of manufacturability and value engineering are
11 See

denition 6.3.4.

6.3. PRODUCT DEVELOPMENT 1. Cost reduction, 2. Reduced complexity of the product, 3. Standardization of components, 4. Improvement of functional aspects of the product, 5. Improved job design and job safety, 6. Improved maintainability (serviceability) of the product, and 7. Robust design.

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Part II

Entrepreneurship

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Chapter 7

Introduction to Entrepreneurship
Although starting a business is usually a complex, dicult undertaking, doing it is simple. As a Chinese philosopher once said, Every journey . . . must begin with a single step. At its core, starting a business simply involves taking the rst step, then taking another step, then another. However, taking that rst step can be extremely daunting. In fact, fear of failure and other insecurities dissuade most people from ever starting a business. Side Note 7.0.6 (Business Failures) A friend and former colleague, Matt McAdams, who has started two businesses and been CEO of three startups once told me, None of the other CEOs respect you until youve driven a couple of businesses into the ground. He was joking, but the humor in the statement lay in the fact that there is some truth to it. If you start a small business, you should be condent, but also realistic. Most businesses fail within the rst 18 months. See also sidenote 7.0.7. The best way to overcome that fear is to address any concerns or uncertainties by preparing as much as possible before taking the plunge. However, ultimately, you will have to decide that you have done as much as you can do and simply take action. Side Note 7.0.7 (Condence vs. Realism) Most people perceive those who start businesses as risk-takers; that is, people who can tolerate a high degree of risk. While it is important to be realistic about risks when starting a business, studies have found that most successful entrepreneurs are actually unrealistically condent 91

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about their prospects. They may not have a realistic assessment of the risks they are undertaking when they start their businesses.1 In our discussion of entrepreneurship, we will discuss how to prepare to start a small business as well as manage a business early in its life. Hopefully, you will nish the course with the condence that if you decide to start a small business, you will maximize your chance of success.

7.1

Characteristics of the Successful Entrepreneur

What are the qualities that lead people to start businesses? Most entrepreneurs feel a sense of urgency that made starting a business seem like a necessity [4, pp. 1213]. Entrepreneur Magazine cites an entrepreneur who states that the time will be right when you can honestly say Ill put my house, jewelry, and other personal collateral on the line to attain the start-up capital I need for the long-term rewards I deserve. According to experts who have studied entrepreneurs, its not usually a single incident (such as getting red) that leads to entrepreneurship, but a series of frustrations. Entrepreneurs typically do not feel fullled working for others and feel the need to control their own destiny. Surveys and research indicates that the most common personality trait is self-condence. Finally, successful entrepreneurs know how to raise money. You not only have to believe in yourself, you have to convince others to believe in you. And by believe in you, I mean believe in you enough to give you money. We will discuss techniques for raising money in detail later in the course. The desire to make alot of money quickly is not one of the characteristics of the successful entrepreneur. If asked, everyone would say that they want to be thier own boss, make lots of money quickly and with little eort.
1 There are a variety of studies that support this. for example, http://wistechnology.com/article.php?id=2018 http://www.ccer.edu.cn/en/ReadNews.asp?NewsID=5324, March 6, 2007.

See, and

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93

Side Note 7.1.1 (A Selsh Act) Bear in mind that starting a business can be a very selsh act. Often, starting a business will require the kind of eort that means you cannot spend sucient time to maintain your personal relationships the way you are accustomed to. Putting in long hours is not something that is done once in a while, but something you may need to do day after day, week after week, month after month, possibly even years at a time. If after many long hours at work your family will be asking you, When are you coming home for dinner? or criticizing you for ignoring them, it may be dicult to keep the necessary focus on the business. You may lose friends because you do not have the time to maintain the friendship. For many people, friends and family are the most important concerns in their life. If you are not prepared to redene relationships relative to your business life, you may not be prepared to start a company. Discuss the impact of the demands of a startup on the marriages of Active.com management and Jerrys diculty balancing work and family life. The discussion of entrepreneurship and starting and managing a business will contain some information that may not be relevant to you as a student at this point. Some of the information is intended for those who have an established career and real-world experience to draw upon. For now, take note of this information. It may be useful later in your career. Among the means by which you can to raise money, we will discuss venture capital. Venture capital nancing is common in the United States but is not yet a common means of nancing in China. However, the use of venture capital will probably increase over time in China. Additionally, the techniques used to acquire nancing from venture capitalists can be put to good use obtaining debt nancing or convincing family, friends, or angel investors. Side Note 7.1.2 (Personal Experience with the Impact of Startups on Relationship) My personal experiences with the work schedule demanded by startup companies as experienced at Active.com and Absolute Performance included Regular 70 hour weeks Incidents that demand devotion to the company over and above the call of duty; for example, at Active.com, we suered a database corruption that resulted in my practically living at work for three weeks

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CHAPTER 7. INTRODUCTION TO ENTREPRENEURSHIP Many all-nighters; for example, The CEO of Absolute Performance once told a customer that the companys product could parse XML les. We didnt, so I volunteered to work a 24-hour day to complete the parser so that he would not have to admit that he stretched the truth to the customer. This kind of event was not uncommon at Absolute Performance. At Active.com, we had to update the web site late at night when our customers were not using it in case something went wrong. The code push would often start at midnight and, depending on the complexity of the push, might last four to six hours. During one crunch time, there were so many engineers sleeping at the oce at Active.com that at one point the landlord threatened to evict us since the lease specied that we were being leased a business rather than residential space

The demands of a startup also had a dramatic impact on the marriages of Active.com management and the family life of the CEO of Absolute Performance. There were far more divorces that occured among management at Active.com than average in the population at large.

7.2

Are You Ready?

If you are thinking about starting your own business, the rst thing you should do is look in the mirror. Try to realistically evaluate your own strengths and weaknesses. Create a Personal Rsum List your personal and professional experiences. e e Include Skills, Educational background, Hobbies, and Accomplishments that require expertise or special knowledge. Do your skills, interests, and experience match the kind of talents your business would require? Analyze Your Personal Attributes As yourself about yourself. Are you friendly and self-motivated? Are you a hard worker? Do you have common sense?

7.3. SETTING GOALS

95

If you are not a people person, you may not want to start a business that focuses on customer relationships. Analyze Your Professional Attributes Be aware of where you need help, such as sales, marketing, advertising, and administration.

7.3

Setting Goals

With any major endeavor, it helps to set goals. When setting goals, Be specic. Raise 100,000 yuan by July 1 is a much better goal than raise money. Be optimistic. Achieve nancial independence is much better than pay the bills. Be realistic. If your goal is to raise 1,000,000 yuan and youve never had a job before, your goal may not be realistic. Start with small goals. Move on to larger goals once the small goals have been met. Set both short-term goals and long-term goals. Short-term goals are those that can be accomplished within a year. Long-term goals are those that may take 5, 10, or 20 years to accomplish. Side Note 7.3.1 (Whats It Really Like?) If you wonder what running a business is really like, ask other entrepreneurs. Like parents, even the successful ones will probably focus on the negative. When I talk to those who I know who have started businesses, it is common to exchange war stories about the dicult times and sacrices, although the successful ones generally view their experiences as positive on the whole. Listening to war stories can help you arrive at an accurate mental picture of what it is really like to start and manage a business. If you talk to an entrepreneur who has not been successful, try to gure out why they were not successful. Learning from failure is as important, if not more important, than learning from success. When setting goals, ask yourself the following questions: Income How much do you want to earn. Consider at least a ve-year time horizon.

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CHAPTER 7. INTRODUCTION TO ENTREPRENEURSHIP Lifestyle Would you be happy traveling frequently? What about your family? Are you willing to invest your personal assets? What do you want in terms of Travel, Hours of work, Geographic location, and Investment of personal assets. Type of work Do you want to work indoors or outdoors? Would you rather work with people or remotely, such as over the phone or internet? How much do you want to work with computers? Ego gratication Be realistic. Many people want to start their own business for ego gratication. Acknowledge this fact and factor it into your decisionmaking. How much is your ego worth?

