Business Fundamentals

Business Fundamentals
This book is licensed under a Creative Commons Attribution 3.0 License

Business Fundamentals
Donald J McCubbrey
Copyright 2009 Donald J McCubbrey
Editor-In-Chief: Donald cCubbre!
Associate Editor: arisa Dre"el
Editorial Assistant: #ackie $harman
%or an! &uestions about this te"t' (lease email: dre"el)u*a.edu
The +lobal Te"t ,ro-ect is funded b! the #acobs %oundation' .urich' $/it0erland
Business Fundamentals 1 A +lobal Te"t
Table of Contents
2. The business eco-s!stem: 3our (ath to findin* the (ot of *old at the end of the rainbo/4. .5
The business eco-s!stem: 3our (ath to findin* the (ot of *old at the end of the rainbo/4............................5
The business eco-s!stem.................................................................................................................................20
The sun rise of !our ne/ business ................................................................................................................. 21
Accessin* market o((ortunit!: the initial rim of the /heel........................................................................... 21
$trate*!: the tactical rim on the /heel........................................................................................................... 25
6randin* /ill make !our blossoms bloom4....................................................................................................10
6randin*: The memorable rim on the /heel................................................................................................. 10
$takeholders: the connective rim on the /heel............................................................................................. 11
The stems of *ro/in* startu(s: definitions of 7startu( stakeholder arro/8 selected terms.........................13
Ethics: the authentic rim on the /heel...........................................................................................................19
:(erations: the lo*istical rim on the /heel................................................................................................... 30
;e/ (roduct: the tan*ible rim on the /heel.................................................................................................. 31
Let the fruits of !our labor blossom: the ne/ (roduct<service launch event (lan........................................3=
,ublic relations: the sensational rim on the /heel........................................................................................ 3>
entor insi*hts: the 7?here the @ubber eets the @oad8 s(okes on the /heel.........................................35
1. The mind of the entre(reneur: 3our entre(reneurial -ourne! be*ins b! embarkin* on !our
o/n heroAs -ourne!4......................................................................................................................B=
Entre(reneur assessment surve!....................................................................................................................B9
Ans/er ke!......................................................................................................................................................=0
3. 6usiness models and marketin*:an overvie/ ...................................................................... ==
?hat is a business modelC..............................................................................................................................==
$uccess factors................................................................................................................................................ =D
Consumer marketin* models......................................................................................................................... >0
The marketin* model...................................................................................................................................... >2
Identif!in* market needs................................................................................................................................>1
6usiness to business marketin* models.........................................................................................................>B
B. Eo/ to or*ani0e and lead an entre(reneurial venture......................................................... 9=
:r*ani0ational issues...................................................................................................................................... 9>
:r*ani0ational sta*es of *ro/th..................................................................................................................... 9D
%lat versus tall or*ani0ations......................................................................................................................... 51
Centrali0ed versus decentrali0ed or*ani0ations............................................................................................ 5B
=. $electin* and mana*in* !our team.......................................................................................55
Com(etitive advanta*e throu*h human resource mana*ement .................................................................. 55
,rovidin* em(lo!ee voice and influence .......................................................................................................5D
@ecruitin* /orkers ........................................................................................................................................ D3
Evaluatin* recruitin* (olicies.........................................................................................................................D=
Em(lo!ee trainin*.......................................................................................................................................... D5
Ali*nin* em(lo!ee career develo(ment /ith or*ani0ational *ro/th...........................................................202
,erformance a((raisal.................................................................................................................................. 203
Determinin* base (a!................................................................................................................................... 20D
eanin*ful -ob desi*n................................................................................................................................... 22>
Termination................................................................................................................................................... 225
>. arketin* on a *lobal scale................................................................................................. 231
Definin* marketin*....................................................................................................................................... 231
3
The role of marketin* in the firm: a basis for classification ........................................................................ 233
Definin* international marketin*................................................................................................................. 239
The international marketin* (lan.................................................................................................................2B3
The international marketin* environment...................................................................................................2BD
9. :(erations mana*ement...................................................................................................... 2=9
?hat is o(erations mana*ementC.................................................................................................................2=9
The in(ut<out(ut transformation model......................................................................................................2=D
:(erations decisions..................................................................................................................................... 2>2
$(ecial to(ic: Total Fualit! ana*ement.....................................................................................................2>9
$(ecial to(ic: su((l! chain mana*ement..................................................................................................... 291
$(ecial to(ic: -ust-in-time and lean s!stems................................................................................................ 29>
5. $ecurin* and mana*in* e"ternal relationshi(s.................................................................. 250
Introduction to e"ternal relationshi(s......................................................................................................... 250
arketin* e"chan*es and (artnershi(s...................................................................................................... 253
Choosin* the ri*ht relationshi( ................................................................................................................... 25>
$trate*ies for e"ternal relationshi(s.............................................................................................................2D0
D. %inancial and mana*erial accountin*G financin* !our or*ani0ation.................................2DD
?h! an accountin* s!stem is im(ortant...................................................................................................... 2DD
6asic t!(es of accounts ................................................................................................................................ 102
Chart of accounts..........................................................................................................................................101
6asic financial statements............................................................................................................................10B
A short histor! of accountin* and double entr! bookkee(in*..................................................................... 10=
Led*ers .........................................................................................................................................................109
Advanced re(orts and anal!ses..................................................................................................................... 122
6ud*ets' forecasts' and alternative scenarios ..............................................................................................12B
20. Levera*in* /ith information technolo*!..........................................................................111
I$ tools for the start-u( or*ani0ation .......................................................................................................... 113
ovin* for/ard /ith information s!stems..................................................................................................11>
Hno/ /hat !our customers /ant................................................................................................................. 130
Isin* information technolo*! com(etitivel!...............................................................................................133
?hat is I$ risk mana*ementC...................................................................................................................... 135
22. Com(etitive intelli*ence.....................................................................................................1BB
Definition...................................................................................................................................................... 1BB
Im(ortance and *oals of com(etitive intelli*ence ...................................................................................... 1B>
Information collection methods...................................................................................................................1B5
The industr! environment ...........................................................................................................................1BD
,orterAs = forces and the anal!sis of com(etitors ........................................................................................ 1=2
ethods of evaluatin* com(etitors ............................................................................................................. 1=B
21. 6usiness ethics in a nutshell.............................................................................................. 1=9
?hat is ethicsC ............................................................................................................................................. 1=9
ana*ement: the meta (rofession...............................................................................................................1>3
Cor(orate $ocial @es(onsibilit!................................................................................................................... 1>5
23. Addin* (roducts and services............................................................................................190
?here does innovation come fromC............................................................................................................. 192
Innovation throu*h business models........................................................................................................... 19=
Evaluatin* ne/ (roducts.............................................................................................................................. 195
Business Fundamentals B A +lobal Te"t
?hen innovation fails: deletin* (roducts....................................................................................................150
2B. International business for the entre(reneur.................................................................... 155
+lobali0ation: o((ortunities and threats to develo(in* countr! business.................................................15D
Earnessin* technolo*! for *lobal business success.....................................................................................1D=
Doin* business across cultures.................................................................................................................... 1D>
,olitical and le*al risk in international business......................................................................................... 1DD
+lobal marketin*: assessin* (otential markets overseas............................................................................ 303
+lobal finance: initial considerations ......................................................................................................... 30>
:r*ani0ational structure and human resources mana*ement.................................................................... 30D
Cor(orate $ocial @es(onsibilit! and sustainable develo(ment in the *lobal environment........................ 32>
2=. +ro/th strate*ies for start-u(s..........................................................................................31>
Definition and models ................................................................................................................................. 31>
+ro/th (roblems.......................................................................................................................................... 332
=
,reface
The +lobal Te"t ,ro-ect Jhtt(:<<*lobalte"t.or*<K /as initiated in earl! 100> to develo( a series of free' o(en
content' electronic te"tbooks. A descri(tion of the +lobal Te"t ,ro-ect is available on the (ro-ectAs /ebsite.
The first book in the series is on information s!stems' because the founders of the +lobal Te"t ,ro-ect are both
Information $!stems (rofessors /ho kne/ man! other I$ academics /ho /anted to hel( start the book. I$
(rofessors have a lon* histor! of coo(eratin* /ith each other on a *lobal scale. Creation of an o(en content
te"tbook on information s!stems re&uired the coo(eration of the /orld/ide communit! of facult! and their
students' as /ell as (ractitioners.
The I$ communit!' of all academic communities' should be the one that is an earl! ado(ter of technolo*! that
holds the (romise of bein* able to create a state-of-the-art o(en electronic te"tbook. The Information $!stems
te"tbook created b! the communit! aims to evolve over time to be best-in-class' u(-to-date' and' (erha(s most
im(ortantl!' make available at no cost to students an!/here in the /orld' but (articularl! to students in the
develo(in* /orld.
The im(etus for develo(in* the business fundamentals te"t as the second of the (roof of conce(t te"ts /as based
on the reali0ation that it is a mistake to teach information s!stems in a vacuum' i.e. /ithout *ivin* students an
a((reciation of the or*ani0ational settin*s in /hich the! o(erate. Accordin*l!' a table of contents /as (re(ared and
volunteers /ere recruited to serve as cha(ter editors and revie/ers for a book on business fundamentals. ost
cha(ter editors are academics /ho /rote their o/n cha(ters /hile' in other cases' teams of *raduate students /rote
se*ments of a cha(ter as a (art of a course assi*nment. All contributions are *ratefull! ackno/led*ed and the
contributors names are noted at the be*innin* of each cha(ter.
?e learned some thin*s from develo(in* the t/o (roof of conce(t te"ts:
%acult! members are bus! (eo(le and, in most instances' a contributed book cha(ter is not as hi*hl!
re*arded for (romotion and tenure as a (eer-revie/ed article in a hi*hl!-rated academic -ournal. As a
result' deliver! times of cha(ters varied /idel!. %or e"am(le' one facult! member /rote his cha(ter over
s(rin* break in 1005' and t/o other cha(ters /ere finall! /ritten b! ne/ authors after it became clear that
the ori*inal authors /ere not *oin* to deliver.
In the meantime' (ublicit! received b! +lobal Te"t attracted the attention of authors /ho either had
manuscri(ts read! to be (ublished or had te"ts that /ere out of (rint Jmost often as a result of
consolidations in the (ublishin* industr!K that could be scanned' and (ublished &uickl! b! +lobal Te"t.
Conse&uentl!' /e are continuousl! searchin* for hi*h &ualit! titles in ever! hi*her education disci(line. The
(lan is to create communities to *et u(dated and to e"tend contributed te"ts.
The idea of havin* students /rite a book as a (art of a course assi*nment (roved to be bear fruit as a books
on IT ana*ement and Chan*e ana*ement /ere created b! *raduate classes at the Iniversit! of Denver
and the Iniversit! of ?ashin*ton' res(ectivel!' durin* the s(rin* of 100D. As discussed on the +T,
/ebsite' the LL book that /as created b! students at the Iniversit! of +eor*ia in 100B' and u(dated b!
successive classes since then' /as a ma-or ins(iration behind the idea of the +lobal Te"t ,ro-ect.
And no/ a bit about the focus of this te"t:
Business Fundamentals > A +lobal Te"t
1. The business eco-system: Your path to finding the pot of gold at the end of the rainbow!
The 6usiness %undamentals te"t is desi*ned to introduce students' (articularl! those in develo(in* economies'
to the essential conce(ts of business and other or*ani0ations. It does this b! focusin* on small' entre(reneurial
start-u(s' and e"(andin* the discussion in each cha(ter to include issues that are faced in lar*er or*ani0ations
/hen it is a((ro(riate to do so. Traditional business models are discussed as /ell as e6usiness models' /ith
a((ro(riate links to the I$ +lobal Te"t and other relevant /ebsites. All ma-or functional areas of modern
or*ani0ations are covered.
A common thread in most' if not all' cha(ters /ill be a((licable (rinci(les of sustainable develo(ment and
cor(orate social res(onsibilit!' althou*h these to(ics are covered in de(th in Cha(ter 21. In kee(in* /ith the
communit!-based content develo(ment (rinci(les of the +lobal Te"t ,ro-ect' active (artici(ation of members of the
*lobal communit! of academics' students' and (ractitioners in its creation and continuin* maintenance is stron*l!
encoura*ed.
Cha(ter 2 and 1 feature a uni&ue interactive o(tion for readers.
Misit htt(:<<///.mentoro*ra(h!.com to (ost the 6lo* 6ack assi*nments to share !our insi*hts and comments
on othersA (ostin*s.
9
1. The business eco-system:
Your path to findin the pot
of old at the end of the
rainbo!"
Editor: oll! Lavik JMatel International 6usiness $chool Los An*eles' I$AK
Reviewer: Debbi D 6rock J6erea Colle*e' I$AK
E"hibit 2: $trikin* *old
Ima*e created b!: Taissia 6elo0erova'
+ra(hic Desi*ner' Artist' 6A Candidate
at ,e((erdine Iniversit! Class of 100D
Dedication: In Meory o! "ancy #ach$ who believed in everyone%$ &tartup tie'
The business eco-system: Your path to findin the pot of old at the end of the
rainbo!"
There are man! /a!s to live !our life. :ne of the most e"citin* !et challen*in* /a!s to live !our life is to start
!our o/n business or /ork for someone /ho has their o/n startu(. ,eo(le /ho start their o/n businesses are
kno/n as entre(reneurs. Entre(reneurs throu*hout the /orld are e"tremel! enthusiastic individuals /ho devise
visionar! methods to accom(lish their ne/ venture ideas /hile simultaneousl! convincin* others to hel(.
Merriam-Webster Online defines the term entrepreneur as follows:Etymology:
Frenh, from Old Frenh, from entreprendre to underta!e " more at ENTERPRISE
#ate: $%&' : one who organi(es, manages, and assumes the ris!s of a business or enterprise
$
Are entre(reneurs born or madeC
There is a lon*-standin* discussion throu*hout the /orld that delves into /hether !ou are born (redis(osed to
become an entre(reneur or is it necessar! for !ou to /ork and stud! hard to make !ourself into one. There are
man! e"am(les of individuals /ho /ere told the! /ould never amount to an!thin* and !et the! /ent on to become
ver! successful entre(reneurs. $o' if !ou think that !ou are unlikel! to be an entre(reneur' (lease reali0e it is
(ossible for !ou to become an entre(reneur and to' (otentiall!' even become a ver! successful one. ?ith that said'
there are characteristics and an overall mindset !ou can ado(t that /ill hel( 7(redis(ose8 !ou to havin* a *reater
o((ortunit! of becomin* a successful entre(reneur. $ome of the most common characteristics of an entre(reneur
include the follo/in* attributes:
7The indset of an Entre(reneur8
Mision: Able to create and communicate an easil! understandable mission for /hat the ne/
venture does in order to successfull! launch a ne/ business. This is accom(lished /hile ins(irin*
others to -oin !ou in !our ne/ enter(rise.
Creativit!: Abilit! to in-ect ima*ination and uni&ueness into a ne/ business venture. It takes skill
and in*enuit! to create a ne/ venture e&ui((ed /ith strate*ies to outsmart the com(etition.
%ocus: Able to maintain the vision of the com(an! /ith un/averin* dili*ence. ItAs ver! eas! to *et
sidetracked es(eciall! if !ou find it necessar! to evolve the ori*inal vision. Ironicall!' /e have
encountered man! successful entre(reneurs /ho *et bored easil!...
,assion: Desirin* to succeed under !our o/n steam NinitiativeO on a business venture...
Drive: ,ossessin* intrinsic ener*! to accom(lish the business *oal even in the face of adversit!.
,erseverance: Able to kee( *oin* even /hen faced /ith seemin*l! insurmountable obstacles.
:((ortunistic ;ature: $ees the (ossibilities even before the! e"ist. Can take advanta*e of an
u(comin* trend or unite unrelated (rocesses to create a uni&ue business venture...
,roblem $olvin* Abilit!: Thrives on comin* u( /ith solutions to com(le" challen*es...
$elf-disci(line: Able to be or*ani0ed and re*imented in (ursuit of a successful business venture.
%ru*alit!: Hno/s ho/ to stretch ever! cent so that e"(enditures are as lo/ as (ossible.
2 erriam-?ebsterAs :nline Dictionar!' 7erriam-?ebster :nline'8 htt(:<<///.merriam-
/ebster.com<dictionar!<entre(reneur JAssessed' Au*ust 30' 1005K.
D
Em(ath!: Able to (ut !ourself in anotherAs shoes and therefore able to sho/ sensitivit! and
understandin* of /hat others are communicatin* in the startu( environment...
$ocial @es(onsibilit!: Ethics' carin* and humanitarianism are characteristics that are commonl!
found in toda!As entre(reneurs...
$(iritualit!: ?e have found that successful entre(reneurs have often devoted time to s(iritualit!
develo(ment. editation and (ositive affirmations are t/o common e"am(les of s(iritualit!.
+ood Timin*: Able to identif! a market o((ortunit! and kno/ /hen itAs the o(timum time to
launch a ne/ venture or e"(ansion of an e"istin* enter(rise.
Luck: Can a (erson be (redis(osed to be luck!: Is luck a human behavior or a karmic universal
(redis(ositionC8
1
Read on: Cha(ter 1 is dedicated to this to(ic and delves dee(l! into 7The mind of an entre(reneur8.
(log (ac) *: Mind$et
(log (ac): Is an entre(reneur born or madeC
?hat characteristics are necessar! for an entre(reneur to be successful and /h!C ?hat additional
entre(reneurial mindset characteristics could be added to the list and /h!C
+o to: htt(:<<///.entoro*ra(h!.com and make !our case.
The business eco-system
?hether !ou (ossess the characteristics of an entre(reneurial mindset' or /ork for someone /ho does' !ou can
still be instrumental in startin* a ne/ venture b! understandin* the business eco-s!stem. ?hat is a business eco-
s!stemC A business eco-s!stem is a set of business com(onents that form the foundation of a ne/ ventureAs
creation. %i*urativel!' the business eco-s!stem is like a /heel that rolls !our ne/ venture for/ard /hich is /h! /e
re(resent the business eco-s!stem in a /heel-sha(ed model.
1 +The indset of an Entre(reneur8 is re(rinted and ada(ted /ith (ermission from entoro*ra(h!' Inc. P 1005.
All @i*hts @eserved. Entre(reneurial arketin*G @eal $tories and $urvival $trate*ies b! oll! Lavik and 6ruce
6uskirk' introduction (a*es ""viii-""".
E"hibit 1: 6usiness eco-s!stem /heel
The 6usiness Eco-s!stem ?heel is re(rinted and ada(ted from the
Entre(reneurial arketin* ?heel /ith (ermission from entoro*ra(h!' Inc.
P 1005. All @i*hts @eserved. Entre(reneurial arketin*G @eal $tories and
$urvival $trate*ies b! oll! Lavik and 6ruce 6uskirk' ,reface' (a*e ""ii.
22
E"hibit 3: Ca(tion: @isin* sun
The sun rise of your ne! business
#ccessin mar$et opportunity: the initial rim of the !heel
arket :((ortunit! is (ositioned at the to( of the 6usiness Eco-s!stem ?heel for a reason. Ever! ne/ venture
starts /ith a sin*le seed or kernel of an idea to do somethin* in business that /ill result in mone! bein* e"chan*ed.
$ince there is al/a!s some risk associated /ith startin* a ne/ business' !ou /ill have to take s(ecial care to (lant
the idea seeds of !our ne/ venture in a /a! that allo/s these seeds to some da! bloom into a successful venture.
?hen to (lant !our market o((ortunit! seeds
?ithout a doubt itAs challen*in* to kno/ /hen to move for/ard and (lant !our ne/ venture ideas in the
7business *arden8 /here !ou /ant to *ro/ !our career.
Entre(reneurs /ho are considerin* movin* for/ard /ith a ne/ venture idea can utili0e the follo/in* &uestions
and the 7$to( and +o $i*ns for Accessin* arket :((ortunit! atri".8
7$to( and +o $i*ns for Accessin* arket :((ortunit! atri"8
QIs there a customer for this (roduct or serviceC Is there someone /ho /ill bu! the (roduct or
service !ouRre considerin* sellin*C 3ou canRt effectivel! ans/er this &uestion until !ou have
(ersonall! s(oken to the (otential customer and ascertained that this (erson /ill bu! !our (roduct.
3ou need to kno/ as much about this customer as the customer kno/s about himself: ?hat are the
demo*ra(hics of this customerC ?hat influences his bu!in* behaviorC ?hat factors could lead to
this customer chan*in* his mind about bu!in* the (roduct or servicesC ?hat /ill be the im(act of
a crisis durin* an emer*in* trendC
#hat will it co$t to a)e a $ale to thi$ cu$toer, If there is a common (itfall for
entre(reneur' itRs *reatl! underestimatin* the cost to ac&uire and re(eatedl! sell to a customer. The
entre(reneurial marketer must account for ever! last e"(ense it /ill take to make the sale.
Commonl! missed e"(enses include: staff time' travel and related e"(enses' overhead for office'
(a!roll ta"es' social securit! em(lo!er matchin* e"(enses J/hich occurs in the Inited $tates so
!our countriesR e&uivalent'K unem(lo!ment (a!roll related e"(enses' marketin* e"(enses' and the
overall amount of time it takes to make a sale.
I$ y tiing right !or thi$ ar)et opportunity, 3ou /ill have a brief /indo/ of o((ortunit!
to launch !our ne/ venture or e"(ansion of an e"istin* enter(rise. is-ud*in* !our timin* is often
the difference bet/een success and failure /ith assessin* market o((ortunit!. If !ou are too earl!'
!ou have the ri*ht (roduct or service but !our market is not read! for it !et. If !ou are too late'
*iant com(etitors ma! have ac&uired a lo!al follo/in*' blockin* ne/ entries to the market.
Can I $ell thi$ product or $ervice !or a pro!it, Even if !ou have an e"istin* customer' and
have accuratel! estimated /hat it /ill cost !ou to ac&uire that customerG !ou mi*ht not have a
sustainable business model until revenues out/ei*h the e"(enses...3ou need to find the
incremental ste(s !ou can take to *et to (rofitabilit!. This is not eas!. A*ain' there is no road ma('
but remember that (atience is needed to reach (rofitabilit!.8 J:ne solution that is becomin* a
common (ractice throu*hout man! (arts of the /orld is micro-financin*. icro-financin* is /here
a small loan is made available to an entre(reneur in a develo(in* countr!. ?hile micro-financin* is
ar*uabl! one form of financin* micro-financin* has been documented to be a more sustainable
form of financin* because the amount of the loan is made in such a small JmicroK amount that the
reci(ient of the loan does not have to levera*e the startu(Rs best interests and assets in order to (a!
the loan back. The small amount of mone! loaned to the entre(reneur can usuall! be (aid back
from the revenues that the ne/ venture is *eneratin*. Check out this micro financin* /ebsite:
htt(:<<///.acion.or*.K
76e o(en and fle"ible and reco*ni0e that alon* the /a! to (rofitabilit! !ou mi*ht stumble on to a
(roduct or service that is in hi*her demand than the ori*inal conce(t.
?hen do I *ive u( on m! (roduct or serviceC ?hen should I (ull u( the roots of m! ne/ ventureC
In the characteristics of an entre(reneur...(erseverance /as listed. There is a (oint' ho/ever'
/here !ou need to 7(ull the (lu*8 and refocus !our ener*ies. 3ou kno/ !ou have reached this (oint
/hen:
3ou have run out of resources and canAt further levera*e an! of the methods su**ested in this book.
The customers /ho said the! /ould bu! !our (roduct durin* !our research (hase are no lon*er
interested.
23
3ou canAt effectivel! market to !our customer.
It costs !ou more than !ou make to sell !our (roduct or service.
Durin* market o((ortunit! assessment' there are times /hen the entre(reneur needs to 7hit the
brakes8 and sto(. ;ot sto((in* fast enou*h can lead to a failed business and<or bankru(tc!. There
are also times /hen an entre(reneur should 7ste( on the accelerator8 and drive on to ne/ market
o((ortunit! territories. Hno/in* /hen to sto( and *o in !our ne/ venture market o((ortunit!
assessment isnAt eas!.
To hel( !ou decide /hen to move for/ard /ith and /hen to fore*o an o((ortunit!' (lease see the
7$to( and +o $i*ns for Assessin* arket :((ortunit! atri".Q ItRs common for an entre(reneurial
marketer to *et cau*ht u( in /hat seems like a *reat idea or business conce(t. This matri" is a
concise' eas! to reference and some/hat sim(listic /a! to make decisions on -ud*in* market
o((ortunit!. This matri" su**ests four ma-or causes for a ne/ venture to not find a (rofitable
market o((ortunit!.
@eco*ni0in* /hen !ou are on the ver*e of *oin* throu*h a $to( $i*n /ithout brakin* is critical. 3ou
can refer back to these sto( si*ns in this matri" as constant reminders of /hen to turn !our market
o((ortunit! strate*! in another direction.8
E"hibit B: $to( and +o $i*ns for Assessin* arket :((ortunit! atri" 7?hen to Access
arket :((ortunit!8 te"t and 7$to( and +o $i*ns for Assessin* arket :((ortunit! atri"8
ada(ted and re(rinted /ith (ermission from entoro*ra(h!' Inc. P 1005. All @i*hts
@eserved. Entre(reneurial arketin*G @eal $tories and $urvival $trate*ies b! oll! Lavik and
6ruce 6uskirk' ini odule on Assessin* arket :((ortunit!' (a*es """i"-"li.
Business Fundamentals 2B A +lobal Te"t
If !ou encounter an! of the four +o $i*ns /hen !ou are assessin* market o((ortunit!' donAt take
time out to (at !ourself on the back. This is because if !ou look over !our shoulder !ou ma! see
someone else reali0in* /hat !ou have discovered. Hee( 7drivin* on8 if !ou are encounterin* all +o
$i*ns.8
3
Read on: Cha(ters 3 and > discuss market o((ortunit! in *reater detail.
(log (ac) 2: -o &ign$
(log (ac): Anal!0e !our ne/ ventureAs market o((ortunit!G do !ou have all 7+o8 si*nsC If !ou have all or some
7$to(8 si*ns /hat can !ou do to remove the roadblocks that are causin* !our 7$to(8 si*nsC Enter !our strate*! for
obtainin* all 7+o8 si*ns at htt(:<<///.ent oro*ra(h!.com .
%ales: the essential rim of the !heel
E"hibit =: The 6usiness Eco-$!stem ?heel and sales
3 7?hen to Access arket :((ortunit!8 te"t and 7$to( and +o $i*ns for Assessin* arket :((ortunit! atri"8 ada(ted and
re(rinted /ith (ermission from entoro*ra(h!' Inc. P 1005. All @i*hts @eserved. Entrepreneurial Mar!eting) *eal
+tories and +ur,i,al +trategies by Molly -a,i! and Brue Bus!ir!, Mini Module on .ssessing Mar!et Opportunity, pages
///i/-/li0
2=
$ales are de(icted as the inter-connectin* factor of each business com(onent on the Eco-s!stem ?heel because
/ithout sales !ou /onAt have the revenue necessar! to kee( !our business *oin*. $ales hel( (rovide the overall
sha(e of the /heel and are a ma-or com(onent of an entre(reneursA /ork. ?hen startin* a ne/ venture !ou need to
convince others of !our vision and eventuall! brin* on strate*ic (artners and vendors to accom(lish !our vision.
3ou /ill need to sell !our (roduct and<or service to others. $ellin* is a skill that absolutel! can be learned and
im(roved u(on. Also' the more (eo(le !ou contact to make a sale' the *reater the odds !ou /ill actuall! sell
somethin*.
?hat /ill I sellC
3ou can sell a (roduct or service. A (roduct is a (h!sical item /hile a service is somethin* !ou /ould im(lement
or e"ecute on behalf of someone else.
.roduct idea$ to con$ider $elling
Eand-crafted art and artifacts for e"(ortin*
%ruit for sellin* at a fruit stand or usin* in the (roduction of cosmetics
Eone! that !ou (roduce as a bee kee(er
ustard condiments (roduced from mustard seeds
Eandcrafted furniture
,aintin*s b! emer*in* artists
@ec!cled *oods made into (roducts such as (urses made from rec!cled -uice and soda containers
A restaurant that offers food menus that others en-o! eatin*
3o*urt served in containers that are edible
Idea$ !or $ervice$ to con$ider o!!ering
,rovidin* education to children as /ell as adults in a school
,urif!in* /ater at the site of /ells that ma! be tainted /ith arsenic
,rovidin* *uide services to travelers
Develo(in* marketin* cam(ai*ns for local businesses
@unnin* food stands for others
,rovidin* tailorin* services
anufacturin* furniture for businesses and residences
:fferin* cookin* services to families
$ellin* /ireless (hones for (hone cor(orations
,rovidin* (eo(le to build buildin*s' houses' roads and or brid*es
Business Fundamentals 2> A +lobal Te"t
:fferin* out-sourced from other countries call center services
,rovidin* com(uter consultin* services
,laces for ins(iration
/0iva J///.kiva.or*K is the /orldRs first (erson-to-(erson micro-lendin* /ebsite' em(o/erin* individuals to
lend directl! to uni&ue entre(reneurs in the develo(in* /orld.8
B
Hiva (rovides a list of entre(reneurs /ho seek
loans and a descri(tion of these entre(reneursA business conce(ts. Misit the Hiva /ebsite to read the ins(irational
stories of these entre(reneurs. htt(:<<///.kiva.or*<a((.(h(C(a*eSbusinesses .
=

71id to 1rti$an$ JATAK' Jhtt(:<<///.aidtoartisans.or* K an international non(rofit or*ani0ation' is a
reco*ni0ed leader of economic develo(ment for the craft industr!. 6! linkin* artisans to ne/ markets and bu!ers to
culturall! meanin*ful and innovative (roducts' ATA (rovides needed economic o((ortunities to artisans /hile
(reservin* the beaut! of *lobal handmade crafts.8
>
%inancin*: the fundamental rim on the /heel
:ne of the *reatest talents that most successful entre(reneurs (ossess is the abilit! to (ersuade others to invest
funds and resources in a startu( durin* the idea creation (hase of a ne/ venture. 3ou are not alone if !ou have
ma-or concerns about attractin* the finances !ou need to *et !our startu( idea 7off the *round8. If !ou are readin*
this and thinkin* !ou do not kno/ an!one /ho /ould consider investin* in !our startu( /e su**est transformin*
!our thinkin* into a more constructive thou*ht (rocess in /hich !ou believe in !ourself and !our o/n abilit! to
achieve financin*.
2inancing opportunitie$
Micro3!inancier$ JDo a +oo*le search at ///.*oo*le.com usin* the ke! /ord Qmicro-financeQ to find
(otential micro-financiers that !ou ma! /ant to research as one method of financin* !our startu( costs.K
2aily traditionall! is the first (lace to look for funds to (a! for some of the startu( costs associated /ith a
ne/ venture. Even if !our famil! has no resources to offer !ou can still talk to famil! members about
introducin* !ou to (eo(le the! kno/ /ho mi*ht be able to hel(. ore mone! then !ou can ima*ine has
been raised in this manner.
2riend$' even casual ac&uaintances' can at times (rovide financin* and resources for a startu(. Even if a
friend is not able to directl! hel(' !ou should ask each friend or (erson !ou contact for hel( to also (rovide
!ou /ith 3 names of others the! kno/ /ho ma! be able to hel(.
-overnental $upport is also a (ossibilit!. If a((licable' !ou can also let the local non-*overnmental
a*enc! associated /ith /hat !ou are doin* kno/ !our needs in case there is some su((ort available.
(arter or trade is a method b! /hich !ou could (rovide a needed service such as consultin*<mana*ement
advice in return for the resources needed for !our startu(.
B Hiva' 7About: ?hat is HivaC'8 htt(:<<///.kiva.or*<about JAccessed #anuar! 22' 100DK.
= Hiva' 7Lend'8 htt(:<<///.kiva.or*<a((.(h(C(a*eSbusinesses JAccessed #anuar! 22' 100DK.
> Aid to Artisans' 7About Is'8 htt(:<<///.aidtoartisans.or* JAccessed #anuar! 21' 100DK.
29
&aving$ take a lon* time and effort to accumulate in the amount most (eo(le need to start a ne/ venture.
There are man! risks involved and !ou ma! not ever be able to re(lenish the amount of mone! !ou took
from !our savin*s to invest in a startu(. :n the (ositive side thou*h' if !ou use !our o/n savin*s !ou do not
have a loan to (a! back.
(an) loan$ are not usuall! available to earl!-sta*e entre(reneurs unless !ou have a track record of a
(revious success and<or the assets to (ut u( such as a home !ou o/n in return for securin* the bank loan.
"etwor)ing refers to attendin* events' conferences' seminars' and an! activit! /here b! !ou can meet
others /ho mi*ht be able to hel( !our further !our startu(Rs develo(ment.
4nline networ)$ are online /ebsites /here !ou can connect /ith (eo(le !ou kno/ to ultimatel! *ain
connections to (eo(le the! kno/. :ne /ell-kno/n online net/ork is LinkedIn at ///.linkedin.com.
Accordin* to the About LinkedIn /ebsite' 7LinkedIn is an online net/ork of more then 30 million
e"(erienced (rofessionals from around the /orld' re(resentin* 2=0 industries.8
9
LinkedIn is available in
En*lish' %rench and $(anish. 3ou can use the search field at the to( of ever! LinkedIn /eb (a*e to search
for (eo(le and com(anies that mi*ht be /illin* to finance !our startu(. 3ou can si*n onto LinkedIn and
connect /ith others that /ould in turn (otentiall! be /illin* to connect !ou to the (eo(le !ou are tr!in* to
meet.
Meber$hip$ in communit! or*ani0ations ma! be a (lace /here !ou can meet like-minded individuals
interested in !our startu( idea. Ise the o((ortunit! to share some information about !our startu( /ith the
(eo(le !ou meet. 3ou ma! find others /ho /ant to hel( !ou make !our startu( a success.
Read on: Cha(ter 20 contains more material on financin* !our business.
%tratey: the tactical rim on the !heel
$trate*! is the method !ou utili0e to *o about achievin* the underl!in* *oal of !our startu(. ItAs recommended
that (rior to s(endin* an! mone! on !our ne/ venture that !ou first come u( /ith the strate*! or strate*ies !ou
(lan to utili0e to make !our startu( successful. Devisin* the ri*ht strate*! often re&uires a *reat deal of market
research on the histor! of !our com(etition' (otential customer needs and /ishes as /ell a takin* into
consideration the economic climate and cultural factors that could im(act !our startu(.
E5aple$ o! $tartup $trategie$:
6ow co$t leader b! char*in* less than the com(etition
6u5ury co$t leader b! char*in* more than the com(etition
2ir$t to ar)et b! havin* !our (roduct or service in the market (lace (rior to an!one else. This strate*!
is often referred to as the 7first mover advanta*e.8
Creating $u$tainable growth for a startu( means that the ne/ venture /ill eventuall! make more
mone! then it takes to o(erate the com(an! and that the (rofitabilit! of this venture is (ossible over an
e"tended (eriod of time.
9 LinkedIn' 7About LinkedIn' htt(:<<///.linkedin.com<staticCke!Scom(an!TinfoUtrkShbTftTabtli JAccessed
Au*ust 2=' 1005K.
Creating $ocietal wealth means the com(an! !ou are startin* /ants to create a (roduct or service that
/ill make the /orld a better (lace. The (roduct or service !ou (lan to create /ill enhance societal value.
Educational institutions and schools are *ood e"am(les. Another e"am(le is (rovidin* foods in the market
(lace that are nutritional in value can have a ma-or (ositive im(act on a societ!As health.
.aradig $hi!ting brand for a startu( means creatin* a (roduct or service that revolutioni0es the /orld4
E"am(les include the first develo(ers of air(lanes that not onl! manufactured the air(lane but also found a
/a! to commerciali0e the (roduct in the market (lace. An emer*in* (roduct in this cate*or! is s(ace shi(s.
Althou*h it ma! sound far-fetched toda!' there are several cor(orations toda! develo(in* the desi*n and
(lans for the da! /here b! /e *et in our s(ace shi( the /a! /e *et in our car or on our bic!cle. $ome
/ealth! business o/ners are even toda! addin* s(ace (orts to their *ara*es.
Read on: Cha(ters 3 and > both contain more information in settin* !our strate*!.
(log (ac) 7: &trategy
(log (ac): Ima*ine that !ou are startin* a ne/ venture utili0in* the strate*! of creatin* a (aradi*m shiftin*
brand. ?hat (roduct and or service mi*ht !ou develo( to im(lement such a strate*!C
+o to: htt(:<<///.entoro*ra(h!.com and share !our idea as /ell as (ost a comment on /hat !ou think of t/o
other ideas that others shared re*ardin* their (aradi*m shiftin* idea.
E"hibit >: id da!
Ima*e created b!: Taissia
6elo0erova' +ra(hic Desi*ner' Artist'
6A Candidate at ,e((erdine
Iniversit! Class of 100D
2D
Brandin !ill ma$e your blossoms bloom"
Brandin: The memorable rim on the !heel
6randin* is the core foundation of !our startu( that is necessar! to make !our (roduct or service blossom and
*ro/. 76randin*8 is a commonl! used marketin* term that refers to a distinctive ima*e' usuall! in the form of a lo*o
or com(an! mark that re(resents a com(an! or (roduct. In recent !ears a com(an!As brand has become an asset
/ith a financial /orth kno/n as 7brand e&uit!8. The marketin* use of the /ord 7brandA is borro/ed from the
(rocess of burnin* a rancherAs mark into the hide of a calf for identification (ur(oses. ?hen buildin* !our brand'
the follo/in* checklist is hel(ful for makin* !our startu( bloom.
6randin* coachin*
?hat is the meanin* behind the messa*e !our (roduct and<or service re(resentsC
Coachin*: Tr! /ritin* the histor! of /h! !ou are startin* this venture and /hat is the dee(er meanin* behind
/h! !ou are doin* this and /hat !ou ho(e the le*ac! of the ne/ venture /ill be in the market (lace. @evie/ the
histor! and (ull out an! information that seems relevant to/ard the meanin*. Then /rite u( some draft messa*es
!ou ho(e to communicate /hen marketin* the (roduct or service.
?hat is the brand essence of !our ne/ (roduct or serviceC
Coachin*: The brand essence of !our venture is the 7heart and soul8 behind the (roduct and service !ou (lan to
develo(G the core D;A of !our (roduct or service. The brand essence is the foundation of !our brands true identit!
and the brand essence t!(icall! sta!s the same over time. An e"am(le of brand essence is the medical cor(oration
International ,atient Assistance Centre head&uartered in $in*a(ore. A revie/ of the cor(orationAs /ebsite
Jhtt(:<<///.i(ac.s*<en<About<
5
K leads one to believe the brand essence for the medical com(an! is 7dedicated and
e"(erienced (atient care teams8. If !ou are not able to come u( /ith the brand essence for !our venture tr! reverse
en*ineerin* the (rocess b! askin* !ourself /hat /ould !ou like the brand essence of !our venture to be and then
make a list of action items !ou /ould have to do to achieve creatin* a com(an! /ith this t!(e of brand essence.
?hat is the brand advanta*eC
Coachin*: ?hat sets our brand a(art from that of the com(etitionC
Tr! ans/erin* the follo/in*:
7?hat is distinctive about the brandC
?hat differentiates this brand from the com(etitorAsC
Eo/ do customers (erceive the brandC
?hat emotion does the brand evokeC
?ho a((reciates the brandC ?h!C
?hat do customers *et from the brandC
?here do customers *o to find the brandC
5 I,AC' International ,atient Assistance Care' ///.i(ac.s*<en<About< JAccessed #anuar! 1' 100D.K
?hat do customers see in the brand that the founders didnAtC8
D
+oure: 7Inderstandin* the Essence of 6rand Advanta*es8 &uestions re(rinted /ith (ermission
from entoro*ra(h!' Inc. P 1005. All @i*hts @eserved. Entre(reneurial arketin*G @eal $tories
and $urvival $trate*ies b! oll! Lavik and 6ruce 6uskirk' 6randin* that ?orks' (a*e 9D.
?hat can !ou do from the start to make sure that others cannot use the mark or brand nameC
Coachin*: Investi*ate /hat the trade-markin* re*ulations are for (rotectin* !our brand. ?hat are the
*overnmental (rocesses for securin* a trademark for !our brandC 71rade mar!ing8 is the (rocess one *oes throu*h
to re*ister /ith a *overnment entit! the te"t and or visual de(iction of !our business name and' if a((licable' the
business mark that accom(anies the venture. A 7logo8 is the /ord utili0ed t!(icall! to describe the visual de(iction
of the business name.
If !ou (lan to trademark !our lo*o or the te"t version of !our business name for (rotection !ou can find out the
necessar! details of this (rocess at the ?orld Intellectual ,ro(ert! :r*ani0ation at:
htt(:<<///./i(o.int<(ortal<inde".html.en
20
b! s(ecificall! utili0in* the adrid $!stem for International
@e*istration arks e"(lained further at:htt(:<<///./i(o.int<madrid<en< .
22
As of :ctober 19' 1005' countriesA statuses are listed re*ardin* the adrid A*reement Concernin* the
International @e*istration of arks and the ,rotocol @elatin* to the adrid A*reement Concernin* the
International @e*istration of arks. Mie/ this information at:
htt(:<<///./i(o.int<e"(ort<sites<///<treaties<en<documents<(df<madridTmarks.(df.
21
Lookin* for ins(irationC
3ou can find man! e"am(les of lo*os in the (rocess of bein* trademarked in the Inited $tates throu*h the
Inited $tates Trademark and ,atent :ffice /ebsite that (osts online 7The Trademark +a0ette8. Eere is an e"am(le
of one issue of The Trademark +a0ette: htt(:<<///.us(to.*ov</eb<trademarks<tmo*<10052130T:+.(df.
23
D 7Inderstandin* the Essence of 6rand Advanta*es8 &uestions re(rinted /ith (ermission from entoro*ra(h!'
Inc. P 1005. All @i*hts @eserved. Entre(reneurial arketin*G @eal $tories and $urvival $trate*ies b! oll!
Lavik and 6ruce 6uskirk' 6randin* that ?orks' (a*e 9D.
20 ?orld Intellectual ,ro(ert! :r*ani0ation' htt(:<<///./i(o.int<(ortal<inde".html.en JAccessed #anuar! 22'
100DK.
22 World Intellectual ,ro(ert! :r*ani0ation' 7adrid $!stem for International @e*istration arks'8
htt(:<<///./i(o.int<madrid<en< JAccessed #anuar! 22' 100DK.
21 ?orld Intellectual ,ro(ert! :r*ani0ation' 7adrid A*reement Concernin* the International @e*istration of
arks and ,rotocol @elatin* to the adrid A*reement Concernin* the International @e*istration of arks'8
htt(:<<///./i(o.int<e"(ort<sites<///<treaties<en<documents<(df<madridTmarks.(df JAccessed #anuar! 22'
100DK.
23 Inited $tates Trademark and ,atent :ffice' 7The Trademark +a0ette'8
htt(:<<///.us(to.*ov</eb<trademarks<tmo*<10052130T:+.(df JAccessed December 1B' 1005K.
12
:nce !ou have secured the trademark for !our business name' !ou then (rocess a le*al standin* to (rotect
a*ainst other businesses usin* !our com(an! name in the cate*or! !ou are doin* business in. Trademarks are
considered assets to a business and have a monetar! value if and /hen !ou /ant to sell or mer*e !our venture.
The 6rand Identit! +uide: A blue(rint to/ard success
Once !ou have develo(ed !our business name into a lo*o and are in the (rocess of trade-markin* that name'
man! entre(reneurs be*in /ides(read use of the lo*o in marketin* materials to raise a/areness of their (roduct or
service to their tar*eted customers. ?ell-kno/n branded businesses assi*n someone the task of makin* sure the
lo*o is (ro(erl! utili0ed' /ith the correct color ink' in the correct si0e' in the correct location of the (a*e la!out
es(eciall! /hen used in con-unction /ith other lo*os. A st!le *uide for the use of the lo*o is often called a 7brand
identit! *uide8.
(log (ac) 8: (rand Identity
(log (ac): 6rainstorm the develo(ment of a 6rand Identit! +uide to illustrate the use of !our lo*o in an!
materials !ou or others create to market the (roduct or service !ou /ould like to create.
?hat is !our brand essenceC
?hat is !our brand advanta*eC
?hat font and font si0e /ill !ou utili0e for !our lo*oC
?hat if an! visual ima*e<dra/in*<illustration /ill accom(an! the te"t of !our lo*oC
?hat colors /ill !ou utili0e for !our lo*oC Isin* the (antone color chart' select the e"act colorJsK !ou /ish to
utili0e.
?ill !our lo*o be de(icted differentl! if itAs used in a hori0ontal vs a vertical (a*e la! outC
?hat is the smallest si0e !our lo*o can a((earC
?hat rules *overn !our lo*oAs use /hen it a((ears /ith lo*os from other com(anies such as ma! be the case
/ith a s(onsorshi(C
In /hat countries /ould !ou like to trademark !our lo*oC
Is there an!thin* else !ou /ould like to share about the brand !ou (lan to createC
+o to: htt(:<<///.entoro*ra(h!.com and share an outline of !our 6rand Identit! +uide.
%ta$eholders: the connecti&e rim on the !heel
3our brand cannot bloom unless !ou ensure that !ou develo( !our brand in a /a! that /ill (lease ever!one /ho
comes into contact /ith !our business. The (eo(le /ho come in contact /ith !our businessAs brand are kno/n as
!our startu(As stakeholders. ?ho /ill be !our startu(As stakeholdersC 7Take aim8 carefull! as !ou decide. Consider
establishin* contacts /ith some of the follo/in* su**ested stakeholder cate*ories common to ne/ venture
enter(rises mentioned in the 7$tartu( $takeholder Arro/8.
E"hibit 9: 7$tartu( $takeholder Arro/8 created b! oll! Lavik' founder' entoro*ra(h!' Inc.'
#anuar! 21' 100D. @e(rinted /ith (ermission from entoro*ra(h!' Inc. P 100D. All @i*hts @eserved.
The stems of ro!in startups: definitions of 'startup sta$eholder arro!( selected
terms
$trate*ists: A strate*ist is a skilled (erson /ho ma! be ade(t at takin* !our overall vision for the business and
develo(in* the (lan of action for achievin* the overarchin* *oals. $trate*ists are e"(erts at comin* u( /ith the
/innin* maneuvers for la!in* the foundation of havin* a successful venture. The term strate*! /as ori*inall!
utili0ed to define militar! maneuver (lans.
E"hibit 5: id da! JAda(tedK
&trategic advi$or$: Advisors are (eo(le t!(icall! /ith e"(erience in an area that !ou /ish to learn more about.
Advisors im(art valuable /isdom that !ou can utili0e to learn valuable lessons re*ardin* *eneratin* revenue and
(rofits for !our (lanned venture.
Chaber$ o! Coerce: Chambers of Commerce are lar*e membershi(s of business federations
re(resentin* hundreds and sometimes thousands of business o/ners.
"etwor): 3our business contacts that can hel( !ou toda! or in the future accom(lish !our *oals. Entre(reneurs
need vast net/orks of (eo(leRs assistance to achieve the ventureRs *oals.
%inancier$: %inanciers are com(rised of (eo(le or a business entit! that (rovides financial resources for !our
ne/ business to utili0e.
icro3!inancier$: These are (eo(le /ho make cash loans in ver! small amounts to entre(reneurs in emer*in*
countries to (eo(le /ho have ver! little if an! resources. :ften the (eo(le /ho receive micro-financed loans have
little to no e"(erience in business. A /ebsite /here (eo(le can see micro-financin* in action is located at:
htt(:<<///.accion.or*.
9enture capitali$t$: These are (eo(le /ho have a hi*h net /orth of resources or are (art of an institution that
has a fund of hi*h net /orth. Menture ca(italists seek out entre(reneurs /ho are startin* ne/ ventures that have an
o((ortunit! to make a lar*e and fast return on the financial resources invested. The main cate*or! that venture
ca(italists have (reviousl! invested in has been the technolo*! industr!. A venture ca(italist does not make an!
mone! until the ne/ venture sells' mer*es or makes an initial (ublic offerin* kno/n as an I,: /hen for the first
1B
time that business offers common stocks to the (ublic. Entre(reneurs have had a Qlove and hateQ relationshi( /ith
venture ca(italists because if the ne/ venture doesnRt make the antici(ated return on investment (redicted the
venture ca(italists usuall! has the le*al ri*ht to take over (art or all of the o/nershi( of the ne/ venture leavin* the
entre(reneurshi( often out of the venture from that (oint for/ard. Menture ca(italists also have the abilit! to
(rovide the cash as /ell as mentorin* resources needed for the ne/ venture to thrive.
1ngel inve$tor$: These are (rivate individuals that t!(icall! have lar*e amounts of resources to invest in !our
startu(. An*el Investors choose to invest in !our startu( because the! share a common interest in /hat !ou are
doin*.
&hareholder$: A (erson /ho o/ns or holds stock in a business.
9e$ting: Mestin* occurs /hen a (erson associated /ith a business venture is *ranted le*all! the ri*ht to (ossess
stock-o(tions if the! /ork for a s(ecified term. 6! /a! of e"am(le a (ersonRs stock o(tions could vest over a three
!ear (eriod /ith the (erson earnin* stock-o(tions incrementall! and full! vestin* in all the (romised stock-o(tions
at the com(letion of the three !ear term.
Mentor$: These are role models /ho !ou can receive instruction' advice and coachin* from re*ardin*
im(ortant lessons to follo/ to make !our ne/ venture a success.