Side Note 7.3.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonskys EQ quiz [4, pp. 1820]. Have the class write down their answers and evaluate their own EQ. The reasons given for adding or subtracting points are as interesting as the ultimate score. Eliminate question 1 and substract one point from the scoring given on p. 20. Side Note 7.3.3 (Personal Goals and Objectives Worksheet) Hand out Lesonskys Personal Goals and Objectives worksheet [4, pp. 21].

Chapter 8

Finding an Idea
The good ideas are the simple ideas. They do not involve engineering the next great wonder of the world, but scratching an itch. They answer the question, How can I do something better? or How can I do it dierently than the next guy? Lesonsky discusses an idea started by two friends in Irvine, California. Good restaurants did not deliver and the amount of time the average American worker had for lunch was getting shorter and shorter, so they started a restaurant delivery business. It was neither original or complicated, but has been very successful because it addressed a local need. Netix, an online DVD rental business, began1 when someone got annoyed by late charges from local video rental stores. Side Note 8.0.4 (Ideas for Businesses Friends Have Started) Discuss some of the ideas that friends have used to start businesses. Active.coms league business began with Matt, a Ph.D. physicist, who enjoyed handicapping sports and felt that putting tools online for sports enthusiasts to use would build a protable online community. Online registration for sporting events was only a part of his original game plan, but over time became the primary thrust of the business. Absolute Performances business began because Jerry felt the monitoring software available for Oracle database systems was not well developed and thought that by combining consulting services with monitoring software, he would be able to provide a better product than competitors who provided only software.
1 Explain the business concept behind Netix. I used Netix when I lived in Chicago. I also used a grocery delivery service. Personal time was in short supply so the convenience they provided was well worth the price.

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CHAPTER 8. FINDING AN IDEA Trackvia arose because Matt felt that small businesses had the need to manage data but did not have the resources to develop expertise in database management. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online.

Side Note 8.0.5 (A Worksheet for Generating Ideas) Hand out Lesonskys Things About Me Work Sheet [4, pp. 2829]. Side Note 8.0.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent, business ideas come at a rapid rate, often one or more a day. I continue to generate business ideas as a matter of habit. My recent ideas include: A rock climbing belt for women which doesnt have to be removed for the woman to relieve herself. It sounds silly, but it is a major complaint for female rock climbers. A nose piercing that consists of a small, hollow tube. Often times, people have to remove nose piercings for work or social occasions; however, nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. The tube could be made unobtrusive enough that it would not need to be removed for work. Those with nose piercings would not need to remove the piercing and risk it closing. An escrow service that arbitrages the dierences in contract enforcement practices and business ethics between Scandinavia and other nations such as those which are not as highly placed on Transparency Internationals Corruption Perceptions Index. However, most ideas are not feasible because They would not be protable enough, They require more nancing than the entrepreneur has access to, They require expertise that the entrepreneur does not have, They require business relationships that the entrepreneur does not have, The ideas are easily copied and would be quickly appropriated by more able competitors, The business would involve too much risk, Etc., etc..

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99

The idea itself is only a small part of the ultimate success of a business. You have to think long and hard about why your idea might not work and satisfy yourself that you will be able to address all the weaknesses in your idea. After all, you will be spending years of your life trying to make the idea work. You do not want all of that time to go to waste and potentially lose your personal investment and that of friends and relatives because you overlooked something.

8.1

Youve Got an Idea. Now What?

The number one trait needed by successful entrepreneurs is perseverance. Entrepreneurs are often told their idea is awed, it is too risky, that they will never make it, or are otherwise discouraged. However, to be truly self-motivated and persistent in the way you need to succeed, you should have thick skin. That is, while you should listen to criticism that others give, you should not let it dissuade you. A well-known phrase in English, used as the title of at least 12 movies and television shows,2 is, Never say die. Side Note 8.1.1 (Security Cameras) Recount the story of Miles friend who started a business selling coordinated, computer-controlled security cameras. He ran the business as a one-man operation for years, making just enough to get by but not much more. People thought he was going nowhere and generally dimissed his business, thinking that if he did not succeed after a couple of years, he would never succeed. Finally, in the wake of 9/11, the business took o. His sales are now in the millions of dollars per year and the business is very protable. Warnings about risk are perhaps the criticism you should consider most carefully. You should be realistic about risks. And you should not risk anything you cant aord to lose, such as your family, home, or health. Side Note 8.1.2 (Checklist for Evaluating Ideas) Present Lesonskys Checklist for Evaluating Ideas [4, p. 33]. Have students come up with examples of products that meet various criteria on the checklist. Side Note 8.1.3 (Business Comparison Work Sheet) Present Lesonskys Business Comparison Work Sheet [4, p. 35]. Have students ll out the form on their own time.

2 http://www.imdb.com/find?s=all&q=never+say+die,

February 17, 2007.

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Chapter 9

Dening Your Market

After coming up with your idea, your next step is to do some market research. There are two broad categories of markets: 1. Consumers and 2. Businesses. Denition 9.0.1 (B2B) Businesses whose customers are primarily other businesses are called B2B, or business-to-business ventures. See also 9.0.2. Denition 9.0.2 (B2C) Businesses whose customers are primarily consumers are called B2C, or business-to-consumer ventures. See also 9.0.1. Not only do you need to decide whether you are marketing to businesses or consumers, but you should try to target your market as specically as possible.

9.1

Finding Your Niche

Finding a niche can be a more daunting task than you might think. When trying to identify your niche market, go through the following 7 steps: 1. Make a wish list Who do you want to do business with? Identify Geographic area you want to serve, 101

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CHAPTER 9. DEFINING YOUR MARKET The types of businesses and consumers you want to target in terms of age, earnings, and other important demographics. It is much better to target pregnant women between 25 and 35 in households that earn more than 50,000 per year.

2. Focus Be specic. Selling maternity clothes to executive women is much better than selling clothes. To focus your search for a niche, Make a list of things you do List your achievements Identify the most important lessons youve learned in life Look for patterns that arise from your style 3. Describe the customers worldview Talk to prospective customers and identify their main concerns.

The rule do unto others as you would have them do unto you is often called the Golden Rule. Lynda C. Falkenstein, author of Nichecraft: Using Your Specialness to Focu coined what she calls the Platinum Rule: Do unto others as they would do unto themselves. [4, p. 75] 4. Synthesize Coalesce your ideas. A good niche has ve qualities (a) It takes you where you want to go. It should conrm to your long-term vision. (b) Somebody else wants it. By someone else, I mean customers. (c) Its carefully planned. (d) Its one-of-a-kind. That is, there is not already alot of competition. (e) It evolves. That is, it allows you to branch o into other niches as the business grows. 5. Evaluation Evaluate your niche against the criteria in step 4. If it does not suciently meet the criteria, discard the idea and move on to the next one. 6. Test Oer samples, give a seminar, etc.. Dont spend alot of money. After all, the longer you wait to go into business in earnest, the longer it will be until you make your rst prot. But do test your product before you go ahead full speed. If your initial test does not go well, you need to stop and seriously reevaluate your plan. A friend in Chicago, Donna, decided to start a business selling unique winter clothes for dogs. She started by making a few samples and giving them to friends with dogs. Then she approached a few local pet stores and arranged for them to oer her products for sale at a low price, then asked them about customer reactions.

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103

7. Go for it! Implement your idea. If you did your homework, you should be able to enter your niche market with condence. Side Note 9.1.1 (Smaller is Bigger) When starting a business, many entrepreneurs make the mistake of being all over the map. That is, they try to satisfy all possible customers and end up trying to do too many things well. It is better to do just one thing well than to do many things poorly. Side Note 9.1.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups, you should practice extra caution to avoid stereotypes or other insensitive approaches. Many Western companies make the mistake of lumping together Japanese, Korean, Chinese, and other Asian customers together. Likewise, many Eastern companies make the mistake of lumping together American and European customers. This can be oensive and serve to alienate rather than appeal to your customer. Marketing to demographic groups has become much more rened in the last few decades. New marketing techniques include generational, life stage, and cohort marketing. (See denitions 9.1.1, 9.1.2, and 9.1.3.) Using these new marketing techniques can allow you to narrow your market, and the narrower your focus on your target, the more likely you are to score a hit. Denition 9.1.1 (Generational Marketing) Marketing to consumers based on age as well as social, economic, demographic, and psychological factors. This marketing technique has been widely used since the early 1980s in the U.S.. Denition 9.1.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life, such as having children, buying a home, or retiring. As older people are more active than before, many are choosing to start families later in life or even have children ten years or more apart. Someone who is starting a family at age 20 has much in common with someone starting a family at age 35 even though their ages may be quite dierent. Denition 9.1.3 (Cohort Marketing) Marketing to people based on the groups or cohorts they were part of during their formative years; for example, the World War II cohort, the Depression-era cohort, etc.. For example, in the U.S., young adults in the Depression, when many people were suering from extreme poverty, are similar in age to those who came of age in World War II, when the country was immersed in a war eort, but their behavior diers signicantly due to the dierent inuences in their youth.

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9.2

Redening and Expanding Your Niche

Lynda C. Falkenstein1 advises that you regularly reevaluate your niche. Every six months or so, ask yourself Who are your target clients? Who arent your target clients? Do you refuse business if it falls outside your niche? Generally, you should. How do clients perceive your business niche? What do they think your business stands for? Is your niche evolving? Does your niche oer customers what they want? Do you have a plan that eectively conveys the need for your niche product to the right market? Can you condently predict the life cycle of your niche? How can your niche be expanded into a variety of products or services? Do you have a sense of passion with respect to your niche? Does your niche feel comfortable and natural? How will pursuing your niche contribute to achieving the goals you have set for your business. Falkenstein states, Creating a niche is the dierence between being in business and not being in business. [4, p. 79]

9.3

The Mission Statement

Once you have a niche, create a mission statement. The mission statement should Be succinct, a few sentences at most. Convey the essence of your businesss goals and philosophies. Side Note 9.3.1 (Mission Statements for Three Organizations) Review Heizer gure 2.2 [1, p. 28] which includes mission statements for three multinational companies:
1 See

section 9.1.

9.3. THE MISSION STATEMENT 1. FedEx FedEx is committed to our People-Service-Prot philosophy. We will produce outstanding nancial returns by providing totally reliable, competitively superior, global air-ground transportation of high-priority goods and documents that require rapid, time-certain delivery. Equally important, positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. A complete record of each shipment and delivery will be presented with our request for payment. We will be helpful, courteous, and professional to each other and the public. We will strive to have a completely satised customer at the end of each transaction. 2. Merck The mission of Merck is to provide society with superior products and services invations and solutions that improve the quality of life and satisfy customer needs to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. 3. The Hard Rock Caf e Our Mission: To spread the spirit of Rock n Roll by delivering an exceptional entertainment and dining experience. We are committed to being an important, contributing member of our community and oering the Hard Rock family a fun, healthy, and nurturing work environment while ensuring our long-term success.

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Side Note 9.3.2 (Ben & Jerrys Mission Statement) Review Ben & Jerrys mission statement. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. Our mission consists of 3 interrelated parts: Product Mission To make, distribute & sell the nest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome, natural ingredients and promoting business practices that respect the Earth and the Environment. Economic Mission To operate the Company on a sustainable nancial basis of protable growth, increasing value for our stakeholders & expanding opportunities for development and career growth for our employees.

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CHAPTER 9. DEFINING YOUR MARKET Social Mission To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally, nationally & internationally.

Ben & Jerrys ice cream company is considered a model of a socially responsible company in the U.S.. Other companies, such as Whole Foods, a grocery chain, give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a xed percentage of their prots to charity depending on which charities are most supported by their customers. See http://www.benjerry.com/our company/our mission/index.cfm for more detail. Answering the following questions can provide you with a clear picture of what your mission statement should include: Who are your customers?2 What image of your business do you want to convey? What is the nature of your products and services? What determines pricing and quantity? What is your competitive edge? Price? Features? Will this change over time? What level of service do you provide? What roles do you and your employees play? You should develop a leadership that organizes, challenges, and recognizes outstanding employees. What kind of relationship will you maintain with suppliers? Remember that when you succeed, so do your partners. How do you dier from competitors? Why would your customers prefer your product to a competitors? How will you use technology, capital, processes, products and services to reach your goals? What philosophies or values guided the responses to the previous questions?
2 Recall

section 9.1.

9.3. THE MISSION STATEMENT When crafting your mission statement,

107

Involve others. Other people can help you with creative ideas and identify weaknesses you might miss. Set aside a full day to work on your statement. Plan a date to meet with people. Write down your thoughts so you can lead people logically through your ideas. Be prepared. Bring paper and pens and some refreshments for your guests. Brainstorm. Do not discard any ideas, no matter how silly. Use radiant words. Colorful, spicy language conveys your excitement and conviction in your idea.

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Chapter 10

Market Research
While the excitement of a great idea is often enough to propel an entrepreneur into business, you need to take a step back for a sanity check. Donna Barson, president of Barson Marketing, Inc., says A lot of companies skim over the important background information because theyre so interested in getting their product to market. But the companies that do the best are the ones that do their homework. Denition 10.0.1 (Market Research) Research into the characteristics, spending habits, location and needs of your businesss target market, the industry as a whole, and the particular competitors you face. Market research should answer the following questions: Who will by my product or service? Why will they buy it? Where will they buy it? In a store? On the internet? What do I need to charge to make a sucient prot? What products or services will mine be competing with? Am I positioning my product or service correctly? How do I compete successfully with existing suppliers? What government regulations do I need to be aware of with respect to my products or services? 109

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10.1

What Am I Researching, Exactly?

Market research should focus on three areas: 1. Your industry. What are the trends, such as growth and technology, in your industry? For example, if you are opening a bookstore to sell textbooks by a university, are other bookstores in the area switching to computerized inventory systems? Does the university provide a database of classes and textbooks you can acquire? Does the university have growth projections for the student population in the next ten years? 2. Your customers. Your customer research should tell you how much you can make in sales. You should know the following things about your customers: What is your market reach? If you are a restaurant, are your customers primarly people living within 5 kilometers of your establishment? What is the per-capita or median income of your customers? What is the unemployment rate in your area? What is the population of potential customers? Are there other important demographic factors, such as gender or cultural background that you need to know about? Based on your expected customers, estimate the total sales for your type of product or service in your area. Now try to determine how much of this you can reasonably expect to get. Again, if you are opening a bookstore to sell textbooks by a university, the total number of potential customers would be the number of students at the university. How much would each be expected to spend on textbooks? Does the university collect information regarding the spending habits of students? 3. Your competition. Most entrepreneurs do not suciently research the competition. Be careful not to underestimate the number of customers. Use the internet, library, local business organizations, and personal connections to research the competition. If you are competing against a publicly traded company, get copies of their nancial statements and annual reports. Go out and visit local competitors. Buy their products if you can.

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10.2

Research Methods

Research can be either primary or secondary. Denition 10.2.1 (Primary Research) In market research, primary research is information that comes directly from the source; that is, customers. This can come from a variety of sources: 1. Surveys, 2. Focus groups, 3. Other sources. See also 10.2.3. Denition 10.2.2 (Focus Group) A type of primary market research1 where a group of potential customers (typically 5 to 12) come together in an informal environment, under the guidance of a moderator, to discuss a product or a service. Side Note 10.2.1 (Grease the Squeeky Wheel) When you conduct primary market research, the customers you should pay the most attention to are the ones who complain the most or give the most negative feedback. Denition 10.2.3 (Secondary Research) In market research, secondary research is information that comes from organizations, government agencies, trade associations, or other groups that gater statistics, reports, and studies. See also 10.2.1.