Mini$trie$: These are offices that (rovide service to the countr! or state of ori*in.
Con$ulate$: These are the official offices of a *overnment a((ointee. These offices can be located in the
countr! of the *overnment that made the a((ointment and or abroad ;+:s: $tands for non-*overnmental
or*ani0ation and ;+:s are run b! (eo(le /ho are not (art of the *overnment althou*h *overnments can (artiall!
fund an ;+: as lon* as the fundin* *overnment a*enc! doesnRt retain an! t!(e of re(resentative or leadershi( role
in the ;+:. In the Inited $tates a t!(e of ;+: is referred to as a non-(rofit or*ani0ation. ;+:s t!(icall! have
or*ani0ation missions and *oals that are dedicated to creatin* *reater societal value versus e"istin* to sta! solel!
focused on *eneratin* (rofits.
1d agency: This is a com(an! that !ou hire to develo( for (a! advertisements to ensure that !our tar*eted
market is a/are and enticed to (urchase !our (roduct or service.
.R agency: A com(an! that !ou hire to *enerate favorable (ublicit! about !our ne/ business to (eo(le /ho
have been found throu*h market research (otentiall! interested in bu!in* !our (roduct or service
eMar)eter$: A *rou( of (eo(le that !ou hire to im(lement !our di*ital media strate*! for the online and
(otentiall! via cell (hone marketin* of !our ne/ business. earketers utili0e ultimatel! an! form of electronic
media to (romote and advertise !our business.
;etroot$: This /ord is a ne/l! coined termed that combines (ortions of the /ords Internet and *rassroots to
define a t!(e of marketin* that tar*ets blo*s and di*ital media in order to cause (o/erful action for achievin* !our
ne/ venture *oals. The term ori*inall! described (olitical action and has recentl! been utili0ed to describe business
action. 6lo**ers: This term describes someone /ho kee(s an online diar!<-ournal<lo* of his or her activities or
comments on othersR activities. :ne of the most (o(ular blo*s in the /orld is about entre(reneurs and is ke(t b!
Business Fundamentals 1= A +lobal Te"t
+u! Ha/asaki called' Eo/ to Chan*e the ?orld: A (ractical blo* for im(ractical (eo(le. Check it out:
htt(:<<blo*.*u!ka/asaki.com.
&ocial networ)$: These are /ebsites dedicated to fosterin* a communit! of individuals around a to(ic. ?e
mentioned LinkedIn earlierG %acebook is another social net/orkin* e"am(le. Accordin* to %acebookRs /ebsite'
Qillions of (eo(le use %acebook ever!da! to kee( u( /ith friends' u(load an unlimited number of (hotos' share
links and videos' and learn more about the (eo(le the! meet.8
2B
@eaders of this cha(ter are invited to -oin m! %acebook (a*e b! re*isterin* to become a %acebook member at
htt(:<<///.facebook.com Jit is free and a social net/orkin* siteK and then enter oll! Lavik into the search field
and click on m! name. Then select add as a friend.
:e5ting: This is /hen !ou t!(e in a messa*e /ith (hotos or in some cases a video via a cell (hone
-ra$$root$: This is a (o/erful movement of ever! da! (eo(le for a cause. Currentl! there is a *rassroots
movement to (rotect the environment throu*hout the /orld.
9iral: This ha((ens /hen a marketin* messa*e is transmitted throu*h (eo(le e"citedl! and enthusiasticall!
s(readin* the messa*e b! tellin* others /ho tell others /ho tell others and so forth. ?hen a marketin* messa*e is
s(read via Q/ord-of-mouthQ the messa*e is visuall! de(icted as s(readin* in the same /a! a cold virus s(reads and
multi(lies throu*h a *ro/in* number of (eo(le in the /intertime. arketers s(end a *reat deal of mone! to
attem(t to initiate the s(read of messa*es via /ord-of-mouth. Eo/ever' itRs easier said than done. An e"am(le of a
marketin* cam(ai*n that /as s(read via /ord-of-mouth /as the marketin* cam(ai*n for the film +lumdog
Millionaire /hich is a film about a (oor or(han from umbai IndiaRs slums /ho is a candidate for /innin*
millions.
In!luencer$: ,ersons /ho are co(ied for /earin* or embracin* a (articular fashion or trend. Taste makers are
often kno/n as trend setters.
&treet tea$: This term is used to describe a *rou( of often !oun* (eo(le bet/een the a*es of 2=-1= !ears old'
/ho travel u( and do/n usuall! cit! streets activel! (romotin* the (roduct or service the! are (aid to market.
Meber$hip organi;ation$: Trade and other forms of (rofessional associations' unions' s(ecial interest
*rou(s and /ork related clubs that one can -oin.
Counity: The *eo*ra(hic' (s!cho*ra(hic as /ell as online nei*hborhood in /hich !our venture o(erates on
a re*ular basis.
9irtual: ,ertainin* to !our ima*e a((earin* in a (erceived manner' live' some/here other then /here !ou
actuall! are currentl! located. The ima*e /ould a((ear via a di*ital format such as throu*h a /eb camera'
simulated artificial intelli*ent a*ent and or three dimensional ima*e such as a holo*ram ima*e.
&upplier$: Com(anies that (rovide valuable resources to !our ne/ business are true su((liers.
9endor$: T!(icall! the valuable resources are (urchased from commercial resources kno/n as vendors.
Con$uer$: These are (eo(le /ho bu! !our (roduct or service.
2B %acebook' 7oll! Lavik'8 htt(:<<///.facebook.com JAccessed December 1B' 100DK.
1>
Eployee$: These are individuals that /ork directl! for !ou and are on !our (a! roll.
Read on: $everal subse&uent cha(ters discuss the im(ortance of stakeholders further.
(log (ac) <: &ta)eholder
(log (ac): Decide ho/ !ou /ant to 7take aim8 carefull! here. ?ho /ill be on !our $tartu( $takeholder Arro/C
6rainstorm ideas for /ho s(ecificall! !ou /ould aim to have for !our $tartu( $takeholder Arro/. 6e sure to include
e"act names of businesses and (eo(le and titles for this list. Tr! to utili0e all the as(ects mentioned in the (rovided
cate*ories of the 7$tartu( $takeholder Arro/8.
+o to: htt(:<<///.entoro*ra(h!.com< and (ost a draft of !our $tartu(As $takeholder Arro/ list.
)thics: the authentic rim on the !heel
Ethic$ re!er$ to the +heart and $oul= o! the activitie$ you engage in while $tarting your bu$ine$$>
Eo/ authentic and truthful !ou are durin* the startu( (hase /ill set the sta*e for the future ethical threshold of
!our ne/ venture. As the founder and chief visionar! behind the conce(t !ou are brin*in* to market' it is !our
res(onsibilit! to create the values and com(an! culture that /ill be !our business. :nce a com(an! culture is set' it
is virtuall! im(ossible to alter the (ath that !ou have set for !our ne/ venture to follo/. :ne /a! to tr! to ensure
the ethical standards of !our com(an! is to first make sure that !ou have a *ood moral com(ass.
3our 7moral com(ass8 is the ethical stance !ou take on decisions and actions /ith !our startu(.
Eere are some &uestions to consider /hen develo(in* !our o/n moral com(ass:
?hat /ill the ne/ ventureAs code of ethics stateC
Eo/ /ill I make decisions for the startu( that /ill limit m! revenue (otential but /ill ultimatel! be the
correct action to take le*all! and ethicall!C
?hat can I do to ensure that the (eo(le I hire have *ood valuesC
?ho /ill I *o to for advice /hen I have a moral<ethical dilemmaC
?ill I be ca(able of follo/in* the advice that I receive for takin* the ri*ht ethical actionC
Eo/ /ill I kno/ /hat is ethical and /hat is notC
?hat (rocesses /ill I (ut in (lace to make sure that m! staff and the stakeholders I associate the startu(
/ith are actin* ethicall! at all timesC
?hat /ill I do if a staff member or ke! stakeholder IAm associatin* /ith violates m! ne/ ventureAs code of
ethicsC
In a crisis ho/ /ill I communicate to m! stakeholders the situation in the most ethical manner (ossibleC
Eo/ often /ill I cross check that IAm follo/in* m! ne/ ventureAs code of ethicsC
?hat seminars' classes and *uidance can I find to make sure IAm actin* ethicall! /hen runnin* the startu(C
?hat (eo(le can I *o to in order to *ain a role model<mentor for actin* ethicall! /ith m! startu(C
If I end u( doin* somethin* that /as unethical /hat /ill be m! (rocess to correct the situation and to
communicate the situation to m! stakeholdersC
?ill I listen to m! *ut if I have a stran*e ethical reaction to someone or somethin*C
Is there an!thin* else I should ask m!self to develo( m! moral com(assC
It turns out in business that self-a/areness of oneRs action is a ke! com(onent to understandin* ho/ to develo(
an ethical moral com(ass. Additionall!' the translation of an entre(reneurAs moral com(ass into the develo(ment of
a ne/ venture leads to the establishment of the businessesA com(an! culture. The 7com(an! culture8 is the values
!ou decide to instill in the ne/ venture.
akin* *ood: elements of a values-based com(an! culture
,rovide a safe /ork (lace and clean /ork environment.
,a! fair /a*es to all em(lo!ees.
,rovide benefits of some kind for em(lo!ees that ma! include health insurance' dental insurance' vision
insurance' a retirement investment (lan' a (ension of (artial salar! to be (aid once an em(lo!ee retires'
and reimbursement for continuous learnin*.
Eost em(lo!ee a((reciation events.
6e res(ectful to all em(lo!ees.
Treat all stakeholders /ith res(ect and fairness.
Eave a su**estion bo" or method /here b! em(lo!ees and stakeholders can make su**estions that !ou
revie/ and consider.
6e a *ood cor(orate citi0en b! su((ortin* some ;+:<non-(rofit entities either b! (a!in* !our em(lo!ees
to volunteer for these named causes or makin* cash donations or s(onsorshi(s to financiall! hel( su((ort
these or*ani0ations. This t!(e of activit! is kno/n as C$@ JCor(orate $ocial @es(onsibilit!.K An e"am(le of
a com(an! that has been a *ood cor(orate citi0en and routinel! (ractices C$@ is +ru(o 6imbo /hich'
accordin* to the com(an!As /ebsite' /as established in 2DB= and is considered one of the most im(ortant
bakeries in the /orld. In 1009' +ru(o 6imboAs net sales amounted to V >.9 billion dollars. In kee(in* /ith
the com(an!As social res(onsibilit!' +ru(o 6imbo (artici(ates in im(ortant communit! (ro-ects such as the
reforestation of (rotected natural areas in e"ico as /ell as in a series of different (ro-ects for communit!
/elfare. 3ou can read all about +ru(o 6imboAs $ocial @es(onsibilit! /ork in health' commitment to the
environment' commitment to associates' and commitment to societ! at:
htt(:<<///.*ru(obimbo.com<dis(la!.(h(CsectionS>
2=
Ado(t a tri(le bottom line (hiloso(h!. 7Tri(le bottom line8 means !our com(an! cares e&uall! not onl!
about makin* a (rofit but also about takin* care of the (eo(le associated /ith !our com(an! and
2= +ru(o 6imbo' 7$ocial @es(onsibilit!'8 htt(:<<///.*ru(obimbo.com<dis(la!.(h(CsectionS> JAccessed
December 15' 100DK.
15
conductin* business in a /a! that is *ood for sustainin* a health! environment for the (lanet. $o to
summari0e' the tri(le bottom line (hiloso(h! means !ou care e&uall! about (eo(le' (lanet and (rofits.
Develo( sustainable business (ractices. :ne /ho cares about the environment of his business *oes to the
trouble and e"(ense to make sure that he:
has a rec!clin* (ro*ram for not onl! *arba*e but also old electronic devices and to"ic /aste dis(osal
from batteries and (rinters.
utili0es office cleanin* su((lies that are environmentall! safe and donAt out*as. 7:ut*assin*8 is a term
that refers to indoor air &ualit! and describes the slo/ release of *as from a manufactured material such
as furniture or car(ets. :ften the term is used to describe the (otentiall! unhealthful attributes of a
ne/l! manufactured material as this *as is released indoors.
carries out office remodelin* and construction in a safe for the environment fashion b! usin* lo/ M:C'
J7Molatile or*anic com(ounds JM:CsK are emitted as *ases from certain solids or li&uids. M:Cs include a
variet! of chemicals' some of /hich ma! have short- and lon*-term adverse health effects.8K
2>
' (aints
that do not out *as as /ell as insulation made from rec!cled materials.
re(laces com(an! li*ht bulbs and li*htin* fi"tures /ith ener*! efficient li*ht bulbs.
(roduces marketin* materials that use so!-based ink and are (rinted on rec!cled (a(er stock. Ee uses
the rec!cled lo*o mark on materials to communicate to stakeholders that he is concerned /ith
sustainin* the environment.
/orks /ith vendors' su((liers and all of his stakeholders that su((ort environmental (rotection tactics.
conserves ener*! and resources /henever (ossible. ovin* to a four da! a /eek' ten hour a da!
schedule can b! /a! of e"am(le conserve ener*! and ultimatel! 7cut kilo/atts to create a slender *as
and electric bill8.
re/ards em(lo!ees for travelin* to and from /ork in sustainable /a!s such as /alkin*' ridin* a bic!cle'
takin* (ublic trans(ortation and /hen a((ro(riate car-(oolin*.
if a((licable' (urchases com(an! vehicles that are electric or electric h!brids.
sta!s current /ith environmental literature to kee( em(lo!eeAs kno/led*e base stron* on conservin*
ener*!.
+oin* *reen on a shoe strin*
3ou ma! be /onderin* /hat !ou are *oin* to do take the ethical stance on !our com(an!As (roactive
sustainabilit! (lans to (rotect the environment /hen !ou are in the startu( (hase of !our venture. It ha((ens that
doin* the ri*ht thin* for the environment is not -ust *ood for the environment but it also can be (rofitable no
matter /hat !our socio-economic state is toda! /ith !our business. The recommended ener*!-savin* tactics listed
above /ill hel( !ou save mone! on !our electric bill. 6! o(eratin* a sustainabl!-focused com(an! !ou /ill be
2> I.$. Environmental ,rotection A*enc!' 7Indoor Air Fualit!: An Introduction to Indoor Air Fualit!: :r*anic
Cases JMolatile :r*anic Com(ounds-M:CsK' htt(:<<///.e(a.*ov<ia&<voc.html JAccessed #anuar! 2>' 100DK.
Business Fundamentals 1D A +lobal Te"t
*eneratin* a *ro/in* amount of *ood /ill for !our venture. And *ood /ill is somethin* !ou can take to the bank4
7+ood/ill8 is the difference bet/een /hat !our com(an! is /orth and /hat !ou are actuall! able to sell !our
venture for in the market (lace. The more *ood/ill !ou *enerate the hi*her value of !our com(an! in com(arison to
!our com(etition. $ome of the most environmentall! conscious (eo(le in the /orld live in severel! economicall!-
challen*ed nei*hborhoods. Do not let !our socio-economic status challen*e the entre(reneurial ethics behind !our
startu(. The *ood/ill !ou are *eneratin* from takin* care of the environment could (otentiall! come back to !ou in
the form of *ood karma4
Read on: 3ouAll find more discussion of a sociall! res(onsible or*ani0ation in Cha(ter 2B.
(log (ac) ?: Moral Copa$$
(log bac): ?rite a draft of !our ne/ ventureAs code of ethics and a descri(tion of !our moral com(assesA
stances includin* /hat sustainable (ractices !our venture /ill ado(t to *o *reen and have a tri(le bottom line focus.
+o to: htt(:<<///.entoro*ra(h!.com and (ost a draft of !our code of ethics' descri(tion of !our moral
com(assesA stances and *reen sustainabilit! (ractices.
*perations: the loistical rim on the !heel
The o(erations of !our business are the tactics and (rocesses !ou im(lement to run !our business.
?ater !our (lants: o(erations h!drate !our startu(
:(erations in a startu( be*in /ith the com(osition of a business (lan. A ne/ venture /ithout a business (lan is
like a car /ithout an en*ineG it e"ists but cannot *et an!/here. In fact' researchin* and draftin* the ne/ ventureAs
business (lan is (robabl! the most im(ortant and necessar! business (ractice !ou /ill ever under take. 6usiness
(lans are usuall! /ritten to obtain financin* for a ne/ venture. Eo/ever' the business document and (lannin*
(rocess (rovides a much more im(ortant function. This document /ill be !our road ma( for *ettin* !our venture
started. The findin*s of !our research contained in !our business (lan can tell !ou from the be*innin* /ith (rett!
*ood certaint! if !our ne/ business has a real chance of bein* successful financiall! and sustainable in the lon* run.
:raditional $ection$ contained in a bu$ine$$ plan:
Copany De$cription *ives a back*round to the histor! of !our startu( and e"(lains /hat !our venture
/ill do.
&tateent o! Mi$$ion or Mantra is a short (hrase that e"(lains the (ur(ose of !our ne/ venture.
,roduct$ and or &ervice$ describe /hat !ou (lan to sell.
:arget Mar)et$ elaborate on /hom !ou (lan to sell to.
Mar)eting &trategy e"(lains /hat uni&ue maneuvers !our venture /ill under-take to accom(lish the
businesses *oals.
Copetitive 1naly$i$ documents /ho !our main com(etitors are in the market (lace.
Manageent :ea$ are the names' titles and back*rounds of the (eo(le /ho /ill lead !our venture to
success.
30
4peration$ !or Inve$tor$ e"(lains /hat tactics !ou /ill undertake to finance the venture and the e"it
strate*! !ou (lan to utili0e for the initial investors to make a (rofit on their investment.
2inancial$ document the forecasted sales and e"(enses for the first five !ears of the ne/ venture. The
financials should be accom(anied b! a detailed assum(tion lo* /hich summari0es /here the numbers
entered in !our financial s(readsheets ori*inall! came from. ost investors /ant to see !our financial
documents include balance sheets' cash flo/s' income statements and ke! ratios such is /hen !ou
antici(ate breakin* even.
6ong3ter -oal$ e"(lain /hat !ou ho(e to eventuall! accom(lish /ith the ne/ venture.
E5ecutive &uary /hich *oes at the be*innin* of !our business (lan but is often /ritten last should
contain a brief summar! of each of the above mentioned business (lan sections. E"ecutive summaries
should be limited to t/o or less (a*es. The E"ecutive $ummar! is often the most read (ortion of !our
business (lan so itAs im(ortant to /rite and re-/rite this section until itAs absolutel! (erfect. $ome
entre(reneurs recommend that !ou draft the e"ecutive summar! first and use this document as a (lannin*
document to cross check /hat !ou need in order to com(lete the business (lan.
After !ou have com(leted draftin* !our ne/ ventureAs business (lan it ma! be time to establish the le*al entit! of
!our business. Check /ith !our local *overnment office to *et directed to the rules and re*ulations and (rocesses
!ou need to follo/ in order to (ro(erl! establish !our businessAs le*al entit!
&oe o! the o$t univer$al copany e$tabli$hent$ are:
sole (ro(rietor
(rivate limited com(an!
state-o/ned enter(rise
(ublic-limited com(an!
;+:
cor(orations
If !ou can *et the resources from famil! and friends to (a! for an attorne! to hel( !ou establish !our business
le*al entit! !ou ma! lessen some of the risks associated /ith startin* a ne/ venture. The t!(e of business entit! !ou
form /ill more than likel! im(act the /a! in /hich !ou (a! ta"es on !our (roducts and services and file !our
countr!As income ta" filin*. The definitions for the different forms of com(an! establishments var! from countr! to
countr!. 3ou /ill /ant to check /ith the (ortion of !our *overnment that *rants com(an! established entities for
clarification
?ith a draft business (lan in hand and !our le*al com(an! business entit! established itAs time to full! ma( out
the o(erations<(rocesses !ou (lan to utili0e to im(lement !our business (lan. ItAs hi*hl! recommend that !ou make
a +antt chart to sta! or*ani0ed /ith the correct se&uence and timin* of each business activit!.
3ou can use icrosoftW E"cel and setu( columns that list:
tasks
(ersonJsK assi*ned to com(lete tasks
dates that tasks must be com(leted b! as /ell as (ro(er task se&uence
an area to check off /hen a task has been effectivel! com(leted
a comment section to kee( a historic list of reactions to the considered tasks
and *iven !our uni&ue (lans' !ou ma! choose to have additional columns.
It is hi*hl! recommended that !ou (ost !our ne/ ventureAs :(erations +antt Chart on a /all in a visible location
so that as man! (eo(le as (ossible have access to this information. This /ill allo/ others to make u(dates as /ell as
understand /hat !ou are /orkin* on /hen the! are considerin* interru(tin* !ou durin* the da!.
Hee( an o(en mind as !ou im(lement !our o(erational (lans for the startu(. @emain fle"ible to continuous
u(dates. @emember a startu( is an evolvin* o(erational (rocess that /ill need fine turnin* alon* the /a!.
Read on: :(erations is the sub-ect of Cha(ter 9
+e! product: the tanible rim on the !heel
The ne/ (roduct can be a (h!sical (roduct and or a service offerin*. Develo(in* a ne/ (roduct is an o(erational
task that *oes 7above and be!ond the call of dut!8 of utili0in* the :(erations +antt chart described in the (revious
:(erations section. Instead' /e are recommendin* that !ou create a ,rocess a((in* +uide in order to effectivel!
develo( !our ne/ (roduct offerin*s. The follo/in* section describes in detail ho/ to develo( a ,rocess a((in*
+uide for !our ne/ (roduct offerin*s
A ne/ (roduct bud is bloomin*: introducin* the 7;e/ Menture Instructional anual to
:(erational E"cellence8
7;e/ Menture Instructional anual to :(erational E"cellence8
$tart b! (rocess ma((in* all of the or*ani0ationAs (rocesses b! creatin* a (rocess lo*. Itili0e a
/ord (rocessin* soft/are (ro*ram /hich has auto sha(es that features a 7flo/chart.8 This /ill *ive
!ou the soft/are necessar! for develo(in* !our (rocess ma(. It does take a lon* time to (rocess
ma( the functions /ithin an or*ani0ation' even a ne/l! formulated venture. ItAs time /ell s(ent.
,rocess ma((in* *uide
There are man! books and (ublications about (rocess ma((in* and there are multi(le /a!s to
(rocess ma(. ?e are *oin* to focus here on sho/in* !ou ho/ to ma( the (rocesses that make u(
ne/ (roduct develo(ment and marketin*. ?e su**est the follo/in*:
Assemble the (eo(le /ho are involved in the develo(ment and marketin* of a ne/ (roduct at !our
or*ani0ation.
6rainstorm a list of the da!-to-da! ste(s that are taken to develo( and market a ne/ (roduct.
31
@evie/ the list /ith !our board' strate*ic alliance (artners' mentors' vendors' and famil! members
for items that ma! have been missed.
Take the final list and divide it into t/o cate*ories: re(etitive (rocesses and rare (rocesses.
@e(etitive (rocesses are ste(s that are taken re(eatedl! /hen develo(in* and marketin* a ne/
(roduct such as manufacturin* the (roduct. @are (rocesses occur infre&uentl!.
Anal!0e the rare (rocesses list to see if an! of the items mentioned can be combined /ith or /oven
into the re(etitive (rocesses. @are (rocesses can drain resources and are often not bud*eted for. If
!ou can combine a rare (rocess /ith a re(etitive (rocess' !ou have taken a valuable ste( to/ard
im(rovin* the o(erational e"cellence of !our business.
ake a flo/chart of the (rocesses /ithin !our or*ani0ation from the list that /as (re(ared and
fine-tuned. This is /here !ou take /hat mi*ht be e"(lained in several (ara*ra(hs of te"t and drill it
do/n to several flo/chart icons. $ee E"hibit 2.D.
,rocess a((in* Dia*ram
E"hibit D: The ,rocess a((in* Dia*ram /as develo(ed b! oll! Lavik'
:ctober >' 1001
There is a *ro/in* trend for cor(orations to or*ani0e their mana*ement s!stems b! (rocesses
instead of (roducts. Lar*e and mid-si0e cor(orations are makin* this shift to achieve cost savin*s.
:nce !ou have com(leted !our (rocess lo* !ou must re(eat the anal!sis (hase. +ather !our
resident e"(erts as /ell as some ne/ mentors and outside board members to anal!0e the firmAs
(rocesses. Look for current (rocesses that could be streamlined.
6ecause areas to streamline are difficult to see' kee( re-e"aminin* /hat has been documented in
the (rocess lo*. I(on e"haustive e"amination of ever! (ossible streamlined scenario' the solution
to achievin* o(erational e"cellence /ill come into focus. $ta! o(en and fle"ible to these ne/ ideas.
Lo* the ne/ (rocess innovations. Embrace the ne/ (rocesses and a((l! them throu*hout the
or*ani0ation /ith the committed su((ort of to( mana*ement. This can be the most challen*in*
ste( and re&uires a chan*e mana*ement cam(ai*n.
A chan*e mana*ement cam(ai*n is the internal communication cam(ai*n that is tar*eted at a
ventureAs em(lo!ees re*ardin* a shift in the /a! a business is mana*ed. This means !ou have to
take a hands-on role in communicatin* the chan*es throu*hout the or*ani0ation' makin* sure that
ever!one understands the ne/ *ame (lan' and /h! it is necessar!. Inevitabl!' some /onAt be
/illin* to *o alon* /ith the ne/ (ro*ram and !ou ma! need to hel( them find em(lo!ment
else/here. :ne ne*ative (erson can dela! the /hole *rou(As transformation.8
29
+oure: 7,rocess a((in* +uide8 te"t and 7,rocess a((in*8 Ima*e re(rinted /ith (ermission
from entoro*ra(h!' Inc. P 1005. All @i*hts @eserved. Entre(reneurial arketin*G @eal $tories
and $urvival $trate*ies b! oll! Lavik and 6ruce 6uskirk' odule on $avv! $trate*ies for
arketin* ;e/ ,roducts' (a*es 255-2D0.
After !our ne/ (roduct bud has bloomed throu*h the im(lementation of a (rocess ma((in* *uide !ou are read!
to launch !our ne/ (roduct offerin* into the market (lace. 3ou should consider (lannin* a ;e/ ,roduct Launch
Event.
Read on: Addin* ,roducts or $ervices is discussed further in Cha(ter 23.
29 7,rocess a((in* +uide8 te"t and 7,rocess a((in*8 Ima*e re(rinted /ith (ermission from entoro*ra(h!'
Inc. P 1005. All @i*hts @eserved. Entre(reneurial arketin*G @eal $tories and $urvival $trate*ies b! oll!
Lavik and 6ruce 6uskirk' odule on $avv! $trate*ies for arketin* ;e/ ,roducts' (a*es 255-2D0.
3B
E"hibit 20: $unn! da!
,et the fruits of your labor blossom: the ne! product-ser&ice launch e&ent plan
3our ne/ business ma! be built around a (roduct or service or both as /e earlier discussed. ?e /ill discuss' b!
/a! of e"am(le' a ne/ (roduct launch event but itAs /orth notin* that the same *eneral (rinci(les a((l! /hether
!ou are (lannin* a ne/ (roduct or ne/ service launch event.
Events or*ani0ed around a ne/ (roduct<service launch are t!(icall! (ost(oned or cancelled because the ne/
(roduct<service does not turn out as antici(ated. 6uild this scenario into an! (lanned event so that !ou can recou(
some of the costs if the event needs to be cancelled.
7Checklist for a ;e/ ,roduct Launch Event
Is the ne/ (roduct *oin* to be full! functional in time for the eventC ?hat is !our backu( (lanC
Eave !ou assembled a /ell-connected board of advisers to hel( /ith the (roduction of the eventC
Eave !ou determined !our bud*et for the ne/ (roduct launch eventC Is there an!one !ou can brin*
in to cos(onsor the event to hel( defra! the costC
Eave !ou hired someone to be res(onsible for the m!riad of details that must come to*ether in
order for a ne/ (roduct launch event to be called a successC
Eave !ou (re(ared a detailed s(readsheet' /ith deadlines' of all the items that need to take (lace
for the event to come to*ether and assi*ned each item to a res(onsible (ersonC
Eave !ou devised the best forum for the ne/ (roduct launch eventC Is the event scheduled durin*
an industr! tradesho/ /here ever!- one /ill alread! be assembled and !ou can easil! fold !our
event into the bi**er sho/' levera*in* all the resources available at that eventC
Eave !ou outlined ho/ !ou are *oin* to communicate !our ne/ (roduct messa*e at the launch
eventC JThere is nothin* /orse than (roducin* an e"(ensive ne/ (roduct launch event that
ever!one ma! en-o! but attendees leave not havin* an! idea /hat brand /as bein* (romoted.K
Eave !ou invited !our tar*eted (ress to cover the ne/ (roduct eventC
Do !ou have a contin*enc! (lan if fe/ (eo(le res(ond to !our invitation to the ne/ (roduct launch
eventC Do !ou have takea/a! lo*o items' commonl! referred to as (remiums' for attendees so the!
can be reminded of the ne/ (roductC
Eave !ou decided ho/ !ou /ill measure and evaluate !our brand buildin* strate*!C
25
+oure: 7;e/ ,roduct Launch Event ,lan8 te"t re(rinted /ith (ermission from entoro*ra(h!'
Inc. P 1005. All @i*hts @eserved. Entre(reneurial arketin*G @eal $tories and $urvival $trate*ies
b! oll! Lavik and 6ruce 6uskirk' odule on $avv! $trate*ies for arketin* ;e/ ,roducts' (a*es
2D2-2D1.
Read on: Launchin* !our business is the to(ic of $ection 1' Cha(ters B' =' and >.
(log (ac) @: 6aunch .lan
(log bac): Develo( a (lan for !our ne/ (roduct launch. Include the name and descri(tion of the venue !ou
(lan to sho/case !our ne/ (roduct as /ell as a detailed bud*et of the researched e"(enses and a forecast of the
media covera*e !ou ho(e to *ain durin* the launch event.
+o to: htt(:<<///.entoro*ra(h!.com and (ost !our ne/ (roduct launch (lan.
.ublic relations: the sensational rim on the !heel
,ublic relations are the activities one en*a*es in to *enerate e"citement about !our ne/ venture so that editorial
covera*e /ill occur. Editorial covera*e is thou*ht to be much more valuable then advertisin* in media because
(eo(le (erceive editorial covera*e as authentic and of interest. $tartu(s need to *enerate a *reat deal of e"citement
kno/n as 7bu008 in order to make the case for media covera*e. 6ecause entre(reneurs normall! donAt have much if
an! marketin* bud*ets to initiall! launch his or her ne/ venture' rel!in* on (ublic relations covera*e becomes
essential for the success of a ne/ venture.
In order to increase !our chances for covera*e of the ne/ venture !ou /ill /ant to make sure that
communications /ith the media include information about !our ne/ venture that is /ritten in /hat is kno/n as a
7ti*ht8 manner includin*' if (ossible' the follo/in* attributes:
25 7;e/ ,roduct Launch Event ,lan8 te"t re(rinted /ith (ermission from entoro*ra(h!' Inc. P 1005. All @i*hts
@eserved. Entre(reneurial arketin*G @eal $tories and $urvival $trate*ies b! oll! Lavik and 6ruce 6uskirk'
odule on $avv! $trate*ies for arketin* ;e/ ,roducts' (a*es 2D2-2D1.
3>
concise<brief summar!
strai*ht-for/ard
timel! and &uite current
a first of its kind if (ossible
attention-*rabbin*
authentic and truthful
t!in*-in if (ossible /ith an emer*in* trend
remarkable
and absolutel! accurate
The (ublic relations (ractitionerAs tool kit
.re$$ relea$e$: ;e/s/orth! te"t re*ardin* the 7?ho' ?hat' ?here' and ?hen8 of the stor! !ou are (itchin*
to the media.
9ideo "ew$ Relea$e$ A9"R$B: Isuall! res(onsible for coordinatin* the video (roduction of ne/s
announcements kno/n as M;@s /hich are sent to television<broadcastin* stations /ith the intention of *ainin*
ne/s covera*e
"ew$wire $ervice$: The ,ublic @elations (ractitioner /orks /ith a com(an! kno/n as a ne/s/ire service to
disseminate ne/s announcements to tar*eted media. :ne e"am(le is C$@/ire service found at:
htt(:<<///.csr/ire.com /hich s(eciali0es in disseminatin* ne/s releases from cor(orate sociall! res(onsible
com(anies often en*a*ed in man! C$@ (ursuits.
2D
"ew$ agencie$: The (ublic relations (ractitioner is in direct contact /ith ne/s services that cover lar*e
batches of ne/s ha((enin*s in s(ecific re*ions. EE@C:,@E$$ is an e"am(le of a ne/s a*enc!. Accordin* to
this ne/s a*enc!As /ebsite' 7E@C:,@E$$ is a ne/s a*enc! concentratin* on ercosur countries /hich o(erates
from ontevideo' Iru*ua! and includes in its area of influence the $outh Atlantic and insular territories.8
10
%or
more information on E@C:,@E$$ visit: htt(:<<///.merco(ress.com<about.do.
Media databa$e$: Contain detailed information on ho/ to reach media contacts. The more e"(ansive and
current the media database' the more likel! !ou are to achieve o(timum (ress covera*e in tar*eted (ublications.
&tyle guide$: ,rovide *uidelines on the (ro(er formattin* of information to include /hen &uotin* from
another source and attributin* in a citation the &uoted source.
E5ten$ive Rolode5: ,ublic relations (ractitioners are ma-or net/orkers /ith vast contacts /ith the media as
/ell as ke! stakeholders.
2D C$@/ire' 7Eome ,a*e'8 htt(:<<///.csr/ire.com JAccessed on Au*ust 2=' 1005K.
10 E@C:,@E$$' 7About E@C:,@E$$' htt(:<<///.merco(ress.com<about.do JAccessed #anuar! 1' 100DK.
:ieline$: $uccessful (ublic relations (ractitioners are kno/n for kee(in* lon* timelines of checklists to make
sure events and cam(ai*ns are carried out fla/lessl! in order to achieve the ma"imum amount of effective media
covera*e
1rchive$: The (ublic relations (ractitioner usuall! is the one to maintain the (ress cli((in* files documentin*
media covera*e as /ell as the video and ima*e files. Ima*es are sometimes used b! the media so kee(in* /ell-
or*ani0ed archive files is essential to an! marketin* cam(ai*n.
6ecause (ublic relations (rofessionals are dedicated to the tasks surroundin* disseminatin*' documentin* and
archivin* ne/s covera*e' these (ractitioners are usuall! a *reat resource to an! startu(.
(log (ac) C: .R .lan
(log (ac): ?rite do/n a list of (ublic relations (lans !ou have for !our ne/ venture. Include /hat !ou /ill do
to *et (ublicit! for !our startu(. ?hat ne/s sources /ill !ou tar*etC 6e s(ecific b! namin* ne/s(a(ers' ma*a0ines'
ne/sletters. Leaflets' si*na*e and other media sources that !ou (lan to tar*et.
+o to: htt(:<<///.entoro*ra(h!.com and (ost !our ,ublic @elations ,lan.
Mentor insihts: the '/here the 0ubber Meets the 0oad( spo$es on the !heel
entor insi*hts are the lessons learned b! the (rotX*X<mentee. entor insi*hts are de(icted as s(okes on the
/heel because the! are the *lue that effectivel! holds to*ether ever!thin* else. Inderstandin* !our mentorAs drivin*
(hiloso(hies is essential if !ou /ant to *ain the /isdom that !our mentors (ossess. There is a tremendous amount
!ou can learn from a mentorAs successes as /ell as their setbacks. entors come literall! in all 7st!les' sha(es and
si0es8. ?hen !ou are a/a! from home be sure to kee( a 7look out8 for (eo(le /ho mi*ht have some business
/isdom to share /ith !ou.
,laces !ou can *o to find mentors (otentiall! ideal for coachin* !ou /ith !our startu(s include:
facult! at schools
libraries
seminars<conferences</orksho(s
to/n meetin*s
mana*ement from other businesses
classmates
famil!
friends
co-/orkers
reli*ious institutions
(ublic markets
nei*hbors
35
near-b! communities
re-ac&uaintin* !ourself /ith (eo(le !ou havenAt ke(t in contact /ith
entre(reneurs
micro-loan reci(ients
To kee( track of the insi*hts that !ou (ick u( from mentors tr! kee(in* a -ournal of the lessons !ou are learnin*
that are a((licable to !our startu(. entor insi*hts can come from a business e"ecutive or role model /ho !ou /ant
to emulate. entor insi*hts can also come from observations of others.
I /as fortunate to meet a student named #a! ilbrandt /hile teachin* a $ocial Entre(reneurshi( course at
,e((erdine Iniversit!As +ra0iadio $chool of 6usiness and ana*ement. #a! had recentl! traveled to 6an*ladesh
and ke(t -ournals of his first-hand observations of meetin* (eo(le /ho /ere (ros(erin* throu*h micro-finance
loans. I found these -ournal entries e"tremel! ins(irational and /e ho(e !ou /ill as /ell. ?e encoura*e !ou to be on
the alert for micro-finance o((ortunities in !our countr! as a (roven method for hel(in* those that are less
fortunate than !ourselves. 6! readin* these -ournal e"cer(ts !ou can e"(erience ho/ those less fortunate are
findin* success no matter /hat their economic situation. icro-financed loans are im(artin* a *reat deal of
o((ortunit! to those that reall! need it and transformin* the economies of develo(in* countries in remarkable
/a!s4 The follo/in* are e"cer(ts from the -ournal of #a! ilbrandt.
#a! ilbrandtAs #ournal Entries from 6an*ladesh
;ot #ust $tatistics
The shear numbers are im(ressive. 2.1 billion (eo(le throu*hout the /orld live in e"treme (overt!.
Accordin*l!' e"treme (overt! is defined b! the ?orld 6ank as livin* belo/ V2 (er da! (urchasin*
(o/er (arit! threshold. The Inited ;ations set the illennium Challen*e *oal of eliminatin*
e"treme (overt! b! the !ear 101=. In 6an*ladesh' at least' it a((ears to be /ell on the /a!. ItAs eas!
to *et lost in the numbers. 6ut' /hen !ou travel throu*h 6an*ladesh meetin* the microcredit
borro/ers' !ou reali0e that behind ever! number is a lifeYreal (eo(le and real families. $uddenl!'
the statistics come alive.
I donAt kno/ /hat itAs like to live on less than V2 (er da!. I have' ho/ever' met enou*h (eo(le to
*arner some details about /hat such a life is like. $im(l! (ut' !ou consume in (ro(ortion to /hat
!ou *ro/G /hen !ou cannot afford more' !ou be*.
eet eera. $he used to live on less than V2 (er da!. ;o/' sheAs a t/ent!-si" !ear old business
o/ner /ith t/o dau*hters' eleven and seven !ears old. Eer husband /alked out on her a fe/ !ears
a*o' leavin* her to fend for herself. In the culture of 6an*ladesh' she /as in a ver! tou*h s(ot. To
*ive birth to onl! dau*hters and no sons is unluck!. Like/ise' for a husband to /alkout on his /ife
is looked do/n u(on even more. In s(ite of this' she became one of the most successful /omen in
her villa*e. Throu*h microcredit' she started and built a lar*e (oultr! farm' raisin* thousands of
chickens and sellin* them to market. After sho/in* us her farm' she invited us into her home'
/hich /as considered a nice home b! villa*e standardsYfour /alls' t/o rooms' a cement floor' and
metal roof. Eer home /as also financed throu*h a +rameen
12
microcredit home loan. And' best of
all' she told us ho/ ha((! she /as and ho/ microcredit chan*ed her life.
Althou*h eera holds the distinction as the first microcredit customer I met' thatAs the onl!
number associated /ith her.
22
?h! I Eave Eo(e
7IAve *ot this feelin* of ho(elessness'8 I admit to a travelin* com(anion. IAm here to see the ho(e
that microcredit has brou*ht' but our ta"i has not even left Dhaka !et and IAm surrounded b! the
most ab-ect (overt! I have ever seen.
IAm on sensor! overload. There are so man! (eo(le that the countr! seems read! to burst at the
seams. ore than 2B0 million (eo(le are (acked into this countr!' a((ro"imatel! the si0e of Io/a.
In Dhaka' *arba*e is ever!/hereYin the streets' in the ditches. Its obvious that the cit! does not
(ossess the infrastructure to service its 2= million inhabitants. #ud*in* b! the inte*rit! of the cit!
streets' /hich a((ear to have been (aved once left alone' IAm not the least bit sur(rised. If the hea(
of *arba*e is fresh' a fe/ (eo(le /ould be rumma*in* throu*h itYlookin* for a meal' I sus(ect. If
the *arba*e /as old' it served as a bed. Audibl!' Dhaka (ulses /ith the sound of non-sto( hornsY
there need be no reason to use it. Dhaka is also a cit! of smells. Ever! street has a different smell'
man! of /hich I find both unfamiliar and una((ealin*.
The streets are a lab!rinthYif I /ere lost' I could never find m! /a! back. ?e round a corner and
roll (ast a lot of /ood and metal. A salva*e !ard ma!beC 7Those are the slums of Dhaka'8 our *uide
e"(lains. :ur ta"i comes to a sto(' /aitin* for a train to (ass. After a fe/ seconds' thereAs a ban* on
the /indo/. ItAs a !oun* bo!' ma!be seven !ears old' be**in* for mone!. EeAs !ellin* in 6en*ali and
motionin* to his mouth /ith his hand. 7In Dhaka' (eo(le /ork to*ether in an or*ani0ed s!stem of
be**in*'8 m! *uide e"(lains. Ee cracks the /indo/ and tells the child to leave. ?e start movin*
a*ain and the child runs alon* until he can no lon*er kee( (ace.
Little did I kno/ at this (oint' that over the succeedin* t/o months' I /ould meet some of the most
disadvanta*ed (eo(le in the /orld: the (oorest-of-the-(oor' victims of traffickin*' (rostituted
/omen' refu*ees' and the illiterate. Des(ite their (erilous circumstances' IAm filled /ith more ho(e
than ever before. ?h!C The (ositive' successful chan*e I /ould come to /itnessYand the *reat
(otential for continued chan*e.
12 +rameen 6ank: 6ankin* for the ,oor' 7Eome ,a*e'8 htt(:<<///.*rameen-info.or*< JAccessed on December 20'
1009K.
11 #a! ilbrandtAs #ournal Entries from 6an*ladesh' ,e((erdine Iniversit! #D<6A alumni' @e(rinted /ith
,ermission.
B0
! ho(elessness' ho/ever' /ould be relieved. ?hat I sa/ in Dhaka /as (robabl! a (iece of histor!
for 6an*ladeshZ Due to current la/s' +rameen 6ank is restricted from o(eratin* in urban areas.
I have ho(e because of 6an*ladesh. I /ish I could have traveled here 10 !ears a*o to e"(erience the
chan*e. %rom the descri(tions of the (eo(le I met' the chan*e has been 6an*ladeshYa model for
*lobal turn aroundG the man sittin* ne"t to me on the air(lane /as convinced that' *iven ten !ears
and ri*ht national leadershi(' the countr! could shine like ala!sia.
13
ovin* the ountains of ,overt!
Eo/ come I have never heard a sermon (reached on the elimination of (overt!C Christians
fre&uentl! talk about *ivin* to those in need or feedin* the hun*r!' but I have !et to hear a sermon
callin* for a solution. Eere is one to start /ith' I /ould like to call it 7icrocredit and the ustard
$eed8:
:ne evenin* -ust before dusk' /e /ere ridin* a ricksha/ do/n a narro/ road in the villa*e of
$alan*a. $uddenl!' our *uide sto((ed the driver' had him turn the ricksha/ around' and (ull u( at
a small metal buildin*. Inside' the buildin* /as diml! lit /ith an or*anic smell and the hum of a
lar*e en*ine. ?e met /ith the o/ner' $hameen' /ho had financed his small business throu*h a
+rameen microloan. 6efore +rameen' he had nothin*Ybarel! enou*h to feed his famil!Yif that
!earAs rice harvest /as (lentiful. After foundin* and *ro/in* his business throu*h +rameen loans'
he started *eneratin* income on his o/n' built a better house' and could afford to send his kids to
school. And his businessC ,rocessin* mustard seeds.
atthe/ 29:10 Nfrom The ;e/ International Mersion' ;IM' /hich is the En*lish translation of the
Christian 6ibleO tells us that /ith the faith the si0e of a mustard seed' /e can tell the mountains to
move. I took this verse literall! /ith a *ood dose of ske(ticism until this da!. Eere /as a mountain
ri*ht in front of us: ore than 2 billion (eo(le clenched in the fist of (overt!. In 6an*ladesh and
throu*hout the /orld' millions of (eo(le are (uttin* a lot of faith in tin! loansY$hameenAs faith'
ironicall!' ha((ened to be a mustard seed.
$oon' the entire buildin* /as flooded /ith local (eo(le /antin* to *a0e at the forei*ners. Each of
these (eo(le /as a microcredit borro/er. ;one of them in the chains of (overt!. This held true for
(racticall! ever!one in the entire villa*e' follo/ed b! millions more throu*hout 6an*ladesh.
icrocredit /as movin* the mountain of (overt! before m! ver! e!es.
Deuteronom! 2=:9-5 sa!s 7If there is a (oor man amon* !ouZ do not be Z ti*htfisted. Z@ather be
o(enhanded and freel! lend him /hatever he needs.8 Is it coincidence that the /ord 7lend8 is usedC
I believe microcredit is a sermon that ever! church should hear. I believe that if Christians /ere to
13 Ibid.
Business Fundamentals B2 A +lobal Te"t
-oin the uslims and Eindus of 6an*ladesh in the mustard seed of microcredit' the mountain
/ould move much faster.
1B
?hat Third ?orldC
The man starin* at me has no shoes or shirt. This seems like the (erfect o((ortunit! to ca(ture the
face of the human condition in rural 6an*ladesh. As I (ull out m! camera he mirrors me /ith none
other than a camera (hone. IAm (hoto*ra(hin* him (hoto*ra(hin* meYsomethin* seems /ron*
here.
Earlier in the da!' I s(ontaneousl! /alked out into a rice field to visit the field /orkers. The! /ere
e"cited to sho/ a forei*ner ho/ fast the! cut' then *ive a brief rice cuttin* lesson. I -ust about took a
6en*ali manAs le* offYthe sickle blade is shar(er than it looks. The! cut a fe/ sheaths of rice' then
tie the bundle off /ith one of the stalks. The /hole (rocess takes but a fe/ seconds. @ice harvestin*
has been done this /a! here for hundreds of !ear. :ccasionall!' I /ould see a billboard for a tractor
or modern a*ricultural convenience' but I never sa/ an! of them in action.
Third /orld technolo*! transfer is an interestin* (henomenon. Is a cell (hone reall! /hat the!
needC Eo/ about dri( irri*ation insteadC :r ma!be a rice harvesterC
+rameen created an interestin* microenter(rise (ro*ram throu*hout 6an*ladesh /ith villa*e
7(hone ladies.8 A /oman in each villa*e is allo/ed to (urchase a cell (hone throu*h a +rameen
loan. The 7(hone ladies8 then sell use of their cell (hone to other villa*ers. The result is that the
7(hone ladies8 have a ver! (rofitable business and villa*es that (reviousl! had no (hone line at all
no/ have a modern method of communication. As travelin* is difficult for the (oor of 6an*ladesh'
the villa*ers no lon*er have to leave if the! need to communicate /ith a relative in another villa*e
or ask a doctor a &uestion. In other villa*es' the (rofitabilit! of 7(hone ladies8 has diminished
because a ma-orit! of villa*ers no/ o/n a (ersonal cell (hone.
ItAs sur(risin* ho/ someone ma! not have runnin* /ater' but o/n a nicer cell (hone than I do.
25
(log (ac) 9: Journal
(log bac): Hee( a -ournal of the lessons learned from !our o/n startu( time mentor insi*hts.
+o to: htt(:<<///.entoro*ra(h!.com and (ost an e"cer(t of one of !our -ournal entries that is (articularl!
a((licable to someone on an entre(reneurial -ourne!.
?ith the entor Insi*hts (rovidin* stron* s(okesG this com(letes the descri(tion and elaboration of the visual
model of the 6usiness Eco-s!stem ?heel.
1B Ibid.
1= Ibid.
B1
E"hibit 22: $trikin* *old
Earl!-sta*e entre(reneurs can re-oice /hen the! invest the time and ener*! to build /ell thou*ht out 6usiness
Eco-s!stems. These hard-/orkin*' strate*ic-thinkin* entre(reneurs increase the chances of creatin* a startu( that
has a real o((ortunit! of (otentiall! strikin* *old at the end of the rainbo/4
About this author and ackno/led*ements:
Editor and Author: oll! Lavik' %ounder' entoro*ra(h!' Inc. U $tartu(Time Coach'
oll!.Lavik)$tartu(Time.com' ,rofessor' Matel International 6usiness $chool. Mer! s(ecial thanks to the
Academic @evie/er: Debbi D 6rock' ?illiam and Ha! oore ,rofessor of Entre(reneurshi( and ana*ement'
6erea Colle*e. $(ecial Thanks to ichael Tanenbaum' Haushik $hirhatti' and $umeet alik m! *raduate assistants
and m! former students' Ann $hafer and Lui0 onto!a from ,e((erdine Iniversit!As +ra0iadio $chool of 6usiness
and ana*ement /ho assisted b! (rovidin* initial research on (reliminar! versions of Cha(ter 2. $(ecial thanks to
m! former student #a! ilbrandt for (rovidin* his -ournal. $(ecial thanks as /ell to Taissia 6elo0erova' +ra(hic
Desi*ner' Artist' 6A Candidate at ,e((erdine Iniversit! Class of 100D. Also' s(ecial thanks to 6ruce D 6uskirk'
,hD' ,rofessor of arketin*' ,e((erdine Iniversit!As +ra0iadio $chool of 6usiness and ana*ement /ho co-
authored the *ratefull! ackno/led*ed and a((reciated e"cer(ts (rovided b! entoro*ra(h!' Inc. from
Entrepreneurial Mar!eting: *eal +tories and +ur,i,al +trategies. Additionall!' s(ecial thanks to Estelle Eollo/a!.