10.2.1

Sources of Secondary Research

There are a variety of sources for secondary research. Local business associations are often good sources of information. In the U.S., most cities have a Chamber of Commerce that serves to promote local businesses and provide opportunities for networking. Radio stations, newspapers, television stations, and other industries that rely heavily on advertising often conduct extensive research into the local market and are also good sources of information regarding incomes and demographics. Go to your local library and talk to the librarian.
1 See

denition 10.2.1.

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CHAPTER 10. MARKET RESEARCH Trade associations often compile information about the industry the association represents. Most trade associations provide their information for free. The government is a valuable source of information. Most of the information is provided for free. In the U.S., a census is conducted every ten years which provides information about income and demographics in specic areas. In the U.S., most government information is now freely available over the internet. Buy a map. Highlight the geographic area where you think your customers will come from. Walk around. What are your impressions of the area? Local universities can often be a valuable source of information. Business students who want to gain some real world experience can be an excellent and low-cost source of labor for research. Business professors are often excellent sources of information.

Side Note 10.2.2 (Sample Market Research Competition Questionnaire) Pass out Lesonskys Sample Market Research Competition Questionnaire. [4, pp. 92 93] The questionnaire supposes that someone is going to open a bar and wants to research other bars in the area. The class should put together a sample research questionnaire for a visit to a competitors location. Side Note 10.2.3 (Web Site Survey) The web site http://www.surveysite.com conducts market research for other e-commerce sites. Even if you do not want to spend money on such a service, you can get ideas about what kind of questions you need to ask if you are starting an online business. Side Note 10.2.4 (Export Oriented Businesses) If you are thinking of starting a business that would involve exporting to the United States, the U.S. Department of Commerces International Trade Administration (ITA) publishes a variety of reports, surveys, and books about imports and exports to the United States. You can nd the U.S. ITA at http://www.usatrade.com. Side Note 10.2.5 (Sample Focus Group Questionnaire) Pass out Lesonskys Sample Focus Group Questionnaire. [4, p. 101] The questionnaire supposes that someone is going to become a chocolatier.

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113

Side Note 10.2.6 (Sample Mail Questionnaire) Pass out Lesonskys Sample Direct Mail Questionnaire. [4, pp. 102103] The questionnaire supposes that someone is going to open an interior decoration business.

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CHAPTER 10. MARKET RESEARCH

Chapter 11

The Business Plan

The business plan is an essential document not only to seek funding but to provide a sanity check and to give you a framework for developing your business. In terms of sanity checking, the business plan should help you avoid ve pitfalls that would limit your opportunity to succeed. Those who provide nancing are aware of these pitfalls, and so should you be. 1. No realistic goals Your business plan should help you ascertain whether your goals are realistic. Set up a timetable with specic steps to be accomplished in a specic period. 2. Failure to anticipate roadblocks You should know what the possible show stoppers are in your business. Your business plan should list obstacles that may arise and what will be done to address them. 3. No commitment or dedication Entrepreneurs must be ready and willing to demonstrate a personal and nancial commitment to the success of the venture. 4. Lack of demonstrated experience Entrepreneurs must give evidence of personal experience or experience on their team in both the business and technical skills that are necessary for a successful venture. 5. No market niche Many entrepreneurs propose an idea without knowing who the potential customers will be. Denition 11.0.4 (Business Plan) A business plan is a written document that details a proposed venture. It must describe current status, expected needs, and projected results of the new business. Every aspect of the venture should be covered, including 115

116 The project, Marketing, Research and development, Manufacturing, Management, Critical risks, Financing, and Milestones or a timetable.

CHAPTER 11. THE BUSINESS PLAN

A business plan is also known as a venture plan, loan proposals, or investment prospectus. Failing in business is very costly, and while a business plan will not guarantee success, it will help you maximize your ventures chances for success. It provides a variety of other benets. The eort and discipline needed to put together the business plan will force the entrepreneur to view the proposed venture critically and objectively. The analyses included in the plan force the entrepreneur to closely scrutinize the assumptions about the ventures success or failure. The business plan allows outside evaluators (such as investors) to critically evaluate the proposed venture. The business plan quanties objectives, allowing the entrepreneur to track results by measurable benchmarks. It is a tool to communicate with outside nancial sources and internal management for guiding the venture to success.

11.1
11.1.1

Preparing to Put the Plan Together

Your Audience

The rst question you should ask yourself is, Who is going to be reading the plan? If you present your plan to venture capitalists or nanciers, you will likely be giving your plan to read many business plans per day. They may spend no more than ve

11.1. PREPARING TO PUT THE PLAN TOGETHER

117

minutes with your business plan before deciding to give you an audience or place you in the circular le.1 Many venture capitalists use the following six step process to evaluate a business plan [3, p. 300]. Note that less than a minute on average is devoted to each step. 1. Determine the characteristics of the venture and its industry. 2. Determine the nancial structure of the plan, including debt or equity nancing required. 3. Read the latest balance sheet. 4. Determine the quality of the entrepreneurs.2 5. Establish the unique details of this venture. 6. Read the plan over casually. If you cannot impress the nancier with these three steps, you will not even get your foot in the door and be invited to present your plan to investors. While the initial read-through might be only a ve-minute perusal, bear in mind that once the plan is advanced to the next stage of nancing, other nancing professionals may spend more time analyzing the details of the plan.

11.1.2

Look and Feel

The way your plan looks and feels will give investors their rst impression of you as a person. They will want to see something that reects that you are neat, thorough and careful, not ostentatious, pretentious, or spendthrift. Kuratko suggests the following [3, p. 301]: Appearance It should look good, but not too good. Binding and printing should not be sloppy, but should not be too lavish. Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. Length
1 The circular le refers to the circular paper ling system that sits under every desk; i.e., the trash can. 2 Do not underestimate the importance of this step.

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CHAPTER 11. THE BUSINESS PLAN It should be no more than 50 pages. 40 pages is ideal.3

The Cover and Title Page The cover should have the name of the company, the date of the plan, and full contact information4 for the company. Inside the front cover should be a title page repeating the cover information. On the title page, a number should be in a corner5 indicating the copy number. You should use this to keep track of who has which copy. It should also serve as a reminder not to make too many copies or your investors may think that others have turned down your plan. The Executive Summary Two or three pages immediately following the title page. It should explain 1. 2. 3. 4. 5. 6. 7. The companys current status, Its products or services, The benets to customers, The nancial forecasts, The ventures objectives in 3 to 5 years, The amount of nancing needed, and How investors will benet.

It is worth repeating: Keep it down to at most two or three pages. Table of Contents The Table of Contents should list each of the business plans sections and mark pages for each section.

11.1.3

Some Style Points

Kuratko also recommends that you [3, p. 302]: Keep the Plan Short People who read the plan are generally pressed for time. If you write to much, they will not read it.
3 Note that for this class, the business plan is expected to be less than Kuratkos recommended length no more than 20 pages. 4 Phone number, address, e-mail address, and/or web site. 5 I suggest the lower-right corner, though you should not put it in the same corner as page numbers appear.

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119

Organize and Package the Plan Appropriately Organize things logically and present a neat package with proper grammar. Use the spell checker on your word processor to check for spelling mistakes. Orient the Plant Toward the Future Create an air of excitement. Avoid Exaggeration Your sales and revenue estimates should be well researched. Your credibility is established in part by the credibility of your plan. Highlight Critical Tasks This part of the plan demonstrates your ability to analyze and address potential problems. Give Evidence of an Eective Team Be sure that your audience knows that your people have the skills to succeed. Do Not Overdiversify Dont try to be all things to all people. Present a focused plan. Identify the Target Market Market research should support a focused customer niche. Keep the Plan Written in the Third Person Do not use I, we, or us. Instead, use he, they, or them. Capture the Readers Interest Be sure your title page and executive summary capture the readers interest quickly.

11.2

The Plan Contents

Side Note 11.2.1 (10 Sections of a Business Plan) Present Kuratko Table 10.2 [3, p. 305], which describes the 10 sections of a typical business plan. Some details on each section of the business plan: 1. Executive Summary This should be the last thing you write, but it is the rst thing that your audience will read. The executive summary gives readers their rst impression, so be sure the writing is nely crafted. 2. Business Description Name the business, and tell why it is named what it is.6 Note any industry developments and describe the business thoroughly. Include any pictures or designs that would be helpful. If there are patents, copyrights, trademarks, or other special market advantages you have, be sure to include them in the business description.
6 E.g.,

is it based on a family name? Does it include technical terms you need to identify?

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CHAPTER 11. THE BUSINESS PLAN

3. Marketing Segment You must convince investors that a market exists, that your sales estimates are reasonable, and that you can beat the competition. (a) Market Niche Dene your market niche. (b) Competitive Analysis Assess the strengths and weaknesses of the competition. This should be an honest assessment. (c) Marketing Strategy Your marketing strategy should be described based on research, including The kinds of customer groups to be initially targeted, The Kinds of customer groups to be targeted as the business matures, Methods of identifying and contacting customers, Features of the product to be emphasized in your sales eorts, Any innovative sales or marketing concepts that will enhance customer acceptance.7 (d) Pricing Policy Compare your pricing policy with competitors. Gross prot margin should be discussed. Justify any price increases over competitors based on newness, quality, warranty, service, etc.. (e) Advertising Plan Discuss any promotional campaign, including the type of media8 and, if the promotional campaign will be a signicant portion of expenses, how and when expenses will be incurred. 4. Research, Design, and Development If R&D9 is to be performed, cost, time, testing, and project status should be discussed. Any risks should also be detailed. 5. Operations Segment First, describe the location of the new segment. Important aspects of location include Labor, supplier, and customer availability and proximity, Local taxes and zoning requirements, and Possible support of local banks. In addition, facilities requirements, such as equipment, storage, oces, etc. should be described. Costs should be detailed for all major expenses. 6. Management Segment Key personnel, their job descriptions and responsibilities, and rsums should be given. In addition, pay and ownership (such e e as stock agreements) should be described. 7. Financial Segment The nancial segment should include
7 For example, if you are going to market leases on equipment where previously only sales were allowed. 8 Such as magazines, television, radio, or internet. 9 Research and Development

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121

(a) A pro forma balance sheet, which investors will use to estimate debt/equity ratios, working capital, current ratios, inventory turnover, etc., (b) An income statement, detailing projected prots and losses, (c) A cash-ow statement, detailing projected inows and outows. 8. Critical-Risks Segment Discuss business risks and the ways you might address them. Risks might include Negative industry trends, Costs exceeding estimates, Diculty purchasing parts or materials, Design or research diculties, Unexpected competitions.

Try to be honest and realistic. Your investors are probably as aware, or more aware, of the risks than you are. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. 9. Harvest Strategy Segment Detail how your company will adapt as the company grows and develops. What happens if the management team changes? What will happen to the company assets if ownership changes? 10. Milestone Schedule Segment Detail milestones with a timetable for various activities to be accomplished. These might include Incorporation of the new venture, Completion of design and development, Completion of prototypes, Hiring of sales representatives, Product display at trade shows, Signing up distributors and dealers, Ordering production quantities of materials, Receipt of rst orders, First sales and rst deliveries, and Payment of rst accounts receivable.

11. Appendix If there are documents, such as blueprints or rsums you would e e like to include which are not core to the business plan, include an appendix. Denition 11.2.1 (Pro Forma) A latin term that means projected, as opposed to actual. For example, a balance sheet containing projected balances is called a pro forma balance sheet. Side Note 11.2.2 (The Growth of Active.com) Discuss the growth of Active.com, including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew.

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CHAPTER 11. THE BUSINESS PLAN

Chapter 12

Presenting the Plan

12.1 The Presentation

Side Note 12.1.1 (What Goes Into the Presentation) Present Kawasakis Investor Pitch, Sales Prospect Pitch, and Potential Partner Pitch [2, pp. 5156].

12.2

Some Suggestions

These suggestions come from those who have experience both giving and listening to business pitches.

12.2.1

Do It Until You Get It Right

This is perhaps the most important piece of advice. The presentation of your plan is an ongoing process, not a one-time event. Your presentation should evolve over time as you listen to your audience and receive feedback. The rst time you present your plan, you will probably not do a good job. Do not be dismayed. You will probably have to present it at least ten times before it is ready for the medium-sized sh.1 You will have to pitch to many medium-size sh before you are ready for the big sh. This means that you should not count on presenting your plan to your most critical investor for the rst time. Present it to your friends, your family, your dog, your business class, local business associations, anyone who will listen. Present it many
1 Guy

Kawasaki, author of The Art of the Start, recommends twenty-ve times [2, p. 62].

123

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CHAPTER 12. PRESENTING THE PLAN

times. Only when you are consistently getting a good response from your audience and are comfortable with the presentation is it time to take it to investors. Guy Kawasaki likes to tell a dierent version of an old joke, How can you tell if an entrepreneur is pitching? The answer: His lips are moving.2 [2, p. 44] Side Note 12.2.1 (The Job Talk) Every Ph.D. graduate in economics puts together a job talk in which they present their dissertation to prospective employers. Most Ph.D. candidates give their job talk half a dozen times to other students before giving it in an interview situation. Most graduates get between 5 and 15 interviews when they graduate. By the time I gave my job talk to my eventual employer, Lexecon, I had given it over a dozen times. In retrospect, I dont think it was quite right until somewhere between the 8th and 10th time.

12.2.2

Know Your Outline Thoroughly

It often helps to include key words in the outline that will help you recall examples and other details during the presentation.

12.2.3

Be Familiar With All Equipment to be Used

Never count on technology working the way you want it to. There will always be glitches, and you dont want something as silly as a burned-out light bulb to cost you an investor. Bring your own laptop. You dont want to try to gure out other peoples equipment, and even if you can gure it out, they may have another version of PowerPoint, Adobe Reader, or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. Bring a backup thumb drive with your presentation on it. Post a copy of your presentation in a secure location on your homepage just in case. Test the equipment the day before. Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. Bring paper copies3 of your presentation in case all else fails. Bring at least twice as many as you expect there to be people in the room.
2 This originally comes from an American classic, the lawyer joke. The original joke goes, How can you tell when a lawyer is lying? The answer, of course, is, His lips are moving. 3 Color copies!

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125

Side Note 12.2.2 (A Presentation in Copenhagen) I ew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. Much of the material required use of the internet. I was shocked to nd out the day I arrived that the conference room reserved for the class did not have internet access even though I had sent them e-mails ahead of time specically indicating that the conference room would need to have internet access.

12.2.4

The First Minute is the Most Important

Your audience should know what you do within the rst minute of your presentation. Guy Kawasaki recommends you set a timer [2, p. 45]. Give your presentation to friends or family. Stop when it goes o. Ask them what your company will do. If they cannot explain it clearly, you are not presenting it well.

12.2.5

Take Notes

Have a pen and paper ready and take notes during the pitch. Your audience may ask you several questions at once. They may ask you something you want to respond to in an e-mail later. They may ask you something that makes you want to change your presentation. It is easy for things to get lost in the heat of the moment, so write things down to make sure you dont forget. Taking notes also makes you look conscientious. In general, I always bring a pen and paper to meetings. Many people feel as if taking notes makes them look stupid, but in reality, it is quite the opposite. At my company in Chicago, where some of the smartest people in the world worked, everyone brought a pen and paper. Everyone.

12.2.6

So What?

When you are planning your presentation, ask yourself after every statement you make, So what? If you cannot answer this question simply and easily, you need to change or eliminate the statement.

12.3

After the Presentation

Each presentation will be dierent, and each investor will respond dierently. You should be prepared for the unexpected, and although you go into each presentation

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CHAPTER 12. PRESENTING THE PLAN

with only success on your mind, you should also realize that most most comments will be negative and most presentations are rejected. Be prepared for rejection and do not consider it the end of the road. Remember that persistence is the most important character trait of entrepreneurs. Each time your are rejected improves your future opportunities. Each negative comment gives you an opportunity to change an investors opinion. Side Note 12.3.1 (What to Do When Youre Turned Down) Present Kuratko table 10.5 [3, p. 321]: What to do when a venture capitalist turns you down: Ten questions.