BB
1. The mind of the
entrepreneur: Your
entrepreneurial 2ourney
beins by embar$in on your
o!n hero3s 2ourney"
Editor: oll! Lavik JMatel International 6usiness $chool Los An*eles' I$AK
In cha(ter 1 /e /ill e"(lore /hat factors and characteristics are commonl! found in an entre(reneurial mindset.
These ma! be characteristics that !ou can strive to (ossess and emulate. ,erha(s !ou ma! need to inherit from !our
(arents a certain combination of entre(reneurial characteristics to become an entre(reneur or (erha(s that has
absolutel! nothin* to do /ith if !ou are destined to become an entre(reneur. Is an entre(reneur ultimatel! born or
madeC That &uestion has no definite ans/er. ?e su**est !ou meet as man! entre(reneurs as !ou can to see if this is
ho/ !ou /ant to s(end !our lifeG then decide if !ou /ant to train under these entre(reneurs as an a((rentice. 3ou
control !our o/n destin! and !our lifeAs -ourne! is !our o/n so !ou decide4
@evie/:
In cha(ter 2 /e discussed the characteristics of an entre(reneur as (ossessin* the follo/in* attributes:
9i$ion: Able to create and communicate an easil! understandable mission for /hat the ne/ venture does in
order to successfull! launch a ne/ business. This is accom(lished /hile ins(irin* others to -oin !ou in !our ne/
enter(rise.
Creativity: Abilit! to in-ect ima*ination and uni&ueness into a ne/ business venture. It takes skill and
in*enuit! to create a ne/ venture e&ui((ed /ith strate*ies to outsmart the com(etition.
2ocu$: Able to maintain the vision of the com(an! /ith un/averin* dili*ence. ItRs ver! eas! to *et sidetracked
es(eciall! if !ou find it necessar! to evolve the ori*inal vision. Ironicall!' /e have encountered man! successful
entre(reneurs /ho *et bored easil!...
.a$$ion: Desirin* to succeed under !our o/n steam NinitiativeO on a business venture...
Drive: ,ossessin* intrinsic ener*! to accom(lish the business *oal even in the face of adversit!.
.er$everance: Able to kee( *oin* even /hen faced /ith seemin*l! insurmountable obstacles.
Business Fundamentals B= A +lobal Te"t
2. The mind of the entrepreneur: Your entrepreneurial journey begins by embaring on your own hero!s journey!
4pportuni$tic "ature: $ees the (ossibilities even before the! e"ist. Can take advanta*e of an u(comin* trend
or unite unrelated (rocesses to create a uni&ue business venture...
.roble &olving 1bility: Thrives on comin* u( /ith solutions to com(le" challen*es...
&el!3di$cipline: Able to be or*ani0ed and re*imented in (ursuit of a successful business venture.
2rugality: Hno/s ho/ to stretch ever! cent so that e"(enditures are as lo/ as (ossible.
Epathy: Able to (ut !ourself in anotherAs shoes and therefore able to sho/ sensitivit! and understandin* of
/hat others are communicatin* in the start u( environment...
&ocial Re$pon$ibility: Ethics' carin* and humanitarianism are characteristics that are commonl! found in
toda!As entre(reneurs...
&pirituality: ?e have found that successful entre(reneurs have often devoted time to s(iritualit! develo(ment.
editation and (ositive affirmations are t/o common e"am(les of s(iritualit!.
-ood :iing: Able to identif! a market o((ortunit! and kno/ /hen it is the o(timum time to launch a ne/
venture or e"(ansion of an e"istin* enter(rise.
6uc): Can a (erson be (redis(osed to be luck!: Is luck a human behavior or a karmic universal
(redis(ositionC
1>
In Cha(ter 1 /e be*in b! introducin* !ou to Costa @oussos' a !oun* entre(reneur from the countr! of C!(ress
/ho is creatin* a *lobal music em(ire. ?e /ill share his stor! throu*h an intervie/ that oll! Lavik conducted /ith
him and look at his entre(reneurial tendencies and attributes. Then it is !our turn to take the Entre(reneur
Assessment $urve! /hich can be used as one indication of measurin* !our o/n entre(reneurial mindset. Eo/ever'
it should be noted that a true entre(reneur /ould never rel! on a surve! to determine ho/ /orth! or read! the! are
to become an entre(reneur. A true entre(reneur /ould sim(l! be*in im(lementin* his or her start u( idea.
True stor!: Costa @oussos /as one of m! students several !ears a*o and immediatel! I noticed somethin* &uite
different from Costa and that /as his focus on startin* a music com(an!. It seems to take a certain t!(e of (erson to
start a ne/ venture because !ou do not have the securit! and structure of a more established com(an! not to
mention the challen*es of ins(irin* others to -oin !our un(roven venture and to hel( !ou meet their deadlines
associated /ith a ne/ business. Do !ou have the t!(e of mindset that Costa seems to (ossess to *et him throu*h the
man! setbacks and challen*es that faced him or an! entre(reneur in the makin*C If !ou are not sure do not /orr!.
?hen the timin* seems ri*ht !ou /ill kno/ if an entre(reneurial -ourne! is !our destin!. And !ou mi*ht even
become a hero to someone or ma!be even an entire *rou( of (eo(le such as ho/ !ou /ill soon read Costa is
becomin* a hero to the inde(endent music artist and music listenin* enthusiast. This is !our future /e are talkin*
about and itAs !our decision if !ou have a heroAs -ourne! ahead4
As !ou read CostaAs stor! (a! (articular attention to the characteristics described as his entre(reneurial mindset.
Do !ou (ossess some of the same characteristicsC @ead CostaAs stor! to find out.
1>+The indset of an Entre(reneur8 is re(rinted and ada(ted /ith (ermission from entoro*ra(h!' Inc. P
1005. All @i*hts @eserved. Entre(reneurial arketin*G @eal $tories and $urvival $trate*ies b! oll! Lavik and
6ruce 6uskirk' introduction (a*es ""viii-""".
B>
htt(:<<///.startu(time.com<costamusicus.html
Do !ou (ossess an! of the entre(reneurial mindset characteristics that Costa hasC
(log (ac) *0: Dour Mind$et
(log (ac): +o to htt(:<<///.entoro*ra(h!.com and (ost !our o/n entre(reneurial mindset characteristics.
$till not sure if !ou are an entre(reneur or if !ou ma! some da! have !our o/n heroAs -ourne! aheadC Tr! takin*
the Entre(reneur Assessment $urve! but remember' this does not mean if !ou have the tendenc! or not' a*ain onl!
!ou *et to decide if !ou /ant to *o on !our o/n entre(reneurial -ourne!. ;o one or no surve! can tell !ou that.
)ntrepreneur assessment sur&ey
Entrepreneur a$$e$$ent $urvey
Directions: ,lease circle !our (ersonal res(onse to each &uestion. ,lease be sure to *o /ith the ans/er that is
!our first choice if and /hen !ou are in doubt of ho/ to res(ond.
2K Do !ou have an issue that is a ma-or drivin* force behind !our (rofessional *oals in lifeC
3es Indecided ;o
1K ?ould !ou describe !ourself as the t!(e of (erson /ho *ives u( easil! /hen faced /ith adversit!C
3es Indecided ;o
3K Do (eo(le /ho have kno/n !ou since childhood describe !ou as the t!(e of (erson /ho *ives u( easil!
/hen faced /ith adversit!C
3es Indecided ;o
BK Eave !ou been successful in the (ast convincin* others to hel( !ou to accom(lish !our *oalsC
3es Indecided ;o
=K Do !ou have a desire to make the /orld a better (lace that is a stron*er *oal for !ou then !our desire to earn
mone!C
3es Indecided ;o
>K Eave !ou considered becomin* an entre(reneurC
3es Indecided ;o
9K Eave !ou s(ent a substantial amount of time in !our life considerin* /hat t!(e of le*ac! !ou /ould like to
leaveC
3es Indecided ;o
5K ?hen tr!in* to raise su((ort for an idea' do !ou ever start b! identif!in* (eo(le to form alliances /ith /ho
ma! be s!m(athetic to !our *oalC
3es Indecided ;o
DK If !ou /ere bus! /ith a deadline for /ork and or school /ould !ou miss com(letin* this deadline on time
because !ou *ave !our o/n ne/ venture<start u(<ne/ (roduct idea a hi*her (riorit!C
3es Indecided ;o
20K ?ill !ou use !our score on this test to ultimatel! hel( determine if !ou should become an entre(reneurC
3es Indecided ;o
22K Eo/ man! of the entre(reneurial mindset characteristics do !ou (ossessC +ive !ourself 2 (oint for each of
the characteristics !ou (ossess from the list belo/.
Total $core for characteristics: TTTTTTTTTT
$ome ke! characteristics of an entre(reneurial mindset
In cha(ter 2 some characteristics of an entre(reneurial mindset /ere sharedG here are additional characteristics
and or similar characteristics to also consider.
entor ethod 1
Euanitarian
#orth * .oint
1dd * .ointFFFF
:r*ani0in* movements that can take man! forms
includin* cam(ai*ns' drives' *rassroots or net roots
movements' lobb!in*' and<or crusades for the e"(ress
(ur(ose of (rovidin* altruistic or charitable su((ort.
9i$ionary
#orth * .oint
1dd * .ointFFFF
,ossessin* the abilit! to (otentiall! define the future
b! makin* bold unsubstantiated (redictions for ne/
enter(rises /hile utili0in* a *reat deal of ima*ination
and foresi*ht in the (rocess.
9alue$3centered
#orth * .oint
1dd * .ointFFFF
Demonstratin* /orth/hile &ualities of leadershi(
that are la/ful' ethical' considerate' and honest in
nature and intent.
Change3oriented
#orth * .oint
Ado(tin* a leadershi( st!le that attem(ts to
transform the status &uo b! creatin* a ne/ method'
(rocess or invention for accom(lishin* tasks.
B5
1dd * .ointFFFF
&el!3reliant
#orth * .oint
1dd * .ointFFFF
De(endin* on !ourself to develo( solutions for the
(roblem or challen*e at hand.
.er$ua$ive
#orth * .oint
1dd * .ointFFFF
Able to convince others that the ne/ or*ani0ationsA
mission and *oals are viable and should be ado(ted and
su((orted.
Eyper3!ocu$ed
#orth * .oint
1dd * .ointFFFF
aintainin* uninterru(ted attention and
concentration directed at im(lementin* the enter(riseAs
mission.
.a$$ion
#orth * .oint
1dd * .ointFFFF
Eavin* a tremendous amount of enthusiasm and
e"citement over the mission and *oals of the ne/
or*ani0ation.
Energetic
#orth * .oint
1dd * .ointFFFF
Demonstratin* an infinite amount of drive and an
enter(risin* nature to/ard accom(lishin* an
or*ani0ationAs ob-ectives.
?hen startin* a ne/ or*ani0ation es(eciall! /hen
startin* a social enter(rise' it re&uires a *reat deal of
ener*! and drive to accom(lish all the ob-ectives
es(eciall! *iven that social enter(rises usuall! re&uire
volunteer staff and un(aid staff for resourcefulness that
*oes far be!ond the standard needs of a traditional'
lon*-established com(an!.
Re$ilient ,ossessin* the abilit! to kee( on tr!in* even /hen
Business Fundamentals BD A +lobal Te"t
#orth * .oint
1dd * .ointFFFF
faced /ith failure' *reat adversit! and seemin*l!
insurmountable obstacles.
21K Ask someone /ho has kno/n !ou since !ou /ere a child ho/ man! of the entre(reneurial mindset
characteristics the! think !ou (ossessC +ive !ourself 2 (oint for each of the characteristics the! feel !ou
(ossess.
Total $core for characteristics: TTTTTTTTTT
#ns!er $ey
1n$wer )ey !or entrepreneur a$$e$$ent $urvey
Directions: ,lease circle !our (ersonal res(onse to each &uestion. ,lease be sure to *o /ith the ans/er that is
!our first choice if and /hen !ou are in doubt of ho/ to res(ond.
2K Do !ou have an issue that is a ma-or drivin* force behind !our (rofessional *oals in lifeC
3es Indecided ;o
&core: Ten (oints for 3es' 0 (oints for Indecided and ;o.
Rea$on: :ne of the first ste(s to/ard creatin* a ne/ com(an! is to have a ma-or reason or issue for !our
ne/ ventureRs mission or *oal.
1K ?ould !ou describe !ourself as the t!(e of (erson /ho *ives u( easil! /hen faced /ith adversit!C
3es Indecided ;o
&core: Ten (oints for ;o and 0 (oints for 3es and Indecided.
Rea$on: 3ou have to be able to continue throu*h all the setbacks to be successful and ultimatel! en-o! bein*
a social entre(reneur.
3K Do (eo(le /ho have kno/n !ou since childhood describe !ou as the t!(e of (erson /ho *ives u( easil!
/hen faced /ith adversit!C
3es Indecided ;o
&core: Ten (oints for ;o and 0 (oints for Indecided and 3es.
Rea$on: It t!(icall! takes a track record in life of dealin* successfull! /ith adversit! to build u( the
confidence and credibilit! that comes /ith a ;o ans/er for this &uestion.
BK Eave !ou been successful in the (ast convincin* others to hel( !ou to accom(lish !our *oalsC
3es Indecided ;o
&core: Ten (oints for 3es and 0 (oints for Indecided and ;o.
=0
Rea$on: ;e/ ventures do not have the fundin* to afford the staff to *et /ork accom(lished. @esourcefulness
is the ke! to succeedin* and one must (ossess the abilit! to attract and retain volunteers and non-(aid e"(erienced
hel( at first to *et the tasks com(leted.
=K Do !ou have a desire to make the /orld a better (lace that is a stron*er *oal for !ou then !our desire to earn
mone!C
3es Indecided ;o
Rea$on: Entre(reneurs are driven b! their need to create societal /ealth vs self-/ealth. This desire takes
(recedent and (riorit! over other *oals. This does not mean that someda! !ou mi*ht not derive a financial bonan0a
for the /ork !ou have been doin* associated /ith the start u(. It -ust means that is not /hat drives !ou toda!.
>K Eave !ou considered becomin* an entre(reneurC
3es Indecided ;o
Rea$on: Even if it /as a subconscious or (assin* thou*ht' usuall! !ou have to have some (ro(ensit! or
interest to/ard becomin* an entre(reneur for it to be !our destin!.
9K Eave !ou s(ent a substantial amount of time in !our life considerin* /hat t!(e of le*ac! !ou /ould like to
leaveC
3es Indecided ;o
Rea$on: ,erha(s !our le*ac! is somethin* to be considered in later !ears. ?ith that said it is never too soon
to be*in considerin* /hat t!(e of foot(rint !ou ma! /ant to leave. If !ou have considered tr!in* to leave a le*ac! of
makin* the /orld a better (lace then !ou ma! a heroAs -ourne! as !our entre(reneurial (ath for future.
5K ?hen tr!in* to raise su((ort for an idea' do !ou ever start b! identif!in* (eo(le to form alliances /ith
/hom ma!be s!m(athetic to !our *oalC
3es Indecided ;o
Rea$on: :ne of the best /a!s to increase !our chances of bein* a successful entre(reneur is to enhance !our
credibilit! b! for*in* strate*ic alliances and (artnershi(s /ith others.
DK If !ou /ere bus! /ith a deadline for /ork and or school /ould !ou miss com(letin* this deadline on time
because !ou *ave !our o/n ne/ venture<start<ne/ (roduct idea a hi*her (riorit!C
3es Indecided ;o
&core: Ten (oints for ;o and 0 (oints for 3es or undecided.
Business Fundamentals =2 A +lobal Te"t
Rea$on: This ma! a((ear to be a trick &uestion. A values-centered leader /ould not sacrifice one im(ortant
commitment for another even if it /as to hel( a social enter(rise. ,art of startin* a ne/ com(an! is demonstratin*
ethical and honest business leadershi(.
20K ?ill !ou use !our score on this test to ultimatel! hel( determine if !ou should become an entre(reneur
3es Indecided ;o
&core: Ten (oints for ;o and 0 (oints for 3es and Indecided.
Rea$on: The truth of the matter is that if !ou are reall! meant to be an entre(reneur !ou do not need a test
and or surve! to tell !ou this. In factG a true entre(reneur does not de(end on others to make their decisions. :nl!
!ou kno/ !our destin!G do not let an!one tell !ou /hat !ou can and canAt accom(lish in life because statisticall!
s(eakin* the! /ould not reall! kno/.
22K Eo/ man! of the entre(reneurial mindset characteristics do !ou (ossessC+ive !ourself 2 (oint for each of
the characteristics !ou (ossess.
Total $core for characteristics: The *oal is to score a ten for this &uestion. an! entre(reneurs embod! these
entre(reneurial mindset characteristics.
21K Eo/ man! of the entre(reneurial mindset characteristics do !ou (ossessC +ive !ourself 2 (oint for each of
the characteristics !ou (ossess.
Total $core for characteristics: The *oal is once a*ain to score a ten for this &uestion as e"(lained above. If it
turns out that !ou have a ver! different score for !our self-assessment of this &uestion in com(arison to /hat
someone /ho has kno/n !ou all !our life then !ou need to come to an understandin* /h! others (erceive !ou
differentl! then !ou (erceive !our o/n interests. ,erha(s !ou are re(ressin* or camoufla*in* !our true interests or
ma!be !ou have chan*ed. The reason for the difference isnAt as im(ortant as makin* sure !ou are a/are of !our o/n
interests.
&core:
A score of 210-220 ma! mean that !ou kno/ that !ou /ant to become an entre(reneur and !ou should
be*in /orkin* out a strate*ic (lan to make !our *oals a realit! and to be*in !our o/n heroAs -ourne!.
A score of 20D-D0 ma! mean that !ou most likel! /ant to become an entre(reneur and !ou should be*in
thinkin* of this (ossibilit! to *ive !ourself a further self-assessment of !our interests.
A score of 5D or lo/er ma! mean that !ou (robabl! are not *oin* to be an entre(reneur but as mentioned
beforeG do not let this assessment be the final or even (artial determinationG the choice is clearl! !our o/n
to make.
(log (ac) **: &tart3up &tory
(log bac): ,ost a stor! or intervie/ /ith an entre(reneur /ho (ossesses some of the entre(reneurial mindset
characteristics !ou ho(e to develo( in !ourself at: htt(:<<///.entoro*ra(h!.com. ?hether !ou (ossess
=1
confidence in !our o/n entre(reneurial mindset or ho(e to enhance or ins(ire further develo(ment there are
resources and thin*s !ou can do toda! to build !our entre(reneurial mindset4
Entre(reneurial mindset enhancin* activities
$et u( a +oo*le Alert for the ke! /ords: 7entre(reneurial mindset8 at htt(:<<///.*oo*le.com<alerts. A
+oo*le Alert is a &uer! of ke! /ords and allo/s !ou to receive in !our e-mail inbo" a list of all the stories to
be (osted on the Internet that da! associated /ith !our ke! /ord. 3ou can set the alert to come to !ou
immediatel!' dail! or /eekl!.
Discuss /ith entre(reneurs /hat attributes the! (ossess that make these founders (articularl! ade(t at
startin* ne/ ventures. ?hen !ou talk /ith these visionar! individuals be on the 7look out8 for uni&ue
characteristics that the! (eo(le (ossess.
Take some time and consider toda! /hat !ou /ant !our lastin* le*ac! to be and /ho !ou /ill accom(lish
those *oals. Hee( a diar! of this -ourne! and tr! /hen (ossible to have -ournal entries about /hat t!(e of
entre(reneurial characteristics !ou are develo(in* to hel( !ou achieve !our le*ac! *oals.
Do not let others define !our entre(reneurial -ourne!4 3ou kno/ /ho !ou are and /ho !ou /ant to be. The
7na!sa!ers8 /ill al/a!s be around to tr! to (revent !ou from startin* a ne/ venture. Learn to listen to !our
*ut.
$eek out educational (ro*rams and literature that /ill hel( !ou better develo( !our o/n entre(reneurial
characteristics. ake a list of the attributes !ou do not !et (ossess and then develo( a (lan of action to
achieve addin* these entre(reneurial characteristics to !our o/n (ersonalit! traits.
$chedule time ever! da! for 30 minutes to kee( refinin* !our entre(reneurial characteristics and fi*urin*
out ho/ to enhance !our entre(reneurial (ersonalit!. an! (eo(le think that /hat !ou s(end time thinkin*
about /ill become ultimatel! !our o/n realit!.
?hile each of !ou are from different countries and cultures there are some (laces that often /ill (rovide
resources for first-time entre(reneurs.
These (laces include:
$mall business associations
6anks' financial institutions' and micro-credit a*encies
Educational %acilities
6usiness related ;+:s
Libraries
Communit! @edevelo(ment A*encies
ost famil! and friends for moral su((ort
The Internet /hen usin* the ri*ht search terms associated /ith develo(in* and or enhancin* !our
entre(reneurial mindset.
;o/ !ou are read! to *o out and (otentiall! create !our o/n heroAs -ourne!
Cha(ter summar!
In Cha(ter 1 titled' 7The mind of the entre(reneur8' /e revie/ed the characteristics of an entre(reneurial
mindset that /ere covered in Cha(ter 2' shared the stor! and entre(reneurial mindset attributes of Costa @oussos
durin* his start u( -ourne! /ith usic.us follo/ed b! sharin* /ith !ou the Entre(reneur Assessment $urve! and
ans/er ke! endin* Cha(ter 1 /ith a list of entre(reneurial mindset enhancin* activities so that !ou can be*in
embarkin* on !our o/n heroAs -ourne!.
(log (ac) *2: Eero .o$t
(log bac): ,ost entries from !our -ournal re*ardin* !our thou*hts about !our o/n -ourne!. Then read /hat
others have (osted. Do !ou see an!one /ho !ou think is on his or her /a! to/ard becomin* a heroC ,ost !our
thou*hts and comments on entre(reneurial mindset characteristics at htt(:<<///.entoro*ra(h!.com.
=B
4. Business models and
mar$etin:an o&er&ie!
Editor$: $alvador Trevi[o and Carlos @u! artine0 JITE$' onterre! Cam(us' e"icoK
Contributor$: Carlos Alberto Alanis' +as(ar @ivera' #or*e Echea*ara!' #ose de #esus ontes' #uana onica
+arcia' @amiro @obles' and @oberto $anche0
Learnin* ob-ectives
ho/ to build and im(lement a successful business model
understand the im(ortance of a com(an! to be market vs (roduct oriented in a develo(in* countr!
ho/ to identif! consumersA /ants successfull!
understand ,orterAs = forces of Industr! Attractiveness
ho/ to (erform a arket @esearch stud!
/hat is a business model5
6usiness models can be a((roached from t/o (ers(ectives. A *eneral (ers(ective defines a business model as
an! t!(e of conce(tual frame/ork e"(lainin* ho/ to or*ani0e and evolve a business venture. :n the other hand'
s(ecific circumstances *uide business modelin*. %or instance' industries such as tourism' bankin* in the services
sector' or automobile or shoe manufacturin* demand s(ecific models that take into account critical variables found
/ithin the industr!As s(ecific environment.
:ne definition from the *eneral (ers(ective is (rovide b! Ale" :ster/alder:
. business model is a oneptual tool that ontains a set of elements and their relationships and
allows e/pressing the business logi of a speifi firm0 2t is a desription of the ,alue a ompany
offers to one or se,eral segments of ustomers and of the arhiteture of the firm and its networ! of
partners for reating, mar!eting, and deli,ering this ,alue and relationship apital, to generate
profitable and sustainable re,enue streams0 3Osterwalder '44&, http:55business-model-
design0blogspot0om5'44&5$$5what-is-business-model0html0 .essed 6o,ember '&, '44780
odels are sim(lified re(resentations of thin*s in the real /orld. 3ou are alread! familiar /ith man! kinds of
models. 3ou have (la!ed /ith a model air (lane or boat /hen !ou /ere a child. 3ou ma! have seen models of
buildin*s' dams' or other construction (ro-ects built b! architects to sho/ the s(onsors of a (ro-ect ho/ a
com(leted buildin* /ill look after it is built. In the same /a!' a business model lets an entre(reneur tr! out
different /a!s to (ut to*ether the com(onents of his or her business and evaluate various o(tions before
im(lementin* the one that looks the best. This techni&ue is es(eciall! im(ortant in toda!As business environment'
/here technolo*! *ives business (eo(le so man! more o(tions than ever before.
Business Fundamentals == A +lobal Te"t
". #usiness models and mareting:an o$er$iew
:ster/alder *oes on to sa!:
For managers and e/euti,es this means that they ha,e a whole new range of ways to design their
businesses, whih results in inno,ati,e and ompeting business models in the same industries0 Before
it used to be suffiient to say in what industry you were for somebody to understand what your
ompany was doing beause all players had the same business model0 1oday it is not suffiient to
hoose a lurati,e industry, but you must design a ompetiti,e business model0 2n addition inreased
ompetition and rapid opying of suessful business models fores all the players to ontinuously
inno,ate their business model to gain and sustain a ompetiti,e edge0
6ased on his search of the literature' :ster/alder lists nine buildin* blocks for mana*ers to use in develo(in* an
innovative and effective business model. ?e list them' alon* /ith some comments of our o/n:
7The value proposition of /hat is offered to the market8G ?e have covered this issue earlier in the
cha(ter in *eneral' and /ith s(ecific reference to ho/ ,orterAs anal!tical tools can assist mana*ers in
*eneratin* a viable value (ro(osition that consumers (erceive as one that is su(erior to /hat is offered b!
the com(etition.
7The target customer segments addressed b! the value (ro(osition8G ana*ers soon learn that the!
cannot be all thin*s to all (eo(le' that /hat a((eals to one se*ment of the market /ill not a((eal to another.
?e /ill discuss this in more detail later in this cha(ter.
7The communication and distribution channels to reach customers and offer the value (ro(osition8G
This issue relates to t/o of the 7four ,As8 J(romotion and (laceK /e discussed briefl! /hen /e discussed the
marketin* mi". %or e"am(le' do /e (romote the business b! /ord of mouth' si*ns on a storefront' ads in a
ne/s(a(er' ads on TM' ads on the Internet' or some combination of all of theseC ,lace refers to /here the
(roduct or service is made available to the customer. The three usual choices are in a store' throu*h a mail-
order catalo*' or from an Internet /ebsite.
7The relationships established /ith customers8G In *eneral' ho/ever' the im(ortant (oint is not -ust to
ac&uire customers' but to serve them in a /a! that !our business retains them as customers. %or e"am(le' it
is usuall! much more e"(ensive to attract a ne/ customer to !our business than it is for !ou to encoura*e a
(revious customer to return.
7The core capacities needed to make the business model (ossible8G This (oint refers to the necessit! to
define the basic ca(abilities !our business must have. %or e"am(le' if !ou are o(enin* an art *aller! to sell
!our o/n /ork' !ou had better have some talent as an artist4
7The configuration of activities to im(lement the business model8G Another /a! of statin* this is to
define the business (rocesses that !our business must have in order to function (ro(erl!.
7The partners and their motivations of comin* to*ether to make a business model ha((en8G ,artnershi(s
and alliances are increasin*l! im(ortant in toda!As /orld.
=>
7The revenue streams *enerated b! the business model constitutin* the revenue model8G In essence' this
is the ,rice com(onent of the 7%our ,As8. ?here does !our revenue come from' /hat are the (ro-ections for
the future' and /hat are the (lans to sustain the necessar! revenue stream as business conditions chan*eC
7The cost structure resultin* of the business model8. The difference bet/een revenues and costs' of
course' is !our (rofit. ?ithout a (rofit' it /ill not be (ossible for !ou to sta! in business ver! lon*.
E"am(les of successful business models
It ma! be hel(ful to illustrate the conce(t of business models /ith t/o e"am(les' cDonalds and CEEL. In
the case of cDonalds' it o(erates franchises all over the /orld. %ranchises are (roven and successful business
models /hose business model 7(rescri(tionQ is successful /ithin the countr! of ori*in and even overseas.
Dominatin* the hambur*er fast food market' cDonaldsA franchise model has also (roven to be successful since it
&uickl! ada(ts and evolves accordin* to the environment. %or e"am(le' cDonalds I$A does not have hot sauces'
but in e"ico /here e"icans like a lot of s(ic! food' the! offer hot sauce' as /ell as s(ic! meat (ut into the
hambur*ers. Another successful e"am(le is the e"ican cement maker CEEL Jthe /orldAs third lar*est (roducer
of cementK that has successfull! im(lemented and tested a standard business model called the 7CEEL ?a!8 in all
the (lants and business units it has /ithin more than =0 countries around the /orld. Considerin* it o(erates in four
different continents' e"ce(t :ceania' /ith ver! different cultures and /a!s of thinkin*G countries such as the I$ vs
Thailand' or Ital! vs 6an*ladeshG it allo/s CEEL to have a ver! &uick res(onse mechanism to ad-ust to the market
demands since it has a standard o(erational (latform. This *ives CEEL a clear com(etitive advanta*e a*ainst its
main rival *iants such as Eolcim and Lafar*e.
Eavin* established /hat a business model is' it is im(ortant to se(arate it from the desi*n of a model actuall!
im(lementin* it' i.e. testin* it and (uttin* it into (ractice. The desi*n is best defined as the strate*!. If a business
model desi*n is not /ell outlinedG the im(lementation and testin* /ill also fail. Takin* a ver! sim(le frame/ork
from Ale"ander :ster/alder J6usiness odel Desi*n 6lo*(ost' #une' 100>K sho/n in E"hibit 21' business model
desi*n is se(arated from business model e"ecution' (receded' of course' b! business e"ecution im(lementation and
testin*. Com(anies in &uadrant 768 /ith sound business model desi*ns and effective e"ecution are successful
com(anies' and the! must focus on sta!in* in that &uadrant. Com(anies in &uadrant 7C8 need to re-e"amine their
business vision and strate*!' /hile com(anies in &uadrant 7D8 do not have a *ood desi*n but are effective on its
im(lementationG this latter usuall! ha((ens /ith the a((earance of di$ruptive technologie$ that 7shake u(8
established industries and business models much the /a! iTunes and the i,od did. It is ver! common for
com(anies to have a sound business model desi*n but fail to im(lement and test it (ro(erl! J&uadrant 7A8K.
E"hibit 21: $uccess S 6usiness model desi*n
and im(lementation
If /e seek to have a successful test result from a business model it is mandator! to have a clear vision as /ell as a
sound business model desi*n. The rest is a matter of testin* and im(lementations' or 7e"ecution8 as it is often
called. $till' successful e"ecution is sometimes the most difficult task of all.
The focus of the balance of this section /ill be to revie/ the main issues com(anies must consider in order to
successfull! im(lement and test a business model.
odel im(lementation<testin* (re-re&uisites
A model must have the follo/in* (re-re&uisites in order to im(lement and test it:
2. A com(an! o/ner<s(onsor: :r*ani0ational models must manifest themselves as a cascadin* effect
emanatin* from to( to bottom. Therefore' the s(onsor must either be the head of the com(an! or other
hi*h level e"ecutive. Isuall! s(onsors are identified as the head of a com(an! de(artment.
1. $ound bud*et: Testin* a business model /ill al/a!s re&uire funds. The amount (rovided must be the one
demanded b! the model to test it' no more and no less.
3. Leader: This is es(eciall! im(ortant since he<she /ill be the 7authorit!8 or res(onsible (erson /ho /ill *et
results.
B. Fualified human resources: The leader *ets to choose his<her team. This an im(ortant (oint since the
leader must look for the ke! individuals /ho are u( to the test and have the necessar! e"(ertise to
successfull! im(lement and test a business model.
=. Effective trainin*: ?ith all the above accom(lished' the final (art of the (re-re&uisites is trainin*. A
business model automated or manuall! develo(ed' must be o(erated b! human bein*s' therefore these
(ersons /ho /ill actuall! test and o(erate the model must have no doubts and be convinced about the
modelAs (rocesses and the benefits of /orkin* accordin*l! to the business model.
@eal e"(ectations outcome: benefits
Isuall! com(anies have a tendenc! to be ver! o(timistic about outcomes /hen a business model is tested.
Com(anies must be balanced bet/een bein* a**ressive and demandin* about the model benefits and be realistic
=5
S
o
u
n
d
A B
F
l
a
w
e
d
C D
Flawed Sound
Business execution
(implementation and testing)
B
u
s
i
n
e
s
s

m
o
d
e
l

d
e
s
i
g
n
/hen evaluatin* outcomes of the test. The main benefits to sho/ /hen a business model is tested must be outlined
around the ne"t three as(ects.
Economical: The! must reflect tan*ible economical benefits' such as: cost reductions or sales increases.
,rocess: The! must im(rove connections bet/een the com(an!As value chain activities such as (roduction'
maintenance' (rocurement' finance' human resources' etc. so the! are better coordinated and decision makin*
(rocesses are more effective and timel!.
,ractice: The! must im(rove the /ork flo/ of ho/ thin*s are done in the com(an!. These im(rovements can be
translated into creatin* better historical data for a com(an! e.*. real time inventor! transactions from a (lant
/arehouse' or com(lete and accurate recordin* of a maintenance -ob (erformed on a s(ecific item of (lant
e&ui(ment. This creates a more accurate data set' later used as im(ortant information to make decisions.
%uccess factors
:nce the benefits have been sho/n' the ne"t ste( is to (reserve them. In order to do so' the follo/in* success
factors must be ke(t in mind.
2. Eave the a((ro(riate leadershi(. ,ersonJsK that can make /ell based and &uick decisions to assure the
continuit! of the model once it has been im(lemented.
1. Create an internal environment of &uick and fle"ible res(onse. All de(artments of the com(an! must be
fle"ible and ad-ust &uickl! to events
3. Eave inte*rative indicators and measurements. This is a model 7thermometer8' one that /ill indicate if
ever!thin* is *oin* smoothl! accordin* to e"(ectations or not. The indicators /ill sho/ /arnin* si*ns in
order to take corrective action.
B. Eave corrective actions or model ad-ustments. Learn from actual results b! &uickl! ad-ustin* and evolvin*
the business model in an inte*rative /a!' bein* coherent' sound and ali*ned /ith the com(an! vision.
Conclusions
After seein* /hat a business model is and the re&uired issues involved in havin* a successful business model test
and im(lementationG com(anies must kee( in mind that there is no one time testin* of a model and *uarantees of
success in the business /orld. In our era' businesses are d!namical (ro(elled b! technolo*! that chan*e constantl!
as /e move more and more into a more *lobal /orld. The ke!s for com(anies to succeed are to be al/a!s focused
and to be fle"ible enou*h to ad-ust its business model &uickl! and effectivel! accordin* to the chan*in* demands of
customers and markets.
:ne of the most im(ortant functions that com(anies can have to antici(ate com(etitive threats and to reco*ni0e
evolvin* market o((ortunities is to have a continuin* com(etitive intelli*ence function /ithin the com(an!.
ana*ement failures are fre&uentl! associated /ith the inabilit! to antici(ate ra(id chan*es in the markets'
res(ond to ne/ and (roliferatin* com(etition' or re-orient technolo*ies and the strate*ic direction of their business
to/ard chan*in* customer needs and ne/ industr! standards. Com(etitive intelli*ence is an im(ortant function in
toda!As ra(idl! chan*in* business environment.
Business Fundamentals =D A +lobal Te"t
Consumer mar$etin models
The formal use of marketin* conce(ts is a fairl! recent activit! in develo(in* economies. In the (ast' most
com(anies focused on (roducin* (roducts or offerin* services /ithout much em(hasis on customers and /ants.
Inderstandin* consumer behavior /as not considered to be im(ortant. The em(hasis /as on the (roduct or service
(er se. +iven the emer*ence of a *lobal econom!' ho/ever' /hich brou*ht the o(enin* of markets and increased
com(etition' the traditional a((roach has chan*ed dramaticall!. Com(anies are increasin*l! focusin* on /hat
customers need and<or /ant. arket-oriented com(anies are be*innin* to emer*e in ever! develo(in* econom! in
the /orld.
The (ur(ose of this section is to introduce !ou to the im(ortance of marketin* oriented com(anies in develo(in*
economies' as /ell as identif!in* business models /hich follo/ a ar)eting odel rather than a product
odel>
The (roduct model vs the marketin* model
Accordin* to ,hili( Hotler' the (roduct model is a mana*ement orientation that assumes that if a &ualit!
(roduct is (roduced' and offered to consumers at a (rice the! find to be acce(table' the com(an! /ill be successful
in the market (lace. Another author /ho successfull! introduced a marketin* orientation is Theodore Levitt. Eis
orientation is sometimes referred as a 7marketin* m!o(ia8 a((roach since com(anies define their business in terms
of (roducts and not in terms of customer needs and /ants. %or e"am(le' a car manufacturer ma! think the! are in
the 7car business8 /hile the! are' in fact' com(etin* in the trans(ortation industr!.
Inder the (roduct model' mana*ement focuses on develo(in* hi*h &ualit! (roducts /hich can be sold at the
ri*ht (rice' but /ith insufficient attention to /hat it is that customers reall! need and /ant. %or e"am(le' A((le
determined that /hat customers /anted /as the abilit! to (urchase music one son* at a time rather than (urchase
an entire CD /ith 2> tracks' onl! three of /hich /ere reall! /anted. The! subse&uentl! develo(ed and introduced
the i,od and iTunes online store /hich revolutioni0ed the /a! consumers bu! music. In the meantime' traditional
(roducers of traditional CDs lost market share to A((le' /hich had a much better understandin* of ho/ to satisf!
consumers.
The (remises im(licit in the (roduct model are:
Consumers bu! (roducts more than solutions.
Consumers are interested basicall! in (roduct &ualit!.
Consumers reco*ni0e (roduct &ualit! and differences in (erformance alternative (roducts.
Consumers choose bet/een different (roducts based on *ettin* the best &ualit! for the mone!.
The main task of or*ani0ation is to kee( im(rovin* &ualit! and reducin* cost as ke! factors to maintain and
attract customers.
The (roduct model used to be a((lied in develo(in* or closed economies /here fe/' if an! choices /ere
available. Advanta*es of the (roduct model are that the cost of determinin* consumer (references and the
develo(ment of ne/ (roducts and services are minimi0ed or eliminated because consumers are in some /a!
ca(tive. 6! /a! of e"am(le' com(are the automobile industr! in develo(ed countries to the automobile industr! in
>0
the $oviet 6loc countries (rior to 2D5D. Customers had a /ide variet! of automobile models to choose from /hile
citi0ens in the Eastern 6loc had fe/. The latter /as o(eratin* on a (roduct model rather than a marketin* model.
Disadvanta*es of the (roduct model are that as soon as a com(an! could offer a (roduct more oriented to satisf!
customers\ needs and desires the com(anies oriented to (roducts /ill lose the most if not all of its market share.
The traditional CD com(anies referred to above are a *ood e"am(le of this.
In summar!' market orientation is essentiall! a customer orientation. Inderstandin* customer needs lies at the
core of the marketin* conce(t.
The mar$etin model
The marketin* model is a mana*ement orientation /hich maintains that the fundamental task of the
or*ani0ation is to determine needs and /ants of customers in the tar*et market and ada(t the or*ani0ation as a
/hole to satisf! their customers more effectivel! and efficientl!. $atisf!in* customers more efficientl! and
effectivel! than com(etitive com(anies increases the chances of the or*ani0ationAs success. The marketin* model is
an a((roach /hereb! com(anies create value for their customers. This conce(t can be understood b! a((l!in* it in
the so called 9alue Chain Model introduced b! ichael ,orter. An a((lication on ho/ this model is a((lied in
marketin* is sho/n E"hibit 23belo/.
E"hibit 23: Malue chain of marketin*
%irst' !ou need to kno/ and understand !our customersA needs and /ants.
6ased on !our understandin* of their needs' throu*h research and develo(ment !ou must develo( an
a((ro(riate (roduct or service that fulfills those needs.
6ased on !our en*ineerin* ca(abilities !ou must define !our manufacturin* (rocess that delivers the ri*ht
(roduct in the most efficient and economical /a!.
%inall!' the (roduct or service must be delivered at the ri*ht time and (lace.
A sim(le /a! to understand the creation of value to customers is b! e"aminin* the follo/in* e&uation:
Malue S 6enefits < ,rice
Malue is created b! increasin* benefits to the customers. %or this reason' 7benefits8 is s(ecified in the numerator
of this e&uation Jthe hi*her the benefits' the hi*her the (erceived value b! the customerKG on the other hand' 7(rice8
is (laced in the denominator since the hi*her the (rice the lo/er the (erceived value.
;o/ !ou must understand ho/ value is created for !our customers. To do so' mana*ers use a techni&ue called
the 7Mar)eting Mi58 Jcommonl! called the four ,\sK
,roduct: ?hat is the (roduct<satisfactor that best fulfills m! customerAs needsC
Business Fundamentals >2 A +lobal Te"t
Customers
needs and
wants
Research &
Development
Engineering anu!acturing
Customer
value
,rice: ?hat should be the a((ro(riate (rice for this (roduct that reflects not onl! its cost but also its
benefits to com(ete /ith other (roducts in the same se*ment or substitute (roductsC
,lace: In /hat markets should the com(an! offer the (roductC
,romotion: Eo/ should the com(an! (romote the (roduct or satisfactorC
:ne of the main advanta*es of the marketin* model a((roach is that the com(an! tries to be near the
customerAs needs b! understandin* them and therefore develo(in* (roducts that fulfill or e"ceed them in the best
(ossible /a!. :n the other hand' and es(eciall! in develo(in* economies' the main disadvanta*e of this model is
the cost in obtainin* the information needed to understand the customer.
6dentifyin mar$et needs
As mentioned (reviousl!' the essence of a((l!in* the marketin* model lies in the findin* of needs and fillin*
them /isel!. ?e /ill assess this issue of 7Identif!in* market needs8 b! introducin* a conce(tual frame/ork kno/n
as Abraham aslo/As Eierarchy o! "eed$.
This model focuses in the (s!cholo*ical features that e"(lain the basic dimensions of human needs.
aslo/As Eierarch! of ;eeds
aslo/As Eierarch! of ;eeds' a sta(le of sociolo*! and (s!cholo*! courses' (rovides a useful frame/ork for
understandin* ho/ and /h! local (roducts and brands are bein* selected and additionall! ho/ the! can be
e"tended be!ond home countr! borders. aslo/ h!(othesi0ed that (eo(leAs desires can be arran*ed into a
hierarch! of five needs. As an individual fulfils needs at each level' he or she (ro*resses to hi*her levels Jsee E"hibit
2B aslo/As Eierarch! of ;eedsK. At the most basic level of human e"istence' (h!siolo*ical and safet! needs must
be met. ,eo(le need food' clothin*' and shelter' and a (roduct that meets these basic needs has (otential for
introduction into a s(ecific market. Eo/ever' the basic human need to consume food and li&uids is not the same
thin* as /antin* or (referrin* a hambur*er and a soft drink.
An additional consideration is that (references are dee(l! embedded in local cultures. @es(ondin* to such
differences has re&uired the creation of (roducts and brands for s(ecific re*ional or countr! markets.
id-level needs in the hierarch! include self-res(ect' self-esteem' and the esteem of others. These social needs'
/hich can create a (o/erful internal motivation' drivin* demand for status-oriented (roducts' cut across the
various sta*es of countr! develo(ment.
Lu"ur! *oods marketers are es(eciall! skilled at caterin* to e$tee need$ on a *lobal basis. $ome consumers
flaunt their /ealth b! bu!in* e"(ensive (roducts and brands that others /ill notice. $uch behaviour is referred to as
7con$picuou$ con$uption8 or 7lu5ury badging8. An! com(an! /ith a (remium (roduct or brand that has
(roven itself in a local market b! fulfillin* esteem needs should consider devisin* a strate*! for takin* the (roduct
*lobal.
>1
E"hibit 2B: aslo/As Eierarch! of ;eeds
$ource: htt(:<<///.(rovenmodels.com<2D<ima*e
Identif!in* customerAs /ants successfull!
A (rocess to determine the actual needs of consumers re&uires the identification of the market factors that
(roduce them. In this (rocess com(anies should find real consum(tion motivators that eventuall! evolve into
(roduct offerin*s. %urthermore' a correct business definition leads to a natural market orientationG for instance'
Charles @evson famous &uote 7in the factor! /e make cosmeticsG in the dru* store /e sell ho(e8
J///.thinke"ist.comK made (ossible for the com(an! to develo( cosmetic (roducts based on /omenAs ho(es rather
than (roduct features. $everal (otential (itfalls should be avoided. %irst' the natural tendenc! to im(ose a (ersonal
(oint of vie/ /hen launchin* a ne/ (roduct or enterin* a ne/ market. $econd' sim(le imitation about com(etitorsA
moves. Third' lack of sufficient research and market kno/led*e to (roduce market (roved ideas. A frame/ork has
been (ro(osed to ali*n customerAs needs and /ants /ith com(anies ca(abilities. This frame/ork /as introduced b!
$herri Dorfman in her 100= marketin* article entitled 7?hat do Customers @eall!' @eall! ?ant8.
In the article aforementioned' Dorfman (ro(oses a three-ste( (rocess to develo( a natural market orientation:
$te( 2. Di$covery: %indin* out /hat customers reall! need
To learn about customer needs and (riorities' to identif! o((ortunities in the com(an! to fulfill these needs' and
to create ne/ or enhanced (roduct offerin*s. These ideas must be incor(orated in a market research (rocess
involvin* customers and other clients and su((liers in the Malue Chain.
$te( 1. De!inition: $ha(in* the offerin*s to meet customer needs
In this ste(' Dorfman (ro(oses (rioriti0in* features and benefits identified b! clients' su((liers' and customers.
Different &ualitative research techni&ues such as in-de(th intervie/s' ethno*ra(hies' and focus *rou( sessions
(ermit the identification of the core market needs.
$te( 3. 9alidation: Insurin* !our offerin*s fit into !our customerRs /orld.
%urther communication /ith consumers validate the final definition of a market based (roduct or service. This
validation takes (lace as (rotot!(es are assessed b! consumers to identif! (otential (roblems and to smooth out
desi*n issues.
All these models take into account the so-called end consumer (ers(ective' /hich im(lies that consumers
bu!in*' usin*' or recommendin* the (roducts are the drivin* force behind successful marketin* efforts.
Eo/ever' there are other marketin* (ers(ectives that assume that or*ani0ations of man! sorts' *iven their
im(ortance in the overall si0e of the *lobal econom! are the real forces behind marketsA success. This im(lies that
marketin* efforts should be aimed at understandin* their behaviour as consum(tion entities' and use this
kno/led*e to develo( marketin* strate*ies.
Business to business mar$etin models
odels of industr! attractivenessG the strate*ic (ers(ective
In order to be successful in business' /e must understand /hat our customerAs needs and /ants are and deliver
them in an efficient and (rofitable manner. In order to do so' /e must also understand the industries in /hich the
com(anies are immersed and /hat makes them attractive from the *eneral (oint of vie/.
Industr! attractiveness /as initiall! described b! ichael ,orter in his book' 9ompetiti,e +trategy J,orter
2D50K. ,orterAs /ell-kno/n 2ive 2orce$ Model is often used as an anal!tical tool b! com(anies /hen the! are
decidin* /hether or not to enter a (articular industr!. Accordin* to ,orter' /hat makes an industr! attractive or
unattractive is determined b! = forces:
2. @ivalr!: This force is measured b! ho/ intense the rivalr!<com(etition relationshi( in an industr! is. The
factors affectin* rivalr! are: number of com(etitors' slo/ market *ro/th' lo/ levels of (roduct
differentiation' ho/ a**ressive com(etin* com(anies are' etc. %or e"am(le' retailin* has al/a!s had the
re(utation of bein* a hi*hl! com(etitive industr!' /hile the rail road industr! is thou*ht to be less
com(etitive.
1. Threat of substitutes: In ,orterRs model' substitute (roducts refer to (roducts that can be substituted for
!our o/n. $ubstitute (roducts can be found /ithin o/n or other industries. %or e"am(le' if !ou decide to
start an inter-cit! bus com(an!' !ou have to consider all the other o(tions !our customers have to *et
from one cit! to another' for instance' cit! trains' small shuttle service' shared (rivate cars' amon* others.
3. 6u!er (o/er: The (o/er of bu!ers is the im(act that customers have on a (roducin* industr!. In *eneral'
/hen bu!er (o/er is stron*' the bu!er has the abilit! to set the (rice because usuall! there are ver! fe/
bu!ers and man! su((liers. +rain farmers are often used as an e"am(le. In most countries' there are
man! small farmers /ho *ro/ *rain' but fe/ lar*e bu!ers /ho have the (o/er to set the (rice a farmer
receives.
>B
B. 6arriers to entr!: 6arriers to entr! are uni&ue offerin*s of com(anies in an industr! that an! com(an!
/ishin* to enter that industr! must be (re(ared to overcome. E"am(les from develo(ed economies are
online bankin* and AT services for banks and fre&uent fl!er (ro*rams for airlines. In man! cases'
develo(ment of these e"(ected (roducts or services is &uite e"(ensive for a ne/ entrant' and' thus' it s a
barrier to entr!.
=. $u((lier (o/er: $u((liers are (o/erful /hen there are fe/ su((liers for a com(an! to (urchase necessar!
items from. In a situation /here there are fe/ su((liers' it is t!(icall! difficult for a bu!er to *et a lo/er
(rice from another su((lier. An e"am(le is the oil industr!' /here the! are man! bu!ers' but relativel!
fe/ su((liers' and most of the su((liers are members of the :,EC cartel /hich sets common (roduction
&uotas' thereb! controllin* the market (rice for oil.
ichael ,orter develo(ed t/o other tools that are /idel! used b! or*ani0ations in their a((roach to markets:
:hree -eneric &trategie$ and the 9alue Chain>
,orter (ostulated that a firm should ado(t onl! one of three *eneric strate*ies. The! are illustrated in :
$ource: htt(:<<///.(rovenmodels.com<19<ima*e A firm can choose to be the lo/ cost (roducer for a /ide
se*ment of the marketG it can offer a differentiated (roduct for a /ide se*ment that customers are /illin* to (a!
more for because of its (erceived *reater valueG or it can focus on a market niche as a lo/ cost (roducer or /ith a
differentiation strate*!. %or e"am(le' the ori*inal Molks/a*en automobile focused in a broad lo/-cost market. As
a matter of fact' the /ord in +erman means 7,eo(les Car8' indicatin* it /as meant to be affordable b! ever!one. A
*ood e"am(le of a differentiated automobile is the 6?. ,eo(le (a! more for a 6? because of the 7cons(icuous
consum(tion8 or 7lu"ur! bad*in* as(ects8 the! have mana*ed to create in (eo(lesA minds' not necessaril! because
Business Fundamentals >= A +lobal Te"t
the 6? is actuall! /orth 30 (er cent more than a com(arable automobile from Cadillac or ;issan. An e"am(le of
a car (ositioned to/ards a lo/ cost niche is the a0da iata' a t/o-seat s(orts car that costs much less than
com(arable cars. %inall!' !ou can consider the Eummer as a car that a((eals to a differentiated market niche.
,orterAs other /idel!-used tool is the Malue Chain' /hich is used to model the firm as a chain of value-creatin*
activities or (rocesses. ,orter identified a set of interrelated *eneric (rocesses common to a /ide ran*e of firms. Ee
divided them into (rimar! activities and su((ort activities' as illustrated in E"hibit 2=.
E"hibit 2=: Malue chain
$ource: htt(:<<///.(rovenmodels.com<1><ima*e
The (rimar! activities in the value chain are: inbound lo*istics' o(erations' outbound lo*istics' marketin* and
sales' and service. The su((ort activities are (rocurement' technolo*! develo(ment and research and develo(ment'
human resource mana*ement' and firm infrastructure Jto( mana*ementK. The (rimar! value chain activities are
interrelated' to the e"tent that the! can be formed /ith hi*h &ualit! and lo/ cost' the firm /ill be able to have
value-added that /ill be returned to the firm as (rofit. As an e"am(le of the /a! that (rimar! value activities are
interrelated' su((ose that the inbound lo*istics (rocess does not do /ell in identif!in* ra/ materials of (oor
&ualit!. This /ill cause (roblems /ith the ne"t (rocess' o(erations' and it ma! cause (roblems as far do/n the
value chain as service after the sale. The value chain is' thus' a useful tool for anal!sin* a com(an!As business
(rocesses and searchin* for /a!s to lo/er costs' im(rove efficienc! or search for (rocess innovations.
>>
:ther $trate*ic odels
There are man! other strate*ic models used b! com(anies to hel( them formulate their overall business and
marketin* strate*ies. Three of best kno/n models are the 6oston Consultin* +rou( J6C+K atri"' the cHinse!
atri"' and Larr! Do/ne three forces. Each of these models is described belo/.
1he B9: matri/
The 6C+ matri" method is based on the product li!e cycle theor! that can be used to determine /hat
(riorities should be *iven in the (roduct (ortfolio of a $trate*ic 6usiness Init J$6IK. To ensure lon*-term value
creation' a com(an! should have a (ortfolio of (roducts that contains both hi*h-*ro/th (roducts in need of cash
in(uts and lo/-*ro/th (roducts that *enerate a lot of cash. This model can be e"(lained in t/o dimensions: relative
market share and market *ro/th. The basic idea behind this model is that the lar*er the market share a (roduct has
relative to its com(etitors or the faster the (roductRs market *ro/s' the better it is for the com(an! in an economic
sense. The ke! com(onents of the matri" are illustrated in E"hibit 2> and discussed belo/:
E"hibit 2>: 6C+ atri"
$ource:htt(:<<///.&uickmba.com<strate*!<ma
tri"<bc*<
2. $tars Jhi*h market *ro/th' hi*h relative market shareK. These are (roducts that re&uire lar*e amounts of cash
and are also leaders in the business and therefore the! should also *enerate lar*e amounts of cash. The! are
fre&uentl! rou*hl! in balance on net cash flo/.
1. Cash Co/s Jlo/ market *ro/th' hi*h relative market shareK. These are (roducts that *enerate hi*h amounts of
(rofit and cash' and because of the lo/ *ro/th' investments needed should be lo/.
3. +iven its characteristics' com(anies should avoid and minimi0e the number of (roducts in this cate*or!. If the
(roduct does not deliver cash' it ma! be discontinued.
B. Fuestion arks Jhi*h market *ro/th' lo/ relative market shareK. These (roducts have the /orst cash
characteristics of all' because of hi*h cash demands and lo/ returns due to lo/ market share. If nothin* is done to
chan*e the market share' &uestion marks /ill sim(l! absorb *reat amounts of cash and later' as the *ro/th sto(s' it
ma! become a do*. $o' mana*ers should either invest heavil! in order to im(rove market share' or sell off<invest
nothin* and *enerate /hatever cash is (ossible.
1he M;insey matri/
The cHinse! matri" is a later and more advanced form of the 6C+ atri". It has several differences /ith 6C+As
matri"' as discussed belo/. It is illustrated in E"hibit 29.
E"hibit 29: cHinse! matri"
$ource:htt(:<<///.&uickmba.com<strate*!<matri"<
bc*<
2. arket JIndustr!K attractiveness re(laces market *ro/th as the dimension of industr! attractiveness.
arket attractiveness includes a broader ran*e of factors other than -ust the market *ro/th rate that can
determine the attractiveness of an industr!<market. %or e"am(le' market attractiveness could be
determined usin* ,orterAs five forces model.
1. Com(etitive stren*th re(laces market share as the dimension b! /hich the com(etitive (osition of each
$trate*ic 6usiness Init is assessed. Com(etitive stren*th like/ise includes a broader ran*e of factors
other than -ust the market share that can determine the com(etitive stren*th of a $trate*ic 6usiness Init.
3. %inall! the cHinse! matri" /orks /ith a 3"3 *rid' /hile the 6C+ atri" has onl! 1"1. This also allo/s
for more insi*ht in the anal!sis of the business.
#ownes< three new fores
Larr! Do/nes J2DDDK identifies three ne/ forces that re&uire a totall! different (ers(ective to/ards a strate*ic
frame/ork and a set of ver! different anal!tic and business desi*n tools: di*itali0ation' *lobali0ation' and
dere*ulation.
Di*itali0ation: As the (o/er of information technolo*! *ro/s' all (la!ers in a market /ill have access to far more
information. Thus' totall! ne/ business models /ill emer*e in /hich even (la!ers from outside the industr! are
>5
able to vastl! chan*e the basis of com(etition in a market. Do/nes *ives the e"am(le of the rise of electronic
sho((in* malls' o(erated for instance b! telecom o(erators or credit card or*ani0ations. Those /ho use the %ive
%orces odel and /ho base their thinkin* on toda!As industr! structure /ould never see these chan*es comin* in
time.
+lobali0ation: Im(rovements in distribution lo*istics and communications have allo/ed nearl! all businesses to
bu!' sell' and coo(erate on a *lobal level. Customers' mean/hile' have the chance to sho( around and com(are
(rices *loball!. As a result' even locall! oriented mid-si0ed com(anies find themselves in a *lobal market' even if
the! do not e"(ort or im(ort themselves. In addition' *lobal and net/orked markets im(ose ne/ re&uirements on
or*ani0ationsR strate*ies. It is not enou*h an! more to (osition oneself as a (rice-leader or &ualit!-leader Jas ,orter
su**ests in his +eneric $trate*ies modelK. @ather' com(etitive advanta*es emer*e no/ from the abilit! to develo(
lastin* relationshi(s to more mobile custumers and to mana*e far-reachin* net/orks of (artners for mutual
advanta*e.
Dere*ulation: The (ast decade has seen a dramatic shrinkin* of *overnment influence in man! industries like
airlines' communications' utilities' and bankin* in the I$ and in Euro(e. %ueled b! the ne/ o((ortunities (rovided
b! information technolo*!' or*ani0ations in these industries /ere able and forced to com(letel! restructure their
businesses and to be on the lookout for ne/ o((ortunities and com(etitive threats. %or e"am(le' traditional land
line tele(hone com(anies that did not enter the /ireless tele(hon! market found themselves /ith a shrinkin*
customer base. This is because !oun* (eo(le fre&uentl! use onl! cell (hones no/ and do not bother to have a land
line (hone in their homes.
Cha(ter summar!
?hile each of these models Jand others /e have not coveredK have their o/n stren*ths and /eaknesses' /hat
or*ani0ations must learn is ho/ to best utili0e each of them. ,orter still is the best kno/n authorit! in strate*!
models and com(lemented /ith Do/nesA di*ital a*e model /orks /ell for man! com(anies. 6C+As atri" and
ckinse!As atri" hel( dia*nose the dimensions in a (roductAs life c!cle. The! are all tools' and -ust as a /orkman
has man! tools in his tool kit' so mana*ers must have man! tools in theirs' and kno/ /hen to use the ri*ht tool in a
*iven situation.
Establishin* that a market e"ists
arket research
Inderstandin* the marketAs needs' com(etitorsA strate*ies' and to obtain information for decision
makin*' it is im(erative to do market research. ;e"t' /e /ill introduce a case that demonstrates
the value of market research to an! firm /illin* to s(end time and resources usin* it. After this
e"am(le is introduced' t/o sections are develo(ed. :ne' introducin* the market research (rocess'
and second' the *eneral *uidelines on ho/ to conduct a market research stud!.
A Cand! $tore Com(an! /ith subsidiaries in ;e/ 3ork and other lar*e cities in I$ /as interested
in o(enin* a store in onterre!' e"ico.
Business Fundamentals >D A +lobal Te"t
The ;e/ 3ork subsidiar! is located in one of the most visited areas of anhattan. It is housed on
three floors' a hu*e locale focused on sellin* all t!(e of candies. Ever! floor has a thematic
decoration' characters' and *ames' de(endin* on the t!(e of candies sold on that floor. Inside the!
even have a coffee sho(. The! em(lo! a hi*h (rice strate*!' and most of their visitors are tourists Ja
differentiated niche in ,orterAs Three +eneric $trate*ies modelK.
The (lan for the store located in onterre! /as recentl! com(leted. It /ill be a bi* store' almost
the same si0e as the one in ;e/ 3ork' /ith hi*h (rices and focused on hi*h-income consumers.
Additional to the thematic areas defined in the ;e/ 3ork store' this store /ill have a s(ace for 7old
cand! brands8 to attract older consumers. The store /ill also have a section for local brands.
A consultant /as hired for advisin* the o/ners on ho/ to achieve the (lan. Eis first advice /as to
do some market research to understand the real o((ortunit!. The market research results /ere
astonishin*: there /as no market in onterre!. Consumers loved the idea' but the! /ere not
/illin* to (a! the hi*h (rices or even to visit the store more than once a month and bein*
onterre! cit! /ith a small amount of tourists there /ould not be enou*h revenue to maintain the
business.
The investment for o(enin* the store in onterre! /as about I$D 2 million dollars. The (otential
entre(reneurs s(ent around I$D 20 thousand in marketin* research' /hich ke(t them from
makin* a bad investment.
:he ar)et re$earch proce$$
There is an inherent risk /hen tr!in* to e"(and the market' launchin* a ne/ (roduct' or startin* a
ne/ business. Definin* that a market e"ists for !our business idea /ill hel( in reducin* that risk.
3ou ma! think that /ith a bunch of collected data and facts !ou /ill be able to decide /hether or
not to *o for/ard /ith !our idea. 6ut the challen*e is not -ust collectin* the data' but ho/ to
transform it and ho/ to use it. arket research /ill su((ort !ou in collectin*' transformin*' and
*ettin* meanin* from the data.
$ome of the reasons /h! market research is so im(ortant are:
2. The cost of errors. Launchin* and sellin* a ne/ (roduct that is not successful in the market(lace
could cause !ou to lose !our entire investment.
1. Conductin* market research /ill hel( !ou identif! ne/ trends' market se*ments' and niches.
3. arket research /ill end u( savin* !ou time b! develo(in* focused strate*ies based on a better
understandin* of !our customers.
arket research involves all the activities that allo/ the com(an! to obtain the re&uired data for
decision su((ort. arket research is collectin*' inter(retin*' and communicatin* the information
used for strate*ic marketin*. The most t!(ical a((roaches are to conduct a tailored' one-time
90
market research stud! as described belo/' or to use readil! available information such as the
(eriodical information (rovided b! com(anies like AC ;ielsen.
This section /ill describe ho/ to conduct a market research stud!. The main ste(s are:
2. Identif! and define the (roblem: The first ste( is definin* the tar*et or (roblem to solve for !our
market research. ost of the time it is more than one (roblem to solve' but !ou should (rioriti0e.
The ri*ht definition of the (roblem should allo/ us to obtain the needed data.
1. Define the ob-ectives: The ob-ective should ans/er the &uestion of /hat !ou /ant to obtain from
the market research. In this ste( !ou should define the sco(e and action (lan. Develo(in* the
ob-ectives should consist of establishin* a bud*et' understandin* the environment' develo(in* the
a((roach to anal!sis' and formulatin* h!(otheses.
3. Develo(in* a research (lan: 6ased u(on a /ell-defined (roblem and ob-ectives' the frame/ork
for the research (lan should be a((arent. This ste( re&uires the *reatest amount of thou*ht' time'
and e"(ertise. It includes incor(oratin* kno/led*e from $econdary in!oration' anal!sis'
&ualitative research' methodolo*! selection' &uestion measurement and scale selection'
&uestionnaire desi*n' sam(le desi*n and si0e' and determinin* the data anal!sis to be (erformed.
B. Collectin* the data: This is the (oint at /hich the finali0ed &uestionnaire Jsurve! instrumentK is
used in *atherin* information amon* the chosen sam(le se*ments. There are a variet! of data
collection methodolo*ies to consider. %or instance: Com(uter Assisted Tele(hone Intervie/in*'
ail $urve!' Internet $urve!' all interce(ts' Traditional tele(hone intervie/in*' Internet (anel'
home (anel' amon* others.
=. ,erformin* data anal!sis: This is the (rocess of anal!0in* the collected data' and transformin*
com(le" to sim(le information. Less com(le" anal!sis on smaller data sets can be handled /ith an!
of a number of (ersonal com(uter office suite tools' like s(readsheets' /hile more com(le" anal!sis
and lar*er data sets re&uire dedicated market research anal!sis soft/are. T!(es of anal!sis that
mi*ht be (erformed are sim(le fre&uenc! distributions' crosstab anal!sis' multi(le re*ression
Jdriver anal!sisK' cluster anal!sis' factor anal!sis' (erce(tual ma((in* Jmultidimensional scalin*K'
structural e&uation modelin* and data minin*
>. @e(ortin* and (resentation: This is one of the most im(ortant ste(s. All business critical
information and kno/led*e that comes from !our market research investment are limited b! ho/
the! are (resented to decision makers. There are as man! re(ortin* st!les as there are research
re(orts' but some are definitel! better than others' and there are definitel! trends to be a/are of.
It is im(ortant to mention that market research b! itself does not arrive at solutions or marketin*
decisions. It does not even *uarantee !our business success. Eo/ever' /hen conductin* a /ell-
e"ecuted market research stud! !ou can reduce the uncertaint! in the decision-makin* (rocess'
increasin* at the same time the (robabilit! and ma*nitude of success.
To illustrate these conce(ts in a live situation' /e have included a discussion of ho/ a market
research stud! /as (erformed to determine the (otential market for a ne/ conce(t for funeral
services in onterre!' e"ico.
arket research to determine the (otential market for funeral services in onterre!' e"ico
6ack*round: A *rou( of investors thou*ht about develo(in* a ne/ enter(rise conce(t of funeral services in
onterre!' e"ico. The main idea /as to offer im(roved funeral services' satisf!in* a need not !et
covered in the cit!.
Conce(t of the (ro-ect: The com(an! /ill offer funeral services to (eo(le of socioeconomic level A and 6].
The ne/ funeral services /ill include: $ale of coffins or cremator! urns' lu"ur! trans(ortation' memorial
vi*ils' cha(el' flo/ers and cafeteria services' reli*ious ceremonies' /ide (arkin* /ith valet (arkin* service'
le*al re&uirements' condolences via Internet' (ublication of brief letters' (rivate room for the famil! /ith
foods at the re&uest of the client and (re-arran*ed funeral (lans.
The architecture of the (lace /ill include man! *reen areas' bi* s(aces and a &uiet and (eaceful atmos(here.
The added value /ill be to su((ort the client in his (ain' reason /h! a s(ecific e"ecutive /ill be in char*e of
all the (roceedin*s and (rocedures for the memorial vi*il and burial of his beloved.
:b-ectives:
To understand if a (otential market e"ists for a funeral services enter(rise in onterre! Cit!.
Identif! current s(ecific needs for the sector.
Evaluate (ro-ect conce(t.
Evaluate (ro-ect location.
Evaluate (ro-ect name and lo*o.
ethodolo*!:
$ta*e I
Fualitative stud!:
1 sessions *rou( /ith the follo/in* (rofile:
$ession 2: en bet/een 3= and =0 !ears of a*e' from socioeconomic level A and ]6 /ho e"(erience in the
(rocess of hirin* funeral services in the last !ear.
$ession 1: ?omen bet/een 3= and =0 !ears of a*e from socioeconomic level A and ]6 /ho had e"(erience
/ith the (rocess of hirin* funeral services in the last !ear.
$ta*e II
Fuantitative stud!:
91
The si0e of sam(le /as of B91 (ersonal intervie/s to men and /omen of socioeconomic level A and ]6' a*es
bet/een 3= and >0 !ears old' /ho live in onterre! and its metro(olitan area.
ain findin*s and conclusions:
In this research /e found an im(ortant o((ortunit! at the funeral lo*istics services since 9> (er cent of the
intervie/ed (eo(le consider that it is necessar! to have a com(an! of this t!(e in the cit!' since at the
moment the com(anies that offer these services have man! o((ortunit! areas.
7Cedillas del Toro8' the most im(ortant funeral services enter(rise u( to date sho/ us some o((ortunit!
areas as: lack of (arkin*' mentioned b! 2= (er cent of the sam(leG the lack of a comfortable cafeteria'
mentioned b! 20 (er cent of the sam(leG small cha(el' mentioned b! 9 (er cent of the sam(leG and the
tem(erature of the ver! cold climate' mentioned b! 9 (er cent of the sam(le' amon* others.
In the &ualitative stud!' (eo(le intervie/ed mentioned /hat the! dislike about 7Cedillas del Toro8 is that the
memorial vi*ils have a common area for visits in /here !ou can not identif! /hom each (erson is
accom(an!in*' turnin* it ver! informal.
The challen*es that /e found at the second more im(ortant funeral services com(an! of the cit!' 7Cedillas
Carmelo8 /ere: hi*h (rice J10 (er cent of mentionsK' lack of facilities for handica(s Jcro/ded elevatin*K
J2= (er cent of mentionsK and (oor availabilit! of cha(els Jonl! threeK J20 (er cent of mentionsK' amon*
others.
The conce(t of the ne/ funeral services enter(rise /as ver! /ell acce(ted b! most of the (eo(le intervie/ed
J90 (er centK' mainl! the idea of havin* a (erson /ho facilitates all the funeral (roceedin*s' seems to be
ver! hel(ful and im(ortant in those moments of *rief.
The (ro(osed location for the ne/ funeral services enter(rise had an acce(tance of 50 (er cent of the (eo(le
intervie/ed' mainl! because the! are near the most im(ortant churches of the cit! /ith eas! accesses.
The o(tions of names (eo(le intervie/ed (referred /ere 7Cedillas arian8 or 7Cedillas de aria8 b! B= (er
cent and 30 (er cent res(ectivel!.
The (eo(le intervie/ed in the &ualitative stud! su**ested some ideas to im(rove the conce(t mentioned like:
To have a (rivate area /ith all the comforts Jtele(hone' com(uter' air condition' bathK for the famil! /ho
does not /ish to receive visits' that have a (leasant decoration Jnot funeralK' and (ersonal attention'
amon* others.
Thanks to this market stud!' the investors could corroborate the idea that a funeral service enter(rise in
onterre! ma! be a *ood business o((ortunit!. In addition the! could delineate the conce(t accordin* to
the market.
The funeral business has been an economic success so far' thanks to its clear definition of its mission and its
market oriented (hiloso(h!: al/a!s searchin* for and deliverin* an e"cellent service to its customers.
Discussion &uestions
Think of an industr! /ith /hich !ou are familiar. Discuss the ma-or elements of a business model
and a((l! it to the industr! chosen. ?hat features in the model a((ear to be a standard com(ared to
other industriesC
?hat are the ste(s in the (rocess of customersA needs and /ants identified in the cha(ter as defined
b! DorfmanC
:r: @efer to the section of this cha(ter entitled 7Identif!in* customersA /ants successfull!8. In
DorfmanAs frame/ork three ste(s lead to the identification of customersR need and /ants. This
(rocess ends on the validation of needs. ?hat /ould be a further ste( *eared to identif! future
needsC
@ead the case about the arket research to determine the (otential market for funeral services in
onterre!' e"ico.
?hat ob-ectives /ould !ou (ro(ose for this stud!C
ethodolo*! su**estedC
?hat (olicies could be derived from the information obtained b! the arketin* @esearch
stud!C
@eferences
Direccion de ercadotecnia. Analisis' (laneaci^n ! control. ,hili( Hotler' B_ edicion.
?hat Do 3our Customers @eall!' @eall! ?antC $herri Dorfman. #une 9' 100=
:ster/alder' Ale". 7$uccess S 6usiness odel Desi*n A;D Im(lementation8. #une 22' 100>.
`htt(:<<business-model-desi*n.blo*s(ot.com<100><0><sucess-business-model-desi*n-and.htmla.
CEEL ?eb site. CEEL $.A. DE C.M. A(ril 1009. `htt(:<<///.CEEL.coma.
cDonalds ?eb site. cDonalds Cor(oration. A(ril 1009. `htt(:<<///.mcdonalds.coma.
?iki(edia. 6usiness model definition b! :ster/alder' ,i*neur and Tucci. 100=.
`htt(:<<en./iki(edia.or*</iki<6usinessTmodela.
9B
7. 8o! to orani9e and lead
an entrepreneurial &enture
Editor: #ohn a!nard JThe Iniversit! of +eor*ia' I$AK
Contributor$: $u0anne 6arnett' L!dia #ones' Carol cDonell' 6ernie eineke' Tamm! $e*ura J+eor*ia $mall
6usiness Develo(ment Center' I$AK
@eviewer: Dr +ideon arkman JThe Iniversit! of +eor*ia' I$AK
Learnin* ob-ectives
differentiate bet/een the *ro/th sta*es of business or*ani0ations
understand ho/ businesses can or*ani0e their tasks and res(onsibilities
com(are the advanta*es and disadvanta*es of tall versus flat or*ani0ation structures
distin*uish bet/een the various t!(es of business le*al entities Jsee skill head' I$ le*al issuesK
Introduction
This cha(ter discusses or*ani0ational issues o/ners face /hile o(eratin* and attem(tin* to *ro/ their
businesses. ?e e"amine four sta*es of or*ani0ational *ro/th and the choices business o/ners face /hen decidin*
ho/ to mana*e tasks and res(onsibilities. Those mana*ement decisions sha(e an or*ani0ationRs structure' /hich in
turn influences lines of communication and decision-makin* (rocesses.
The end of the cha(ter includes a short descri(tion of business le*al entities. Also' !ou /ill find e"ercises to hel(
!ou better *ras( these conce(ts and to determine /hat t!(e of or*ani0ational structure and le*al entit! mi*ht best
suit !our venture.
ovin* from a one-(erson band to an orchestra
ost businesses start like a one-(erson band. The o/ner (la!s all the instruments' some better than others' but
all out of necessit!.
Like an! musical ensemble' a small business includes man! roles. In the be*innin*' the o/ners are often the best
at makin* or deliverin* the (roduct or service. $ince the! have the most at stake' the! often assume a /ide variet!
of roles' includin* sales' accountin*' and much more.
Throu*h a combination of skill' (lannin*' talent' and (erha(s luck' some businesses mana*e to *ro/. This
*ro/th leads to ne/ and chan*in* roles in the business for ever!one' includin* the o/ner. :f all the roles an o/ner
has in the business' (erha(s the most im(ortant one is to be the designer for the business.
In the role of chief desi*ner' business o/ners have three critical duties:
%. &ow to organi'e and lead an entrepreneurial $enture
.rovide the vi$ion and direction !or the copany> :/ners set the direction for the values of the
com(an!' develo( its (roduct and service strate*ies' and set the tone for its relationshi(s /ith customers.
Develop and re!ine proce$$e$ and procedure$> :/ners desi*n the 7business model8' or the bi*
(icture formulas and (rocesses of doin* business. Then' the! must fill in the details b! anal!0in* (rocesses
and findin* bottlenecks.
Create the organi;ation%$ huan re$ource $tructure> :/ners identif! the (ositions and t!(es of
(eo(le the business needs' and then the! find the (eo(le to fill those roles. In the /ords of #im Collins'
author of the bestseller :ood to :reat' 7+et the ri*ht (eo(le on the bus' the /ron* (eo(le off the bus' and
*et ever!one in the ri*ht seats.8
The (a!off for a /ell-desi*ned business is immense. ?ith clarit! of vision' e"(ectations and (rocesses' and /ith
the ri*ht (eo(le (ullin* to*ether' there is a stron* foundation for *ro/th. Instead of a *rim 7never take a da! off8
*rind' the business o/ner can no/ en-o! the rideYand ma!be take a da! off from time to time. It is also no/
(ossible for the o/ner to think about a (rofitable e"it' because a business that can run /ithout the o/ner is /orth a
lot more than one that falls a(art /hen he or she is not at the controls.
:/ners of a *ro/in* business eventuall! have to decide ho/ to or*ani0e em(lo!ees and dele*ate authorit!.
Doin* so can be a frustratin* task for man! entre(reneurs. ost /ould rather concentrate on closin* sales'
(roducin* (roduct' or mana*in* cash. Eo/ever' the! do so at the (eril of (uttin* off (lannin* for the future needs
of their enter(rise.
*rani9ational issues
Entre(reneurs t!(icall! kno/ /hen their com(an! needs a structural overhaul. The o/ner can no lon*er -u**le
all the critical da!-to-da! activities. Im(ortant decisions are dela!ed' customer contact suffers' em(lo!ees feel
over/helmed and confused about their and othersR roles in the or*ani0ation. As the em(lo!ee count rises' someone
other than the o/ner has to mana*e and be em(o/ered to make critical decisions. The stress *enerated b! these
various d!sfunctional s!m(toms eventuall! reaches a (oint /here the o/ner has to decide to either continue
*ro/in* the business Jbut in a more mana*ed /a!K or to restrict its *ro/th to effectivel! mana*e the firm sin*le-
handedl!.
Acme $ecurit! Com(an!As Jthe name has been chan*ed to maintain its anon!mit!K ori*inal or*ani0ational
structure caused man! (roblems for the com(an!' es(eciall! as its customer base be*an to e"(and.
1he ompany pro,ides seurity and fire alarm systems for high rise buildings and large orporate and
go,ernment ustomers0 2t had grown to more than =4 employees in a short time, but was finding it inreasingly
diffiult to pro,ide the ser,ie ustomers e/peted0 1he ompany<s organi(ational struture had e,ol,ed to meet
the needs of the many family members that wor!ed in the ompany, but not the needs of the ustomers0
The com(an! had a (roduct-based structure. The de(artments included Ins(ection' aintenance' and Alarm
Installation. Each de(artment had a mana*er' a sales mana*er' field cre/s and administrative su((ort. Even
thou*h most customers needed and (urchased all of the com(an!As services' no one /as res(onsible for meetin* the
total needs of the customer. Each de(artment focused on *ettin* its /ork done. The lack of communication and
coordination resulted in schedulin* snafus and invoicin* (roblems. A *ro/in* number of (ett! details &uickl!
9>
buried the CE: and (revented her from focusin* on the im(ortant strate*ic and financial issues facin* the
com(an!. $he /as also a bottleneck that contributed to customer service (roblems. ;o /onder she ke(t a cand!
dish filled /ith antacids on her desk4
E"hibit 25: A ,roduct-based or*ani0ation
From the ustomer<s point of ,iew, wor!ing with .me +eurity was a!in to entering a restaurant and ha,ing
to order the appeti(er from the appeti(er waiter, entr>e from the entr>e waiter, and dessert from the dessert
waiter0 2n this senario, eah waiter is only onerned with getting his or her order omplete and deli,ered0 1he
dessert might arri,e before the entr>e or appeti(er0 .nd if the entr>e is deli,ered old, the other waiters annot
help0 Finally, one the meal is o,er, all the waiters ha,e to get together to figure out the bill0 -i!e .me +eurity,
the restaurant<s struture made it diffiult, if not impossible, to deli,er ?uality ser,ie0
?ith the ultimate *oal of im(rovin* customer service' /hat should the ne/ and im(roved Acme $ecurit!
or*ani0ational structure look likeC %or this com(an!' a function-based rather than a (roduct-based structure /as
more a((ro(riate. The most im(ortant chan*e /as to assi*n one (erson as the (rimar! contact for each Acme
$ecurit! customer. This Account ana*er /ould re(ort to the $ales ana*er. The ne/ com(an! structure features
t/o other ke! mana*ement (ositions' an :(erations ana*er and an :ffice ana*er. These three ke! mana*ers
re(ort to the CE:. The challen*e for the CE: /as to dele*ate res(onsibilit! and authorit! to these three mana*ers.
6elo/ /e /ill discuss the com(osition and res(onsibilities of these three functional de(artments:
E"hibit 2D: A %unction-based or*ani0ation
Sales: inludes the +ales Manager, the aount managers and estimators0 .ount Managers are assigned by
building or a ma@or orporate aount0 1his way e,eryone in the ompany, and more importantly the ustomer,
!nows who is responsible for a ?uestion or problem0 1he .ount Manager<s primary tas! is to meet the
ustomer<s total needs, and to ma!e sure the in,oies for wor! performed are issued in a timely manner0
Operations: inludes the operations manager and the field rews0 1his department inludes a position
responsible for sheduling all operations wor! and a position responsible for olleting and entering all @ob ost
information0 Operations< primary tas! is to meet the needs of the .ount Manager and the needs of the Offie
Manager with respet to information re?uired to proess in,oies and payroll0 1he department maintains a
entrali(ed sheduling system that is aessible to e,eryone0 1hey notify the .ount Manager that a @ob is
omplete, pro,ide the neessary @ob osting and billing information so that the .ount Manager an notify
aounting that an in,oie should be issued0
Administration is led by the Offie Manager0 1his department inludes the reeptionist, .ounting
Manager, and Auman *esoures0 1his department<s primary tas! is to issue in,oies and manage payables,
reei,ables, and to pro,ide management with timely finanial reports0
With impro,ed struture and ommuniation, the 9EO of .me +eurity an fous on more strategi issues
and replae the bowl of antaids with hoolateB
95
*rani9ational staes of ro!th
As an or*ani0ation *ro/s' it *enerall! (ro*resses throu*h four sta*es of increasin*l! formal mana*ement
structures.
19
&tage *: In a one-(erson o(eration' the o/ner does ever!thin*: sales' bookkee(in*' marketin*' (roduction and
so on. an! firms remain one-(erson o(erations indefinitel! due to the o/nerRs famil! obli*ations' financial
constraints' or contentment /ith the status &uo.
&tage 2: As more (eo(le -oin an or*ani0ation' the business o/ner becomes a (la!er-coach. The entre(reneur
continues to (erform da!-to-da! tasks' but alon* /ith other em(lo!ees. $o the o/ner assumes additional em(lo!ee
mana*ement duties such as hirin*' schedulin*' su(ervisin*' and (a!roll.
&tage 7: %irms reach a ma-or milestone in or*ani0ational develo(ment /hen the! add an additional level of
su(ervision. The o/ner relin&uishes some direct control and be*ins /orkin* throu*h an intermediar! la!er of
(rofessional mana*ers.
&tage 8: As a com(an! adds more la!ers of mana*ement and (rocesses' it also ado(ts /ritten (olicies' bud*ets'
standardi0ed (ersonnel (ractices' or*ani0ational charts' -ob descri(tions' and control (rotocols.
De(artmentation
;e/ business o/ners do not ask themselves ho/ the! should or*ani0e their business. @ather' the! or*ani0e b!
ob-ective: /hat does it take to *et a -ob done' meet a *oal or create /ealth. Eo/ o/ners or*ani0e a com(an!
de(ends on a multitude of factors: for e"am(le' are certain tasks (erformed in-house or out-sourcedC Are (eo(le
Jstaff and mana*ementK /ith the necessar! skills availableC
6usiness scholars have cate*ori0ed various or*ani0ational structures as described belo/. Eo/ever' do not
assume that a *ro/in* business must at one (oint or another assume one of these structures. @ather' smart
entre(reneurs constantl! t/eak their or*ani0ations to remain a*ile to take advanta*e of ne/ o((ortunities or
res(ond to ne/ challen*es. $ometimes the chan*es necessar! to move from a small to lar*er business re&uire *ut
/renchin* decisions: for e"am(le' (ersonnel that mi*ht have (la!ed ke! roles in establishin* a ne/ business mi*ht
not be the ri*ht fit for a lar*er' more structured or*ani0ation.
As the business *ro/s' its or*ani0ational structure is heavil! influenced b! function J(eo(le *rou(ed /ith similar
res(onsibilitiesK' (rocess J(eo(le involved in similar (rocessesK' (roduct J(eo(le buildin* a s(ecific (roductK or
(ro-ects Jmembers of a (ro-ectK.
15
A firmRs structure mi*ht be influenced b! some or all of these t!(es of
de(artmentation. Lar*e firms usuall! em(lo! a variet! of de(artmentation st!les' selectin* the most a((ro(riate
form for each subs!stem.
19 Lon*enecker' #ustin +ooderl' oore' Carlos ?.G ,ett!' #. ?illiamG ,alich' Leslie. J2DD2K. $mall 6usiness
ana*ement: An Entre(reneurial Em(hasis. $outh-?estern Colle*e ,ublishin*. ason' :E.
15 7Entre(reneurial %irms: An E"amination of :r*ani0ational $tructure and ana*ement @oles Across Life C!cle
$ta*es'8 ?atson' Hathleen .' ,lascha' +erhard @.' (a(er (resented at I.$. Association for $mall 6usiness and
Entre(reneurshi( annual conference' 6altimore' ar!land' :ctober 2DD3K
#epartmentation by funtion
+rou(in* activities b! function is the most /idel! used form of de(artmentation. $imilar activities are housed in
a de(artment or under a sin*le chain of command. %or e"am(le' sales' advertisin*' (ublic relations' and (romotion
mi*ht be *rou(ed in a marketin* de(artmentG em(lo!ee benefits' em(lo!ee trainin* and em(lo!ee re*ulator!
com(liance ma! be housed in the human relations de(artment and so on.
%unctional de(artmentation takes advanta*e of em(lo!eesA s(eciali0ation. Em(lo!ees /ith similar trainin*'
education' skills' or e&ui(ment /ork to*ether and under a su(ervisor res(onsible for that de(artmentRs activities.
6ecause one su(ervisor t!(icall! oversees a ma-or area of activit!' functional de(artmentation also facilitates
coordination. %or instance in a lar*er retail o(eration' one marketin* de(artment su(ervisor /ould control and
coordinate the /ork of bu!ers' merchandisers and the sales force so that information and activities of each function
/ould be more efficient and (roductive.
The (rocess or e&ui(ment used in (roducin* a (roduct or service ma! be the basis for determinin* de(artmental
units. $ince a certain amount of e"(ertise or trainin* is re&uired to handle com(licated (rocesses or com(le"
machiner!' activities that involve the use of s(eciali0ed e&ui(ment ma! be *rou(ed into a se(arate de(artment.
This form of de(artmentation is similar to functional de(artmentation. The *rou(in* of all millin* machines
into one de(artment or the (lacin* of lathes in another de(artment is illustrative of de(artmentation b! e&ui(ment
or (rocess. As a further e"am(le' a lar*e food (roducts firm ma! be de(artmentali0ed b! (rocesses such as
manufacturin*' (acka*e desi*n' distribution' and shi((in*.99
50
E"hibit 10: De(artmentation b! function
E"hibit 12: De(artmentation b! (rocess
#epartmentation by produts
Com(anies /ith diversified (roduct lines fre&uentl! create de(artmental units based on the (roduct. To
de(artmentali0e on a (roduct basis means to establish each ma-or (roduct in a (roduct line as an inde(endent unit
/ithin the overall structure of the com(an!. %or instance' retail stores ma! or*ani0e their o(erations to meet the
needs of s(ecific customer *rou(s b! formin* s(ecial de(artments to cater to house /ares' mens/ear' childrenAs
clothin* and so forth. ,roduct de(artmentation can be a useful *uide for *rou(in* activities in service businesses as
/ell. an! banks have se(arate de(artments for mort*a*es' checkin* accounts and commercial loans.
E"hibit 11: De(artmentation b! (roduct
#epartmentation by pro@ets
,ro-ect or*ani0ations are s(ecificall! desi*ned to deal /ith chan*in* environments. A (ro-ect in this sense is a
series of related activities re&uired to accom(lish a /ork outcome' such as the develo(ment of a ne/ (roduct.
,ro-ects and task forces or teams are *enerall! uni&ueYdesi*ned to /ork on a nonrecurrin* (ro-ect. The! are
ti*htl! or*ani0ed units under the direction of a mana*er /ith broad (o/ers of authorit!.
A team is *iven a (ro-ect /ith s(ecific tasks or o(erational concerns. This team is com(osed of em(lo!ees from
the firm /ho have e"(ertise or skills that can be a((lied directl! to the (ro-ect. The members of the team mana*e
the (ro-ect /ithout direct su(ervision and assume res(onsibilit! for the results. ?hen /ork teams function /ell'
the need for a lar*e number of su(ervisors decreases.
#epartmentation by matri/
$ome firms are or*ani0ed b! usin* a mi" of de(artmentation t!(es Jmatri" or*ani0ationK. It is not unusual to see
firms that utili0e the function and (ro-ect or*ani0ation combination. The same is true for (rocess and (ro-ect as
/ell as other combinations. %or instance' a lar*e hos(ital could have an accountin* de(artment' sur*er!
de(artment' marketin* de(artment' and a satellite center (ro-ect team that make u( its or*ani0ational structure.
:nce the bases for de(artmentation are determined' another (roblem of structure immediatel! arises
concernin* ho/ man! de(artments or ho/ man! individual /orkers should be (laced under the direction
of one mana*er. This is referred to as a s(an of mana*ement or s(an of control issue. A number of factors
should be considered /hen decidin* u(on a s(an of control:
the com(le"it! of the subordinatesA -obs and need for interaction /ith mana*ement
the com(le"it! of the su(ervisorsA -obs
the com(etence of the su(ervisors and subordinates
the number and nature of the su(ervisorsA other interactions /ith non-subordinates
the e"tent to /hich staff assistants (rovide su((ort.
Flat &ersus tall orani9ations
6! definition' a small business is t!(icall! a flat' centrali0ed or*ani0ation. The founder<o/ner is the boss and
makes all the critical decisions. Eo/ever' as the (ersonnel count *ro/s' the firmAs structure t!(icall! e"(ands either
hori0ontall! JflatK or verticall! JtallK. A*ain' various factors includin* the o/nerAs mana*ement st!le' mi*ht affect
/hat t!(e of structure a business assumes.
%lat or*ani0ations
%lat or*ani0ations follo/ the decentrali0ed a((roach' or or*anic s!stem. There are fe/er levels of mana*ement
/hich creates an environment for faster *ro/th and res(onse bet/een all levels. :r*ani0ations that follo/ this t!(e
of structure have /ider s(ans of su(ervisor! control and have more hori0ontal communication. This t!(e of
structure (romotes task interde(endence /ith less attention to formal (rocedures.
ore decisions are made at the middle levels of the or*ani0ation. The! are less bureaucratic and less structured.
E"ternall!' the or*ani0ation as a /hole becomes more ada(table to its market and can &uickl! react to chan*es.
Internall!' the or*ani0ation as a /hole encoura*es more (artici(ation bet/een all levels of the or*ani0ation. As a
result' all levels have the (otential of /orkin* more closel! to*ether /hich enhances a closer /orkin* environment
/ith better communication and creativit!.
51
E"hibit 13: %lat or*ani0ation
Tall or*ani0ations
A tall structure is a more formal' bureaucratic or*ani0ation or mechanistic s!stem. In this environment' multi(le
levels of mana*ement control decision makin* (rocesses and em(lo!ees /ithin the or*ani0ation. ?hen numerous
levels become involved in dail! o(erations' decision-makin* tends to be more im(ersonal. $ince this t!(e of
structure has more levels' the division of labor is much more s(eciali0ed. De(artments can become more
com(artmentali0ed' /hich increases the communication /ithin them' but does not lend itself to communication
/ith other de(artments.
E"hibit 1B: Tall or*ani0ation
Centrali9ed &ersus decentrali9ed orani9ations
Communication is essential to disseminate information throu*hout or*ani0ations and can take (lace at man!
levels. There are t/o communication models that are utili0edYcentrali0ed and decentrali0ed. A*ain' each st!le can
be effective de(endin* on the environment and each has its advanta*es and disadvanta*es' as are outlined belo/.
Centrali0ed
Centrali0ed or*ani0ations re&uire communications flo/ throu*h a central (erson or location. $in*le leaders are
(rominent and have a *reat deal of decision-makin* (o/er. These (ersons have access to more information and can
therefore e"ercise a *reat deal of influence over *rou( members b! controllin* the flo/ of critical information.
:ne disadvanta*e to centrali0ed communication is that as the or*ani0ation *ro/s' the amount of information
can over/helm the central hub J(erson or de(artmentK that (rocesses this information. :ne advanta*e to the
centrali0ed a((roach is that it encoura*es standardi0ed (rocesses that t!(icall! result in cost savin*s and better
&ualit! control.
Decentrali0ed
Decentrali0ed or*ani0ations tend to utili0e man! channels of information flo/' allo/in* for more o(en
communication bet/een *rou( members. This model is more conducive to solvin* com(le" (roblems.
:ne of the ma-or advanta*es to decentrali0ed communication is that (roblems and (rocesses can be solved and
chan*ed in a timel! manner. Also' the needs of customers and em(lo!ees are more easil! and &uickl! met because
fe/er levels of mana*ement are involved.
A ma-or disadvanta*e to a decentrali0ed or*ani0ation is that de(artments can easil! lose si*ht of the
or*ani0ationRs common mission. To ensure or*ani0ations sta! on task' u((er mana*ement should maintain o(en
lines of communication /ith local mana*ement.
Cha(ter summar!
$o ho/ does an o/ner be*in to di*est and (ick bet/een all the choices Jfunction' (roduct' (rocess' (ro-ect or
matri" structure' flat versus tall' centrali0ed versus decentrali0edK available /hen it comes to or*ani0in* a businessC
To desi*n a better business' o/ners should take these ste(s:
$chedule time to /ork on the business. This a((lies to start-u(s and established businesses. There is an old
sa!in*' 7If !ou are cho((in* /ood' !ou need to take some time to shar(en the a"e8.
?rite ever!thin* do/n. Document all -ob descri(tions' (rocesses' and (rocedures' and then refine the
(rocesses so the result is reliable and hi*h &ualit! out(ut. In his book 1he E-Myth' ichael +erber makes
the case that entre(reneurs should build and document their business as if it /ere the first of ='000
locations' even if the! never (lan to e"(and.
Tr! to become unim(ortant to the da!-to-da! o(erations. A business that /ould cease if somethin*
ha((ened to the o/ner has ver! little value to a (otential bu!er. If the business is a turn-ke! o(eration /ith
documented and reliable (rocesses' it has much *reater value to the current o/ner and future bu!ers.
5B
6e (re(ared to chan*e roles as the business *ro/s. As time *oes on' the amount of time an o/ner s(ends
/orkin* in the business should decrease. Ee or she should embrace the role of a CE: /ho is /orkin* on the
business.
In the introduction of this cha(ter /e likened the business o/nersA role to a musician. In the earl! sta*es of the
business' the o/ner had to (la! ever! instrument. 6ut if the business is to *ro/ and (ros(er' the o/ner must
become the conductor of an evolvin* orchestra. If an orchestra has *ood musicians' e"cellent sheet music' and a
talented conductor' the result is beautiful music.
I$ le*al issues
6ecause la/s re*ulatin* business var! *reatl! b! countr! and locale' entre(reneurs should (ick a
le*al entit! for their business in consultation /ith a local attorne! that s(eciali0es in business la/.
The le*al issues discussed belo/ reflect *eneral (ractices in the Inited $tates /here la/s *overnin*
business var! not onl! b! state' but b! local -urisdictions /ithin states.
6usinesses activities are or*ani0ed either b! individuals' cou(les or *rou(s of (eo(le.
6usinesses /ith one o/ner Jthe most common and referred to as sole (ro(rietorshi(s in the Inited
$tatesK can be launched /ithout an! le*al assistance' and de(endin* on the location' /ith or
/ithout certain (ermits.
6usinesses /ith multi(le o/ners t!(icall! /rite out e"(licit *uidelines re*ardin* investment and
mana*ement issues usin* one of several t!(es of le*al a*reements desi*ned s(ecificall! for
business or*ani0ations. Thus' one of the first decisions facin* ne/ business o/ners is decidin*
/hat le*al entit! to use for their business. That decision-makin* (rocess t!(icall! /ei*hs the
follo/in* issues:
JaK ho/ much time or involvement in the business is re&uired
JbK /hat skills are re&uired
JcK de*ree of risk associated /ith the business
JdK amount of ca(ital needed
JeK ta" re*ulations on labor and income earned b! the business
In the Inited $tates' there are four basic t!(es of business o(erations:
*> &ole proprietor$hip$
A sole (ro(rietorshi( is an individual o/ner of a business J/ith or /ithout em(lo!eesK. This t!(e of
o(eration is the sim(lest to form' and the sin*le o/ner' or sole (ro(rietor' ma! /ork as much or as
little time as desired. The sole (ro(rietor is *enerall! held accountable for all (roducts and<or
services (roduced b! the business' as /ell as debts and liabilities of the business. $ince the o/nerAs
(ersonal liabilit! e"tends /ell be!ond amounts invested in the business or even be!ond assets
(urchased b! the business' this t!(e of o(eration is considered hi*h risk.
The amount of ca(ital re&uired to start a sole (ro(rietorshi( is *enerall! minimal.
In addition to sole o/nershi( of all assets and liabilities' the (ro(rietor benefits b! receivin* all
(rofits' /hich in the Inited $tates are ta"ed as (art of the o/nerAs total (ersonal income. The sole
(ro(rietor ma! em(lo! /orkers or en*a*e inde(endent contractors to increase skills available' but
the business ceases to e"ist u(on the o/nerAs death.
A sole (ro(rietor business can be or*ani0ed at an! time into a different le*al entit!. The o/ner
often decides to reor*ani0e /hen (rofits substantiall! increase the individualRs ta" liabilit!.
2> .artner$hip$
?hen t/o or more famil! members or (eo(le -oin to*ether in a business o(eration' the! ma!
choose to establish a (artnershi( /hich can take the form of a *eneral or limited liabilit!
(artnershi(. +eneral (artnershi(s are similar to the combination of a *rou( of sole (ro(rietorshi(s
in that the (artners share /orkloads' (rofits' and liabilities. Limited Liabilit! ,artnershi(s'
ho/ever' usuall! include one or more (artners /ho mana*e dail! o(erations and are *enerall!
liable for the debts of the business /hile other limited (artners risk their investment in
antici(ation of (rofits.
Initial a*reement is essential concernin* ho/ the (artnershi( /ill o(erate' /ho /ill mana*e dail!
o(erations' ho/ (rofits /ill be disbursed' and /ho assumes liabilities and debts. $uch an
a*reement is normall! formali0ed in /ritin* and is kno/n as a 7,artnershi( A*reement8.
,artnershi(s' like sole (ro(rietorshi(s' are *enerall! dissolved u(on the death of a (artner. ,rofits
are shared in accordance /ith terms of the ,artnershi( A*reement and re(orted to ta"in*
authorities on (ersonal ta" returns of the (artners.