Chapter 13

Inventory Control
Most entrepreneurs do not know how to set up eective inventory control systems. Even more problematic, startup businesses dont have a past sales gures or experience with which to project demand and inventory requirements. Side Note 13.0.2 (Insucient Inventory) Insucient inventory can mean Lost sales, Costly back-orders, High prices for emergency inventory. Side Note 13.0.3 (Excess Inventory) However, excess inventory costs money for Extra overhead, Debt service on loans that you purchased the inventory with, Additional personal property tax on unsold inventory, and Additional insurance costs. You may also nd yourself wanting to lower your prices to get rid of excess inventory. By some estimates [4, p. 287] excess inventory costs 20% to 30% of the original purchase price of the merchandise to store and maintain. 127

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CHAPTER 13. INVENTORY CONTROL

13.1

Inventory and Cash Flow

Cash ow is essential for most starting businesses, particularly before money is coming in from customers. Tying money up in inventory can mean be dierence between a business succeeding and failing. To manage inventory cash ow where there are a variety of types of products, use the ABC approach. Divide materials into groups A, B, and C depending on the total impact they have on the bottom line, not their price. Most people focus most on the expensive items in their inventory. But often the lower-prices items contribute more to the bottom line. Stock more of vital A items while keeping the B and C items at a more manageable level. Side Note 13.1.1 (The 80/20 Rule) In many businesses, 80% of the revenues come from only 20% of the products. When managing inventory (and other aspects of the business), eorts should be focused on the key 20% of items.

13.2

Tracking Inventory

Inventory tracking tells you What inventory is in stock, What is on order, When it will arrive, and What youve sold. Methods for inventory control should include one or more of the following inventory control systems: Manual Tag Systems In a manual tag system, you remove price tags from the product at the point of purchase (e.g., at the cash register). The removed tags are then cross-checked against physical inventory to gure out what youve sold. Reports from a manual tag system may show sales according to product line, brand name, and styles and would include any other relevant information such as whether the items were on sale or discounted.

13.3. COMPUTERIZED INVENTORY CONTROL Dollar-control Systems

129

Dollar control systems show the cost and gross prot margin on individual inventory items. Most computerized inventory tracking systems1 provide this type of information. Unit-control Systems Unit-control systems use methods ranging from eyeballing shelves to bin tickets. Denition 13.2.1 (Bin Tickets) In unit-control inventory systems, bin tickets are tiny cards kept with each type of product that list a stock number, a description, maximum and minimum quantities stocked, cost (in code), selling price and any other information you want to include. [4, p. 291] Bin tickets will have corresponding oce le cards that list a stock number, selling price, cost, number of items to a case, supply source and alternative source, order dates, quantities, and delivery time. Whatever inventory control system is used, retailers should make inventory checks as often as is practical: Daily, weekly, or at a minimum, yearly.

13.3

Computerized Inventory Control

Most businesses in the U.S. use some sort of computerized inventory control these days. They provide more information with much less eort than manual systems and should let you Track usage, Monitor changes in unit costs, Calculate when you need to reorder, and Analyze inventory levels on an item-by-item basis. Side Note 13.3.1 (POS (Point-of-Sale) Systems) Computerized inventory control systems called POS, or point-of-sale, systems, involves the exchange of information collected at the cash register with the business computerized inventory control system to help you Analyze sales data in great detail,
1 See

section 13.3 below.

130 Maintain a sales history, and Improve pricing accuracy.

CHAPTER 13. INVENTORY CONTROL

When considering the purchase of a POS, consider the following features: Ease of use Does it have a friendly and easy-to-use interface? Entry of sales information Is it easy to enter sales information? Pricing You should be able to set up multiple prices for each item, such as for volume discounts for preferred customers. Updating product information At the time a sale is entered, these systems should automatically update inventory and accounting records. Security To prevent theft, be sure its not easy to hack the system. Taxes Be sure you can support the local tax system or multiple tax rates if you deal in more than one state or on the internet. Note that there are both o-the-shelf POS systems available in the market and industry-specic systems useful for all sorts of businesses ranging from book stores to auto repair shops to dry cleaners to beauty salons.

13.3.1

Inventory Turnover

Typically, a high inventory turnover is a mark of a well-managed inventory system. Denition 13.3.1 (Turnover) When you have replaced 100% of your original inventory, you have turned over your inventory. To improve eciency of inventory control, work with suppliers to improve delivery times and count inventory more often. Denition 13.3.2 (Order Cycle) In inventory management, the order cycle is the amount of time it takes to process paperwork and place orders. Denition 13.3.3 (Count Cycle) In inventory management, the count cycle is the amount of time between counting inventory. For example, if you perform an inventory count four times a year, your count cycle is 12 weeks. Denition 13.3.4 (Delivery Cycle) In inventory management, the delivery cycle is the amount of time between placing an order and receiving it.

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131

Denition 13.3.5 (Needs Period) In inventory management, the needs period is the sum of the count cycle, order cycle, and delivery cycle. In other words, Needs Period = Count Cycle + Delivery Cycle + Order Cycle. See denitions 13.3.3, 13.3.4, and 13.3.2. Many businesses also measure turnover by measuring sales per square foot (or square meter). You should know how many sales per square meter per year you need to survive. Calculate your sales per square meter once per month.

13.4

Inventory Accounting

Your accountant will typically handle inventory accounting, but you should at least know about LIFO and FIFO. In the U.S., you must estimate your inventory value when you le your taxes. LIFO and FIFO are two accounting methods used to do this. In deciding which to use, follow the recommendation of your accountant. Denition 13.4.1 (LIFO (Last In, First Out)) LIFO (last in, rst out) assumes that you sell the most recently purchased inventory rst. If there is ination, it values your remaining inventory based on the prices of the least recently purchased items, which allows you to pay less taxes on your inventory.2 See also 13.4.2. Denition 13.4.2 (FIFO (First In, First Out)) FIFO (rst in, rst out) assumes that you sell the least recently purchased inventory rst. If there is ination, it values your remaining inventory based on the prices of the most recently purchased items, which may result in higher taxes.3 See also 13.4.1.

13.4.1

Buying Inventory

In the process of putting together your business plan, you should arrive at a basic assessment of the stock levels youll need for monthly or seasonal sales volume. After you have been in business your inventory control system should give you a better idea of stocking levels.
2 At 3 At

least this is true in the U.S. The author is unfamiliar with Chinese tax codes. least this is true in the U.S. The author is unfamiliar with Chinese tax codes.

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CHAPTER 13. INVENTORY CONTROL

Denition 13.4.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period, usually one, three or four months. Open-to-buy can be calculated with the following formula:
Planned inventory + planned sales - actual inventory - stock on order = open-to-buy

Note that formulas and computerized inventory control systems and other means to manage inventory dont make up for a business owners intuition. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense.

13.5

Suppliers

Suppliers can be divided into four categories: 1. Manufacturers Note that some manufacturers refuse to ll small orders. 2. Distributors Also known as wholesalers, brokers or jobbers. Their prices are higher than a manufacturers. 3. Independent craftspeople 4. Import sources They operate like domestic wholesalers.

13.5.1

Dealing with Suppliers

The most important thing about a supplier is reliability. Good suppliers will help you by providing products and even creative solutions to help meet your customers demands. Note that it is not uncommon that Some suppliers require a minimum order for merchandise. The minimum may be higher for rst orders to cover the cost of setting up a new account. Some suppliers demand a minimum number of items per order. Rieva Lesonsky, author of Start Your Own Business, says, Be open, courteous and rm with your suppliers, and they will respond in kind.