7> Corporation$
In the Inited $tates' cor(orations are considered se(arate le*al entities that are chartered and
re*ulated b! an authorit! in each state' such as the $ecretar! of $tate. Additionall!' a se(arate
a*ent /ho acts on behalf of the cor(orate entit! is identified in the initial a((lication (rocess to
receive le*al notifications. Cor(orations must also submit identification and *overnin* documents
such as Articles of Incor(oration and 6!-La/s. Cor(orate entities are *enerall! re&uired to be ke(t
in active status throu*h annual u(dates to a re*ulator! authorit!. As a result' this t!(e of entit! is
deemed sli*htl! more com(le" to form and mana*e.
Cor(orations re&uire investment b! one of more o/ners /ho are kno/n as 7shareholders8 or
7stockholders8' and the amount of investment varies de(endin* on the needs of the business. $ince
this form of entit! (rovides (rotection J/idel! kno/n as the 7cor(orate veil8K for the (ersonal
assets of o/ners a*ainst certain t!(es of claims' it is *enerall! of lo/er risk. Cor(orate entities ma!
5>
var! in numbers of o/ners from a sin*le shareholder to an unlimited number. $tates and federal
a*encies re*ulate financial activities and re(ortin* re&uirements that are cate*ori0ed b! the
number of shareholders and /hether their shares are available to (urchase and sell on (ublic stock
e"chan*es. %or e"am(le' I$ cor(orations /ith (ublicl! traded shares are re*ulated b! the I$
$ecurities and E"chan*e Commission.
The cor(oration ma! em(lo! /orkers and en*a*e inde(endent contractors as needed to increase
skills available. Cor(orations are re&uired' ho/ever' to ackno/led*e formall! Jin a /ritten
documentK the individuals /ho are a((roved to en*a*e in financial transactions on behalf of the
entit!.
In the Inited $tates' the Internal @evenue $ervice re*ulates federal ta" codes. There are t/o ta"in*
o(tions for earnin*s of cor(orations: a (ro*ressive structure on (rofits for the traditional
cor(oration and another that allo/s o/ners to 7flo/-throu*h8 (rofits to their (ersonal ta" returns.
8> :he 6iited 6iability Copany A66CB
In the Inited $tates' the Limited Liabilit! Com(an! JLLCK is the entit! of choice for the o/ner or
o/ners /ho (refer the limited liabilit! afforded b! a cor(oration and a ta" treatment that allo/s
(rofits to flo/ from the business to the o/ner or o/ners. The LLC must also be re*istered /ith a
$tate authorit!' but re&uires less documented structure. :/nershi( is ackno/led*ed b! (ercenta*e
as o((osed to number of shares and (rotection for the o/ners is similar to that of a cor(oration.
Describe the characteristics of each of the four sta*es of *ro/th a business or*ani0ation mi*ht
e"(erienceC
Describe the advanta*es and disadvanta*es of a flat versus tall or*ani0ational structure.
+iven !our (ersonalit! and (ast e"(erience' do !ou (refer /orkin* in a flat or tall or*ani0ation and
/h!C
?hat are the characteristics of the four t!(es of business le*al entitiesC
@eferences
Collins' #im. J1002K. :ood 1o :reat. Ear(erCollins' ;e/ 3ork' ;3.
+erber' ichel E. J2DD=K. E-Myth *e,isited: Why Most +mall Businesses #onCt Wor! and What to #o .bout 2t0
Ear(erCollins ,ublishers' Inc. ;e/ 3ork' ;3.
:. %electin and manain
your team
Editor: C!nthia M %ukami JDaniels Colle*e of 6usiness' Iniversit! of Denver' I$AK
Contributor$: The students of +T B3B0' $trate*ic Euman @esource ana*ement' $(rin* 1009
Learnin* ob-ectives
to understand the field of Euman @esource ana*ement and its (otential for creatin* and sustainin*
com(etitive advanta*e
to understand ho/ an or*ani0ation can effectivel! recruit' mana*e' and terminate its em(lo!ees.
to kno/ the basic a((roaches to creatin* effective re/ard s!stems throu*h base (a!' benefits' and (a! for
(erformance
to understand the relationshi( bet/een /ork desi*n and em(lo!ee motivation
to sho/ familiarit! /ith mechanisms to create em(lo!ee voice and influence
Competiti&e ad&antae throuh human resource manaement
.n introdution, by 9ynthia D Fu!ami
A *reat deal of recent research has underscored the strate*ic advanta*e to be *ained from mana*in* em(lo!ees
as if the! are assets rather than commodities. Consider the commodities a business em(lo!sY(ads of (a(er'
ball(oint (ensYthin*s that !ou (urchase' use u(' and then discard. Investin* in a commodit! is never consideredY
refillin* a ball(oint (en' for a sim(le e"am(leYbecause it sim(l! is not /orth the e"(enditure of time and
resources. A return on that investment is not e"(ected. :n the other hand' consider the assets em(lo!ed in business
Ythe (h!sical (lant' the e&ui(ment' and the mone!Ythin*s that are maintained and develo(ed. ?hen the (aint
(eels on the office /alls' one does not thro/ a/a! the buildin* and build a ne/ oneG a ne/ coat of (aint is sufficient.
akin* investments in a businessAs assets makes a *reat deal of sense' because these investments /ill brin* a
return. A *ro/in* number of com(anies' reco*ni0in* that their em(lo!ees are amon* their most valuable assets' are
backin* u( that reco*nition /ith solid investment.
In an im(ortant recent book' ,rofessor #effre! ,feffer of $tanford Iniversit! identified seven mana*ement
(ractices that have been associated /ith (roducin* sustained com(etitive advanta*e for the com(anies that have
ado(ted them. These (ractices are: em(lo!ment securit!' selective hirin*' self-mana*ed teams /ith decentrali0ed
authorit!' hi*h (a! contin*ent on or*ani0ational (erformance' trainin*' reduced status differences' and sharin*
information. ,ut to*ether' these (ractices form the foundation of /hat is called a 7hi*h-commitment8 or a 7hi*h-
(erformance8 mana*ement s!stem.
5. (electing and managing your team
The evidence on the results of im(lementin* a hi*h-commitment mana*ement s!stem is strikin* and stron*.
@esearch has been conducted in man! industries' from bankin* to automotive to semiconductors to service. $ome
research has focused on one industr! /hile others have looked across industries. $ome research has included
com(anies from the Inited $tates and others have studied com(anies abroad. :verall' the conclusions of these
studies are remarkabl! similar. Ei*h-commitment mana*ement s!stems (roduce hi*her or*ani0ational
(erformance. ,feffer summari0es the results into three cate*ories. %irst' (eo(le /ork harder because the! have
more control over their /ork from the hi*h-commitment mana*ement (ractices. $econd' (eo(le /ork smarter
because the! have stron*er skills and *reater com(etence from the investments of hi*h-commitment mana*ement
(ractices. Third' com(anies save administrative overhead and the costs b! reducin* the alienation of their
/orkforce and the adversarial relationshi( /ith mana*ement.
In a stud! of firms re(resentin* all ma-or industries' ark Euselid found that a one standard-deviation
increased the use of hi*h-commitment (ractices /as associated /ith a 9.0= (er cent decrease in em(lo!ee turnover'
a I$D 19'0BB (er-em(lo!ee increase in sales' I$D 25'>B2 more in market value (er em(lo!ee' and I$D 3'52B
more in (rofits (er em(lo!ee. ?hen he re(eated the stud! several !ears later' he found that a similar increase in the
use of hi*h-commitment mana*ement (ractices /as associated /ith a I$D B2'000 increase in shareholder value
(er em(lo!ee.
Another note/orth! stud! e"amined the mana*ement (ractices of initial (ublic offerin*s or I,:s to see if there
/as a relationshi( bet/een hi*h-commitment mana*ement (ractices and the five-!ear survival rate of I,:s. This
stud! concluded that the treatment of em(lo!ees as assets and the use of stock o(tions' (rofit sharin* and *ain
sharin* (ro*rams for all em(lo!ees Jversus limitin* the (ro*rams to ke! e"ecutivesK /ere si*nificantl! related to the
survival of the I,: to the five-!ear milestone.
These studies' and man! others like them' have (ut conventional /isdom on its ear. T!(icall!' /e have assumed
that success /as related to factors such as si0e' or bein* *lobal' or leadin* !our market' or bein* in (articular
industries such as hi*h tech' or (ursuin* a brilliant strate*!. 3et' research sho/s there is virtuall! no connection
bet/een industr! and success. As ?al-art and $outh/est Airlines have sho/n us' an individual business can be
ver! successful in a terrible industr!. $imilarl!' there is little or no connection bet/een success over time and
com(an! si0e or market dominance. Instead' com(etitive advanta*e comes from the /a! business is conducted' and
em(lo!ees are the ke!s to this. The most successful com(anies mana*e their /orkforce effectivel! as assets not
commodities.
$o /h! are more com(anies not ado(tin* hi*h-commitment mana*ement (racticesC ?h! are their e"ecutives
(roclaimin* em(lo!ees to be their most valuable assets' /hile continuin* to treat them as commoditiesC ,erha(s it
is a continual cultural em(hasis on short run (erformance and stock (ricesYan em(hasis that makes it seem more
(rofitable to la! off em(lo!ees or to cut trainin* /hen times are tou*h. ,erha(s it is a (reoccu(ation /ith s!stems
that control rather than dele*ate. ,erha(s it is our over/helmin* tendenc! to teach future mana*ers technical tools
at the e"(ense of (eo(le-mana*ement tools. ?hatever the reasons' the challen*e remains. If a business is able to
meet that challen*e' the odds are that com(etitive advanta*es /ill follo/.
.ro&idin employee &oice and influence
By -i( E,ans
5D
Em(lo!ees are the resources of an or*ani0ation in the same /a! as material assets but the! are also the firmAs
stakeholders. The conce(t of eployee$ a$ $ta)eholder$ refers to the interest em(lo!ees have in the success of
the com(an! and the fact that actions taken b! the or*ani0ation directl! affect the em(lo!ees J:lson' 1003K.
Em(lo!eesA stakes in the com(an! are economic in the fact that their livelihood comes from the firm' (s!cholo*ical
in that the! derive (ride from their /ork' and (olitical in terms of their ri*hts as em(lo!ees and citi0ens. Thou*h
em(lo!ees are the stakeholders /ho are ar*uabl! most visible to mana*ement on a da!-to-da! basis' the! do not
often command the ma-orit! of attention in terms of decision-makin* influences. The short-term' economic duties
to stockholders often command more mana*erial attention in the decision makin* (rocess than em(lo!ee o(inion
J,eterson' 100=K. Accordin* to #ones' the best /a! to incor(orate em(lo!eesR stake to im(rove firm (erformance is
throu*h em(lo!ee (artici(ation and influence JEm(lo!ees as $takeholders' 2DD9K.
A(art from unioni0ation' em(lo!ees can obtain influence in or*ani0ational decisions in several /a!s.
-rievance and Due .roce$$ &y$te$ allo/ em(lo!ees to address *rievances and to ar*ue their (oint if the!
feel the! are /ron*ed b! mana*ement or another em(lo!ee. .articipation &y$te$ (rovide em(lo!ees /ith
influence in the or*ani0ational or mana*erial decision makin* (rocesses. This subcha(ter /ill discuss the /a!s
em(lo!ees are *iven voice and influence in non-unioni0ed /ork(laces' /ith (articular attention (aid to influence in
decision-makin* and or*ani0ational success. This /ill include the benefits of em(lo!ee in(ut to the firm' the
difference bet/een voice and influence' and the man! (artici(ation mechanisms mana*ement can use to harness
em(lo!ee influence into decision-makin*.
There are benefits to a firm for (rovidin* em(lo!ee influence. %or one' stron* em(lo!ee voice and influence
mechanisms are an im(ortant (art of a Eigh3.er!orance Euan Re$ource &y$te in /hich the human
resources of the firm are coordinated and 7desi*ned to ma"imi0e the &ualit! of human ca(ital in the or*ani0ation8
J6ecker U Euselid' 1002K. Moice and influence mechanisms allo/ em(lo!ees to *ive in(ut and to contribute their
e"(ertise to business successG these mechanisms allo/ firms to *et the most benefit from the skills of their human
ca(ital. Thus' firms /ith em(lo!ee influence mechanisms *et hi*her financial return from their em(lo!ee assetsG
hi*h-(erformance E@ s!stems im(rove the financial bottom line of the firm J6ecker U Euselid' 1002K.
Des(ite the man! benefits' there are various reasons not to im(lement voice and influence mechanisms
(erceived b! em(lo!ees and mana*ement. Moice and influence can benefit em(lo!ees b! hel(in* them to (rotect
their ri*hts and most 7em(lo!ees /ant a voice in their /ork(lace8 J,eterson' 100=K. Eo/ever' em(lo!ees ma! be
hesitant to or*ani0e into em(lo!ee associations or (ush for voice mechanisms for fear of retribution due to
(erceived o((osition to influence b! mana*ement J,eterson' 100=K. Em(lo!ers benefit from the increased trust
that comes from sharin* information and *ivin* em(lo!ees influence J,feffer U Mie*a' ,uttin* ,eo(le %irst for
:r*ani0ational $uccess' 2DD5K. Eo/ever' mana*ers /ho are used to havin* control often find it 7disconcertin*'
difficult and even im(ossible8 to share (o/er in the form of influence in e"chan*e for the man! or*ani0ational
benefits Jarken' 100BK.
Moice and influence are different' but both are necessar! to *arner the benefits to the firm. an! mana*ers
reco*ni0e the im(ortance of *ivin* their em(lo!ees a voice' but often this o(en communication does not result in
authentic em(lo!ee involvement or influence on the actual decision makin* (rocess J+olan' 1003K. Eearin*
em(lo!ee voice is not the same as *ivin* con$ideration to the received informationG consideration is /hat *ives
Business Fundamentals D0 A +lobal Te"t
em(lo!ees influence in the or*ani0ation J+arvin U @oberto' 1002K. Misible action is as im(ortant to influence as
consideration J$olnik' 100>K. Action (rovides the follo/ u( that allo/s mana*ement to make it a((arent to
em(lo!ees that the! have influenceG it also allo/s mana*ement to see real chan*e and benefit from the insi*ht
(rovided b! em(lo!ees. Moice /ithout consideration and action creates little benefit for em(lo!ees or the firm.
an! different (artici(ation s!stems can be im(lemented to authenticall! *et em(lo!ee in(ut and to ca(itali0e
on the benefits associated /ith em(lo!ee influence. 4pen boo) anageent em(o/ers em(lo!ees /ith the
information the! need to see the realit! of the or*ani0ational situation and to *ive relevant and hel(ful in(ut JCase'
2DD9K. $imilar to o(en book mana*ement are open3door policie$' /here mana*ement makes it clear that
em(lo!ees can informall! raise issues or *ive in(ut at an! time. The o(en-door (olic! (a*e on the Central ,arkin*
Cor(oration /ebsite (rovides an e"am(le of such a (olic! and the (rocedures em(lo!ed b! the com(an! for
submittin* and receivin* em(lo!ee in(ut JCentral ,arkin* Cor(oration' 100BK. 2eedbac) progra$' sometimes
im(lemented in the form of em(lo!ee surve!s or throu*h direct em(lo!ee-mana*ement interaction' can be a less
e"(ensive /a! to *et feedback from em(lo!ees concernin* s(ecific (ro*rams or (olicies J$olnik' 100>K. $urve!s are
(articularl! economical' es(eciall! /hen done online usin* free surve! (ro*rams such as $urve! onke!.com
J$urve! onke!' 1009K. Team mechanisms such as Guality circle$H wor) tea$H and total Guality
anageent tea$ (rovide em(lo!ees /ith the abilit! to s!nthesi0e their individual in(ut into a better solution
to or*ani0ational (roblems.
In conclusion' there are man! (ossible benefits to a firm associated /ith (rovidin* em(lo!ees /ith voice and
influence /ithin the or*ani0ation. Eo/ever' in order for these benefits to be reali0ed' mana*ement must not onl!
(rovide em(lo!ees /ith an outlet to s(eak' but must also take the information into consideration and follo/ u(
/ith visible action. In this /a!' an or*ani0ation can attend to its most im(ortant stakeholders' the em(lo!ees' and
*arner return on its investment in its human ca(ital.
ana*in* differences in or*ani0ations
By Aanoi 6 +oto :aria and 6ora Martin
In toda!As business environment' an increasin* trend to/ards team/ork' a lar*er (resence of /omen and ethnic
minorities in the /ork(lace' and a *reater e"(osure to international businesses and cultures are constantl!
challen*in* em(lo!ees from a variet! of industries in all (arts of the /orld. This (osts a *reater o((ortunit! for
(eo(le to learn from cultural and (ersonal differences and create a more (roductive /ork environment. Thomas L
%riedman' in 1he World is Flat' makes the follo/in* comment after one of his tri(s to 6an*alore' India: 7It is no/
(ossible for more (eo(le than ever to collaborate and com(ete in real time /ith more (eo(le on more different
kinds of /ork from more different corners of the (lanet and on a more e&ual footin* than at an! (revious time in
the histor! of the /orld8 J100>K. Due to the im(ortance of mana*in* differences effectivel! in or*ani0ations' there
is a need to identif! the t!(es of differences encom(assed in or*ani0ations' the effects of differences in /ork teams'
and the im(ortance of understandin* and dia*nosin* differences to ma"imi0e or*ani0ational (erformance.
:r*ani0ations usuall! take one of t/o (aths in mana*in* diversit!: J2K the! encoura*e (eo(le of diverse
back*rounds to blend in for the benefit of fairness and e&ualit!G or J1K the! set them a(art in -obs that relate
s(ecificall! to their back*rounds' assi*nin* them' for e"am(le' to areas that re&uire them to interface /ith clients or
customers of the same identit! *rou(. African American 6As often find themselves marketin* (roducts to inner-
D2
cit! communitiesG Latino Americans are fre&uentl! (ositioned to market to Latinos or /ork for Latin American
subsidiaries. In those kinds of cases' com(anies are o(eratin* on the assum(tion that the main virtue identit!
*rou(s have to offer is kno/led*e of their o/n (eo(le. This assum(tion is limited and detrimental to diversit!
efforts. Diversit! *oes be!ond increasin* the number of different identit!-*rou( affiliations on the (a!roll. $uch an
effort is merel! the first ste( in mana*in* a diverse /orkforce for the or*ani0ationAs utmost benefit. Diversit!
should be understood as the 7varied (ers(ectives a((roaches to /ork that members of different identit! *rou(s
brin*8 JThomas U El!' 2DD>K.
Leaders reali0e that increasin* demo*ra(hic variation does not in itself increase or*ani0ational effectiveness.
The! reali0e that it is how a com(an! defines diversit! and what it does /ith the e"(eriences of bein* a diverse
or*ani0ation that delivers on the (romise.
-roup diver$ity refers to the amount of hetero*eneit! /ithin a *rou( determined b! several characteristics
derived from informational' visible' and value differences JEobman' 6ordia' U +allois' 1003K. In!orational
di!!erence$ refer to different (rofessional back*rounds and e"(eriencesG vi$ible di!!erence$ refer to thin*s that
become more (h!sicall! a((arent' such as a*e' *ender' ethnicit!' etc.G and value di!!erence$ are sha(ed b! each
individualAs set of beliefs' *oals' and values. These three cate*ories of differences have a ma-or im(act on team
(erformance because the! can become the cause for multi(le t!(es of conflicts /ithin a team. ?hen a((roachin*
tasks' different members of the team /ill have different behaviors based on their o/n set of informational' visible'
and values characteristics. Em(lo!ees /ith different vie/s of the same situation ma! have totall! different /a!s of
res(ondin* to it.
After the a((earance of conflict' team members can create a true learnin* environment /here the! can (erform
far be!ond e"(ectations b! levera*in* their differences. Eobman' 6ordia' and +alois hi*hli*ht the /a!s in /hich
*rou( diversit! can foster a hi*her or*ani0ational (erformance' 7It has been noted that diversit! can lead to hi*her
(erformance /hen members understand each other' combine and build on each othersA ideas. This su**ests that
interaction (rocesses /ithin a diverse team are crucial to the inte*ration of diverse vie/(oints. %or e"am(le'
Abramson found that or*ani0ations that had teams /ith hi*h diversit! and inte*ration had the best (erformance8
JConse&uences of %eelin* Dissimlar from :thers in a ?ork Team' 1003K. Alon* these lines' diverse *rou(s have a
hi*her abilit! to overcome initial difficulties b! identif!in* the multi(le an*les of a (roblem and *eneratin* creative
solutions.
The more o(enl! the! are reco*ni0ed and discussed' the better chance there is for differences to become (art of
or*ani0ational success. Tomas and El! believe in the notion that 7a more diverse /ork(lace /ill increase
or*ani0ational effectiveness. It /ill lift morale' brin* *reater access to ne/ se*ments of the market (lace' and
enhance (roductivit!8 Jakin* Differences atterG A ;e/ ,aradi*m for ana*in* Diversit!' 2DD>K. 6! trul!
embracin* diversit!' levera*in* the talent /ithin multicultural teams' and a((roachin* diversit! as means to hi*her
kno/led*e and (roductivit!' or*ani0ations /ill effectivel! mana*e differences' to achieve com(etitive advanta*e
successfull!.
Table 2: ,aradi*ms of diversit!
.aradig 2ocu$ 0ey $ucce$$ !actor$
Discrimination-and-fairness
E&ual o((ortunit!' fair
treatment' recruitment' and
com(liance /ith I$ federal
E&ual Em(lo!ment
:((ortunit! re&uirements
Leaders /ork to/ards
restructurin* the makeu( of
the or*ani0ation to reflect
more closel! that of societ!
Effectiveness in its
recruitment and retention
*oals rather than b! the
de*ree to /hich com(anies
allo/ em(lo!ees to dra/ on
their (ersonal assets and
(ers(ectives to do their
/ork more efficientl!
Access-and le*itimac!
;eed of a more diverse
/orkforce to hel( com(anies
*ain access to the
differentiated se*ments
atches the demo*ra(hics of
the or*ani0ation to those of
critical consumer or
constituent *rou(s
De*ree to /hich leaders in
or*ani0ations understand
niche ca(abilities and
incor(orate them into
differentiated cate*ories
ali*ned to their business
strate*!
Learnin*-and-effectiveness
Incor(orates em(lo!eeAs
(ers(ectives into the main
/ork of the or*ani0ation
Enhances /ork b! rethinkin*
(rimar! tasks and redefinin*
markets' (roducts' strate*ies'
missions' business (ractices'
and even cultures
The (romotion of e&ual
o((ortunit! and
ackno/led*ment of cultural
differences
:r*ani0ational learnin* and
*ro/th fostered b!
internali0in* differences
amon* em(lo!ees
End *oal: Leaders should thrive to shift to the Learnin*-and-effectiveness (aradi*m to a((roach diversit! as a
means to hi*her kno/led*e and (roductivit!.
0ecruitin !or$ers
-u!h,inder *ai
@ecruitment of talented em(lo!ees is an essential (art of an! com(an!As abilit! to maintain success and ensure
the achievement of standards /ithin an or*ani0ation. @ecruitin* /orkers consists of activel! com(ilin* a diverse
(ool of (otential candidates /hich can be considered for em(lo!ment. A *ood recruitment (olic! /ill do this in a
timel!' cost-efficient manner. The ultimate *oal of an! human resources recruitment (olic! is to develo(
relationshi(s /ith (otential em(lo!ees before the! ma! actuall! be needed /hile remainin* co*ni0ant of the costs of
doin* so. In different industries' the constant need for talent creates a hi*hl! com(etitive market(lace for
individuals' and it is im(ortant for an! mana*er to be a/are of these factors as the! develo( recruitment (ro*rams
D3
and (olicies. As retirement amon* bab! boomers becomes increasin* (revalent' victor! in the 7/ar for talent8 /ill
de(end *reatl! on recruitment (olicies.
ethods of recruitment
There are t/o (rinci(al /a!s to recruit /orkers: internall! and e"ternall!. ost com(anies /ill activel! use both
methods' ensurin* o((ortunities for e"istin* em(lo!ees to move u( in the or*ani0ation /hile at the same time
fieldin* ne/ talent. De(endin* on the time frame and the s(eciali0ation of the (osition to fill' some methods /ill be
more effective than others. In either case' the establishment of a com(rehensive -ob descri(tion for ever! (osition
for /hich the com(an! recruits /ill hel( to narro/ the sco(e of the search' and offer more &ualified candidates'
aidin* in search efficienc!.
Internal recruitent is often the most cost effective method of recruitin* (otential em(lo!ees' as it uses
e"istin* com(an! resources and talent (ool to fill needs and therefore ma! not incur an! e"tra costs. This is done in
t/o (rinci(al /a!s:
Advertisin* -ob o(enin*s internall!: This is the act of usin* e"istin* em(lo!ees as a talent (ool for o(en
(ositions. It carries the advanta*e of reallocatin* individuals that are &ualified and familiar /ith the
com(an!As (ractices and culture /hile at the same time em(o/erin* em(lo!ees /ithin the or*ani0ation. It
also sho/s the com(an!As commitment to' and trust in' its current em(lo!ees takin* on ne/ tasks.
Isin* net/orkin*: This method can be used in a variet! of different /a!s. %irst' this recruitment techni&ue
sim(l! (osts the &uestion to e"istin* em(lo!ees on /hether an!bod! is a/are of &ualified candidates that
the! kno/ (ersonall! /hich could fill a (osition. Hno/n as em(lo!ee referrals' this method often *ives
bonuses to the e"istin* em(lo!ee if the recommended a((licant is hired. Another method uses industr!
contacts and membershi( in (rofessional or*ani0ations to hel( create a talent (ool' throu*h sim(le /ord-
of-mouth information re*ardin* the needs of the or*ani0ation.
E5ternal recruitent focuses resources on lookin* outside the or*ani0ation for (otential candidates and
e"(andin* the available talent (ool. The (rimar! *oal of e"ternal recruitment is to create diversit! amon* (otential
candidates b! attem(tin* to reach a /ider ran*e of individuals unavailable throu*h internal recruitment. Althou*h
e"ternal recruitment methods can be costl! to mana*ers in terms of dollars' the addition of a ne/ (ers(ective
/ithin the or*ani0ation can carr! man! benefits /hich out/ei*h the costs. E"ternal recruitment can be done in a
variet! of /a!s:
Traditional advertisin*: This often incor(orates one or man! forms of advertisin*' ran*in* from ne/s(a(er
classifieds to radio announcements. It is estimated that com(anies s(end I$D 1.25 billion annuall! on
these t!(es of ads JHulik' 100BK. 6efore the emer*ence of the Internet' this /as the most (o(ular form of
recruitment for or*ani0ations' but the decline of readershi( of ne/s(a(ers has made it considerabl! less
effective JEeathfield' Ise the ?eb for @ecruitin*: @ecruitin* :nlineK.
#ob fairs and cam(us visits: #ob fairs are desi*ned to brin* to*ether a com(rehensive set of em(lo!ers in
one location so that the! ma! *ather and meet /ith (otential em(lo!ees. The costs of conductin* a -ob fair
are distributed across the various (artici(ants' and can offer an e"tremel! diverse set of a((licants.
De(endin* on the (ro"imit! to a colle*e or universit!' cam(us visits hel( to find candidates that are lookin*
Business Fundamentals DB A +lobal Te"t
for the o((ortunit! to (rove themselves and have minimum &ualifications' such as a colle*e education' that
a firm seeks.
Eeadhunters and recruitment services: These outside services are desi*ned to essentiall! com(ile a talent
(ool for a com(an!G ho/ever the! can be e"tremel! e"(ensive. Althou*h this service can be e"tremel!
efficient in (rovidin* &ualified a((licants for s(eciali0ed or hi*hl! demanded -ob (ositions the rate for the
services (rovided b! headhunters can ran*e from 10 to 3= (er cent of the ne/ recruitAs annual salar! if the
individual is hired JEeathfield' @ecruitin* $tars: To( Ten Ideas for @ecruitin* +reat CandidatesK.
:nline recruitment. The use of the Internet to recruit a talent (ool is &uickl! becomin* the (referred /a! of
doin* so' due to its abilit! to reach such a /ide arra! of a((licants e"tremel! &uickl! and chea(l!. There are
man! /a!s to turn the Internet into a recruitment tool for !our com(an!.
%irst' the use of the com(an! /ebsite can allo/ a business to com(ile a list of (otential a((licants /hich are
su(remel! interested in the com(an! /hile at the same time allo/in* them e"(osure to !our com(an!As values and
mission. In order to be successful usin* this recruitment method' a com(an! must ensure that (ostin*s and the
(rocess for submittin* resumes are as trans(arent and sim(le as (ossible.
Another (o(ular use of online recruitin* is throu*h career /ebsites Je.*0 onster.com or C areerbuilder.com K.
These sites char*e em(lo!ers a set fee for a -ob (ostin* /hich can remain on the /ebsite for an a*reed amount of
time. These sites also carr! a lar*e database of a((licants and allo/ clients to search their database to find (otential
em(lo!ees. Althou*h e"tremel! effective' man! com(anies (refer to use their o/n /ebsites to eliminate the flood of
resumes /hich ma! result from these services.
%inall!' man! (rofessional associations ma! have /ebsites on /hich a com(an! ma! (ost -ob o(enin*s. %or
instance' the ;CAA allo/s all of its member schools and conferences to (ost -obs on their /ebsite at a minimal cost'
allo/in* for a more s(eciali0ed selection of candidates. It ma! also be in a com(an!As interest to contact area
schools to see if the! offer a career services site for their students for (ostin* o(enin*s' further e"(andin* the reach
of recruitment efforts.
To learn more about the *ro/th of internet -ob (ostin*s:
htt(:<<///.click0.com<sho/,a*e.htmlC(a*eS3BB35=2
To learn ho/ to create an effective online -ob (ostin*:
htt(:<<///.!ourhre"(erts.com<(ostin*.html
)&aluatin recruitin policies
To evaluate recruitment (olicies' the conce(t of a yield ratio is often used. This calculates the efficienc! of
recruitment (ractices b! takin* the number of hirable individuals resultin* from a recruitment (olic! divided b! the
total number of individuals recruited b! the same (olic! JHulik' 100BK. This e&uation is outlined belo/:
3ieldratio=
;umber of hirable individuals
Total number of recruits
%or man! com(anies' this number can var! enormousl!' de(endin* on the ima*e' si0e and business of the
com(an!. Eo/ever' it is still an e"tremel! useful measure as it offers insi*ht into the abilit! of a recruitment (olic!
D=
and /hether it needs to be modified. A com(an! like icrosoft ma! receive thousands of a((licants sim(l! based
on the ima*e that the firm carries' distortin* its !ield ratio /ithout tellin* an!thin* about the effectiveness of their
recruitment strate*ies.
;o matter ho/ a com(an! decides to recruit' the ultimate test /ill remain the abilit! of a recruitment strate*! to
(roduce viable a((licants. Each mana*er /ill face different obstacles in doin* thisG ho/ever' it is im(ortant to
remain concise and ob-ective /hen searchin* for (otential a((licants. It is im(ortant to remember that recruitin* is
not sim(l! done at a time of need for an or*ani0ation but rather is a !earlon* (rocess that constantl! maintains a
talent (ool and fre&uent contact /ith candidates.
$elective hirin*
By ;risten :iahino and Emily :ray
In recruitin*' it is beneficial to attract not onl! a lar*e &uantit! of a((licants but a *rou( of individuals /ith the
necessar! skills and re&uirements for the (osition. After obtainin* a lar*e' &ualified a((licant base mana*ers need
to identif! those a((licants /ith the hi*hest (otential for success at the or*ani0ation. Accordin* to ,feffer and
Mei*a' selectin* the best (erson for the -ob is an e"tremel! critical (iece of the human resources inflo/ (rocess
J,feffer U Mie*a' ,uttin* ,eo(le %irst for :r*ani0ational $uccess' 2DD5K. $elective hirin* hel(s (revent the costl!
turnover of staff and increases the likeliness of hi*h em(lo!ee morale and (roductivit!.
In order to evaluate the fit' it is im(ortant for mana*ers to create a list of relevant criteria for each (osition
before be*innin* the recruitment and selection (rocess. Each -ob descri(tion should be associated /ith a list of
critical skills' behaviors or attitudes that /ill make or break the -ob (erformance. ?hen screenin* (otential
em(lo!ees' mana*ers need to select based on cultural fit and attitude as /ell as technical skills and com(etencies.
There are some com(anies' such as $outh/est Airlines' based out of the Inited $tates' /ho hire (rimaril! based on
attitude because the! es(ouse the (hiloso(h! that !ou hire for attitude' train for skill. Accordin* to former CE:
Eerb Helleher' 7?e can chan*e skill levels throu*h trainin*. ?e canAt chan*e attitude8 J:R@eill! U ,fefferK. After
determinin* the most im(ortant &ualifications' mana*ers can desi*n the rest of the selection (rocess so that it is in
ali*nment /ith the other human resource (rocesses.
ana*ers must strive to identif! the best a((licants at the lo/est cost. Com(anies have a variet! of (rocesses
available to screen (otential em(lo!ees' so mana*ers must determine /hich s!stem /ill *enerate the most accurate
results. The methods of selection var! both in levels of effectiveness and in cost of a((lication. In addition to
bio*ra(hical information' com(anies can conduct (ersonal intervie/s' (erform back*round checks' or re&uest
testin*. 6ecause of the costs associated /ith these measures' com(anies tr! to narro/ do/n the number of
a((licants in each round of hirin*. In some countries' such as the Inited $tates' the selection (rocedures are
sub-ect to E&ual Em(lo!ment :((ortunit! *uidelines J@ecruitmentK. Therefore' the com(anies also need to ensure
that the (rocess is accurate' /ith a hi*h level of validit!' reliable and related to critical as(ects of the -ob. ,roactivel!
takin* these measures /ill hel( com(anies avoid liti*ation related to discrimination in the selection (rocess.
Intervie/s
As mentioned' it is im(ortant to first define the skills and attributes necessar! to succeed in the s(ecified
(osition' then develo( a list of &uestions that directl! relate to the -ob re&uirements. The best intervie/s follo/ a
structured frame/ork in /hich each a((licant is asked the same &uestions and is scored /ith a consistent ratin*
Business Fundamentals D> A +lobal Te"t
(rocess. Eavin* a common set of information about the a((licants u(on /hich to com(are after all the intervie/s
have been conducted allo/s hirin* mana*ers to avoid (re-udices and all intervie/ees are ensured a fair chance
J$mith +.K. an! com(anies choose to use several rounds of screenin* /ith different intervie/ers to discover
additional facets of the a((licantAs attitude or skill as /ell as develo( a more /ell rounded o(inion of the a((licant
from diverse (ers(ectives. Involvin* senior mana*ement in the intervie/ (rocess also acts as a si*nal to a((licants
about the com(an! culture and value of each ne/ hire. There are t/o common t!(es of intervie/s: behavioral and
situational.
Beha,ioral i nter,iew
In a behavioral intervie/' the intervie/er asks the a((licant to reflect on his or her (ast e"(eriences J#an0'
2D51K. After decidin* /hat skills are needed for the (osition' the intervie/er /ill ask &uestions to find out if the
candidate (ossesses these skills. The (ur(ose of behavioral intervie/in* is to find links bet/een the -obAs
re&uirement and ho/ the a((licantAs e"(erience and (ast behaviors match those re&uirements. E"am(les of
behavioral intervie/ &uestions:
Describe a time /hen !ou /ere faced /ith a stressful situation. Eo/ did !ou handle the situationC
+ive me an e"am(le of /hen !ou sho/ed initiative and assumed a leadershi( roleC
J%ree $am(le 6ehavioral Intervie/ FuestionsK.
+ituational i nter,iew
A situational intervie/ re&uires the a((licant to e"(lain ho/ he or she /ould handle a series of h!(othetical
situations. $ituational-based &uestions evaluate the a((licantAs -ud*ment' abilit!' and kno/led*e JLatham U $aari'
2D5BK. 6efore administerin* this t!(e of intervie/' it is a *ood idea for the hirin* mana*er to consider (ossible
res(onses and develo( a scorin* ke! for evaluation (ur(oses. E"am(les of situational intervie/ &uestions:
3ou and a collea*ue are /orkin* on a (ro-ect to*etherG ho/ever' !our collea*ue fails to do his a*reed
(ortion of the /ork. ?hat /ould !ou doC
A client a((roaches !ou and claims that she has not received a (a!ment that su((osedl! had been sent five
da!s a*o from !our office. $he is ver! an*r!. ?hat /ould !ou doC
JCreatin* $ituational Intervie/s and @atin* $calesK
$election tests
?hen makin* a hirin* decision' it is critical to understand the a((licantAs (ersonalit! st!le' values' and
motivations J$mith +.K. Technical a(titude is im(ortant' but attitude is often more im(ortant. The realit! is that
technical skills can be learned' but inter(ersonal /ork attitudes are usuall! more difficult to chan*e J$chaeferK.
6ehavioral assessments and (ersonalit! (rofiles are a *ood /a! for hirin* mana*ers to learn ho/ the individual /ill
interact /ith their co/orkers' customers' and su(ervisors J$mith +.K. Tests such as the !ers 6ri**s and D.I.$.C
,rofile assessments are (o(ular tools that (rovide an accurate anal!sis of an a((licantAs attitudes and inter(ersonal
skillsG ho/ever' it is critical that the tests are administered' scored and inter(reted b! a licensed (rofessional. :ther
selection tests used in hirin*' ma! include co*nitive' /hich measure *eneral intelli*ence' /ork sam(le tests that
demonstrate the a((licantAs abilit! to (erform s(ecific -ob duties' and inte*rit! tests' /hich measure honest! JHulik'
100BK.
D9
6ack*round checks
6ack*round checks are a /a! for em(lo!ers to verif! the accurac! of information (rovided b! a((licants in
resumes and a((lications. Information *athered in back*round checks ma! include em(lo!ment histor!' education'
credit re(orts' drivin* records' and criminal records. Em(lo!ers must obtain /ritten consent from the a((licant
before conductin* a back*round check' and the information *athered in a back*round check should be relevant to
the -ob.
Evaluation
Em(lo!ers ma! choose to use -ust one or a combination of the screenin* methods to (redict future -ob
(erformance. It is im(ortant for com(anies to assess the effectiveness of their selective hirin* (rocess usin*
metrics. This (rovides a benchmark for future (erformance as /ell as a means of evaluatin* the success of a
(articular method. Com(anies can continuousl! im(rove their selection (ractices to ensure a *ood fit for future
em(lo!ees that /ill successfull! accom(lish all that the -ob entails as /ell as fit into the or*ani0ational culture. If
com(anies are not successful in their hirin* (ractices' hi*h turnover or lo/ em(lo!ee morale' decreased
(roductivit! /ill result. @esearch sho/s that the 7de*ree of cultural fit and value con*ruence bet/een -ob a((licants
and their or*ani0ations si*nificantl! (redicts both subse&uent turnover and -ob (erformance8 J,feffer U Mie*a'
,uttin* ,eo(le %irst for :r*ani0ational $uccess' 2DD5K. Thus' com(anies need to assess their hirin* in terms of
technical success as /ell as cultural fit. Evaluatin* the hirin* (rocess /ill hel( ensure continuin* success because
human ca(ital is often a com(an!As most im(ortant asset.
)mployee trainin
By Eeter Wright
%or !ears' em(lo!ee trainin* /as vie/ed as a necessar! evil somethin* un(leasant but needed. Eo/ever' /ith
time it /as reali0ed that trainin* could be used to the advanta*e of the com(an!. ?hen used effectivel!' trainin*
(rovides the em(lo!ee /ith skill and kno/led*e /ith relation to the -ob tasks' /hich then creates a com(etitive
advanta*e for the com(an! J,feffer U Mie*a' ,uttin* ,eo(le %irst for :r*ani0ational $uccess' 2DD5K.
:raining is *enerall! defined as the act of teachin* a skill or behavior. Eo/ever' /hat does this mean in
business termsC $im(l! (ut' trainin* in business is the investment of resources in the em(lo!ees of a com(an! so
that the! are better e&ui((ed to (erform the tasks of their -ob. The t!(e of resources invested ma! include time to
learn' mone! to create (ro*rams and develo( trainin* materials' trainin* effectiveness evaluation s!stems' etc.
J%ukami' $trate*ic Euman @esources: Trainin*' 1009K. There are man! trainin* methods from /hich a com(an!
ma! chooseG these /ill be covered in the 1raining Methods section of this article.
6enefits of trainin*
Trainin* can be a source of a com(etitive advanta*e for a com(an!. The (rimar! benefit to the com(an! is the
result of an accumulation of smaller benefits. Trainin* (rovides *reater skill and kno/led*e to the em(lo!ees'
/hich translate into an! number of im(roved -ob (erformances. The belief is that (rovidin* em(lo!ees /ith
trainin* /ill result in increased (rofitsYthe im(roved (erformance or error reduction of the em(lo!ees results in
cost reduction for the com(an! J,feffer U Mie*a' ,uttin* ,eo(le %irst for :r*ani0ational $uccess' 2DD5K. The
com(an! is not the onl! beneficiar! of em(lo!ee trainin*G the em(lo!ee benefits &uite a bit as /ell.
The /ell-trained em(lo!ee creates an advanta*e for him or herself. 6! attendin* trainin* sessions' em(lo!ees
can dee(en their e"istin* skill set' increase their overall skill set and increase their understandin* of the
or*ani0ation. Additionall!' the trained em(lo!ee becomes more marketable in the event that he or she searches for
another -obYmore and better skills /ill often lead to better or hi*her (a!in* -obs JHulik' 100BK.
These are not the onl! benefits that the com(an! and em(lo!ee en-o! as a result of utili0in* a com(an!As trainin*
s!stems. 6elo/ is a list of other benefits that both ma! en-o!:
increased -ob satisfaction and morale amon* em(lo!ees
increased em(lo!ee motivation
increased efficiencies in (rocesses' resultin* in financial *ain
increased ca(acit! to ado(t ne/ technolo*ies and methods
increased innovation in strate*ies and (roducts
reduced em(lo!ee turnover
enhanced com(an! ima*e' e.*0 conductin* ethics trainin* Jnote that this is not a *ood reason for ethics
trainin*4K
risk mana*ement' e.*. trainin* about se"ual harassment' diversit! trainin* JDuenin* U Ivancevich' 1003K
;eed for trainin*
The need for trainin* varies de(endin* on the t!(e of or*ani0ation that is bein* discussedG a manufacturin*
com(an! has different trainin* needs than an insurance firm. 6ut re*ardless of the t!(e of com(an! bein*
discussed' a((ro(riate trainin* s!stems can *reatl! benefit the com(an!. Eo/ever' ho/ does one decide on a
trainin* s!stemC The ans/er to this &uestion stems from the e"am(le aboveYit de(ends on the t!(e of or*ani0ation
that is bein* discussed as /ell as /hat the com(an! /ishes to address in the trainin*. The (rocess be*ins /ith a
trainin* needs assessment. This assessment ou*ht to be a s!stematic and ob-ective anal!sis of the trainin* needs in
three main areasYor*ani0ational' -ob' and (erson.
:r*ani0ational needs deal mostl! /ith the skills the com(an! is lookin* for' the labor force' etc. /hereas the -ob
needs focus on the skills that the com(an! vie/s as necessar! for a s(ecific (osition. Then there are the (erson
needs' and these are the most variable needs. :ften these needs arise after a *a( is seen in the e"(ected
(erformance com(ared to the actual (erformance of the em(lo!ee. A lar*e *a( needs to be addressed and is often
dealt /ith throu*h trainin* or termination Jsee the 1ermination and #ownsi(ing sectionK J%ukami' $trate*ic
Euman @esources: Trainin*' 1009K. :ther reasons for the (erson issues in re*ards to trainin* ma! include trainin*
to develo( a skill set that is lackin* but not affectin* (erformance or that the em(lo!ee feels a need to develo(.
Trainin* can also be a (art of a !oun* em(lo!eeAs 7e"(loration8 sta*e' /here trainin* can be used to focus the
em(lo!eeAs interest and develo(ment to/ards a s(ecific area JHulik' 100BK.
$(ecific circumstances ma! also create the need for trainin*. These circumstances usuall! occur rather suddenl!
and infre&uentl!' creatin* a need for a s(ecific and hi*hl! directed trainin* mechanism. E"am(les of such
circumstance are shifts in an or*ani0ations ethics Jkee(in* the em(lo!ees and or*ani0ation in ali*nmentK' ne/ le*al
DD
re&uirements Jsuch as $arbanes-:"le! com(liance in the Inited $tatesK' or durin* states of chan*e /ithin the
or*ani0ation JDuenin* U Ivancevich' 1003K. If a com(an!' re*ardless of the circumstances surroundin* that need'
deems trainin* necessar! a method for conductin* this trainin* needs to be develo(ed and im(lemented.
Trainin* methods
Desi*nin* and im(lementin* the trainin* s!stems re&uires the com(an! to consider a number of thin*sG the
method of trainin*' the material the trainin* /ill deal /ith' /ho /ill (rovide the trainin*' ho/ to evaluate the
effectiveness of the trainin*' etc. J%ukami' $trate*ic Euman @esources: Trainin*' 1009K. There are also a number of
other items that can im(act the trainin* s!stem' thin*s like /hat the trainin* (ro*ram is called. 6ecause of the
ne*ative vie/ that trainin* has had for so lon*' some or*ani0ations are sh!in* a/a! from the term trainin* and
re(lacin* it /ith thin*s such as 7L earnin* U D evelo(ment 8 in order to em(hasi0e the im(ortance of learnin* for the
individual and the or*ani0ation. In other or*ani0ations' the term 7Euman @esource Develo(ment8 is used
JTrainin* and Develo(ment' 1009K.
T/o of the lar*est issues that a com(an! faces /ith develo(in* these trainin* s!stems are: J2K /hat t!(e of
trainin* to use' and J1K ho/ to evaluate the effectiveness of the trainin*. It is im(ortant that these trainin* s!stems
and evaluation (rocedures remain in-line /ith the culture and (olicies of the rest of the com(an!. 6elo/ is a (artial
list of common trainin* s!stems:
Lectures: $imilar to a school classroom' the session is lead b! a 7trainer<teacher8 /ho covers a s(ecific to(ic
such as ho/ to use a ne/ com(uter (ro*ram.
Audio-visual media U com(uter-based trainin*: ?ith the advancement of technolo*!' com(anies can
invest in video' audio and com(uter based learnin* such as instructional ta(es' recorded lectures or
7(odcasts8' or com(uter materials such as %lash (resentations. The benefit of these methods is that the! are
relativel! ine"(ensive and can be utili0ed b! the em(lo!ee at their discretion JTrainin* and Develo(ment'
1009K.
:n-the--ob: a trainin* method that relies on the em(lo!ee to reco*ni0e the skills and kno/led*e he or she
/ill need as the! (erform their /ork' and then develo( those skills on his or her o/n.
Technical trainin*: s(eciali0ed trainin* that focuses on a s(ecific need of s(ecific em(lo!ees. This t!(icall!
a((lies to manufacturin* based com(anies in relation to trainin* their em(lo!ees on the machiner! and
methods used.
entorin* U coachin*: entorin* s!stems (air a !oun*er or less e"(erienced em(lo!ee /ith an individual
that has e"(erience and success /ithin the com(an! /ho can offer *uidance' aid and insi*ht to the
!oun*er<less e"(erienced em(lo!ees JCraumer' 1002K. Coachin* s!stems are sli*htl! different. The! involve
the mana*er offerin* develo(mental assistance to the em(lo!ee throu*h observation' assessment'
(rovidin* feedback' &uestionin*' etc. JHram' 2D5=K
:utdoor (ro*rams: the use of (h!sical and mental activities such as ro(es courses or (roblem-solvin* tasks
that encoura*e the use of team /ork.
After the trainin* s!stem has been develo(ed and im(lemented' the effectiveness of the s!stem needs to be
evaluated' and there are multi(le /a!s to do this. Common methods includes surve!s *iven to the em(lo!ees /ho
have used the s!stem' an @:I anal!sis and test at the end of the session J%ukami' $trate*ic Euman @esources:
Trainin*' 1009K.
Trainin* in the conte"t of *lobal business
?hen e"aminin* the need for and t!(e of trainin* in the conte"t of *lobal<international business' trainin*
becomes even more necessar!. The trainin* of an em(lo!ee /ho /ill be /orkin* in a countr! other than his or her
o/n can be broken into three se*mentsY(re-de(arture' on-site' and re(atriation.
The pre3departure trainin* consists of formal lan*ua*e trainin*' trainin* /ith res(ect to the local culture
Jculture sensitivit!K' education about the countr! Jhistor!' *eo*ra(h!' *overnment' etc.K' and education about the
com(anies o(eration in the forei*n countr!. $uch trainin* allo/s for easier assimilation of the em(lo!ee into the
countr! and the com(an!As office there.
:nce on site' trainin* takes the sha(e of trainin* at an! other branch of the com(an! Jsee 7Trainin* methods8
sectionK. ?hen the em(lo!ee abroad returns to his or her home countr! it is e&uall! im(ortant that the com(an!
offer some form of re(atriation (ro*ram. $uch (ro*rams are desi*ned to reduce culture shock u(on return and to
inte*rate the e"(erience abroad into the em(lo!ees overall career (lans and develo(ment. These (ro*rams are often
most effectivel! carried out throu*h mentor (ro*rams JAshe*hian U Ebrahimi' 100=K.
#linin employee career de&elopment !ith orani9ational ro!th
By *ahul 9houdaha
Wor! is suh a o(y plae that it<s sometimes diffiult for :oogle employees to lea,e the offieF
JLashinsk!' 1009K.