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133

13.5.2

Payment Plans

Suppliers of expensive equipment or merchandise may require credit references. If you dont have trade references or a credit rating (as is the case with many starting businesses) you may nd smaller suppliers more accomodating than large suppliers. If you are dealing with a reticent large supplier, personal interaction can work wonders. You can also present your nancial statements and prospects for success. If a supplier is uncertain about you, they will put you on a c.o.d. basis until you have proven yourself reliable. Denition 13.5.1 (COD (or c.o.d.)) Cash on delivery. If a supplier does not extend credit, customers may be required to pay upon receipt of goods. Whatever you do, do not falsify or misrepresent your nancial statements. At least in the U.S., it is considered a felony. Side Note 13.5.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree, I regularly had to deal with food vendors. Discuss Their negotiating technique when discussing pricing, and The need to be rm but fair, such as the occasions on which we had to send back bad food or refuse an entire shipment (and make do with what was on hand) in order to make a point about late deliveries. Tips for dealing with suppliers: 1. Be sure to add up Costs, Discounts, and Allowances before you make a decision. Suppliers sometimes try to complicate pricing to their advantage. 2. Ask about the freight policy before ordering. Sometimes if an order is large enough, the supplier will pay for freight. For items being shipped, you should know who is liable for damage to goods in transit.

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CHAPTER 13. INVENTORY CONTROL Depending on whether the supplier pays frieght, it may be worthwhile to cancel backorders and bundle them with a subsequent orders.

3. Be aware of your suppliers priorities. Do they ll orders in the order that they come in or do they give preferential treatment to larger orders? 4. Specify a cancellation date on your order forms. 5. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. Denition 13.5.2 (FOB (or f.o.b.)) Free on board. International Term of Sale that means the seller fullls his or her obligation to deliver when the goods have passed over the ships rail at the named port of shipment. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export.4 Colloquially, people often say something like f.o.b. Seattle to indicate that an item being shipped from Seattle is free on board. See also denition 13.5.3. Denition 13.5.3 (FOB Destination (or f.o.b. Destination)) Free on board destination. As opposed to FOB, FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. 5 FOB Destination changes the location where title and risk pass. Under this arrangement, title and risk remain with the seller until they have delivered the freight to the delivery location specied in the contract.6 See also denition 13.5.2. Denition 13.5.4 (Back Order) This is a Distribution (business) term and refers to the status of items on a purchase order in the event that some or all of the inventory required to full the order is out of stock. This diers from a forward order where stock is available but delivery is postponed for other reasons.7

4 Source: 5 Source:

http://www.epoi.com/jargon.html, May 19, 2007. http://www.abcsmallbiz.com/reference/glossary/glossary efg.html, May 19,

2007. 6 Source: http://www.roadway.com/shippers/glossary.html, May 19, 2007. 7 Source: http://en.wikipedia.org/wiki/Backorder, May 19, 2007.

Chapter 14

Hiring Employees
Hiring is perhaps the most important task for any entrepreneur. The benets of nding the right person for a job cannot be overstated. On the other hand, a bad hire, besides being bad for business, can take a tremendous personal toll on the entrepreneur as he or she is faced with the prospect of stressful personnel management duties such ring the employee.

Side Note 14.0.2 (Tip: A Personal Note Concerning Personnel Management) By far the most stressful decisions I have made in my management career have concerned ring or laying o employees. While reprimanding or terminating ineective employees and downsizing are necessary business decisions, they are often emotionally draining for the manager as well as the employee involved.

This chapter will cover the ins and outs of hiring Full-time employees (FTEs), Part-time employees, Temporary employees (temps), and Independent contractors.

Side Note 14.0.3 (Job Analysis) Present Lesonskys sample Job Analysis form [4, p. 337]. 135

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14.1

How to Hire

Hiring involves analyzing the job requirements, creating a job description, and recruiting. Side Note 14.1.1 (Formalities) While it may seem when you hire your rst employee an unnecessary burden to write a job description and create all the other formalities, by the time you hire your 40th employee, youll be grateful to have spent the time to go through a more formal process.

14.1.1

Job Analysis

Before creating a job description, you need to consider The physical or mental tasks involved. Cleaning, lifting, programming, writing reports, selling, etc.. How the job will be done. Will the person use a computer? What software do they need to do? Will they be welding? What kind of welding equipment will they need to be familiar with? The reason the job exists. What are the goals for the employee and how does the job relate to other jobs in the company? The qualications needed. Not only education and skills, but personality traits.

14.1.2

Job Description

Side Note 14.1.2 (Tip: Job Title Ination) Inexperienced employers are often tempted to inate the job title of the position they are trying to hire in an attempt to lure candidates. However, this can create several problems: Even if the employee is grateful to have an inated job title at rst, they will soon expect compensation commensurate with their job title. If you call someone a Vice President but dont compensate them as such, you will likely nd that they will come to you at some point to demand a vice presidents salary. If you have do terminate the employee, an employee with an inated job title may expect an inated severance package. You may not leave enough buer above the employee. If you give someone a job as Vice President, then want to hire someone else later at a position above them in the company, you have nothing to oer.

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There is little room for advancement. Part of retaining quality employees is the prospect of advancement. If you hire someone at the highest level of their competency, you may nd it dicult to give them a promotion later. If you give someone an inated job title but do not oer a salary commensurate with the title, you may nd they are tempted to leverage that job title to seek employment elsewhere. You may actually be doing your employee a disservice by inating their job title. If, for example, you hire someone as Director who is not qualied to be a director, then they go on to a Director position at another company, their lack of qualications may be obvious to their new employer and result in their termination or other harm to their career. Side Note 14.1.3 (Job Description) Present Lesonskys sample Job Description form [4, p. 339]. Denition 14.1.1 (Job Description) Job descriptions should include A job title, The position of that employee in the corporate heirarchy, and Job summary with major and minor duties. Denition 14.1.2 (Job Specication) Job specications are similar to job descriptions (see denition 14.1.1) and should include the personal requirements expected of an employee [4, p. 338]. Like a job description, it includes The job title, Who the person reports to, and A summary description of the position. It also includes Any educational requirements, Desired experience, Specialized skills or knowledge, A salary range, Benets, Physical or other special requirements associated with the job, and Any occupational hazards.

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14.1.3

Advertising the Job

When you write an advertisement, List the top 4 or 5 skills that are most essential to the job. Keep in mind that many qualied applicants may not answer an ad if you list skills that are not particularly necessary for the job. For example, if you are looking for an accountant, dont list familiarity with Quickbooks1 if you really just want someone who is familiar with accounting. Do not list requirements other than educational or experience-related ones. Do not ask for specic personality traits, such as outgoing or detailoriented, or people who may not have them will just try to fake those personality traits in the interview. Be sure to list appropriate contact information. For professional positions, applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. For other positions, you may have applicants schedule an appointment by e-mail or over the phone and come in to ll out an application.2 Side Note 14.1.4 (Using an E-mail Address) For professional positions, e-mail addresses have become perhaps the most popular way to get applicant information at U.S. companies. With e-mail, you dont get calls from aggressive applicants who are trying to circumvent the hiring process. It also makes it easy to receive and process a large number of applications with a minimum of eort. Many American companies are no longer providing phone numbers, particularly those that advertise on web sites, due to the number of applicants for competitive positions.

14.1.4

Finding People

There are many possible sources of applicants. Your Personal and Professional Network University and College Placement Oces
1 Quickbooks is the most popular accounting software package for small businesses in the U.S.. 2 See sidenote 14.1.5.