?e all can (redict at least one thin* about the future of businessesYcom(etition /ill increase. Eo/ever' the
direction of com(etition /ill not onl! be for customers' but also for talent. $atisfied talent /ill attract more
customers and in turn /ill kee( them satisfied. Losin* talent in an era of talent scarcit! is the last thin* an
or*ani0ation /ants. Es(eciall! for small and medium enter(rises' criticalit! and de(endabilit! on the talent is much
hi*her. $ch/e!er makes a case for im(rovin* the retention strate*ies /ithin the or*ani0ation because /innin* the
internal /ar for talent is as critical as losin* a to( (erformer and leads to *eneral em(lo!ee dissatisfaction.
7$uccessful talent mana*ement inside an or*ani0ation sets in motion a virtuous c!cle. Throu*h /ord of mouth it
becomes kno/n as a *reat (lace to /ork. This reduces the e"ternal /ar for talent to mere skirmishes in /hich talent
/ill almost al/a!s choose the to( em(lo!er8 JAn Internal ?ar for Talent' 100>K.
@ecruitin* and selectin* the ri*ht talent is the first sta*e' and identif!in* talent /hich fits into com(an!As needs
and values is critical. $ubse&uentl!' the challen*e for the or*ani0ation is to kee( the talent and consistentl!
motivate them to over deliver. 6aruch e"amines transformin* models of career mana*ement' ar*uin* that there is a
*eneral shift in career tra-ectories from linear to multidirectional tra-ectories JTransformin* Careers from Linear to
ultidirectional Career ,aths' 100BK. In this ne/ model' /orkersA e"(erience of career develo(ment and
(ro*ression does not follo/ a traditional linear model of movin* u( or*ani0ational hierarchies. The multidirectional
career model su**ests that as the individual career tra-ectories *ain multi(le direction and (ossibilities' /orkers are
e"(osed to *reater diversit! of relationshi(s' involvin* cross-functional' inter- and intra-or*ani0ational and multi-
level encounters /hich transform the landsca(e of relationshi(s involved in career e"(eriences.
202
6est of East and ?est
+oo*le /as ranked number 2 in the %ortune 200 6est Com(anies to ?ork %or. +oo*le receives
almost 2'300 resumes ever! da!. The bi**est challen*e for +oo*le is not ho/ to attract the best
talent but ho/ to retain them and kee( them e"cited. +oo*le (rovides innumerable (erks at the
office like free meals' free (rofessional advice on health and finance' childcare' shuttle services' *!m
etc. +oo*le (rovides t/o ke! o((ortunities for career develo(ment. %irst' en*ineers are re&uired to
devote 10 (er cent of their time to (ursuin* (ro-ects of their interests /hich are in ali*nment /ith
or*ani0ational *oals. $econd' +oo*le is e"(lorin* a sabbatical (ro*ram and mobilit! /ithin the
com(an! for the develo(in* and retainin* talent.
TC$ /as ranked the number 2 technolo*! com(an! in the DF-IDC India $urve!: 6est Em(lo!ers.
This is not an eas! achievement considerin* si0e of TC$ and its (hiloso(h! of bein* one of the
moderate (a! masters. TC$ has over 90'000 em(lo!ees' and earned *lobal revenue of I$D B.3
billion J100>-09K. The ke! to success is the learnin* culture that the or*ani0ation (romotes. The
or*ani0ation has ado(ted a t/o-(ron* strate*! for develo(in* talent. %irst' continuous learnin*
throu*h technolo*!: TC$ has launched iCAL$' an inte*rated com(etenc! and learnin*
mana*ement s!stem. $econd' (rovidin* *lobal assi*nments to em(lo!ees and hence enablin* a
route for (rofessional and financial *ro/th JData&uest' 100>K.
The career develo(ment (ro*rams should (rovide e"citement and satisfaction at various sta*es of em(lo!ee
develo(ment. arshall hi*hli*hted that leadershi( develo(ment (ro*rams for small or*ani0ations should identif!
the talent earl! on and (rovide multi(le o((ortunities of learnin* b! -ob rotation JLeadershi( Develo(ment for
$mall :r*ani0ations' 1001K. These develo(ment (ro*rams should also levera*e the internal talent' /ho are alread!
e"(erts in their fields for creatin* ins(iration and develo(in* the ne"t chain of leaders. Homisar shared his
e"(eriences and mentioned that a (assion-driven career has ma-or virtues and am(le learnin* o((ortunities. This is
*ood for the or*ani0ation as the! kno/ that em(lo!ee is en-o!in* the /ork' and finall! it (rovides fluidit! and
fle"ibilit! in the ever-chan*in* landsca(e of the ne/ econom! J+oodb!e Career' Eello $uccess' 1000K.
The chan*in* nature of careers and or*ani0ations has increased the si*nificance of mentorin*. It benefits and
stren*thens em(lo!er-em(lo!ee relationshi(. entorin* can be accom(lished b! immediate su(eriors' (eers /ithin
oneAs o/n or*ani0ation' individuals outside of oneAs or*ani0ation' subordinates' and an! number of other
individuals J6au*h U $ullivan' 100=K. ichaels' Eandfield-#ones' and A"elrod in their book 1he War for 1alent
mentions that talent develo(ment is critical for or*ani0ations and man! think develo(ment means trainin*' but
trainin* is onl! a small (art of the solution J1002K. The! su**est that develo(ment (rimaril! ha((ens throu*h a
se&uence of stretch -obs' coachin*' and mentorin*. Eo/ever' or*ani0ations are not levera*in* the develo(ment
o((ortunities. Com(anies need to ado(t and accelerate develo(ment b! im(rovin* the fre&uenc! and candor of
feedback and institutionali0in* mentorin*. Ever! leader at all levels can and should be res(onsible for (eo(le
develo(ment.
E!mo/it0 sa!s that mana*ers are not s(endin* ade&uate time in understandin* their team members and
(rovidin* them /ith o((ortunities to learn and *ro/ on the -ob J?hen ana*ers ;e*lect to Coach Their Talent'
1009K. This is leadin* to em(lo!ees feelin* alienated' underutili0ed and i*nored' and ma! be searchin* for ne/ -obs
else/here. 7ana*ers /ho focus on talent assi*n their em(lo!ees to -obs that (la! to their stren*ths' make sure
the! have the resources the! need to (erform /ell' res(ect their o(inions and (ush them to advance8 JE!mo/it0'
1009K. The (eo(le mana*er should develo( relationshi(s and an environment that is conducive to develo(ment.
%ive skill areas that successful develo(ers of (eo(le have mastered are:
encoura*in* an o(en climate for dialo*ue /ith em(lo!ees
(rovidin* em(lo!ees /ith on-*oin* feedback re*ardin* (erformance
hel(in* em(lo!ees understand the strate*ies of the or*ani0ation
hel(in* em(lo!ees identif! multi(le and realistic o(tions for their career *ro/th and develo(ment /ithin
the enter(rise
hel(in* em(lo!ees com(ile meanin*ful' business-driven (ersonal develo(ment (lans JHa!e U Multa**io'
100BK
7ZNIOn the ne/ career model' em(lo!ees make ma-or shifts /ithin the same com(an!' or e"it and reenter the
com(an! at different career sta*es8 JHulik' 100BK. :r*ani0ations need to reali0e that talent is (recious and
d!namic. :r*ani0ations need to create action strate*ies and (rovide a favorable environment to hel( talent *ro/ in
line /ith the or*ani0ational *oals.
.erformance appraisal
By .dam *uberg
Eurpose of appraisals
Eistoricall!' (erformance a((raisals have been used b! com(anies for a variet! of different (ur(oses' includin*
salar! recommendations' (romotion and la!off decisions' and trainin* recommendations JHulik' 100BK. In *eneral'
7(erformance elements tell em(lo!ees /hat the! have to do and standards tell them ho/ /ell the! have to do it8
JInited $tates De(artment of the Interior' 100BK. This broad definition' ho/ever' can allo/ for a((raisals to be
ineffective' even detrimental' to em(lo!ee (erformance. 7$econd onl! to firin* an em(lo!ee' mana*ers cite
(erformance a((raisal as the task the! dislike the most8' and em(lo!ees *enerall! have a similar dis(osition
JEeathfield' ,erformance A((raisals DonRt ?orkK. :ne ke! item that is often for*otten durin* the a((raisal (rocess
Jb! mana*ers and em(lo!ees alikeK is that the a((raisal is for im(rovement' not blame or harsh criticism J6acal'
2DDDK.
Creatin* an a((ro(riate a((raisal (rocess
:ne si*nificant (roblem in creatin* an a((raisal (rocess is that no sin*le (erformance a((raisal method /ill be
(erfect for ever! or*ani0ation JHulik' 100BK. Establishin* an a((ro(riate (rocess involves si*nificant (lannin* and
anal!sis in order to (rovide &ualit! feedback to the em(lo!ee. The most crucial task in the (rocess is determinin*
(ro(er -ob dimensions that can be used to *au*e the em(lo!ee a*ainst acce(ted standards that affect the
(erformance of the team' business unit' or com(an! J%ukami' ,erformance A((raisal' 1009K. ,eter Drucker
develo(ed a method termed bana*ement b! :b-ectivesR or 6:' in order to address the creation of such -ob
203
dimensions. Drucker su**ests that the ob-ectives of an! em(lo!ee can be validated if the! (ass the follo/in* si"
tests Jana*ement b! :b-ectivesY$A@T' 1009K:
&(ecific
Measurable
1chievable
Realistic
:ime-related
If an ob-ective meets these criteria' it is considered a valid dimension on /hich to *au*e (erformance. The
standards on /hich the ob-ective is com(ared /ith should also be validated usin* the $A@T method.
A((raisal methods
;umerous methods e"ist for *au*in* an em(lo!eeAs (erformance' and each (rovides stren*ths and /eaknesses
for *iven environments. The follo/in* outlines some of the more commonl! used methods' as /ell as some recentl!
develo(ed ones that can be useful for various feedback situations:
+ra(hic ratin* scales: This method involves assi*nin* some form of ratin* s!stem to (ertinent traits. @atin*s
can be numerical ran*es J2-=K' descri(tive cate*ories Jbelo/ avera*e' avera*e' above avera*eK' or scales bet/een
desirable and undesirable traits J(oor e"cellentK. This method can be sim(le to setu( and eas! to follo/' but is
often critici0ed for bein* too sub-ective' leavin* the evaluator to define broad traits such 7Leadershi( abilit!8 or
7Conformance /ith standards8 JHulik' 100BK.
6ehavioral methods: A broad cate*or! encom(assin* several methods /ith similar attributes. These methods
identif! to /hat e"tent an em(lo!ee dis(la!s certain behaviors' such as askin* a customer to identif! the usefulness
of a sales re(resentativeAs recommendation. ?hile e"tremel! useful for -obs /here behavior is critical to success'
identif!in* behaviors and standards for em(lo!ees can often be ver! time consumin* for an or*ani0ation JHulik'
100BK.
1]1: A relative ne/comer in (erformance a((raisal methodolo*!' the 1]1 feedback s!stem demonstrates ho/
a((raisals can be used (rimaril! for im(rovement (ur(oses. 6! offerin* em(lo!ees t/o com(liments and t/o
su**estions for im(rovement focused around hi*h-(riorit! areas' creators Dou*las and D/i*ht Allen su**est that
or*ani0ations can become 7more (leasant' more d!namic' and more (roductive8 J%ormula 1]1' 100BK. If the *oal
of the (erformance a((raisal is em(lo!ee im(rovement' this s!stem can (rovide si*nificant benefitsG ho/ever' if the
*oals are more akin to com(ensation chan*es and rankin*s' the s!stem (rovides little benefit.
A((raisal methodolo*ies de(end *reatl! on the t!(e of /ork bein* doneG an assembl! /orker /ill re&uire a
considerabl! different a((raisal s!stem than a business consultant. $i*nificant (lannin* /ill be re&uired to develo(
a((ro(riate methods for each business unit in an or*ani0ation in order to obtain ma"imum (erformance to/ards
the a((raisal *oals.
,erformin* the a((raisal
,erformin* an a((raisal on em(lo!ees can be nerve rackin* for both (arties if the situation is not handled
correctl!' and is thus seen as one of the most difficult tasks mana*ers face. There are man! acts a mana*er can
(erform to make the (rocess easier on both (arties' and ho(efull!' mutuall! beneficial.
an! assume that (erformance a((raisals are meant to identif! /eaknesses to be /orked on' and e"(osin*
these /eaknesses can be (ainful for em(lo!ees. artha Craumer su**ests that or*ani0ations should be levera*in*
the stren*ths of each em(lo!ee rather than focusin* on their /eaknesses. 6! 7encoura*in* and develo(in* /hat
(eo(le do /ell naturall!Zthe or*ani0ation could become more efficient b! allo/in* their (eo(le to do /hat the! do
best8 JCraumer' 1002K.
The fre&uenc! of a((raisal can be a notable factor in on*oin* develo(ment. 3earl! (erformance revie/s are
becomin* increasin*l! rare as com(anies be*in to see the benefits of fre&uent a((raisal. $usan Eeathfield su**ests
that &uarterl! (erformance develo(ment meetin*s can allo/ for clear direction to/ards (erformance *oals
JEeathfield' ,erformance ana*ement is ;:T an Annual A((raisalK. Constant tunin* of (erformance can be much
more effective than annual overhauls.
An! individual administerin* (erformance a((raisals must reali0e the t/o-/a! conversation that is occurrin*.
Invitin* feedback and listenin* to reactions and concerns from the em(lo!ee durin* the a((raisal (rocess becomes
ver! im(ortant to establishin* trust /ith the em(lo!ee JInited $tates De(artment of the Interior' 100BK. If the
a((raiser (rovides an! ne*ative feedback or im(rovement (oints' su**estions should be made to hel( resolve the
(roblem to develo( the (ersonAs (erformance. ?ith the su**estions made' follo/-u( should occur to assist /ith an!
(roblems /ith the develo(ment and to track (ro*ress' rather than /aitin* until the ne"t (erformance revie/
J%ukami' ,erformance A((raisal' 1009K.
:ften bein* seen as a strictl! hierarchical feedback tool' (erformance a((raisals can be less 7scar!8 if em(lo!ees
have the o((ortunit! to a((raise their mana*ers as /ell as their (eers. ?ith this 3>0-de*ree feedback (rocess'
em(lo!ees and mana*ers /ill see multi(le vanta*es of their (erformance and can (artici(ate on an even (la!in*
field' ultimatel! (rovidin* a *reater abilit! to /ork to*ether to achieve cor(orate *oals JHulik' 100BK.
,erformance a((raisals should not be looked u(on as a necessar! evil' but rather a (rocess that has the abilit! to
develo( and im(rove the (eo(le /ithin the com(an!. 6! takin* the time to create a((ro(riate (erformance
measures' and administerin* them accordin*l!' the resultin* s!stem can (rovide lon*-term *ain for the com(an!.
%or further investi*ation:
%or a discussion of /h! man! (eo(le think of feedback as criticism visit:
htt(:<<///.selfhel(ma*a0ine.com<articles<*ro/th<feedback.html
%or a discussion of differin* vie/s on feedback and s(ecific e"am(les on ho/ to *ive feedback visit:
htt(:<<home.att.net<cnickols<feedback.htm
+ivin* and receivin* feedback
B! ;ristin Aamilton and 1iffani Willis
20=
In a broad sense' !eedbac) is sim(l! verbal or nonverbal communication bet/een t/o or more (arties. $o' /h!
are so man! of us afraid of the /ord feedbackC ,eo(le often think of feedback as bein* s!non!mous /ith criticism
because feedback is *iven' in most circumstances' /hen e"(ectations have not been met J@ichK. As humans' /e all
have the desire to fit in /ith our societ!As social norms and (lease those /ithin our communit! b! meetin*
e"(ectations. As sho/n in E"hibit 1=' /e are constantl! surrounded b! feedback as /e see the conse&uences of our
actions and ho/ our actions affect the im(ressions of those around us J#osse! and 6ass' 2DD=K. %eedback is an
essential (art of our (ersonal life and our /ork environment' makin*' *ivin* and receivin* feedback successfull!
critical.
E"hibit 1=: %eedback
+ivin* feedback
an! are not a/are that *ivin* successful feedback is affected b! more than -ust the /ords used to
communicate. ?ords used to tell ideas are onl! 79 (er cent of !our communication' !our tone of voice comes out to
35 (er cent and !our *estures are e&uivalent to == (er cent of !our total communication8 JEatha/a!K. As a result'
the effectiveness of communication is related to ho/ /ell one mirrors the culture and behaviors of the (erson to
/hich one is talkin*. atchin* a (ersonAs voice tone' tem(o' bod! (osture' movements' and *estures creates a
feedback environment /here the ideas bein* communicated are easil! understood.
In addition to mirrorin* the (erson !ou are communicatin* /ith' there are nine eas! ste(s that can be follo/ed
/hen *ivin* feedback. %irst' be clear about /hat !ou have to sa!. $econd' em(hasi0e the (ersonAs abilit! to chan*e
in a (ositive /a!. Third' avoid *eneral comments and clarif! (ronouns such as 7it8 and 7that8 so the (erson
understands e"actl! /hat !ou are attem(tin* to communicate. %ourth' make sure to (ick the ri*ht time. %ifth' focus
on the behavior that can be chan*ed rather than the (erson or !our o(inions JeisterK. $i"th' be descri(tive rather
than evaluative. $eventh' o/n the feedback b! usin* 7I statements8 that clarif! !our feelin*s related to the (erson
!ou are *ivin* feedback to. Ei*hth' avoid *enerali0ation /ords such as 7all8' 7never8' 7al/a!s8 etc.G rather' use more
s(ecific e"am(les of the behavior !ou are tr!in* to chan*e or encoura*e in the future. ;inth' to ensure mutual
understandin* after *ivin* feedback' ask the (erson !ou are communicatin* /ith to restate their understandin* of
the issue bein* discussed Jc+ill U 6eatt!' 2DDBK.
?hen thinkin* about feedback in an or*ani0ation' it is likel! a (erson /ill think of (erformance revie/s. :ne
common (roblem that mana*ers overlook /hen revie/in* (erformance is rememberin* that feedback is not all
about forms. Traditional (erformance revie/s have checklists' ratin*s or re(orts that are used as tools to anal!0e
feedback in the or*ani0ation. ?hile these forms are useful in documentin* and a((raisin* a (ersonAs (erformance'
feedback should not be dictated b! the t!(e of form an or*ani0ation uses. ,erformance a((raisals are often *iven at
benchmarked times throu*hout the !ear. As a result' feedback is often dela!ed. Increased amounts of time that (ass
bet/een the time the behavior took (lace and the time the reci(ient receives the feedback *reatl! affects the
reci(ients abilit! to acce(t the feedback as useful information.
In oneAs (ersonal life and in the /ork environment' it is im(ortant to understand that feedback is somethin*
that can be asked for. As such' the *iver and receiver of feedback are e&uall! accountable for communicatin* the
need and desire to *ive and receive feedback. %inall!' it is im(ortant to ask for comment on the /a! one *ives
feedback because most humans are *reat at self-delusion. It is much easier to think that our su**estions are useful
to another (erson than to actuall! understand ho/ our feedback is bein* inter(reted b! another. In the end'
feedback is a continuous (rocess /hich ensures *oals and e"(ectations are bein* met throu*h communication
bet/een t/o (arties.
@eceivin* feedback
?hile *ivin* feedback is e"tremel! im(ortant' receivin* feedback and chan*in* oneAs characteristics to reflect
that feedback is -ust as im(ortant. :ften' em(lo!ees become defensive /hen the! are receivin* feedback on their
(erformance. Hen 6lanchard' co-author of 1he One Minute Manager states' 7NtOhe reason a lot of (eo(le *et
defensive /ith feedback is the! donAt distin*uish feedback from reaction. ?hile the! are listenin* to the feedback'
the! have a reaction to the demand for action that !our feedback im(lies8 J6lanchard' 2DD>K. %or e"am(le' /hen a
boss is tellin* an em(lo!ee the as(ects of the -ob the em(lo!ee needs to /ork on' he ma! onl! focus on the ne*ative
(oints and not the (ositive.
@eceivin* feedback should not onl! be looked at from a do/n/ard (oint of vie/' such as a boss *ivin* his
em(lo!ees criti&uesG but it should also be studied in an u(/ard /a!. Accordin* to @ichard @eill!' #ames $mither'
and ;icholas Masilo(oulos' authors of . -ongitudinal +tudy of Gpward Feedba!' 7u(/ard feedback Jthat is'
subordinates ratin* the (erformance of their immediate su(ervisorK is *ro/in* in im(ortance as a tool for the
individual and or*ani0ational develo(ment8 J2DD>K. I(/ard feedback allo/s mana*ement to see the effects the!
have on their em(lo!ees. It is then u( to the mana*ers to act on that feedback. At/ater' @oush and %ischthal found
that 7follo/er ratin*s of student leaders im(roved after feedback /as *iven to leaders and that leaders receivin*
Ane*ativeA feedback Jdefined as self-ratin*s that /ere considerabl! hi*her than follo/er ratin*sK im(roved the most8
JThe Influence of I(/ard %eedback on $elf and %ollo/er @atin*s of Leadershi(' 2DD=K. This sho/s that there is a
bi**er reaction /hen the u(/ard feedback is ne*ative instead of (ositive.
In order to effectivel! receive feedback' a (erson has to be read! to understand that the! ma! hear criti&ues that
the! do not /ant to hear. #an 6. Hin*' the former ,resident and CE: of erritt ,ublishin* states that an individual
is read! to receive feedback /hen he:
209
/ants to kno/ him as others see him and he is clear that this is their (erce(tion' net necessaril! /hat is
true about !ou inside.
trusts his co-/orkers to care enou*h about his develo(ment to risk hearin* their o(inion.
has a (lace outside /ork /here !ou can talk it throu*h.
Eas o((ortunities for additional feedback so he *ets validation of the chan*es he has made J@eceivin*
%eedback +racefull! is a Critical Career $killK.
If an individual is not read! to constructivel! receive feedback' then the feedback he does receive /ill not be
effective. Hin* continues to state that individuals must remember this about feedback' 7it is one o(inion comin*
from another individualAs uni&ue (ers(ective8 J@eceivin* %eedback +racefull! is a Critical Career $killK. #ust
because one (erson vie/s another individual in a (articular /a! does not mean that the rest of /orld vie/s that
(erson in the same /a!' but it is a *ood /a! for an individual to find out /hat others think of him<her that is not
kno/n.
There are several ti(s that an individual can use /hen receivin* feedback. These ti(s include:
Tr! to sho/ !our a((reciation to the (erson (rovidin* the feedback. The! /ill feel encoura*ed and believe it
or not' !ou do /ant to encoura*e feedback.
Even !our mana*er or su(ervisor finds (rovidin* feedback scar!. The! never kno/ ho/ the (erson
receivin* feedback is *oin* to react.
If !ou find !ourself becomin* defensive or hostile' (ractice stress mana*ement techni&ues such as takin* a
dee( breath and lettin* it out slo/l!.
%ocusin* on understandin* the feedback b! &uestionin* and restatin* usuall! defuses an! feelin*s !ou have
of hostilit! or an*er.
If !ou reall! disa*ree' are an*r! or u(set' and /ant to dissuade the other (erson of their o(inion' /ait until
!our emotions are under control to reo(en the discussion JEeathfield' Eo/ to @eceive %eedback /ith +race
and Di*nit!K.
These ti(s are hel(ful in becomin* a better receiver for feedback' but the! /ill onl! /ork as lon* as the! are
(racticed on a re*ular basis.
?ith the above facts and fi*ures /orkers can see that *ivin* and receivin* feedback does not have to be scar!. As
lon* as (eo(le *ive and receive feedback in a constructive /a! and (ractice their feedback skills it /ill eventuall!
become second nature to the em(lo!ees. It /ill also sho/ that feedback (rovides benefits for both the individuals
that /ork for the com(an!' and the com(an! itself.
%or further investi*ation:
%or information on Hen 6lanchard' his Book One Minute Manager, and various facts on feedback visit:
htt(:<<///.ans/ers.com<to(ic<ken-blanchard
%or more information on the findin*s of 7A lon*itudinal stud! of u(/ard feedback8 visit:
htt(:<<///.black/ell-s!ner*!.com< doi< abs<20.2222<-.29BB->=90.2DD>.tb02=5>."
Link !our kno/led*e:
Click on this link to find an e"ercise to (ractice effective /a!s to receive feedback:
htt(:<<humanresources.about.com<cs<communication<ht<receivefeedback.htm
Determinin base pay
By 9ynthia D Fu!ami
Eave !ou ever /ondered ho/ a com(an! decides ho/ much to (a! for a (articular -obC Ima*ine that !ou have
seen a -ob (osted on the Internet. It reads' 7:ffice Assistant ?anted. ?ill ans/er the (hone and *reet visitors.
$ome /ord (rocessin* duties. :ther duties as assi*ned. $tart at I$D 5.00 an hour8. Eo/ did the mana*er decide to
(a! I$D 5.00 (er hourC ?h! did she decide that /as fairC In this subcha(ter' /e /ill cover the t/o t!(es of
7fairness8 im(ortant in desi*nin* a base (a! s!stem.
Internal e&uit!
The first consideration is that the base (a! s!stem needs to be internally eGuitable. This means that the (a!
differentials bet/een -obs need to be a((ro(riate. The amount of base (a! assi*ned to -obs needs to reflect the
relative contribution of each -ob to the com(an!As business ob-ectives. In determinin* this' the mana*er should ask
his or herself' 7Eo/ does the /ork of the office assistant described above com(are /ith the /ork of the office
mana*erC8 Another &uestion to be asked is' 7Does one contribute to solutions for customers more than anotherC8
Internal e&uit! im(lies that (a! rates should be the same for -obs /here the /ork is similar and different for -obs
/here the /ork is dissimilar. In addition' determinin* the a((ro(riate differential in (a! for (eo(le (erformin*
different /ork is a ke! challen*e. Com(ensation s(ecialists use t/o tools to hel( make these decisions: -ob anal!sis
and -ob evaluation.
Job analy$i$ is a s!stematic method to discover and describe the differences and similarities amon* -obs. A
*ood -ob anal!sis collects sufficient information to ade&uatel! identif!' define' and describe the content of a -ob.
$ince -ob titles ma! in and of themselves be misleadin*' for e"am(le' 7s!stems anal!st8 does not reveal much about
the -obG the content of the -ob is more im(ortant to the anal!sis than the title. In *eneral' a t!(ical -ob anal!sis
attem(ts to describe the skill' effort' res(onsibilit!' and /orkin* conditions of each -ob. &)ill refers to the
e"(erience' trainin*' education' and abilit! re&uired b! the -ob. E!!ort refers to the mental or (h!sical de*ree of
effort actuall! e"(ended in the (erformance of the -ob. Re$pon$ibility refers to the de*ree of accountabilit!
re&uired in the (erformance of a -ob. #or)ing condition$ refer to the (h!sical surroundin*s and ha0ards of a
-ob' includin* dimensions such as inside versus outside /ork' heat' cold' and (oor ventilation. A Iob de$cription
summari0es the information collected in the -ob anal!sis. $ee htt(:<<en./iki(edia.or*</iki<#obTanal!sis for more
information about -ob anal!sis.
Job evaluation is a (rocess that takes the information *athered b! the -ob anal!sis and (laces a value on the
-ob. #ob evaluation is the (rocess of s!stematicall! determinin* the relative /orth of -obs based on a -ud*ment of
each -obAs value to the or*ani0ation. The most commonl! used method of -ob evaluation in the Inited $tates and
Euro(e is the 7(oint method8. The (oint method consists of three ste(s: J2K definin* a set of com(ensable factors'
J1K creatin* a numerical scale for each com(ensable factor' and J3K /ei*htin* each com(ensable factor. Each -obAs
20D
relative value is determined b! the total (oints assi*ned to it. $ee htt(:<<///.hr-*uide.com<-obevaluation.htm for
more information about -ob evaluation and the (oint s!stem.
The result of the -ob anal!sis and -ob evaluation (rocesses /ill be a (a! structure or &ueue' in /hich -obs are
ordered b! their value to the or*ani0ation.
E"ternal e&uit!
The second consideration in creatin* a base (a! s!stem is e"ternal e&uit!. E5ternal eGuity refers to the
relationshi( bet/een one com(an!As (a! levels in com(arison to /hat other em(lo!ers (a!. $ome em(lo!ers set
their (a! levels hi*her than their com(etition' ho(in* to attract the best a((licants. This is called 7leadin* the
market8. The risk in leadin* the market is that a com(an!As costs /ill *enerall! be hi*her than its com(etitorsA costs.
:ther em(lo!ers set their (a! levels lo/er than their com(etition' ho(in* to save labor costs. This is called 7la**in*
the market8. The risk in la**in* the market is that the com(an! /ill be unable to attract the best a((licants. ost
em(lo!ers set their (a! levels the same as their com(etition. This is called 7matchin* the market8. atchin* the
market ma"imi0es the &ualit! of talent /hile minimi0in* labor costs.
An im(ortant &uestion in e"ternal e&uit! is ho/ !ou define !our market. Traditionall!' markets can be defined
in one of three /a!s. :ne /a! to define !our market is b! identif!in* com(anies /ho hire em(lo!ees /ith the same
occu(ations or skills. %or e"am(le' if a com(an! hires electrical en*ineers' it ma! define its market as all com(anies
that hire electrical en*ineers. Another /a! to define a market is b! identif!in* com(anies /ho o(erate in the same
*eo*ra(hic area. %or e"am(le' if the com(an! is in Denver' Colorado' the market /ould be defined as all com(anies
in Denver' Colorado. A third /a! to define a com(an!As market is b! identif!in* direct com(etitors' that is' those
com(anies /ho (roduce the same (roducts and services. %or e"am(le' $had! Acres Meterinar! Clinic ma! define its
market as all other veterinar! clinics. ;otice that these three characteri0ations can interact' that is' $had! Acres
mi*ht define its market as all veterinar! clinics in Denver' Colorado that em(lo! veterinar! technicians.
:nce !ou have defined !our market' the ne"t ste( is to surve! the com(ensation (aid b! em(lo!ers in !our
market. $urve!s can be done in a variet! of /a!s. %irst' there are (ublicl! available data throu*h the 6ureau of
Labor $tatistics in the Inited $tates. $econd' there are (ublicl! available data throu*h the Internet' from sites such
as ///.salar!.com or ///.ha!(a!net.com. Third' salar! information can be obtained from a third (art! source'
such as an industr! *rou( or em(lo!er or*ani0ation' /hich has collected *eneral information for a *eo*ra(hic
re*ion or industr!. %ourth' the com(an! can hire a consultin* or*ani0ation to custom desi*n a surve!. %inall!' one
can conduct a surve! oneAs self. $ee htt(:<<///.hr-*uide.com<data<+B9B.htm for more information about salar!
surve!s.
Combinin* internal and e"ternal e&uit!
A com(an! that has (erformed a((ro(riate research has t/o sets of data. The first is pay $tructure' the out(ut
from the -ob evaluation. The second is ar)et data' the out(ut from the market surve!. The ne"t ste( /ill be to
combine these t/o sets of data' to create a pay policy line. The (a! (olic! line can be dra/n freehand' b! *ra(hin*
actual salaries and connectin* the dots. Alternativel!' statistical techni&ues such as re*ression anal!sis are used to
create a (a! (olic! line. Regre$$ion *enerates a strai*ht line that best fits the data b! minimi0in* the variance
around the line. In other /ords' the strai*ht line *enerated b! the re*ression anal!sis /ill be the line that best
combines the internal value of a -ob Jfrom -ob evaluation (ointsK and the e"ternal value of a -ob Jfrom the market
surve!K. 3ou can also enact a (olic! of 7leadin*8 the market b! raisin* the line' and the (olic! of 7la**in*8 the
market b! lo/erin* the line.
Eo/ do com(anies decide the (a! associated /ith each -obC %irst' the! anal!0e the content of each -ob. $econd'
the! assess the value each -ob contributes to the com(an!. Third' the! (rice each -ob in the market. %inall!' the!
look at the relationshi( bet/een /hat the! value internall! and /hat the market values e"ternall!. 6! follo/in*
each of these ste(s' a com(an! /ill have a fair base (a! s!stem' /hich /ill lead to attractin* and retainin* the best
em(lo!ees.
6enefits and non-monetar! com(ensation
By Hulie Wells
In order for most businesses to function' em(lo!ees must be (rovided /ith a (a!ment in e"chan*e for their
services. Cash is one /a! to com(ensate em(lo!ees' but cash alone is rarel! enou*h (a!ment. 7Com(ensation is
becomin* more variable as com(anies base a *reater (ro(ortion of it on stock o(tions and bonuses and a smaller
(ro(ortion on base salar!' not onl! for e"ecutives but also for (eo(le further and further do/n the hierarch!8
J,feffer' $i" Dan*erous !ths About ,a!' 1000K. 6enefits and other forms of non-monetar! com(ensation are
becomin* more a((ro(riate forms of com(ensation for em(lo!ees in toda!As /ork(lace.
A bene!it is a 7*eneral' indirect and non-cash com(ensation (aid to an em(lo!ee8 that is offered to at least 50
(er cent of staff JEm(lo!ee 6enefits DefinitionK. :n avera*e' B0 (er cent of (a!roll is dedicated to non-cash benefits
JHulik' 100BK. In order to attract' retain' and motivate the best em(lo!ees' benefits and other sources of non-
monetar! com(ensation should be considered. There are three thin*s a com(an! must full! consider before
determinin* if and ho/ the! /ill issue em(lo!ee benefits: the industr! structure' the stren*ths of the com(an! and
its com(etitors' and the /a*e structure. A com(an! should not issue benefits to em(lo!ees if the! have not
considered the im(lications of these factors' s(ecificall! the /a*e structure. If a com(an! offers em(lo!ees
e"tremel! hi*h /a*es com(ared to other businesses in the industr! in addition to non-monetar! com(ensation'
costs ma! increase at a faster rate than (rofit. 6enefits are also related to the t!(e of industr! in /hich the com(an!
does business. If the com(an! has an understandin* of /hat the! can offer to em(lo!ees and ho/ those offerin*s
/ill be received in the industr!' benefits can increase a com(an!As /orkforce &ualit! and *eneral ha((iness of
em(lo!ees.
Table 1: T!(es of non-monetar! com(ensation
Eployee (ene!it$ 2ringe (ene!it$ .er)$ AperGui$ite$B
relocation assistance sick leave com(an! cars
medical and<or dental insurance
(lans
income (rotection hotel sta!s
fle"ible s(endin* accounts vacation (rofit-sharin*
retirement (lans (rofit sharin* leisure activities on /ork time'
in-office e"ercise facilities
life and lon*-term insurance education fundin* stationar!' business cards'
222
(ersonali0ed office su((lies
le*al assistance (lans first choice at -ob assi*nments
ado(tion assistance and child
care (lans
miscellaneous em(lo!ee
discounts
The benefit of benefits
6enefits can be re&uired b! *overnment' offered /illin*l! b! em(lo!ers' or arise from (ressures /ithin the
com(an!. In the I$' the *overnment re&uires that businesses deduct %ederal Income Contribution Act J2IC1K
ta"es from em(lo!ee (a!checks' /hich (a! for $ocial $ecurit! and edicare JInternal @evenue $erviceK. #or)er$%
Copen$ation is (aid to em(lo!ees if the! are in-ured /hile (erformin* /ork necessar! for their -ob functionG
this can include breakin* a bone' *ettin* into a car accident' or (a!ments made to the famil! of someone killed on
the -ob. Jneployent in$urance (rovides /a*es to unem(lo!ed (ersons' *enerall! onl! if the! are re*istered
as unem(lo!ed and activel! seekin* a -ob. In Australia' these benefits are (aid throu*h the income ta"es' but
(a!ments are issued b! Centrelink' a *overnmental office that seeks to su((ort unem(lo!ed individuals and hel(
them become self-su((ortin* JCentrelinkK. The %amil! edical Leave Act J2M61K allo/s individuals to leave /ork
for a semi-e"tended (eriod of time in order to care for an ailin* famil! member' ne/ child' or (ersonal illness. This
leave is un(aid' but it *uarantees that em(lo!ees /ill not lose their -obs if the! leave under these circumstances.
Em(lo!ee benefits that are not re&uired b! la/ are often (rovided. These are attractive to businesses as /ell as
em(lo!ees because the! (rovide both /ith some ta" advanta*es. %or e"am(le' if a com(an! offers em(lo!ees a
fle"ible s(endin* account' mone! that em(lo!ees receive in this account ma! be deducted from total earnin*s on
em(lo!eesA ta" returns. Em(lo!ees can 7use (re-ta" dollars to (a! for eli*ible health care and de(endent care
e"(enses8' ho/ever an! mone! that remains in the account at the end of the !ear /ill be forfeited J$E,$K. This is a
benefit to em(lo!ees because individuals /ill receive a (ortion of their income ta"-free. Em(lo!ers also benefit
from offerin* these t!(es of (ro*rams because the! also receive ta" benefits and the! retain ha((! em(lo!ees b!
(rovidin* (ro*rams that meet their needs.
6enefits are also offered to em(lo!ees as incentives. These are desi*ned to attract' kee(' and im(rove life for
em(lo!ees. The! are not usuall! re&uired b! the *overnment but com(anies ma! receive ta" benefits for some t!(es
of these non-monetar! (a!ments. There are a (lethora of services that can be offered' includin* com(lementar!
*!m membershi(s' on-site da!care' com(an! cars' and (aid vacations. Com(anies offer such these benefits in order
to create a culture for their em(lo!ees' /hich have the abilit! to (romote social interaction' make life easier for
/orkin* (arents' or im(rove em(lo!eesA &ualit! of life. De(endin* on the industr!' benefits ma! be more attractive
than salar! fi*uresG this could allo/ com(anies to (a! lo/er /a*es to em(lo!ees' thus reducin* the total amount
s(ent in (a!roll. In situations like these' a com(an! ma! /ant to be e"tremel! creative in devisin* their benefit
(acka*es.
Detriments of benefits
6enefits can (rovide com(anies /ith /a!s to attract hi*h &ualit! em(lo!ees and hel( retain them es(eciall! if
the benefits offered are si*nificantl! different or better than the benefits offered b! com(etitors. Eo/ever' there are
ne*ative situations that can arise from offerin* too man! or the /ron* kind of benefits to em(lo!ees. These can be
better understood in the conte"t of the follo/in* case stud!.
6! attractin* em(lo!ees /ho desire a stron* /ork<life balance' the $A$ Institute has the (otential to create an
overl! homo*enous culture. This can lead to a lack of dissent in the com(an!G if someone disa*rees /ith a (olic! or
(ractice' the! ma! be less likel! to voice their o(inions for fear of demonstratin* different o(inions than their
friends and co-/orkers. This can also foster an environment that lacks cultural' ethnic' or social diversit!' /hich
can lead to an inabilit! to ado(t chan*e /ithin the com(an!.
Case' The $A$ Institute
The $A$ Institute' based in the southern Inited $tates' is a soft/are develo(ment com(an! that com(etes
a*ainst *lobal soft/are *iants' such as icrosoft. In order to attract em(lo!ees that fit their uni&ue
com(an! culture' $A$ has develo(ed an e"tensive em(lo!ee benefit (ro*ram that is offered to all
em(lo!ees at the com(an!. $alaries (aid to $A$ em(lo!ees are not si*nificantl! hi*her than com(etitors
in the industr!' but the! do maintain a com(etitive (a! rate. %or the ideal em(lo!ee' ho/ever' the benefits
more than com(ensate for an unim(ressive salar!.
6enefits at $A$ include: (rivate offices for all em(lo!eesG contributions of 2= (er cent into em(lo!ee (rofit
sharin* (lansG 100 acre natural cam(us settin* /ith on-site hikin* trails and (icnic areas' scul(tures' and
art/orkG the latest technolo*! and e&ui(mentG 3= hour /ork /eekG on-site medical facilit! Jincludin*
nurses' doctors' a (h!sical thera(ist' massa*e thera(ist' and mental health (ractitionerK' five minute
/aitin* time for a((ointments' and free healthcare for em(lo!ees and their familiesG health (lans that
cover most basic needs and offer 7cost accountable8 services for services that are more e"tensiveG on-site
ontessori da!care at 33 (er cent of the cost of normal da!careG on-site (rivate -unior and senior hi*h
schools' o(en to students from outside of $A$' /ith hi*h tech laboratories and e&ui(mentG free on-site
*!m for em(lo!ees and families /ith a (ool' e"ercise classes' !o*a' /ei*ht room' etc.G cafeteria /ith hi*h
&ualit! food at lo/ (rices' live (iano music' and the o(tion of dinin* /ith !our children if the! attend the
on-site schoolsG subsidi0ed membershi(s offered for health clubs and da!care off (ro(ert!G com(an!
o/ned countr! club membershi(s at si*nificantl! lo/ costs for em(lo!ees and their familiesG and more.
$A$ is a uni&ue e"am(le of a com(an! that hires em(lo!ees /ho desire a stron* /ork<life balance. ;ot all
soft/are en*ineers /ould desire this lifest!le' but $A$ reco*ni0es that the! hire from a uni&ue niche of
em(lo!ees and seek to attract these individuals. This has been ver! successfulG 7$A$ is certainl! amon*
the lo/est NturnoverO in the industr!Yless than B (er cent annuall!. %or a com(an! of more than ='000
em(lo!ees' this is &uite an achievement' and much of their success can be linked to their uni&ue E@
(ractices8 J$A$K.
,a! for (erformance
6! Bonggi Iim and 9hana!iat .rt +amarnbutra
223
9ompensation tehni?ues
Accordin* to Hulik' it is im(ortant for com(anies to attract 7&ualit! -ob a((licants' motivate em(lo!ees to be
hi*h (erformers' and encoura*e lon*-term em(lo!ee retention8 JEuman @esources for the ;on-E@ ana*er'
100BK. Doin* these thin*s can increase com(aniesA com(etitive (o/er toda!. Com(ensation s!stems usuall! consist
of three cate*ories: 7base salar!' short-term incentive s!stems' and lon*-term incentive s!stems8 JHulik' 100BK.
@e/ard s!stems reall! affect /ork (erformance.
@e/ard s!stems can be a((lied to em(lo!ees /ith different formula. ,oorl! desi*ned and administered re/ard
s!stems can do more harm than *ood. It is im(ortant to desi*n re/ard s!stems carefull!' takin* into considerations
base salar! and incentives accordin* to the different tasks of s(ecific em(lo!ees.
Com(anies should have /ell-desi*ned base salaries. ;o/ada!s' man! /ebsites Je.*0 salar!.com' -obstar.or*'
/a*e/eb.comK (rovide detailed information to em(lo!ees accordin* to com(an! mission JHulik' 100BK. ?hen a
com(an! desi*ns a base salar!' the! have to consider the com(an!As uni&ue as(ects: locations and ac&uisition
(eriod of skills and so on. De(endin* on rankin* s!stem of the com(an!' em(lo!ees need to be evaluated
differentl!. A CE:As evaluation is different from that of mana*ement and evaluation of mana*ement is different
from that of em(lo!ees.
Com(anies also (rovide short term incentives to em(lo!ees. ost com(aniesA com(ensation s!stems include
7variable (a!8 JHulik' 100BK. De(endin* on /ork (erformance' man! com(anies re/ard their em(lo!ees /ithout
affectin* base salar!. To achieve a set *oal' man! com(anies use bonuses. %or e"am(le' 7;ucor set its base (a! at
about half of the com(etitionAs. 6! em(hasi0in* a bonus s!stem' ;ucor has shifted the risk onto the em(lo!eeAs
shoulders8 JHulik' 100BK. Com(anies should have e"act evaluation s!stems that su((ort bonus (a!. an!
com(anies such as +E' E,' and $un icros!stems are usin* soft/are that directl! evaluates em(lo!eesA behavior
/ith res(ect to customer service.
Lon*-term incentives are also a (art of re/ard s!stems. $tock o(tions and (rofit-sharin* (lans are
re(resentative lon*-term re/ard s!stems JHulik' 100BK. Even thou*h em(lo!ees are motivated b! these incentives'
the! do not receive benefits until after fe/ !ears. %or e"am(le' em(lo!ees cannot sell stock o(tions until after a fe/
!ears after the! receive stock o(tions. 7In a (rofit-sharin* (lan' em(lo!ees are (romised a (a!ment be!ond base
(a! that is based on com(an! (rofits8 JHulik' 100BK.
9omponents of pay for performane
Accordin* to Dr C!nthia %ukami' a (rofessor from the Iniversit! of Denver' these are the main com(onents of
(a! for (erformance J%ukami' @e/ard $!stems' 1009K:
2. The com(an! (a!s the em(lo!ee be!ond his or her -ob value.
1. an! forms for im(rovin* the (a! s!stem are available.
3. The com(an! can divide u( the (a! into 3 levels that are individual' team' and com(an!-/ide.
Eay serey
6esides the com(ensation techni&ues' the com(anies should consider /hether the com(ensation s!stem should
be secret. Eistoricall!' em(lo!ees and businesses both e"(ressed concerns about the (ublic discussion of salar!G
ho/ever' such discussions should not be (rohibited JHulik' 100BK. Com(anies need to conclude /hat information
the! should reveal in their (a! s!stems. $ome I$ com(anies select to announce salar! ran*es. %or e"am(le' for
each (osition American E"(ress (osts the market (a! ran*es so that its em(lo!ees can com(are them /ith their
salaries. $ome com(anies disclose the formula and the factors the! ma! use to calculate salaries' such as education
and e"(erience.
:ood outomes of paying for performane
Dr C!nthia %ukami notes that re/ard s!stem is a (o/erful tool if (a! links /ith (erformance J%ukami' @e/ard
$!stems' 1009K:
2. $trate*ic ob-ectives of the or*ani0ation /ill be achieved.
1. The re/ard s!stem /ill su((ort the or*ani0ational culture.
3. Em(lo!eesA /orkin* (erformance /ill be im(roved from the ri*ht (a! (ractice.
B. Com(etitive advanta*es have increased continuousl!.
Folly of reward systems in different organi(ations
2n politis: ,oliticians are se(arated from the *eneral (o(ulation /hen the! s(eak onl! of official *oals that are
(ur(osel! va*ue and *enerali0ed. In contrast' the electorate /ill (unish the candidate /ho frankl! informs about
the source of fund.
2n uni,ersities: Accordin* to $teven Herr' 7$ociet! ho(es that (rofessors /ill not ne*lect their teachin*
res(onsibilities but re/ards them almost entirel! for research and (ublications8 J(. DK. ?hile it is eas! to reco*ni0e
those (rofessors /ho receive a/ards' &uantif!in* a dedication to teachin* is more difficult. To resolve this (roblem'
it is essential that universit! leadershi( should em(hasi0e teachin* and doin* research e&uall!.
2n sport: Coaches talk about team/ork' not individuals. Clearl!' in a re/ard s!stem' the best (la!er /ill receive
the bi**est re/ard. Therefore' (la!ers normall! think of themselves first and their team second. To correct this
(roblem' the team mana*er needs to reduce the *a(s of (a! amon* team (la!ers.
9autions for introduing a pay system
Muh ad,ie about pay is wrong JHerr' 2DD=K.
an! e"ecutives learn that the em(lo!ees /ill certainl! /ork more effectivel! in case that the com(an!
*ives them hi*her com(ensation. ,feffer said that the e"ecutives ma! not be 7s(endin* as much time and
effort as it should on the /ork environment-on definin* its -obs' on creatin* its culture' and makin* /ork
fun and meanin*ful8 J$i" Dan*erous !ths About ,a!' 1000K. $ometimes' com(anies (a! /ell to create
(roactive /ork environment and *et ne/ innovative ideas in return. This (olic! does not surel! /ork'
es(eciall! /hen the to( e"ecutives and em(lo!ees are lackin* of trust /ith each other.
Eay systems need to align with the ompany ulture0
The to( mana*ement should ad-ust the (a! s!stem /hen it is not fit /ith the current business strate*!.
Eo/ever' chan*in* the internal culture is a /ron* idea because it is embedded in the em(lo!eesA minds.
The confusion can make the *ro/th of the com(an! sta*nant.
2mplementing the reward system is hard and ta!es management time
22=
ost com(anies believe that em(lo!ees /ill /ork effectivel! /hen the! *et re/ards for their efforts.
6ecause of this concern' the E@ mana*ers cannot maintain the (olic! in com(ensation. %rom ercer
surve!' 7nearl! three-&uarters of all the com(anies surve!ed had made ma-or chan*es to their (a! (lans in
-ust the (ast t/o !ears8 J,feffer' $i" Dan*erous !ths About ,a!' 1000K. In addition' an e"am(le of
chan*in* re/ard s!stem occurred in $ears. $ears had to eliminate its commission s!stem because $earsAs
em(lo!ees /anted hi*h commission' so the! offered unneeded services to customers.
Meaninful 2ob desin
By *yan Brown and Mi!e M9lain
#ob desi*n is critical to the success of an! or*ani0ation. %or our (ur(oses Iob de$ign is defined as the allocation
of s(ecific /ork tasks to individuals and *rou(s J$chermerhorn' #ob Desi*n Alternatives' 100>K. Allocatin* -obs
and tasks means s(ecif!in* the contents' method and relationshi(s of -obs to satisf! technolo*ical and
or*ani0ational re&uirements as /ell as the (ersonal needs of -obholders. If successful -ob desi*n is not
im(lemented' than the com(anies *eneral strate*! and direction /ill be stron*l! diverted. eanin*ful -obs must
also e"em(lif! the com(an!As *oals and culture.
Elements to -ob desi*n
In order to better understand -ob desi*n it is hel(ful to define some ke! elements and their relationshi( /ith -ob
desi*n (rocesses. A ta$) can be best defined as a (iece of assi*ned /ork e"(ected to be done /ithin a certain time.
It is im(ortant to strictl! and thorou*hl! identif! tasks that need com(letion. In addition individuals need to be
com(elled' e"cited' and (assionate to do their /ork. Eence' it is essential to desi*n -obs that motivate em(lo!ees.
Motivation describes forces /ithin the individual that account for the level' direction' and (ersistence of effort
e"(ended at /ork J$chermerhorn' #ob Desi*n Alternatives' 100>K.
In -ob desi*n it is necessar! to identif! and structure -obs in a /a! so that the com(an!As resources are bein*
efficientl! used. Re$ource 1llocation occurs /hen or*ani0ations decide to a((ro(riate or allocate certain
resources to s(ecific -obs' tasks or dilemmas facin* the or*ani0ation. #obs need to be constructed so that efficienc!
of the /orker or de(artment is ma"imi0ed. :r*ani0ations need to use the resources and creativit! of their
em(lo!ees effectivel! and efficientl!. A((ro(riate resource allocation allo/s lar*e or*ani0ations to foster and
develo( innovation in their /orkforce JDorenbosch' van En*en' U Merha*en' 100=K.
@e/ard s!stems also (la! a role in -ob desi*n. Reward $y$te$ include com(ensation' bonuses' raises' -ob
securit!' benefits' and various other methods of re/ard for em(lo!ees. An outline or descri(tion of re/ard (acka*es
needs to be established /hile constructin* -obs.
6rief histor! of traditional a((roaches to -ob desi*n
:aylori$' also kno/n as scientific mana*ement' is a foundation for mana*ement and mana*erial decisions.
%rederick Ta!lor develo(ed this theor! in an effort to develo( a 7science8 for ever! -ob /ithin an or*ani0ation
JTa!lorismK.
Table 3: Ta!lorism
:aylori$ principle$
Create a standard method for each -ob.
$uccessfull! select and hire (ro(er /orkers.
Effectivel! train these /orkers
$u((ort these /orkers.
Eert0ber*Rs otivation-E!*iene theor! attem(ts to uncover (s!cholo*ical needs of em(lo!ees and enhance
em(lo!ee satisfaction. In re*ards to this theor! em(lo!ers are encoura*ed to desi*n -obs that enhance and motivate
em(lo!ees be!ond sim(l! meetin* a dail! or /eekl! &uota. This theor! hi*hli*hts the im(ortance of re/ards
s!stems and monitorin* /hen and ho/ em(lo!ees are re/arded. $im(le reco*nition is often enou*h to motivate
em(lo!ees and increase -ob satisfaction JEer0ber*Rs otivation-E!*iene Theor!K.
ore effective -obs can be created /hen s(ecific *oals are established. -oal $etting theory as described b!
Ed/in Locke mainl! focuses on the motivational (ro(erties of task *oals J$chermerhorn' #ob Desi*n Alternatives'
100>K. Task *oals can be hi*hl! motivatin* /hen set and mana*ed (ro(erl!. :ne of the (roblems /ith *oal settin*
theor! in -ob desi*n is that individuals are more stron*l! motivated b! establishin* or settin* their o/n (ersonal
*oals. If or*ani0ations set these *oals for their em(lo!ees the effectiveness of this techni&ue is diminished.
oreover' individuals are often times ineffective at settin* (ersonal *oals J+od/in' ;eck' U Eou*hton' 2DDDK. If a
com(an! /ants to im(lement *oal settin* theor! /ith re*ards to -ob desi*n than a reasonable -ob criteria and
descri(tion must be established.
Current a((roaches to -ob desi*n
Technolo*! and the flattenin* of the *lobal econom! have contributed *reatl! to the chan*es /e no/ see in -obs
and -ob content across the /orld. This shift is a si*nal for em(lo!ers to meet chan*in* -ob demands and
e"(ectations JcDonald U :benchain' 1003K. ?e no/ reco*ni0e that a (erson (resented /ith &ualit! meanin*ful
/ork is more likel! to do that /ork /ell. 6ecause of this insi*ht' -ob desi*n no/ (resentl! takes a cou(le of
(rominent forms.
The first of /hich is desi*ned around the evolution from individual /ork to /ork-*rou(s. This -ob desi*n
(ractice is called socio-technical s!stems J$T$K a((roach. This a((roach has the follo/in* *uidin* (rinci(les:
The desi*n of the or*ani0ation must fit its *oals.
Em(lo!ees must be activel! involved in desi*nin* the structure of the or*ani0ation.
Control of variances in (roduction or service must be undertaken as close to their source as (ossible.
$ubs!stems must be desi*ned around relativel! self-contained and reco*ni0able units of /ork.
$u((ort s!stems must fit in /ith the desi*n of the or*ani0ation.
The desi*n should allo/ for a hi*h &ualit! of /orkin* life.
Chan*es should continue to be made as necessar! to meet the chan*in* environmental (ressures JAccel
TeamK
229
Click here to read more about soci-technial s!stems a((roach to -ob desi*n.
Another modern -ob desi*n theor! is the #ob Characteristics odel JJCMK' /hich maintains five im(ortant
elements that motivate /orkers and (erformance: skill variet!' task identit!' task si*nificance' autonom!' and -ob
feedback. The individual elements are then (ro(osed to lead to (ositive outcomes throu*h three (s!cholo*ical
states: e"(erienced meanin*fulness' e"(erienced res(onsibilit!' and the kno/led*e of results J,arker U Turner'
1001K.
A further evolution of this theor! is .$ychological Epowerent :heory J$(reit0er' 2DD=K. This theor!
(osits that there is a distinction bet/een em(o/erin* (ractices and co*nitive motivational states. ?hen a (erson is
a/are of the im(act that the! are havin*' the! benefit more than if the! cannot relate a (ositive im(act to an! of
their behaviors or (ractices.
There are man! more iterations of -ob desi*n theor! that have evolved from the (ractices of (revious
*enerations' but one *eneral trend can be identified amon* themG the move to/ards autonomous /ork teams and
the im(ortance (laced u(on the meanin* derived from the individual.
$te(s to effective -ob desi*n
He! to effectivel! craftin* a meanin*ful -ob for an em(lo!ee is startin* the thou*ht (rocess b! lookin* at the
values and strate*! of the or*ani0ation. 6! framin* the -ob in these conte"ts the -ob desi*n (rocess is more likel! to
ali*n (otential em(lo!ees /ith the (ur(ose of the com(an!. :nce !ou have this conte"t the follo/in* ste(s /ill
ensure both meanin*ful and effective -ob desi*n:
2. Assess skills' needs' abilities' and motivations of em(lo!ees and the or*ani0ation.
1. Desi*n the -ob to meet those needs' abilities and motivations.
3. Im(lement the ne/ -ob desi*n.
B. Audit the success of the -ob desi*n and be*in /ith ste( one (eriodicall! as /ell as /hen (roblems have
been identified.
Eo/ meanin*ful -ob desi*n can im(act an or*ani0ation
The *oal of -ob desi*n is to (ositivel! affect the (erformance of an or*ani0ation. 7It J-ob desi*nK affects ho/ /ell
em(lo!ees coordinate their /ork' the de*ree to /hich the! are committed to the *oals of the or*ani0ation' the
e"tent to /hich their abilities are ta((ed' and the e"tent to /hich their (s!cholo*ical and er*onomic needs are met8
J6eer' $(ector' La/rence' ills' U ?alton' 2D5BK. As this &uote sho/s' -ob desi*n is the base element for (roducin*
effective /ork or*ani0ations' and /ithout meanin*ful -ob desi*n' an or*ani0ation /ill never o(erate to its (otential.
Termination
By Hames Frashe
The termination of an em(lo!ee is an uncomfortable event for all (arties involved. :bviousl!' the em(lo!ee
losin* his or her -ob /ill be distrau*ht for man! reasons' and in man! cases the mana*er res(onsible for makin* the
termination decision and the em(lo!ee have formed a (ersonal relationshi( durin* the em(lo!eeAs tenure' thereb!
makin* the mana*erAs res(onsibilit! of 7lettin* someone *o8 an undesirable one. Eo/ever' there are /a!s that a
mana*er can lessen the un(leasantness of the termination (rocess.
There are man! factors to take into consideration /hen terminatin* an em(lo!ee. %irst and foremost' an
em(lo!er must take into account the nature of the relationshi( that e"ists bet/een the or*ani0ation and the
em(lo!ee in order to assess the le*alit! of the termination. In the Inited $tates' a((ro"imatel! 90 (er cent of
em(lo!ers and em(lo!ees maintain an 7at /ill8 relationshi( /ith one another' that is' an em(lo!ee ma! &uit their
-ob for an! reason' at an! time' or an em(lo!er ma! fire an em(lo!ee for an! reason' at an! time. The other 30 (er
cent of the /orkforce is em(lo!ed under individual em(lo!ment contracts or union contracts that s(ecif! the
7len*th of an em(lo!ment relationshi(' ho/ the relationshi( can be severed' and ho/ the relationshi( can be
e"tended8 JHulik' 100BK.
An 7at /ill8 relationshi( ma! *ive the im(ression that a termination decision ma! never be challen*ed. Indeed'
firin* an em(lo!ee 7for cause8 is made even easier /hen an 7at /ill8 relationshi( is (resent. 6roadl! s(eakin*' an
em(lo!er can t!(icall! fire an em(lo!ee 7for cause8 /hen their behavior falls under the follo/in* cate*ories
J%alcone' 1001K:
2. ,olic! and (rocedure violations
1. $ubstandard -ob (erformance
3. Ina((ro(riate /ork(lace conduct
B. Attendance<tardiness (roblems
Eo/ever' there are some instances in /hich em(lo!ees can be /ron*full! dischar*ed or fired for reasons that
are not le*itimate' t!(icall! either because the! are unla/ful or because the! violate the terms of an em(lo!ment
contract JLectric La/ Librar!K. $ome of the ille*itimate reasons for terminatin* em(lo!ees include' amon* man!
others' discrimination and violations of (ublic (olic!. %or a more com(lete list of ille*itimate reasons for
terminatin* em(lo!ees in the I$' visit: htt(:<<smallbusiness.findla/.com<em(lo!ment-em(lo!er<em(lo!ment-
em(lo!er- endin*<em(lo!ment-em(lo!er-endin*-/ron*ful-reasonsJ2K.html .
There are several la/s that have been enacted in the Inited $tates in order to (rotect em(lo!ees from unfair
termination in the /ork(lace based on discrimination' the most (revalent of /hich are Title MII of the Ci,il *ights
.t of $JK=' the .ge #isrimination and Employment .t of $JK7 J1DE1K and the .merians with #isabilities .t
of $JJ4 J1D1K. Title MII' the broadest of these statutes' (rotects em(lo!ees' a((licants' and union members from
termination and discrimination in the /ork(lace based on race' color' reli*ion' *ender' and national ori*in'
re*ardless of the nature of the em(lo!ment relationshi( Jat /ill' union' etc.K JClarkson' 100BK. %or instance' if an
African American or uslim individual can (rove in a court of la/ that he or she /as fired because of race or
reli*ious (references' that em(lo!ee is entitled to both com(ensator! and (unitive dama*es under Title MII.
:r*ani0ations that em(lo! 200 (eo(le or less are liable for I$D =0'000 and or*ani0ations that em(lo! 200 or more
em(lo!ees are liable for I$D 300'000 in (unitive and com(ensator! dama*es under Title MII JClarkson' 100BK.
%or more information on Title MII' includin* the claims (rocess' bona fide occu(ational &ualification defense' and
/ho is (rotected' visit the E&ual Em(lo!ment :((ortunit! CommissionAs JEE4CK /ebsite at:
htt(:<<///.eeoc.*ov<(olic!<vii.html.
Accordin* to ?estAs 6usiness La/' it is &uite (ossible that discrimination based on a*e is the most /ides(read
form of discrimination' bein* that an!one' re*ardless of *ender' national ori*in' etc. ma! find themselves a victim
22D
at some (oint in their life JClarkson' 100BK. The (ractice of 7la!in*-off8 older em(lo!ees and hirin* !oun*er' less
e"(ensive ones in order to cut costs is a common occurrence amon*st or*ani0ations that o(erate in the Inited
$tates. $ec. >12 J$ection 1K of the ADEA states' 7in the face of risin* (roductivit! and affluence' older /orkers find
themselves disadvanta*ed in their efforts to retain em(lo!ment' and es(eciall! to re*ain em(lo!ment /hen
dis(laced from -obs8. In an effort to (romote em(lo!ment of older (ersons based on their abilit! rather than a*e'
Con*ress enacted the ADEA' /hich 7(rohibits em(lo!ment discrimination on the basis of a*e a*ainst individuals
forty years of age or older8 JThe I$ E&ual Em(lo!ment :((ortunit! CommissionK. In order for the ADEA to a((l!
to a s(ecific em(lo!er Junder federal la/K' that em(lo!er must em(lo! t/ent! or more (eo(le' and the em(lo!er
must en*a*e in interstate commerce.
$hould a (laintiff successfull! (rove that a*e discrimination has occurred' the remedies under the ADA sti(ulate
that the em(lo!ee ma! be a/arded back (a!' attorne!As fees' li&uidated dama*es J/hen a /illful violation has been
(rovenK' front (a! J/hich is desi*ned to com(ensate the victim for future lossesK' and in-unctive relief J/hich ma!
include reinstatementK. Inlike Title MII' (unitive and com(ensator! dama*es are not a/arded under the ADEA
JClarkson' 100BK. To vie/ the ADEA in its entiret!' visit the EE:CAs /ebsite at:
htt(:<<///.eeoc.*ov<(olic!<adea.html.
Accordin* to the I$ Con*ress' B3'000'000 Americans have one or more mental or (h!sical disabilities. In 2DD0'
Con*ress enacted the .merians with #isabilities .t' /hich made it ille*al for (rivate em(lo!ers' state and local
*overnments' em(lo!ment a*encies' labor or*ani0ations' and labor-mana*ement committees to discriminate
a*ainst individuals based on a disabilit! JThe I$ E&ual Em(lo!ment :((ortunit! CommissionK. %urthermore' the
ADA /as s(ecificall! enacted in order to 7J2K (rovide a clear and com(rehensive mandate for the elimination of
discrimination a*ainst individuals /ith disabilities' J1K (rovide clear' stron*' consistent' enforceable standards
addressin* discrimination a*ainst individuals /ith disabilities' J3K to ensure that the %ederal +overnment (la!s a
central role in enforcin* the standards established in this Act on behalf of individuals /ith disabilities' and JBK to
invoke the s/ee( of con*ressional authorit!' includin* the (o/er to enforce the fourteenth amendment and to
re*ulate commerce' in order to address the ma-or areas of discrimination faced da!-to-da! b! (eo(le /ith
disabilities8 JI$ De(artment of LaborK.
As of 2DDB' the ADA is a((licable to com(anies that em(lo! 2= or more em(lo!ees and (rohibits such com(anies
from discriminatin* based on a disabilit! in all em(lo!ment (ractices such as recruitment' (a!' hirin*' firin*'
(romotion' benefits' etc. %or more information on the ADA includin* remedies under the act and the (laintiffAs
burden of (roof' visit the I$ De(artment of LaborAs /ebsite at:
htt(:<<///.dol.*ov<esa<re*s<statutes<ofcc(<ada.htm.
ost states in the I$ (rohibit em(lo!ers from 7firin* an em(lo!ee in violation of (ublic (olic!' that is' for
reasons that most (eo(le /ould find morall! or ethicall! /ron* such as terminatin* an em(lo!ee for J2K refusin* to
commit an ille*al act such as refusin* to falsif! insurance claims or lie to *overnment auditors J1K com(lainin*
about an em(lo!erAs ille*al conduct such as the em(lo!erAs failure to (a! minimum /a*e' or J3K e"ercisin* a le*al
ri*ht such as votin* or takin* famil! leave8 J%indLa/.comK.
The manner in /hich an or*ani0ation terminates an em(lo!ee can send a (o/erful messa*e to the or*ani0ationAs
remainin* staff JEeathfield' Eo/ to %ire an Em(lo!eeK. ana*ers must be a/are that seemin*l! unfair or harsh
terminations ma! cause some of the or*ani0ations best /orkers to become less effective or seek ne/ em(lo!ment
for fear of the same treatment. In some cases' it is a((ro(riate for mana*ers to en*a*e in (ro*ressive disci(line
before terminatin* an under (erformin* em(lo!ee. ,ro*ressive disci(line is 7a (rocess for dealin* /ith -ob-related
behavior that does not meet e"(ected and communicated (erformance standards. The (rimar! (ur(ose for
(ro*ressive disci(line is to assist the em(lo!ee to understand that a (erformance (roblem or o((ortunit! for
im(rovement e"ists8 JEeathfield' Disci(line J,ro*ressive Disci(lineKK. 6! attem(tin* to assist an em(lo!ee in fi"in*
an! (roblems that the! are e"(eriencin* in the /ork(lace before terminatin* them' the or*ani0ation communicates
a stron* commitment to its em(lo!ees' /hich can *o a lon* /a! in re*ards to retention' turnover' and other areas of
concern.
$hould the decision be made to move for/ard /ith the termination (rocess after all other o(tions have been
e"hausted' it is im(ortant for mana*ers to kno/ ho/' /hen' and /here to break the ne/s to the em(lo!ee.
$u(ervisin* mana*ers should *enerall! be res(onsible for terminatin* an em(lo!ee' and it is *enerall! im(ro(er to
(ass this res(onsibilit! off to u((er mana*ement or to the human resources de(artment. ost mana*ers (ost(one
tellin* an em(lo!ee about their termination until the end of the /eek. Eo/ever' this ma! be a *rave mistake' as the
em(lo!ee /ill have the entire /eekend to com(lain about their treatment to their co/orkers and friends' thereb!
tarnishin* the re(utation of the or*ani0ation. An alternative is for mana*ers to break the ne/s of termination to
em(lo!ees at the be*innin* of the /eek. This /ill *ive the em(lo!ee time to 7cool off8 and think about their ne"t
move before the! have the o((ortunit! to sociall! interact /ith former co/orkers durin* the /eekend JHulik'
100BK.
The termination intervie/ is an im(ortant as(ect of the e"it (rocess. The follo/in* are *uidelines for the
termination intervie/ (rovided b! the e"(erts at Ea! Associates as seen in %rame/ork for Euman @esource
ana*ement.
Elan the inter,iew arefully0
ake sure the em(lo!ee kee(s the a((ointment time.
;ever inform an em(lo!ee over the (hone.
Allo/ 20 minutes as sufficient time for the intervie/.
Ise a neutral site' never !our o/n office.
Eave em(lo!ee a*reements' the human resources file' and a release announcement Jinternal and
e"ternalK (re(ared in advance.
6e available at a time after the intervie/ in case &uestions or (roblems arise.
Eave (hone numbers read! for medical or securit! emer*encies.
:et to the point. As soon as the em(lo!ee enters the meetin*' *ive the (erson a moment to *et comfortable
and then inform him or her of !our decision.
#esribe the situation. 6riefl! e"(lain /h! the (erson is bein* fired. @emember to describe the situation
rather than attack the em(lo!ee (ersonall!.
212
-isten. Continue the intervie/ until the (erson a((ears to be talkin* freel! and reasonabl! calml! about the
reasons for termination.
*e,iew all elements of the se,erane pa!age. Describe severance (a!ments' benefits' access to office
su((ort (eo(le' and the /a! references /ill be handled. Eo/ever' under no conditions should an! (romises
or benefits be!ond those alread! in the su((ort (acka*e be im(lied.
2dentify the ne/t step. The terminated em(lo!ee ma! be disoriented and unsure of /hat to do ne"t. E"(lain
/here the em(lo!ee should *o ne"t' u(on leavin* the intervie/.
;ote: The above is a brief summar! of some of the issues surroundin* the termination (rocess in the Inited
$tates and' due to s(ace constraints' in no /a! takes into account all of the factors that mana*ers should consider
/hile terminatin* an em(lo!ee. @eaders are encoura*ed to e"(lore the outside reference material noted above as
/ell as other literature that /ill (rovide more insi*ht into the termination (rocess' as /ell as consultin* /ith
a((ro(riate le*al counsel.
Do/nsi0in*
By -ogan Erie
The *oal of an! com(an! is to su((l! a (roduct or service that customers are /illin* to (a! for. If a com(an!
(rovides a *ood that consumers are /illin* to (a! a lot of mone! for' the com(an! /ill similarl! earn a lot of mone!.
As lon* as the amount of mone! the com(an! brin*s in is more than the amount the! s(end to make the *ood the
com(an! /ill (rofit and *ro/. To fuel this *ro/th com(anies must invest in additional resources and must increase
its number of /orkers. Durin* times of *ro/th fe/ em(lo!ees are laid off and the com(an! is makin* mone!.
Eo/ever' a com(an!As (roduct or service ma! no lon*er be desired b! consumers over time. $ome reasons this
mi*ht occur are because the *ood has *one out of date or a com(etitor ma! have created a better (roduct or ma!
offer a better service. Loss of demand ha((ens all the time in a com(etitive business environment. ?ith so man!
com(anies tr!in* to sell their (roducts or services it becomes essential for com(anies to continuall! im(rove u(on
e"istin* offerin*s so the! do not fall behind com(etitors. 6ut com(anies do fall behind' and as a result *ro/th and
(rofits &uickl! turn to la!offs and losses. $ometimes losses are so bad that the com(an! cannot survive and sim(l!
closes do/n. :ther times the lost revenue is not enou*h to shut do/n the com(an!. In this instance the com(an!
cuts some resources and /orkers in order to survive the do/nturn in business. ?hen com(anies decide to do this it
is called down$i;ing.
To do/nsi0e' as defined b! the erriam-?ebster Dictionar!' is 7to fire Jem(lo!eesK for the (ur(ose of
do/nsi0in* a business8. The reasons for do/nsi0in* businesses var!' but the main reason for doin* this is because
the (roductJsK or serviceJsK that the com(an! offers is not as successful as it once /as. As a result revenues
decrease' and e"(enses Jcosts like materials and em(lo!eesK must be cut to counter the lost revenue. :bviousl!'
em(lo!ees do not like it /hen the! *et laid off. Eo/ever' do/nsi0in* is somethin* that neither the com(an! nor the
em(lo!ees /ant to see ha((en. $ince both sides suffer Jthe com(an! loses mone! and the /orker loses a -obK
do/nsi0in* is often not met /ith stron* resistance from em(lo!ees. :ne reason for this lack of resistance is that
em(lo!ees understand that the! are not bein* fired for doin* a bad -ob. Em(lo!ees tend to be more understandin*
if a com(an! is forced to reduce its labor force. Also' the em(lo!ees that are laid off durin* a do/nturn are normall!
the first ones to be rehired if business (icks back u(. 6usiness /ill al/a!s have com(anies that are *ro/in* and
com(anies that are d!in*' and do/nsi0in* and la!offs are a natural (art of that c!cle. $ince do/nsi0in* is a normal
(art of business it can often be seen as necessar! and reasonable.
There is one other main reason /h! com(anies /ould do/nsi0e. If a com(an! observes that the! could be
*ettin* the same amount of out(ut from fe/er /orkers it makes economic sense to let the e"cess /orkers *o. As an
e"am(le' ima*ine a -ob that it /ould take three /orkers an hour to do. ;o/' if a fourth /orker /as added the -ob
area /ould *et cro/ded so ever!one /orked slo/l! and it took the four of them over an hour to com(lete. Clearl!'
the fourth /orker is not addin* value to the -ob and the com(an! should do/nsi0e b! firin* the fourth /orker. This
(ractice is some/hat common' as most businesses continuall! revie/ their (rocesses to look for areas of the
business that could run more efficientl! /ith fe/er e"(enses. %or e"am(le' b! evaluatin* and chan*in* a
manufacturin* (rocess could be streamlined resultin* in reduced labor' material' and<or time costs /hile
(roducin* the same out(ut.
In order to continue *ro/th and avoid the need for do/nsi0in*' (roducts and services must constantl! be made
better' chea(er' and<or faster than /hat is bein* offered b! the com(etition. A com(an! that does this successfull!
/ill en-o! increased revenues and most likel! *ro/th. Com(anies that fail to offer (roducts and services that are
better' chea(er' and<or faster than their com(etition /ill not succeed. Com(anies are constantl! battlin* /ith each
other for market share' and do/nsi0in* and *ro/th are t/o results of ho/ effectivel! com(anies create demand for
their *ood.
E@ etrics
By *onald 1am
%or an! com(an! that is im(lementin* ne/ human resource (ro*rams or ad-ustin* e"istin* ones' these chan*es
can &uickl! become a substantial com(an! (ro-ect. The roles of human resource (ro*rams are to mana*e the
em(lo!ees of com(anies to increase the huan capital in a com(an!. Eo/ever' the s(ecific *oals or strate*ies
that E@ seeks to achieve ma! be different for each com(an! or situation. Therefore' there is no set standard for
measurin* the success of E@.
QThe business /orld is dominated b! (eo(le /ho look at metrics, and the E@ /orld needs to (la! in that s(aceZ
if !ou can measure manufacturin* efficienc! /ith $i" $i*ma' /h! not use similar anal!tics to measure human
ca(ital (erformanceQ J+rossman' 100>K. It is su**ested that the business /orld is focused on metrics in
determinin* success. $imilar a((roaches must be taken to value E@ in order for it to be /idel! acce(ted' 7but /ere
the E@ (olicies and (ractices reall! /orth the time and effortC E@ thou*ht so' based on overall com(an!
(erformance. 6ut ,oses' /ho also had served as a financial anal!st at Allied$i*nal' /anted more. Ee /anted
substantive (roof' validation that his E@ investments /ere (a!in* off8 J+rossman' 100>K. This is the most common
vie/ of com(anies /hen it comes to E@' so the metrics sou*ht out here is a financial measure.
The first a((roach to E@ metrics /ould be the a((roach in measurin* the financial success of the com(an! as a
result of the E@ im(lementations. Evaluations can be vie/ed as com(an! (ro-ects or investments in this case. The
first measurement is -ust a sim(le ratio of chan*e in (rofits due to ne/ E@ divided b! cost of the ne/ E@. This
measure /ill *ive an idea of ho/ /ell the ne/ chan*es (aid off relative to ho/ much /as s(ent on it. Another
measure is (a!back (eriod' 7The (a!back (eriod of an investment is the (eriod of time re&uired for the cumulative
213
cash inflo/s Jnet cash flo/sK from a (ro-ect to e&ual the initial cash outla! Jnet investmentK8 Jo!er' c+ui*an' U
Hretlo/' 100>K. The (a!back (eriod is measured b! the net investment divided b! the annual cash inflo/s as a
result of that investmentG this measure /ill *ive a com(an! an idea of ho/ lon* it takes the (ro-ect to earn b! its
cost. The final measure for financial metrics of E@ is a net (resent value' 7The net (resent value of a ca(ital
e"(enditure (ro-ect is defined as the (resent value of the stream of net Jo(eratin*K cash flo/s from the (ro-ects
minus the (ro-ectAs net investment8 Jo!er' c+ui*an' U Hretlo/' 100>K. This is done b! takin* the (resent value
of all future e"(ected cash flo/s from the E@ chan*e and subtractin* it from the cost of the (ro-ect. This /ill (ut
the value of the E@ (ro-ect in monetar! terms like an! other investment for the com(an!. These are all measures
that can be used to e"(ress the E@ (ro*ram or chan*es in terms of a relationshi( bet/een its financial returns and
costs. There are no s(ecific standards for determinin* /hether an E@ (ro-ect /as a *ood investment or not' but the
com(an! should relate their results /ith industr! results or historic results.
The other a((roach to E@ metrics is more to/ards o(erations as(ect of the com(an!. 7The old E@ measures'
such as head count' the cost of com(ensation and benefits' time to fill' and turnover' no lon*er cut it in this ne/
/orld of accountabilit!. The! donRt *o far enou*h to create shareholder value and ali*n (eo(le decisions /ith
cor(orate ob-ectives8 J$chneider' 100>K. $ince the (ur(ose of E@ is to im(rove an o(erational as(ect of the
com(an!' it should also be measured in that conte"t. 7an! com(anies are for*in* ahead on efforts to create a ne/
set of metrics that the traditional E@ functions like recruitin*' trainin*' and (erformance revie/ NrelateO to overall
cor(orate *oals8 J$chneider' 100>K. easurements here can include a variet! of traditional measurements such as
em(lo!ee turnover' avera*e sta! of em(lo!ees' efficienc! of em(lo!ees' etc. These measures all affect the o(eration
as(ects of a com(an! and are standardi0ed information currentl!. A ne/ measure that can be introduced is the
measurement of human ca(italG 7human-ca(ital metrics can (rovide meanin*ful correlations that hel( (redict
behavior and human-ca(ital investment demands /ell ahead of the annual bud*et8. Another ne/ E@ metric can be
directl! related to the o(erational as(ects of the com(an!. 7E@ metrics mi*ht measure efficienc!' or the time and
cost of activitiesG human-ca(ital metrics measure the effectiveness of such activities. Time to fill becomes time to
(roductivit!G turnover rate becomes turnover &ualit!G trainin* costs become trainin* return on investment8
J$chneider' 100>K. The take from non-financial E@ metrics is that there is no limit to an! measurements or
techni&ues. The! can ran*e from somethin* sim(le and standard such as em(lo!ee turnover to somethin* creative
that measures the effects of human ca(ital increases' customer satisfaction increases' etc.
Euman resources should be treated like an! other (ro-ects that a com(an! can undertake. It can be measured
both /ith financial results or o(erational results. The financial results are measures to com(are the cost a*ainst the
return from E@. The o(erational measure can look at standards or more com(le" and creative measures.
Iltimatel! E@ metrics are valued and -ud*ed a*ainst the *oals or strate*ies of the com(an! and ho/ /ell the! are
ali*ned /ith the results. Therefore' a com(an! should not limit themselves on ho/ the! are evaluatin* their E@
success and build techni&ues around ho/ the! feel the! feel the! should value it.
,rovide three reasons for a com(an! to im(lement a hi*h-commitment /ork s!stem.
;ame and describe three e"am(les of mechanisms a com(an! could use to increase em(lo!ee
(artici(ation.
Discuss the four different cate*ories of diversit!. +ive one reason /h! each /ould be im(ortant to a
com(an!.
Discuss the (ros and cons of internal and e"ternal recruitin*. ?hich one do !ou (refer' and /h!C
$hould tests be used to select em(lo!eesC ?h!C ?h! notC
?hat are the (rimar! benefits of trainin* em(lo!eesC
?hat is the relationshi( bet/een career develo(ment s!stems and em(lo!ee retentionC
Identif! the critical (arts of an effective (erformance a((raisal.
,rovide t/o lessons for *ivin*' and for receivin*' feedback effectivel!.
Define internal and e"ternal e&uit! in establishin* a base (a! s!stem.
,rovide three reasons to (rovide em(lo!ees com(ensation in the form of benefits.
;ame and describe t/o e"am(les of each: short-term incentives and lon*-term incentives.
;ame the five characteristics of the #C a((roach to -ob desi*n' and (rovide an e"am(le of each.
?hat are the four main reasons /h! an em(lo!ee is terminatedC
Eo/ can a com(an! avoid do/nsi0in*C
Identif! t/o /a!s to measure the effectiveness of !our Euman @esource ana*ement (olicies.
E"ercise
2. @ead the descri(tion of $A$ Institute in the section on Em(lo!ee 6enefits. Do some research on $A$
Institute. 6ased on the descri(tion and !our research' be (re(ared to debate the follo/in* issue:
Is $A$ smart to (rovide these abundant benefits to its em(lo!ees' or' are the! s(endin* too much mone! on
their em(lo!eesC
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6ewsletter.
232
;. Mar$etin on a lobal
scale
Editor: Dr #ohn 6urnett JDaniels Colle*e of 6usiness' Iniversit! of Denver' I$AK
Reviewer: Dr Asit $arkar JIniversit! of $askatche/an' CanadaK
Learnin* ob-ectives
As !ou read this cha(ter' !ou should develo( an understandin* of the follo/in* ke! marketin* conce(ts:
the im(ortant role marketin* can (la! in the success of an or*ani0ation
the various kinds of marketin*
the strate*ic /orkin*s of marketin* com(onents
understand the various bases for market se*mentation
understand the role of marketin* research
understand the behavior of the individual consumer in the market(lace
understand the (rimar! tools available to marketers and ho/ the! are used
Definin mar$etin
;oted Earvard ,rofessor of 6usiness Theodore Levitt' states that the (ur(ose of all business is to Qfind and kee(
customersQ. %urthermore' the onl! /a! !ou can achieve this ob-ective is to create a com(etitive advanta*e. That is'
!ou must convince bu!ers J(otential customersK that /hat !ou have to offer them comes closest to meetin* their
(articular need or /ant at that (oint in time. Eo(efull!' !ou /ill be able to (rovide this advanta*e consistentl!' so
that eventuall! the customer /ill no lon*er consider other alternatives and /ill (urchase !our (roduct out of habit.
This lo!al behavior is e"hibited b! (eo(le in the I$ /ho drive onl! %ords' brush their teeth onl! /ith Crest' bu!
onl! Dell com(uters' and have their (lumbin* fi"ed onl! b! Q$amson ,lumbin*Y:n Call 1B hours' 9 da!s a /eekQ.
Creatin* this blind commitmentY/ithout consideration of alternativesYto a (articular brand' store' (erson' or idea
is the dream of all businesses. It is unlikel! to occur' ho/ever' /ithout the su((ort of an effective marketin*
(ro*ram. In fact' the s(ecific role of marketin* is to pro,ide assistane in identifying, satisfying, and retaining
ustomers.
?hile the *eneral tasks of marketin* are some/hat strai*htfor/ard' attachin* an acce(table definition to the
conce(t has been difficult. A te"tbook /riter once noted' Qarketin* is not eas! to define. ;o one has !et been able
to formulate a clear' concise definition that finds universal acce(tanceQ. 3et a definition of some sort is necessar! if
/e are to la!out the boundaries of /hat is (ro(erl! to be considered Qmarketin*Q. Eo/ do marketin* activities differ
). *areting on a global scale
from non-marketin* activitiesC ?hat activities should one refer to as marketin* activitiesC ?hat institutions should
one refer to as marketin* institutionsC
arketin* is advertisin* to advertisin* a*encies' events to event marketers' knockin* on doors to sales(eo(le'
direct mail to direct mailers. In other /ords' to a (erson /ith a hammer' ever!thin* looks like a nail. In realit!'
marketin* is a /a! of thinkin* about business' rather than a bundle of techni&ues. It is much more than -ust sellin*
stuff and collectin* mone!. It is the connection bet/een (eo(le and (roducts' customers and com(anies. Like
or*anic tissue' this kind of connectionYor relationshi(Yis al/a!s *ro/in* or d!in*. It can never be in a stead!
state. And like tissue (a(er' this kind of connection is fra*ile. Customer relationshi(s' even lon*Ystandin* ones' are
contin*ent on the last thin* that ha((ened.
Tracin* the evolution of the various definitions of marketin* (ro(osed durin* the last thirt! !ears reveals t/o
trends: J2K e"(ansion of the a((lication of marketin* to non-(rofit and non-business institutionsG e.*. charities'
education' or health careG and J1K e"(ansion of the res(onsibilities of marketin* be!ond the (ersonal survival of the
individual firm' to include the betterment of societ! as a /hole. These t/o factors are reflected in the official
American arketin* Association definition (ublished in 2D55.
Mar!eting is the proess of planning and e/euting the oneption0 priing, promotion, and distribution of
ideas, goods, and ser,ies to reate e/hanges that satisfy indi,idual 3ustomer8 and organi(ational
ob@eti,es0 $
?hile this definition can hel( us better com(rehend the (arameters of marketin*' it does not (rovide a full
(icture. Definitions of marketin* cannot flesh out s(ecific transactions and other relationshi(s amon* these
elements. The follo/in* (ro(ositions are offered to su((lement this definition and better (osition marketin* /ithin
the firm.
2. The overall directive for an! or*ani0ation is the mission statement or some e&uivalent statement of
or*ani0ational *oals. It reflects the inherent business (hiloso(h! of the or*ani0ation.
1. Ever! or*ani0ation has a set of functional areas Je.*. accountin*' (roduction' finance' data (rocessin*'
marketin*K in /hich tasks that are necessar! for the success of the or*ani0ation are (erformed. These
functional areas must be mana*ed if the! are to achieve ma"imum (erformance.
3. Ever! functional area is *uided b! a (hiloso(h! Jderived from the mission statement or com(an! *oalsK
that *overns its a((roach to/ard its ultimate set of tasks.
B. arketin* differs from the other functional areas in that its (rimar! concern is /ith e"chan*es that take
(lace in markets' outside the or*ani0ation Jcalled a transationK.
=. arketin* is most successful /hen the (hiloso(h!' tasks' and manner of im(lementin* available
technolo*! are coordinated and com(lementar!0
The role of mar$etin in the firm: a basis for classification
arketin* is an individuali0ed and hi*hl! creative (rocess. Des(ite the availabilit! of hi*h-(o/ered com(uters
and so(histicated soft/are ca(able of anal!0in* massive amounts of data' marketin* is still more of an art rather
233
than a science. Each business must customi0e its marketin* efforts in res(onse to its environment and the e"chan*e
(rocess. Conse&uentl!' no t/o marketin* strate*ies are e"actl! the same.
This re&uirement of marketin* to (la! sli*htl! different roles' de(endin* u(on some set of situational criteria'
has in turn (rovided us /ith a division of marketin* into a number of different cate*ories. This is not to im(l!'
ho/ever' that there are not *eneral marketin* (rinci(les that /ork in most businessesYthere are. There is a ri*ht
and /ron* /a! to desi*n a (acka*e. There are certain advertisin* strate*ies that tend to /ork more often than
others. @ather' /e are sa!in* that because of certain factors' a businessRs a((roach to/ard marketin* and the
ensuin* strate*! /ill re&uire some modification from the basic (lan.
$ho/n in Table B are the most common t!(es of marketin* cate*ories. $ince these various t!(es of marketin*
/ill be discussed throu*hout this te"t' a brief introduction is (rovided at this (oint.
acromarketin* versus micromarketin*
The division of marketin* into macromarketin* and micromarketin* is a fairl! recent one. Initiall!' the division
/as a result of the controvers! concernin* the res(onsibilit! of marketin*. $hould marketin* be limited to the
success of the individual firm' or should marketin* consider the economic /elfare of a /hole societ!C Acce(tin* the
later' or QmacroQ' (oint of vie/ dramaticall! chan*es the /a! marketin* is carried out. In this li*ht' ever! marketin*
decision must be evaluated /ith re*ard to ho/ it mi*ht (ositivel! or ne*ativel! affect each (erson and institution
o(eratin* in that societ!. In 2D51' 6unt and 6urnett surve!ed the academic communit! in order to define more
(recisel! the distinction bet/een macro- and mircomarketin*.B Their findin*s su**est that the se(aration de(ends
u(on Q/hat is bein* studiedQ' Q/hether it is bein* vie/ed from the (ers(ective of societ! or the firmQ' and Q/ho
receives the conse&uences of the activit!Q. E"am(les of macromarketin* activities are stud!in* the marketin*
s!stems of different nations' the conse&uences on societ! of certain marketin* actions' and the im(act of certain
technolo*ies on the marketin* transaction.
The use of scanners in su(ermarkets and automatic teller machines in bankin* illustrates the last e"am(le.
icromarketin* e"am(les include determinin* ho/ ;ikon $teel should se*ment its market' recommendin* ho/
Denver ColoradoAs ;ational #e/ish Eos(ital in the I$ should (rice their (roducts' and evaluatin* the success of the
I$ Q#ust $a! ;oQ anti-dru* cam(ai*n.
$ervice marketin* versus *oods marketin*
The distinction bet/een services and *oods (roducts is not al/a!s clear-cut. In *eneral' service (roducts tend to
be intan*ible' are often consumed as the! are (roduced' are difficult to standardi0e because the! re&uire human
labor' and ma! re&uire the customer to (artici(ate in the creation of the service (roduct.
+oods (roducts tend to be -ust the o((osite in terms of these criteria. Conse&uentl!' marketers of service
(roducts usuall! em(lo! a marketin* strate*! &uite different from that of *oods marketers. %or e"am(le' a local
famil! (h!sician creates tan*ibilit! b! (rovidin* an environment: /aitin* room e"amination rooms' di(lomas on
the /alls' that convinces (atients that the! are receivin* *ood health care. Conversel!' coffee (roducers create
intan*ibilit! in order to a((ear different from com(etitors. This is done throu*h colorful (acka*in* and
advertisements sho/in* (eo(le /ho are successful because the! start each da! /ith a cu( or t/o or ten of
$tarbuckRs coffee.
Table B: Hinds of marketin*
Cla$$i!ication E5aple 2actor$
acromarketin* The devaluation of the !en Em(hasis of stud!
icromarketin* A (ricin* strate*! for ?al-art ,ers(ective' receiver of conse&uences
+oods arketin* ;abisco International Tan*ibilit!' standardi0ation' stora*e'
(roduction' involvement
$ervice marketin* Chase anhattan 6ank
%or-(rofit marketin* :tis Elevator Concerns for (rofits
;on(rofit marketin* ;e/ 3ork useum of Art Ta" status
ass marketin* $on! ;ature of contact
Direct marketin* Time a*a0ine Information
Internet marketin* tri(.com ,rocess for (urchasin* and deliver!
Local marketin* Im(erial +arden @estaurant ,ro"imit! of customers
@e*ional marketin* :l!m(ia 6re/er! +eo*ra(hic area
;ational marketin* American @ed Cross E"tent of distribution
International marketin* %ord otor Com(an! ;et/ork' marketin*
+lobal marketin* F/est variation commitment to countr!
Consumer *oods
marketin*
Hraft %oods ;ature of consumer
6usiness-to-business
marketin*
I6 ,roduct function
%or-(rofit marketin* versus non(rofit marketin*
As the terms connote' the difference bet/een for-(rofit and non(rofit marketin* is in their (rimar! ob-ective.
%or-(rofit marketers measure success in terms of (rofitabilit! and their abilit! to (a! dividends or (a! back loans.
Continued e"istence is contin*ent u(on level of (rofits.
;on(rofit institutions e"ist to benefit a societ!' re*ardless of /hether (rofits are achieved. 6ecause of the
im(licit ob-ectives assi*ned to non-(rofits' the! are sub-ect to an entirel! different additional set of la/s' notabl!
ta" la/s. ?hile the! are allo/ed to *enerate (rofits' the! must use these monies in s(ecific /a! in order to maintain
their non-(rofit status. There are several other factors that re&uire ad-ustments to be made in the marketin*
strate*ies for non(rofits.
23=
ass marketin*' direct marketin*' and Internet marketin*
ass marketin* is distin*uished from direct marketin* in terms of the distance bet/een the manufacturer and
the ultimate user of the (roduct. ass marketin* is characteri0ed as havin* /ide se(aration and indirect
communication. A mass marketer' such as ;ike' has ver! little direct contact /ith its customers and must distribute
its (roduct throu*h various retail outlets alon*side its com(etitors. Communication is im(ersonal' as evidenced b!
its national television and (rint advertisin* cam(ai*ns' cou(onin*' and (oint-of-(urchase dis(la!s. The success of
mass marketin* is contin*ent on the (robabilit! that /ithin the hu*e audience e"(osed to the marketin* strate*!
there e"ist sufficient (otential customers interested in the (roduct to make the strate*! /orth/hile.
Direct marketin* establishes a some/hat (ersonal relationshi( /ith the customer b! first allo/in* the customer
to (urchase the (roduct directl! from the manufacturer and then communicatin* /ith the customer on a first-name
basis. This t!(e of marketin* is e"(eriencin* tremendous *ro/th. A((arentl!' marketers have tired of the /aste
associated /ith mass marketin* and customers /ant more (ersonal attention. Also' modern mechanisms for
collectin* and (rocessin* accurate mailin* lists have *reatl! increased the effectiveness of direct marketin*.
Catalo*ue com(anies J$(ie*el' #.C. ,enne!K' telecommunications com(anies J$(rintK' and direct mail com(anies
J,ublishers Clearin* EouseK are e"am(le of direct marketers. A modified t!(e of direct marketin* is re(resented b!
com(anies that allo/ orderin* of (roduct b! callin* a toll-free number or mailin* in an order card as (art of an
advertisement.
Althou*h Jofficiall!K' Internet marketin* is a t!(e of direct marketin*' it has evolved so &uickl! and demanded
the attention of so man! com(anies that a se(arate section here is /arranted. Essentiall!' Internet technolo*!
J/hich chan*es b! the momentK has created a ne/ /a! of doin* business. In the Internet a*e' the /a! consumers
evaluate and follo/ throu*h on their (urchase decisions has chan*ed si*nificantl!. QCall no/4Q is no lon*er an
effective (itch. Consumers have control over ho/' /hen' and /here the! sho( on the Internet. The Internet has all
but eliminated the ur*enc! of satisf!in* the need /hen the o((ortunit! is (resented.
Local' re*ional' national' international' and *lobal marketers
As one /ould e"(ect' the si0e and location of a com(an!Rs market varies *reatl!. Local marketers are concerned
/ith customers that tend to be clustered ti*htl! around the marketer. The marketer is able to learn a *reat deal
about the customer and make necessar! chan*es &uickl!. ;aturall!' the total (otential market is limited. There is
also the (ossibilit! that a ne/ com(etitor or environmental factor /ill (ut a local marketer out of business.
@e*ional marketers cover a lar*er *eo*ra(hic area that ma! necessitate multi(le (roduction (lants and a more
com(le" distribution net/ork. ?hile re*ional marketers tend to serve ad-oinin* cities' (arts of states' or entire
states' dramatic differences in demand ma! still e"ist' re&uirin* e"tensive ad-ustments in marketin* strate*!.
;ational marketers distribute their (roduct throu*hout a countr!. This ma! involve multi(le manufacturin*
(lants' a distribution s!stem includin* /arehouses and (rivatel! o/ned deliver! vehicles' and different versions of
the marketin* Qmi"Q or overall strate*!. This t!(e of marketin* offers tremendous (rofit (otential' but also e"(oses
the marketer to ne/' a**ressive com(etitors.
International marketers o(erate in more than one countr!. As /ill become clear later in this book' massive
ad-ustments are normall! made in the marketin* mi" in various countries. Le*al and cultural differences alone can
*reatl! affect a strate*!Rs outcome. As the I$ market becomes more and more saturated /ith I$-made (roducts'
the continued e"(ansion into forei*n markets a((ears inevitable.
+lobal marketin* differs from international marketin* in some ver! definite /a!s. ?hereas international
marketin* means a com(an! sells its *oods or services in another countr!' it does not necessaril! mean that the
com(an! has made an! further commitments. Isuall! the (roduct is still manufactured in the home countr!' sold
b! their (eo(le' and the (rofits are taken back to that countr!. In the case of Eonda otors' for e"am(le' it means
buildin* manufacturin* (lants in the I$' hirin* local em(lo!ees' usin* local distribution s!stems and advertisin*
a*encies' and reinvestin* a lar*e (ercenta*e of the (rofits back into the I$.
Consumer *oods marketin* and business-to-business JindustrialK marketin*
Consumer *oods marketers sell to individuals /ho consume the finished (roduct. 6usiness-to-business
marketers sell to other businesses or institutions that consume the (roduct in turn as (art of o(eratin* the
business' or use the (roduct in the assembl! of the final (roduct the! sell to consumers. 6usiness-to-marketers
en*a*e in more (ersonal sellin* rather than mass advertisin* and are /illin* to make e"tensive ad-ustments in
factors such as the sellin* (rice' (roduct features' terms of deliver!' and so forth.
%or the consumer *oods marketer' the various marketin* com(onents are relativel! fi"ed. In addition' consumer
*oods marketers mi*ht em(lo! emotional a((eals and are faced /ith the constant battle of *ettin* their (roduct
into retail outlets.
Definin international mar$etin
;o/ that the /orld has entered the ne"t millennium' /e are seein* the emer*ence of an interde(endent *lobal
econom! that is characteri0ed b! faster communication' trans(ortation' and financial flo/s' all of /hich are
creatin* ne/ marketin* o((ortunities and challen*es. +iven these circumstances' it could be ar*ued that
com(anies face a dece(tivel! strai*htfor/ard and stark choice: the! must either res(ond to the challen*es (osed b!
this ne/ environment' or reco*ni0e and acce(t the lon*-term conse&uences of failin* to do so. This need to res(ond
is not confined to firms of a certain si0e or (articular industries. It is a chan*e that to a *reater or lesser e"tent /ill
ultimatel! affect com(anies of all si0es in virtuall! all markets. The (ressures of the international environment are
no/ so *reat' and the bases of com(etition /ithin man! markets are chan*in* so fundamentall!' that the
o((ortunities to survive /ith a (urel! domestic strate*! are increasin*l! limited to small-and medium-si0ed
com(anies in local niche markets.
,erha(s (artl! because of the ra(id evolution of international marketin*' a vast arra! of terms have emer*ed
that su**est various facets of international marketin*. Clarification of these terms is a necessar! first ste( before /e
can discuss this to(ic more thorou*hl!.
Let us be*in /ith the assum(tion that the marketin* (rocess outlined and discussed in Cha(ters 2-B is -ust as
a((licable to domestic marketin* as to international marketin*. In both markets' /e are *oal-driven' do necessar!
marketin* research' select tar*et markets' em(lo! the various tools of marketin* Ji.e. (roduct' (ricin*' distribution'
communicationK' develo( a bud*et' and check our results. Eo/ever' the uncontrollable factors such as culture'
social' le*al' and economic factors' alon* /ith the (olitical and com(etitive environment' all create the need for a
m!riad of ad-ustments in the marketin* mana*ement (rocess.