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Senior Citizen Centers Senior citizens who need extra income or retirees who want to make productive use of their time often make excellent employees An Unemployment Agency Contact government and private agencies who assist unemployed persons Job Banks Professional associations often have job banks where professionals who are looking for employment can supply their resumes. In the U.S., most professional associations job banks are now online. Industry Publications Most trade publications take ads for job openings. Online In the U.S., particularly in the high-tech industry, many positions are being lled online. Try to perform a search on a job sites such as http://www.monster.com or http://www.dice.com with the keyword java will demonstrate just how widely used online tools are.3 Generally, for professional positions, the hiring process proceeds as follows: 1. You narrow the number of resumes down to about 10. 2. You interview the candidates. 3. You narrow down the 10 candidates to 3. 4. You conduct a second round of interviews with the remaining 3 candidates. 5. You check references. 6. You hire the preferred candidate. Screening People Reviewing resumes and applications is an art, not a science. If you are lucky, you will get several candidates for any job you are oering. For any job, you need to narrow down the number of applicants to those you can interview in a reasonable time frame, about 10 or so. To weed out candidates, Focus on the skills that a person can bring to your company. You can evaluate their personality during the interview, but when looking at a resume, be sure that a candidate can provide what you are looking for.
3 Java is a programming language. Searching on Monster.com with the keyword Java on May 19, 2007 turned up more than 5,000 hits searching just the Information Technology search category. There were 4,314 listings in the Computers, Software category. 159 in Financial Services. 665 in Internet/E-Commerce. And 921 in Engineering.

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Do they change jobs too quickly? Throw out applications if someone cannot provide enough references. That typically indicates that someone cannot supply enough positive references. Dont necessarily discard resumes with some gaps. On the other hand, if a person survives downsizing or other major changes at their former employers, that is a very good sign that they are a survivor. Rely on your intuition. Side Note 14.1.5 (Job Application) Present Lesonskys sample job application [4, pp. 344345]. Applications should ask for things such as Name, address, phone number, and e-mail address, Educational background, Work experience As for salary information when asking about work experience Availability, including when an applicant can work and the hours they can work, Special skills, and References. Side Note 14.1.6 (Hiring at Active.com) In the hiring process at Active.com, so many resumes came in that an administrative assistant was asked to perform the rst screening. She simply passed along resumes that contained certain keywords that we were looking for. Of those we looked at, we tossed those that had spelling or grammatical mistakes, did not match our requirements closely enough, listed expertise in too many subject areas,4 were not experienced enough, or were too experienced. From the hiring process at Active.com, I learned that people lie on their resumes all the time. Due to this, I have some personal recommendations: Always check references.
4 It takes time to become an expert with any suciently compex technology. If an applicant indicated they were an expert with too many technologies, this indicated to us that the applicant was not being truthful.

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Ask the person questions they would only know if they are competent in their eld. Ask people questions about their resume during the interview. Get clarication on anything that you think may be suspect. Do not hire people who are discovered to be lying on their resume. Ever. Not also that many of the best people we hired were not the best on paper. Several of the engineers I hired did not nish their undergraduate degree. However, their love of and devotion to learning technology far exceeded most university graduates who were computer science majors simply because they thought it would make them money. They were the type of people who would write software all day, then go home and play on computers in their spare time.5 Side Note 14.1.7 (No-nos) In the U.S., there are certain things you may not discuss with a job applicant in order to avoid discrimination and other issues. Though laws undoubtedly dier in China, in the U.S., employers may not ask about anything not related to the job, including [4, p. 347] Age or date of birth, Sex, race, creed, color, religion, or national origin, Disabilities of any kind, Marital status, Maiden name (for female applicants), or If a person is a citizen.6 Questions that are not explicitly prohibited, but which can get employers in legal trouble, include Whether the applicant has children, Whether the applicant has every been treated by a psychologist or psychiatrist, Whether the applicant has every been treated for drug or alcohol addiction, Whether the applicant has every been arrested, How many days the applicant was sick in the previous year, and
5 I dont mean play in the sense that they were playing video games they were networking their house or setting up interesting web sites or doing other productive activities. 6 Employers can, however, ask prospective employees whether they can submit proof that they have the legal right to work in the United States, such as through a Green Card.

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CHAPTER 14. HIRING EMPLOYEES If a worker was ever injured on the job or led for workers compensation.

Side Note 14.1.8 (Your Rsum) Discuss with students how to put together an e e eective resume when they graduate. The Interview Remember that the candidate will be interviewing you as much as you will be interviewing them. Good candidates will do their best to put their best foot forward. You should do the same. First impressions are the most important. Hopefully they will be neat and clean, friendly, and demonstrate good communication skills. Begin with some small talk. Discuss the job and the company. It is as important to get the candidate excited about your company as you want to be about them. Then ask them about their skills and background. Be sure to ask open-ended questions, such as Tell me about your last position, or Tell me about a problem that you solved at your last job and the way you solved it. Dont ask yes-or-no questions. You want the candidate to talk enough to give you a detailed impression. Here are some suggestions for questions to ask the candidate:7 If you could design the perfect job for yourself, what would you do? Why?8 What kind of supervisor gets the best work out of you? How would you describe your current supervisor? How do you structure your time? What are three things you like about your current job? What were your three biggest accomplishments in your last job? In your career? What can you do for our company that noone else can? What are your strengths and weaknesses? How far do you think you can go in the company? Why? What do you expect to be doing in ve years?9
from [4, p. 349]. a recent debate, the Democratic partys candidates for President of the United States in the 2008 election were asked what their perfect job would be. Curiously, only one of them answered, President of the United States. 9 This is a very typical job interview question in the United States, so much so that it is almost a clich. A friend from Texas was asked this question when he interviewed with Moe torola to be a supervisor in a manufacturing plant in Austin, Texas. He answered, bowling. The interviewer laughed out loud. He got the job.
8 In 7 Taken

14.1. HOW TO HIRE What interest you most about this company? This position? Describe three situations where your work was criticized. Have you hired people before? If so, what did you look for? Things to watch out for include A bad attitude regarding the candidates previous employer, Things the candidate seems reluctant to talk about, Whether the candidate can think on their feet,

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The candidates general demeanor, such as their posture, attentiveness, and general tidiness in their appearance. After your questions, give them time to ask you questions. If the candidate is really interested in the position, they will have questions about the company and the position. Finally, after you nish the interview, take a few minutes to write down your impressions. Side Note 14.1.9 (The I.Q. Test) At Active.com, the CTO liked to ask questions like you would nd on an I.Q. test to see how employees solved problems. This has become popular recently in the U.S., with many companies like Google incorporating these kinds of questions into their standard interview process. Examples of these kinds of questions include Name as many ways you can think of to nd a needle in a haystack within 30 seconds. What letter comes next in the sequence MTWTFS? If you have N people in a room and every person shakes every other persons hand, how many handshakes are there? Checking References One thing that far too few employers do is check references. I have interviewed people who looked great on paper, gave a strong interview, but there references were poor. They were not hired. Most supervisors, at least in the U.S., do not give bad references to avoid potential lawsuits. Be wary of answers that subtly indicate that there may have been a problem with the candidate. Lesonsky tells of one supervisor who was asked about

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a candidate who simply replied, I only give good references. When asked, What can you tell me about this person, they again said, I only give good references. Many larger companies will refer you to the human resources department. You should try to speak directly to the candidates previous employer, who knows the candidate well, rather than a human resources employee who may not. Also, check their educational background. Contact their university to conrm that they graduated and that their grades were what they said they were. Although I dont know how things work in China, in the U.S., you can hire companies to check educational references and perform criminal background checks for about $100 per check. Considering the cost of hiring someone whose resume has been fabricated or who has a criminal background, it is usually a good investment.

Bibliography
[1] Jay Heizer and Barry Render. Operations Management. Pearson Education, Inc., Upper Saddle River, New Jersey, 7th edition, 2005. [2] Guy Kawasaki. The Art of the Start. Penguin Books, Ltd., New York, New York, 2004. [3] Donald F. Kuratko and Richard M. Hodgetts. Entrepreneurship: Theory, Process, and Practice. Thompson South-Western, Mason, Ohio, 6th edition, 2004. [4] Rieva Lesonsky. Start Your Own Business. Entrepreneur Press, Canada, 3rd edition, 2004. [5] Fred Luthans Richard M. Hodgetts and Jonathan Doh. International Management: Culture, Strategy, and Behavior. McGraw-Hill Companies, Inc., New York, New York, 6th edition, 2006. [6] Shooting the messenger. The Economist, pages 7083, September 2 2004.

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