239
At its sim(lest level' international mar!eting involves the firm in makin* one or more marketin* decisions
across national boundaries. At its most com(le"' it involves the firm in establishin* manufacturin* and marketin*
facilities overseas and coordinatin* marketin* strate*ies across markets. Thus' ho/ international marketin* is
defined and inter(reted de(ends on the level of involvement of the com(an! in the international market(lace.
Therefore' the follo/in* (ossibilities e"ist:
#omesti mar!eting. This involves the com(an! mani(ulatin* a series of controllable variables' such as
(rice' advertisin*' distribution' and the (roduct' in a lar*el! uncontrollable e"ternal environment that is
made u( of different economic structures' com(etitors' cultural values' and le*al infrastructure /ithin
s(ecific (olitical or *eo*ra(hic countr! boundaries.
2nternational mar!eting. This involves the com(an! o(eratin* across several markets in /hich not onl! do
the uncontrollable variables differ si*nificantl! bet/een one market and another' but the controllable factor
in the form of cost and (rice structures' o((ortunities for advertisin*' and distributive infrastructure are
also likel! to differ si*nificantl!. De*ree of commitment is e"(ressed as follo/s:
JaK E/port mar!eting. In this case the firm markets its *oods and<or services across national<(olitical
boundaries.
JbKMultinational mar!eting. Eere the marketin* activities of an or*ani0ation include activities'
interests' or o(erations in more than one countr!' and /here there is some kind of influence or
control of marketin* activities from outside the countr! in /hich the *oods or services /ill actuall!
be sold. Each of these markets is t!(icall! (erceived to be inde(endent and a (rofit center in its o/n
ri*ht.
JcK :lobal mar!eting. The entire or*ani0ation focuses on the selection and e"(loration of *lobal
marketin* o((ortunities and marshals resources around the *lobe /ith the ob-ective of achievin* a
*lobal com(etitive advanta*e. The (rimar! ob-ective of the com(an! is to achieve a s!ner*! in the
overall o(eration' so that b! takin* advanta*e of different e"chan*e rates' ta" rates' labor rates' skill
levels' and market o((ortunities' the or*ani0ation as a /hole /ill be *reater than the sum of its
(arts.2
Thus To!ota otors started out as a domestic marketer' eventuall! e"(orted its cars to a fe/ re*ional markets'
*re/ to become a multinational marketer' and toda! is a true *lobal marketer' buildin* manufacturin* (lants in the
forei*n countr! as /ell as hirin* local labor' usin* local ad a*encies' and com(l!in* to that countr!Rs cultural mores.
As it moved from one level to the ne"t' it also revised attitudes to/ard marketin* and the underl!in* (hiloso(h! of
business.
Iltimatel!' the successful marketer is the one /ho is best able to mani(ulate the controllable tools of the
marketin* mi" /ithin the uncontrollable environment. The (rinci(al reason for failure in international marketin*
results from a com(an! not conductin* the necessar! research' and as a conse&uence' misunderstandin* the
differences and nuances of the marketin* environment /ithin the countr! that has been tar*eted.
$tandardi0ation and customi0ation
In 2D53' Earvard marketin* (rofessor Theodore Levitt /rote an article entitled' QThe +lobali0ation of arketsQ'
and nothin* about marketin* has been the same since.1 Accordin* to Levitt' a ne/ economic realit!-the emer*ence
of *lobal consumer markets for sin*le standard (roducts-has been tri**ered in (art b! technolo*ical develo(ments.
?orld/ide communications ensure the instant diffusion of ne/ lifest!les and (ave the /a! for a /holesale transfer
of *oods and services.
Ado(tin* this *lobal strate*! (rovides a com(etitive advanta*e in cost and effectiveness. In contrast to
multinational com(anies' standardi0ed J*lobalK cor(orations vie/ the /orld or its ma-or re*ions as one entit!
instead of a collection of national markets. These /orld marketers com(ete on a basis of a((ro(riate value: i.e. an
o(timal combination of (rice' &ualit!' reliabilit!' and deliver! of (roducts that are identical in desi*n and function.
Iltimatel!' consumers tend to (refer a *ood (rice<&ualit! ratio to a hi*hl! customi0ed but less cost-effective item.
Levitt distin*uished bet/een (roducts and brands. ?hile the *lobal (roduct itself is standardi0ed or sold /ith
onl! minor modifications' the brandin*' (ositionin*' and (romotion ma! have to reflect local conditions.
Critics of LevittRs (ers(ective su**est that his ar*ument for *lobal standardi0ation is incorrect and that each
market strate*! should be customi0ed for each countr!. Hotler notes that one stud! found that 50 (er cent of I$
e"(orts re&uired one or more ada(tations. %uthermore' the avera*e (roduct re&uires at least four to five
ada(tations out of a set of eleven marketin* elements: labelin*' (acka*in*' materials' colors' name' (roduct
features' advertisin* themes' media' e"ecution' (rice' and sales (romotion.3 Hotler su**ests that all eleven factors
should be evaluated before standardi0ation is considered.
To date' no one has em(iricall! validated either (ers(ective. ?hile critics of Levitt can offer thousands of
anecdotes contradictin* the validit! of standardi0ation' a more careful read of LevittRs ideas indicate that he offers
standardi0ation as a strate*ic o(tion' not a fact. Althou*h *lobal marketin* has its (itfalls' it can also !ield
im(ressive advanta*es. $tandardi0ed (roducts can lo/er o(eratin* costs. Even more im(ortant' effective
coordination can e"(loit a com(an!Rs best (roduct and marketin* ideas.
Too often' e"ecutives vie/ *lobal marketin* as an either<or (ro(osition-either full standardi0ation or local
control. 6ut /hen a *lobal a((roach can fall an!/here on a s(ectrum-from ti*ht /orld/ide coordination on
(ro*rammin* details to loose a*reements on a (roduct ideas-there is no reason for this e"treme vie/. In a((l!in*
the *lobal marketin* conce(t and makin* it /ork' fle"ibilit! is essential. The bi* issue toda! is not /hether to *o
*lobal' but ho/ to tailor the *lobal marketin* conce(t to fit each business and ho/ to make it /ork.
@easons for enterin* international markets
an! marketers have found the international market(lace to be e"tremel! hostile. A stud! b! 6aker and
H!nak'B for e"am(le' found that less than 10 (er cent of firms in Te"as /ith e"(ort (otential actuall! carried out
business in international markets. 6ut althou*h man! firms vie/ in markets /ith tre(idation' others still make the
decision to *o international. ?h!C
In one stud!' the follo/in* motivatin* factors /ere *iven for initiatin* overseas marketin* involvement Jin order
of im(ortanceK:=
2. lar*e market si0e
23D
1. stabilit! throu*h diversification
3. (rofit (otential
B. unsolicited orders
=. (ro"imit! of market
>. e"cess ca(acit!
9. offer b! forei*n distributor
5. increasin* *ro/th rate
D. smoothin* out business c!cles
:ther em(irical studies over a number of !ears have (ointed to a /ide variet! of reasons /h! com(anies initiate
international involvement. These include the saturation of the domestic market' /hich leads firms either to seek
other less com(etitive markets or to take on the com(etitor in its home marketsG the emer*ence of ne/ markets'
(articularl! in the develo(in* /orldG *overnment incentives to e"(ortG ta" incentives offered b! forei*n
*overnments to establish manufacturin* (lants in their countries in order to create -obsG the availabilit! of chea(er
or more skilled laborG and an attem(t to minimi0e the risks of a recession in the home countr! and s(read risk.>
@easons to avoid international markets
Des(ite attractive o((ortunities' most businesses do not enter forei*n markets. The reasons *iven for not *oin*
international are numerous. The bi**est barrier to enterin* forei*n markets is seen to be a fear b! these com(anies
that their (roducts are not marketable overseas' and a conse&uent (reoccu(ation /ith the domestic market. The
follo/in* (oints /ere hi*hli*hted b! the findin*s in the (reviousl! mentioned stud! b! 6arker and Ha!nak' /ho
listed the most im(ortant barriers:9
2. too much red ta(e
1. trade barriers
3. trans(ortation difficulties
B. lack of trained (ersonnel
=. lack of incentives
>. lack of coordinated assistance
9. unfavorable conditions overseas
5. slo/ (a!ments b! bu!ers
D. lack of com(etitive (roducts
20. (a!ment defaults
22. lan*ua*e barriers
It is the combination of these factors that determines not onl! /hether com(anies become involved in
international markets' but also the de*ree of an! involvement.
Business Fundamentals 2B0 A +lobal Te"t
The sta*es of *oin* international
Earlier in our discussion on definitions' /e identified several terms that relate to ho/ committed a firm is to
bein* international. Eere /e e"(and on these conce(ts and e"(lain the rationale behind this (rocess. T/o (oints
should be noted. %irst' the (rocess tends to be ranked in order of Qleast risk and investmentQ to Q*reatest
involvement8. $econd' these are not necessaril! se&uential ste(s' even thou*h e"(ortin* is a((arentl! most
common as an initial entr!.
%irms t!(icall! a((roach involvement in international marketin* rather cautiousl!' and there a((ears to e"ist an
underl!in* lifec!cle that has a series of critical success factors that chan*e as a firm moves throu*h each sta*e. %or
small-and medium-si0ed firms in (articular' e"(ortin* remains the most (romisin* alternative to a full-blooded
international marketin* effort' since it a((ears to offer a de*ree of control over risk' cost' and resource
commitment. Indeed' e"(ortin*' es(eciall! b! the smaller firms' is often initiated as a res(onse to an unsolicited
overseas order-these are often (erceived to be less risk!.
E"(ortin*
In *eneral' e"(ortin* is a sim(le and lo/ risk-a((roach to enterin* forei*n markets. %irms ma! choose to e"(ort
(roducts for several reasons. %irst' (roducts in the maturit! sta*e of their domestic life c!cle ma! find ne/ *ro/th
o((ortunities overseas' as ,errier chose to do in the I$. $econd' some firms find it less risk! and more (rofitable to
e"(and b! e"(ortin* current (roducts instead of develo(in* ne/ (roducts. Third' firms /ho face seasonal domestic
demand ma! choose to sell their (roducts to forei*n markets /hen those (roducts are Qin seasonQ there. %inall!'
some firms ma! elect to e"(ort (roducts because there is less com(etition overseas.
A firm can e"(ort its (roducts in one of three /a!s: indirect e"(ortin*' semi-direct e"(ortin*' and direct
e"(ortin*. 2ndiret e/porting is a common (ractice amon* firms that are -ust be*innin* their e"(ortin*. $ales'
/hether forei*n or domestic' are treated as domestic sales. All sales are made throu*h the firmRs domestic sales
de(artment' as there is no e"(ort de(artment. Indirect e"(ortin* involves ver! little investment' as no overseas
sales force or other t!(es of contacts need be develo(ed. Indirect e"(ortin* also involves little risk' as international
marketin* intermediaries have kno/led*e of markets and /ill make fe/er mistakes than sellers.
In semi-direct e"(ortin*' an American e"(orter usuall! initiates the contact throu*h a*ents' merchant
middlemen' or other manufacturers in the I$. $uch semi-direct e"(ortin* can be handled in a variet! of /a!s: JaK a
combination e"(ort mana*er' a domestic a*ent intermediar! that acts as an e"(ortin* de(artment for several
noncom(etin* firmsG JbK the manufacturerRs e"(ort a*ent JEAK o(erates ver! much like a manufacturerRs a*ent in
domestic marketin* settin*sG JcK a ?ebb-,omerene E"(ort Association ma! choose to limit coo(eration to
advertisin*' or it ma! handle the e"(ortin* of the (roducts of the associationRs members andG JdK (i**!back
e"(ortin*' in /hich one manufacturer JcarrierK that has e"(ort facilities and overseas channels of distribution
handles the e"(ortin* of another firm JriderK noncom(etin* but com(lementar! (roducts.
?hen diret e/porting is the means of entr! into a forei*n market' the manufacturer establishes an e"(ort
de(artment to sell directl! to a forei*n film. The e"(ortin* manufacturer conducts market research' establishes
(h!sical distribution' and obtains all necessar! e"(ort documentation. Direct e"(ortin* re&uires a *reater
investment and also carries a *reater risk. Eo/ever' it also (rovides *reater (otential return and *reater control of
its marketin* (ro*ram.
2B2
Licensin*
Inder a licensin* a*reement' a firm JlicensorK (rovides some technolo*! to a forei*n firm JlicenseeK b! *rantin*
that firm the ri*ht to use the licensorRs manufacturin* (rocess' brand name' (atents' or sales kno/led*e in return
for some (a!ment. The licensee obtains a com(etitive advanta*e in this arran*ement' /hile the licensor obtains
ine"(ensive access to a forei*n market.
A licensin* arran*ement contains risk' in that if the business is ver! successful' (rofit (otentials are limited b!
the licensin* a*reement. Alternativel!' a licensor makes a lon*-term commitment to a firm and that firm ma! be
less ca(able than e"(ected. :r' the licensee ma! be un/illin* to invest the necessar! resources as needed to be
successful. Licensin* ma! be the least (rofitable alternative for market entr!. $carce ca(ital' im(ort restrictions' or
*overnment restrictions ma! make this the onl! feasible means for sellin* in another countr!.
Franhising re(resents a ver! (o(ular t!(e of licensin* arran*ement for man! consumer (roducts firms.
Eolida! Inn' Eert0 Car @ental' and cDonaldRs have all e"(anded into forei*n markets throu*h franchisin*.
#oint ventures
A @oint ,enture is a (artnershi( bet/een a domestic firm and a forei*n firm. 6oth (artners invest mone! and
share o/nershi( and control of (artnershi(. #oint ventures re&uire a *reater commitment from firms than licensin*
or the various other e"(ortin* methods. The! have more risk and less fle"ibilit!.
A domestic firm ma! /ish to en*a*e in a -oint venture for a variet! of reasonsG for e"am(le' +eneral otors and
To!ota have a*reed to make a subcom(act car to be sold throu*h + dealers usin* the idle + (lant in California.
To!otaRs motivation /as to avoid I$ im(ort &uotas and ta"es on cars /ithout an! I$-made (arts.
Direct investment
ultinational or*ani0ations ma! choose to en*a*e in full-scale (roduction and marketin* abroad. Thus' the!
/ill invest in /holl! o/ned subsidiaries. An or*ani0ation usin* this a((roach makes a diret in,estment in one or
more forei*n nations. :r*ani0ations en*a*in* in licensin* or -oint ventures do not o/n manufacturin* and
marketin* facilities abroad.
6! establishin* overseas subsidiaries' a multinational or*ani0ation can com(ete more a**ressivel! because it is
QinQ the market(lace. Eo/ever' subsidiaries re&uire more investment as the subsidiar! is res(onsible for all
marketin* activities in a forei*n countr!. ?hile such o(erations (rovide control over marketin* activities'
considerable risk is involved. The subsidiar! strate*! re&uires com(lete understandin* of business conditions'
customs' markets' labor' and other forei*n market factors.
I$ commercial centers
Another method of doin* business overseas has come in the form of G+ 9ommerial 9enters5. A Commercial
Center serves the (ur(ose of (rovidin* additional resources for the (romotion of e"(orts of I$ *oods and services
to host countries. The Commercial Center does so b! familiari0in* I$ e"(orters /ith industries' markets' and
customs of host countries. The! are facilitatin* a*encies that assist /ith the three arran*ements -ust discussed.
I$ Commercial Centers (rovide business facilities such as e"hibition s(ace' conference rooms' and office s(ace.
The! (rovide translation and clerical services. The! have a commercial librar!. The! have commercial la/
information and trade (romotion facilities' includin* the facilitation of contacts bet/een bu!ers' sellers' bankers'
distributors' a*ents' and *overnment officials. The! also coordinate trade missions and assist /ith contracts and
e"(ort and im(ort arran*ements.
Trade intermediaries
$mall manufacturers /ho are interested in buildin* their forei*n sales are turnin* to trade intermediaries to
assist them in the sale and distribution of their (roducts. These entre(reneurial middlemen t!(icall! bu! I$-
(roduced *oods at 2= (er cent belo/ a manufacturerRs best discount and then resell the (roducts in overseas
markets. These trade intermediaries account for about 20 (er cent of all I$ e"(ortsD. The trade intermediar!
(rovides a valuable service to small com(anies' /hich often do not have the resources or e"(ertise to market their
(roducts overseas. The trade intermediaries have develo(ed relationshi(s /ith forei*n countriesG these
relationshi(s are time-consumin* and e"(ensive to develo(.
Alliances
Eeineken' the (remium Dutch beer' is consumed b! more (eo(le in more countries than an! other beer20. It is
also the number-one im(orted beer in America. iller and 6ud/eiser' the t/o lar*est American beer (roducers'
have entered into *lobal com(etition /ith Eeineken' (artl! because the American beer market has been flat. The!
are doin* so b! formin* alliances /ith *lobal bre/eries such as olson' Corona' and Dos E&uis. Eeineken has
res(onded to the challen*e' heavil! (romotin* (roducts such as Amstel Li*ht and ur(h!Rs Irish $tout. Eeineken
has also be*un develo(in* an alliance /ith Asia ,acific 6re/eries' the maker of Ti*er 6eer.
The international mar$etin plan
It should be a((arent b! no/ that com(anies and or*ani0ations (lannin* to com(ete effectivel! in /orld
markets need a clear and /ell-focused international marketin* (lan that is based on a thorou*h understandin* of
the markets in /hich the com(an! is introducin* its (roducts. The challen*e' then' of international marketin* is to
ensure that an! international strate*! has the disci(line of thorou*h research' and an understandin* and accurate
evaluation of /hat is re&uired to achieve the com(etitive advanta*e. As such' the decision se&uence in international
marketin* Jsee E"hibit 1>K is much lar*er than that of domestic markets. As noted in the ne"t Inte*rated arketin*
bo"' it is also more com(licated. $ee belo/.
2B3
E"hibit 1>: The decision se&uence in international marketin*
The cor(orate level
?e be*in at the cor(orate level' /here firms decide /hether to become involved in international markets and
determine the resources the! are /illin* to commit. Thus' this sta*e is (rimaril! concerned /ith the anal!sis of
international markets. Decisions here /ill be de(endent on matchin* the results of that anal!sis /ith the com(an!Rs
ob-ectives. These ob-ectives' in turn' /ill be determined b! the man! motivatin* factors /e have discussed in the
earlier sections. The level of resources that the com(an! is /illin* to commit should be determined b! the strate*!
that is needed to achieve the ob-ectives that have been set.
The business level
6usiness-level considerations be*in /ith the assessment of the stakeholders involved in the business. It is
im(ortant to clearl! identif! the different stakeholder *rou(s' understand their e"(ectations' and evaluate their
(o/er' because the stakeholders (rovide the broad *uidelines /ithin /hich the firm o(erates. In the case of
international marketin*' it is (articularl! im(ortant to address the concerns of the stakeholders in the host
com(an!.
The situation anal!sis concerns a thorou*h e"amination of the factors that influence the businessesR abilit! to
successfull! market a (roduct or service. The results lead to a realistic set of ob-ectives. Conductin* a situation
anal!sis in an international settin* is a bit more e"tensive. It not onl! includes the normal assessment of e/ternal
Business Fundamentals 2BB A +lobal Te"t
en,ironmental factors and resoures5apabilities' it also includes a determination of the le,el of ommitment
e"hibited b! the business' as /ell as (ossible methods of entr!. These last t/o factors are interrelated in that a
com(an!Rs level of commitment to international markets /ill directl! influence /hether the! em(lo! e"(ortin*' a
-oint venture' or some other method of entr!.
In turn' level of commitment and method of entr! are influenced b! the evaluation of environmental factors as
/ell as resources and ca(abilities. The latter audits not onl! the /eaknesses of the com(an!' but also the stren*ths
of the com(an!' /hich are often taken for *ranted. This is (articularl! im(ortant in international marketsG for
e"am(le' customer brand lo!alt! ma! be much stron*er in certain markets than others' and (roducts ma! be at the
end of their life in the domestic market but ma! be ideal for less so(histicated markets.
It is im(ortant' too' to evaluate the ca(acit! of the firm to be fle"ible' ada(table' and (roactive' as these are the
attributes necessar!' for success in a hi*hl! com(etitive and ra(idl! chan*in* /orld.
Indoubtedl!' environmental factors have received the most attention from marketers considerin* international
markets.
Mar!eting ob@eti,es
Eavin* identified stakeholder e"(ectations' carried out a detailed situation anal!sis' and made an evaluation of
the ca(abilities of the com(an!' the overall marketin* *oals can be set. It is im(ortant to stress that there is a need
for realism in this' as onl! too fre&uentl! cor(orate (lans are determined more b! the desire for short-term
credibilit! /ith shareholders than /ith the likelihood that the! /ill be achieved.
The (rocess ado(ted for determinin* lon*-term and short-term ob-ectives is im(ortant and varies si*nificantl!'
de(endin* on the si0e of the business' the nature of the market and the abilities and motivation of mana*ers in
different markets. At an o(erational level' the national mana*ers need to have an achievable and detailed (lan for
each countr!' /hich /ill take account of the local situation' e"(lain /hat is e"(ected of them' and ho/ their
(erformance /ill be measured. E"am(les of ob-ectives mi*ht be:
financial (erformance' includin* return on investment and (rofitabilit!
market (enetration' includin* sales Jb! volume and valueK' market share b! (roduct cate*or!
customer *ro/th' b! volume and (rofitabilit!
distribution' includin* stren*th in su((l! chain' number of outlets
brand a/areness and value
ne/ (roduct introductions and diffusion
com(an! ima*e' includin* &ualit! and added value Jor serviceK
The functional level
Eavin* set the ob-ectives for the com(an!' both at the cor(orate level and the business level' the com(an! can
no/ develo( a detailed (ro*ram of functional activities to achieve the ob-ectives. %ollo/in* the inte*rated a((roach
em(lo!ed throu*hout this te"t' each of the functional elements Je.*. finance' human resources' researchK must be
considered -ointl!. The international marketin* strate*! is doomed to failure if human resources can not find and
2B=
train the a((ro(riate em(lo!ees' or research can not modif! the (roduct so that it is acce(table to consumers in
another countr!. Iltimatel!' this coordination bet/een business functions is contin*ent on the market entr!
strate*! em(lo!ed as /ell as the de*ree of standardi0ation or customi0ation deemed.
Eavin* inte*rated at the function level' /e ne"t consider inte*ration of the marketin* mi" elements.
Erodut5promotion
Hee*an22 has hi*hli*hted the ke! as(ect of marketin* strate*! as a combination of standardi0ation or ada(tation
of (roduct and (romotion elements of the mi" and offers five alternative and more s(ecific a((roaches to (roduct
(olic!:
2. One produt, one message, worldwide: ?hile a number of /riters have ar*ued that this /ill be the
strate*! ado(ted for man! (roducts in the future' in (ractice onl! a handful of (roducts mi*ht claim to
have achieved this alread!.
1. Erodut e/tension, promotion adaptation: ?hile the (roduct sta!s the same this strate*! allo/s for the
ada(tation of the (romotional effort either to tar*et ne/ customer se*ments or to a((eal to the (articular
tastes of individual countries.
3. Erodut adaptation, promotion e/tension: This strate*! is used if a (romotional cam(ai*n has achieved
international a((eal' but the (roduct needs to be ada(ted because of local needs.
B. #ual adaptation: 6! ada(tin* both (roducts and (romotion for each market' the firm is ado(tin* a totall!
differentiated a((roach.
=. Erodut in,ention: %irms' usuall! from advanced nations' that are su((l!in* (roducts to less /ell-
develo(ed countries ado(t (roduct invention.
Another critical element that is closel! ali*ned /ith the (roduct and (romotion is the brand. Anthon! :R@eill!'
Chairman of E.#. Eein0' believes that the communications revolution and the conver*ence of cultures have no/ set
the sta*e for trul! *lobal marketin*. The a*e of the *lobal brand is at hand. %or e"am(le' Eein0 /as lookin* to
e"(and its D Lives cat food brand and orris the Cat lo*o into osco/. Althou*h it is a stable and successful brand
in the I$' testin* and research done b! Dimitri E(imov' a local marketin* mana*er in osco/' led Eein0
e"ecutives to make a marketin* chan*e to ensure the (roductRs success in @ussia. ;amel!' a fatter-lookin* orris
/as created for (acka*in*. Another discover!: ?hile Americans tend to treat their kitties /ith tuna' @ussian cat-
lovers (refer to serve beef-flavored food.
As discussed earlier' (roduct (ositionin* is a ke! success factor and reflects the customerRs (erce(tions of the
(roduct or service. Eo/ever' in countries at different sta*es of economic develo(ment' the customer se*ments that
are likel! to be able to (urchase the (roduct and the occasions on /hich it is bou*ht ma! be si*nificantl! different.
%or e"am(le' /hile H%C and cDonaldRs restaurants aim at ever!da! eatin* for the mass market in the develo(ed
countries' in less-develo(ed countries the! are (erceived as (laces for s(ecial-occasion eatin*' and are be!ond the
reach of the (oorest se*ments of the (o(ulation. The (roduct (ositionin*' therefore' must var! in some dimensions.
In confirmin* the (ositionin* of a (roduct or service in a s(ecific market or re*ion' it is therefore necessar! to
establish in the consumer (erce(tion e"actl! /hat the (roduct stands for and ho/ it differs from e"istin* and
(otential com(etition b! desi*nin* an identit! that confirms the value of the (roduct.
Business Fundamentals 2B> A +lobal Te"t
Eriing
,ricin* (roducts in forei*n nations is com(licated b! e"chan*e rate fluctuations' tariffs' *overnmental
intervention' and shi((in* re&uirements. A common strate*! involves a marketer settin* a lo/er (rice for their
(roducts in forei*n markets. This strate*! is consistent /ith the lo/ income levels of man! forei*n countries' and
the lo/er (rice hel(s to build market share. ,ricin* strate*ies are also stron*l! influenced b! the nature and
intensit! of the com(etition in the various markets.
%or these reasons' it is im(ortant to reco*ni0e at the outset that the develo(ment and im(lementation of (ricin*
strate*ies in international markets should follo/ the follo/in* sta*es:
2. anal!0in* the factors that influence international (ricin*' such as the cost structures' the value of the
(roduct' the market structure' com(etitor (ricin* levels' and a variet! of environmental constraints
1. confirmin* the im(act the cor(orate strate*ies should have on (ricin* (olic!
3. evaluatin* the various strate*ic (ricin* o(tions and selectin* the most a((ro(riate a((roach
B. im(lementin* the strate*! throu*h the use of a variet! of tactics and (rocedures to set (rices
=. mana*in* (rices and financin* international transactions
,erha(s the most critical factor to be considered /hen develo(in* a (ricin* strate*! in international markets'
ho/ever' is ho/ the customers and com(etitors /ill res(ond. ;a*le 21 has su**ested nine factors that influence the
sensitivit! of customers to (rices' and all have im(lications for the international marketer. ,rice sensitivit! reduces:
The more distinctive the (roduct is:
the *reater the (erceived &ualit!
the less a/are consumers are of substitutes in the market
if it is difficult to make com(arisons
if the (rice of a (roduct re(resents a small (ro(ortion of total e"(enditure of the customer
as the (erceived benefit increases
if the (roduct is used in association /ith a (roduct bou*ht (reviousl!
if costs are shared /ith other (arties
if the (roduct cannot be stored
%inall!' there are several inherent (roblems associated /ith (ricin* in international markets. :ften com(anies
find it difficult to coordinate and control (rices across their activities in order to enable them to achieve effective
financial (erformance and their desired (rice (ositionin*. $im(l!' ho/ can (rices be coordinated b! the com(an!
across the various markets and still make the necessar! (rofitC Difficult! ans/erin* this &uestion has led to t/o
serious (roblems. #umping J/hen a firm sells a (roduct in a forei*n countr! belo/ its domestic (rice or belo/ its
actual costsK is often done to build a com(an!Rs share of the market b! (ricin* at a com(etitive level. Another
reason is that the (roducts bein* sold ma! be sur(lus or cannot be sold domesticall! and are therefore alread! a
burden to the com(an!. ?hen com(anies (rice their (roducts ver! hi*h in some countries but com(etitivel! in
2B9
others' the! en*a*e in a *ra! market strate*!. A gray mar!et' also called parallel importing' is a situation /here
(roducts are sold throu*h unauthori0ed channels of distribution. A *ra! market comes about /hen individuals bu!
(roducts in a lo/er-(riced countr! from a manufacturerRs authori0ed retailer' shi( them to hi*her-(riced countries'
and then sell them belo/ the manufacturerRs su**ested (rice throu*h unauthori0ed retailers.
Considerable (roblems arise in forei*n transactions because of the need to bu! and sell (roducts in different
currencies. Fuestions to consider are: ?hat currenc! should a com(an! (rice its (roductsC Eo/ should a com(an!
deal /ith fluctuatin* e"chan*e ratesC
%inall!' obtainin* (a!ment (rom(tl! and in a suitable currenc! from less develo(ed countries can cause e"(ense
and additional difficulties. Eo/ should a com(an! deal /ith sellin* to countries /here there is a risk of
non(a!mentC Eo/ should a com(an! a((roach sellin* to countries that have a shorta*e of hard currenc!C
#istribution and logistis
#istribution hannels are the means b! /hich *oods are distributed from the manufacturer to the end user.
-ogistis' or (h!sical distribution mana*ement' is concerned /ith the (lannin*' im(lementin*' and control of
(h!sical flo/s of materials and final *oods from (oints of ori*in to (oints of use to meet customer needs at a (rofit.
Essentiall! there are three channel links bet/een the seller and bu!er. The first link is the sellerRs head&uarters
or*ani0ation' /hich is res(onsible for su(ervisin* the channel' and acts as (art of the channel itself. Channels
bet/een countries re(resent the second link. The! are res(onsible for *ettin* (roducts to overseas markets and
(a!ment in return. %inall!' the third link is the channel structure Jlo*isticsK /ithin countries' /hich distributes the
(roducts from their (oint of entr! to the final consumer.
Distribution strate*ies /ithin overseas markets are affected b! various uncontrollable factors. %irst' /holesalin*
and retailin* structure differs /idel! from one nation to the ne"t. $o' too' does the &ualit! of service (rovided.
Differences in the si0e and nature of retailers are even more (ronounced. @etailers more closel! reflect the
economic conditions and culture of that countr!G man! small retailers dominate most of these countries.
,h!sical distribution to overseas markets often re&uires s(ecial marketin* (lannin*. an! countries have
inade&uate dockin* facilities' limited hi*h/a!s' various railroad track *au*es' too fe/ vehicles' and too fe/
/arehouses. ana*in* (roduct inventories re&uires consideration of the availabilit! of suitable /arehousin*' as
/ell as the costs of shi((in* in small &uantities.
1he budget
arketin* mi" com(onents must be evaluated as (art of an overall marketin* strate*!. Therefore' the
or*ani0ation must establish a marketin* bud*et based on the re&uired marketin* effort to influence consumers. The
marketin* bud*et re(resents a (lan to allocate e"(enditures to each of the com(onents of the marketin* mi". %or
e"am(le' the firm must establish an advertisin* bud*et as (art of the marketin* bud*et and allocate e"(enditures to
various t!(es of advertisin* mediaYtelevision' ne/s(a(ers' ma*a0ines. A sales (romotion bud*et should also be
determined' allocatin* mone! for cou(ons' (roduct sam(les' and trade (romotions. $imilarl!' bud*ets are re&uired
for (ersonal sellin*' distribution' and (roduct develo(ment.
Eo/ much should be s(entC Consider the follo/in* e"am(le. A common &uestion that marketers fre&uentl! ask
is' QAre /e s(endin* enou*h Jor too muchK to (romote the sale of our (roductsCQ A reasonable ans/er /ould
revolve around another consideration: Q?hat do /e /ant to accom(lishC ?hat are our *oalsCQ The discussion
should ne"t turn to the methods for achievement of *oals and the removal of obstacles to these *oals. This ste( is
often ski((ed or avoided.
Isuall!' /hen the &uestion is asked' QAre /e s(endin* enou*hCQ an automatic ans/er is *iven' in terms of /hat
others s(end. Hno/in* /hat others in the same industr! s(end can be im(ortant to an or*ani0ation /hose
(erformance la*s behind the com(etition or to an or*ani0ation that sus(ects that its e"(enditures are hi*her than
the! need to be. 6ut *enerall!' kno/in* /hat others s(end leads to an un(roductive Qkee(in*-u(-/ith-the-#onesesQ
attitude. It also assumes that the others kno/ /hat the! are doin*.
E,aluating results
;o marketin* (ro*ram is (lanned and im(lemented (erfectl!. arketin* mana*ers /ill tell !ou that the!
e"(erience man! sur(rises durin* the course of their activities. In an effort to ensure that (erformance *oes
accordin* to (lans' marketin* mana*ers establish controls that allo/ marketers to evaluate results and identif!
needs for modifications in marketin* strate*ies and (ro*rams. $ur(rises occur' but marketin* mana*ers /ho have
established sound control (rocedures can react to sur(rises &uickl! and effectivel!.
arketin* control involves a number of decisions. :ne decision is /hat function to monitor. $ome or*ani0ations
monitor their entire marketin* (ro*ram' /hile others choose to monitor onl! a (art of it' such as their sales force or
their advertisin* (ro*ram. A second set of decisions concerns the establishment of standards for (erformanceG e.*.
market share' (rofitabilit!' or sales. A third set of decisions concerns ho/ to collect information for makin*
com(arisons bet/een actual (erformance and standards. %inall!' to the e"tent that discre(ancies e"ist bet/een
actual and (lanned (erformance' ad-ustments in the marketin* (ro*ram or the strate*ic (lan must be made.
:nce a (lan is (ut into action' a marketin* mana*er must still *ather information related to the effectiveness
/ith /hich the (lan /as im(lemented. Information on sales' (rofits' reactions of consumers' and reactions of
com(etitors must be collected and anal!0ed so that a marketin* mana*er can identif! ne/ (roblems and
o((ortunities.
The international mar$etin en&ironment
A number of factors constitute the international environment: social' cultural' (olitical' le*al' com(etitive'
economic' (lus technolo*!. Each should be evaluated before a com(an! makes a decision to *o international.
1he soial5ultural en,ironment
The cultural environment consists of the influence of reli*ious' famil!' educational' and social s!stems in the
marketin* s!stem. arketers /ho intend to market their (roducts overseas ma! be ver! sensitive to forei*n
cultures. ?hile the differences bet/een our cultural back*round in the Inited $tates and those of forei*n nations
ma! seem small' marketers /ho i*nore these differences risk failure in im(lementin* marketin* (ro*rams. %ailure
to consider cultural differences is one of the (rimar! reasons for marketin* failures overseas.
This task is not as eas! as it sounds as various features of a culture can create an illusion of similarit!. Even a
common lan*ua*e does not *uarantee similarit! of inter(retation. %or e"am(le' in the I$ /e (urchase QcansQ of
various *rocer! (roducts' but the 6ritish (urchase QtinsQ. A number of cultural differences can cause marketers
(roblems in attem(tin* to market their (roducts overseas. These include: JaK lan*ua*e' JbK color' JcK customs and
2BD
taboos' JdK values' JeK aesthetics' JfK time' J*K business norms' JhK reli*ion' and JiK social structures. Each is
discussed in the follo/in* sections.
-anguage
The im(ortance of lan*ua*e differences cannot be overem(hasi0ed' as there are almost 3'000 lan*ua*es in the
/orld. Lan*ua*e differences cause man! (roblems for marketers in desi*nin* advertisin* cam(ai*ns and (roduct
labels. Lan*ua*e (roblems become even more serious once the (eo(le of a countr! s(eak several lan*ua*es. %or
e"am(le' in Canada' labels must be in both En*lish and %rench. In India' there are over 100 different dialects' and
a similar situation e"ists in China.
9olors
Colors also have different meanin*s in different cultures. %or e"am(le' in E*!(t' the countr!Rs national color of
*reen is considered unacce(table for (acka*in*' because reli*ious leaders once /ore it. In #a(an' black and /hite
are colors of mournin* and should not be used on a (roductRs (acka*e. $imilarl!' (ur(le is unacce(table in Eis(anic
nations because it is associated /ith death.
Consider ho/ the follo/in* e"am(les could be used in develo(ment of international marketin* (ro*rams:
In @ussia' it is acce(table for men to *reet each other /ith a kiss' but this custom is not acce(table in the
I$.
+ermans (refer their salad dressin* in a tube' /hile Americans (refer it in a bottle.
In %rance' /ine is served /ith most meals' but in America' milk' tea' /ater' and soft drinks are (o(ular.
cDonaldsRs Cor(oration has o(ened 10 restaurants in India. $ince 50 (er cent of Indians are Eindu'
cDonaldRs /ill use a nonbeef meat substitute for its traditional hambur*er. The likel! beef substitute /ill be lamb'
a ver! (o(ular meat in India. In antici(ation of its restaurant o(enin*s' cDonaldRs conducted e"tensive market
research' site selection studies' and develo(ed a relationshi( /ith IndiaRs lar*est chicken su((lier. cDonaldRs has
o(ted to market its (roduct in India' lar*el! because IndiaRs (o(ulation of more than D00 million re(resents one
si"th of the /orldRs (o(ulation.
Dalues
An individualRs values arise from his<her moral or reli*ious beliefs and are learned throu*h e"(eriences. %or
e"am(le' in America /e (lace a ver! hi*h value on material /ell-bein*' and are much more likel! to (urchase status
s!mbols than (eo(le in India. $imilarl!' in India' the Eindu reli*ion forbids the consum(tion of beef' and fast-food
restaurants such as cDonaldRs and 6ur*er Hin* /ould encounter tremendous difficulties /ithout (roduct
modification. Americans s(end lar*e amounts of mone! on soa(' deodorant' and mouth/ash because of the value
(laced on (ersonal cleanliness. In Ital!' sales(eo(le call on /omen onl! if their husbands are at home.
.esthetis
The term aesthetis is used to refer to the conce(ts of beaut! and *ood taste. The (hrase' Q6eaut! is in the e!e of
the beholderQ is a ver! a((ro(riate descri(tion for the differences in aesthetics that e"ist bet/een cultures. %or
e"am(le' Americans believe that suntans are attractive' !outhful' and health!. Eo/ever' the #a(anese do not.
Business Fundamentals 2=0 A +lobal Te"t
1ime
Americans seem to be fanatical about time /hen com(ared to other cultures. ,unctualit! and deadlines are
routine business (ractices in the I$. Eo/ever' sales(eo(le /ho set definite a((ointments for sales calls in the
iddle East and Latin America /ill have a lot of time on their hands' as business (eo(le from both of these cultures
are far less bound b! time constraints. To man! of these cultures' settin* a deadline such as QI have to kno/ ne"t
/eekQ is considered (ush! and rude.
Business norms
The norms of conductin* business also var! from one countr! to the ne"t. Eere are several e"am(les of forei*n
business behavior that differ from I$ business behavior:
In %rance' /holesalers do not like to (romote (roducts. The! are mainl! interested in su((l!in* retailers
/ith the (roducts the! need.
In @ussia' (lans of an! kind must be a((roved b! a seemin*l! endless strin* of committees. As a result'
business ne*otiations ma! take !ears.
$outh Americans like to talk business Qnose to noseQ. This desire for close (h!sical (ro"imit! causes
American business (eo(le to back a/a! from the constantl! for/ard-movin* $outh Americans.
In #a(an' business(eo(le have mastered the tactic of silence in ne*otiations. Americans are not (re(ared
for this' and the! (anic because the! think somethin* has *one /ron*. The result is that Americans become
im(atient' (ush for a closure' and often make business concessions the! later re*ret.
These norms are reflected in the difficult! of introducin* the ?eb into Euro(e Jsee the ne"t Inte*rated
arketin* bo"K.
*eligious beliefs
A (ersonRs reli*ious beliefs can affect sho((in* (atterns and (roducts (urchased in addition to his<her values' as
discussed earlier. In the Inited $tates and other Christian nations' Christmastime is a ma-or sales (eriod. 6ut for
other reli*ions' reli*ious holida!s do not serve as (o(ular times for (urchasin* (roducts. ?omen do not (artici(ate
in household bu!in* decisions in countries in /hich reli*ion serves as o((osition to /omenRs ri*hts movements.
Ever! culture has a social structure' but some seem less /idel! defined than others. That is' it is more difficult to
move u(/ard in a social structure that is ri*id. %or e"am(le' in the I$' the t/o-/a*e earner famil! has led to the
develo(ment of a more affluent set of consumers. 6ut in other cultures' it is considered unacce(table for /omen to
/ork outside the home.
The (olitical<le*al environment
The (olitical<le*al environment abroad is &uite different from that of the I$. ost nations desire to become
self-reliant and to raise their status in the e!es of the rest of the /orld. This is the essence of nationalism. The
nationalistic s(irit that e"ists in man! nations has led them to en*a*e in (ractices that have been ver! dama*in* to
other countriesR marketin* or*ani0ations. %or e"am(le' forei*n *overnments can intervene in marketin* (ro*rams
in the follo/in* /a!s:
2=2
contracts for the su((l! and deliver! of *oods and services
the re*istration and enforcement of trademarks' brand names' and labelin*
(atents
marketin* communications
(ricin*
(roduct safet!' acce(tabilit!' and environmental issues
Eolitial stability
6usiness activit! tends to *ro/ and thrive /hen a nation is (oliticall! stable. ?hen a nation is (oliticall!
unstable' multinational firms can still conduct business (rofitabl!. Their strate*ies /ill be affected ho/ever. ost
firms (robabl! (refer to en*a*e in the e"(ort business rather than invest considerable sums of mone! in
investments in forei*n subsidiaries. Inventories /ill be lo/ and currenc! /ill be converted ra(idl!. The result is that
consumers in the forei*n nation (a! hi*h (rices' *et less satisfactor! (roducts' and have fe/er -obs.
Monetary irumstanes
The e/hange rate of a (articular nationRs currenc! re(resents the value of that currenc! in relation to that of
another countr!. +overnments set some e"chan*e rates inde(endentl! of the forces of su((l! and demand. The
forces of su((l! and demand set others. If a countr!Rs e"chan*e rate is lo/ com(ared to other countries' that
countr!Rs consumers must (a! hi*her (rices on im(orted *oods. ?hile the conce(t of e"chan*e rates a((ears
relativel! sim(le' these rates fluctuate /idel! and often' thus creatin* hi*h risks for e"(0rters and im(orters.
1rading blos and agreements
I$ com(anies make one-third of their revenues from (roducts marketed abroad' in (laces such as Asia and
Latin America. The ;orth American %ree Trade A*reement J;A%TAK further boosts e"(ort sales b! enablin*
com(anies to sell *oods at lo/er (rices because of reduced tariffs. @e*ional tradin* blocs re(resent a *rou( of
nations that -oin to*ether and formall! a*ree to reduce trade barriers amon* themselves. ;A%TA is such a bloc. Its
members include the I$' Canada' and e"ico. ;o tariffs e"ist on *oods sold bet/een member nations of ;A%TA.
Eo/ever' a uniform tariff is assessed on (roducts from countries not affiliated /ith ;A%TA. In addition' ;A%TA
seeks common standards for labelin* re&uirements' food additives' and (acka*e si0es.
:ne of the (otentiall! interestin* results of trade a*reements like ;A%TA is that man! (roducts (reviousl!
restricted b! dum(in* la/s' la/s desi*ned to kee( out forei*n (roducts' /ould be allo/ed to be marketed. The
(ractice of dumping involves a com(an! sellin* (roducts in overseas markets at ver! lo/ (rices' one intention
bein* to steal business from local com(etitors. These la/s /ere desi*ned to (revent (ricin* (ractices that could
seriousl! harm local com(etition. The la/s /ere desi*ned to (revent lar*e (roducers from floodin* markets /ith
ver! lo/ (riced (roducts' *ain a mono(ol!' and then raise (rices to ver! hi*h levels. In 2DD3' about B0 nations'
countin* the Euro(ean Communit! as one' had anti-dum(in* le*islation. Those in favor of a*reements ar*ue that
anti-dum(in* la/s (enali0e those com(anies /ho are ca(able of com(etin* in favor of those com(anies that are not
com(etitive.
Almost all the countries in the ?estern hemis(here have entered into one or more re*ional trade a*reements.
$uch a*reements are desi*ned to facilitate trade throu*h the establishment of a free trade area customs union or
customs market. %ree trade areas and customs unions eliminate trade barriers bet/een member countries /hile
maintainin* trade barriers /ith nonmember countries. 9ustoms Gnions maintain common tariffs and rates for
nonmember countries. A ommon mar!et (rovides for harmonious fiscal and monetar! (olicies /hile free trade
areas and customs unions do not. Trade a*reements are becomin* a *ro/in* force for trade liberali0ationG the
develo(ment of such a*reements (rovides for tremendous o((ortunities for I$ com(anies doin* business in Latin
America and ;orth America.
The creation of the sin*le Euro(ean market in 2DD1 /as e"(ected to chan*e the /a! marketin* is done
/orld/ide. It meant the birth of a market that /as lar*er than the Inited $tates' and the introduction of Euro(ean
Currenc! Inits JEurosK in (lace of the individual currencies of member nations. E"(erience in multilin*ual
marketin* /ould hel( non-Euro(ean com(anies succeed in this *i*antic market. ?ith ne/ technolo*ies such as
multilin*ual (rocessin* (ro*rams' it /ould be (ossible to tar*et (otential customers an!/here in Euro(e' in an!
lan*ua*e' and in the same marketin* cam(ai*n.
,ro*ress to/ard Euro(ean unification has been slo/-man! doubt that com(lete unification /ill ever be
achieved. Eo/ever' on 2 #anuar! 2DDD' 22 of the 2= member nations took a si*nificant ste( to/ard unification b!
ado(tin* the Euro as the common currenc!. These 22 nations re(resent 1D0 million (eo(le and a I$D >.= trillion
market. $till' /ith 2B different lan*ua*es and distinctive national customs' it is unlikel! that the EI /ill ever
become the QInited $tates of Euro(e8.
1ariffs
ost nations encoura*e free trade b! invitin* firms to invest and to conduct business there' /hile encoura*in*
domestic firms to en*a*e in overseas business. These nations do not usuall! tr! to strictl! re*ulate im(orts or
discriminate a*ainst forei*n-based firms. There are' ho/ever' some *overnments that o(enl! o((ose free trade. %or
e"am(le' man! Communist nations desire self-sufficienc!. Therefore' the! restrict trade /ith non-Communist
nations. 6ut these restrictions var! /ith East-?est relations.
The most common form of restriction of trade is the tariff' a ta" (laced on im(orted *oods. ,rotective tariffs are
established in order to (rotect domestic manufacturers a*ainst com(etitors b! raisin* the (rices of im(orted *oods.
;ot sur(risin*l!' I$ com(anies /ith a stron* business tradition in a forei*n countr! ma! su((ort tariffs to
discoura*e entr! b! other I$ com(etitors.
E/propriation
All multinational firms face the risk of e"(ro(riation. That is' the forei*n *overnment takes o/nershi( of (lants'
sometimes /ithout com(ensatin* the o/ners. Eo/ever' in man! e"(ro(riations there has been (a!ment' and it is
often e&uitable. an! of these facilities end u( as (rivate rather than *overnment or*ani0ations. 6ecause of the risk
of e"(ro(riation' multinational firms are at the merc! of forei*n *overnments' /hich are sometimes unstable' and
/hich can chan*e the la/s the! enforce at an! (oint in time to meet their needs.
2=3
1he tehnologial en,ironment
The level of technolo*ical develo(ment of a nation affects the attractiveness of doin* business there' as /ell as
the t!(e of o(erations that are (ossible. arketers in develo(ed nations cannot take man! technolo*ical advances
for *ranted. The! ma! not be available in lesser develo(ed nations. Consider some of the follo/in* technolo*icall!
related (roblems that firms ma! encounter in doin* business overseas:
%orei*n /orkers must be trained to o(erate unfamiliar e&ui(ment.
,oor trans(ortation s!stems increase (roduction and (h!sical distribution costs.
aintenance standards var! from one nation to the ne"t.
,oor communication facilities hinder advertisin* throu*h the mass media.
Lack of data (rocessin* facilities makes the tasks of (lannin*' im(lementin*' and controllin* marketin*
strate*! more difficult.
The economic environment
A nationRs economic situation re(resents its current and (otential ca(acit! to (roduce *oods and services. The
ke! to understandin* market o((ortunities lies in the evaluation of the sta*e of a nationRs economic *ro/th.
A /a! of classif!in* the economic *ro/th of countries is to divide them into three *rou(s: JaK industriali0ed' JbK
develo(in*' and JcK less-develo(ed nations. The industriali(ed nations are *enerall! considered to be the Inited
$tates' #a(an' Canada' @ussia' Australia' and most of ?estern Euro(e The economies of these nations are
characteri0ed b! (rivate enter(rise and a consumer orientation. The! have hi*h literac!' modem technolo*!' and
hi*her (er ca(ita incomes.
#e,eloping nations are those that are makin* the transition from economies based on a*ricultural and ra/
materials (roduction to industrial economies. an! Latin American nations fit into this cate*or!' and the! e"hibit
risin* levels of education' technolo*!' and (er ca(ita incomes'
%inall!' there are man! less de,eloped nations in toda!Rs /orld. These nations have lo/ standards of livin*'
literac! rates are lo/' and technolo*! is ver! limited.
Isuall!' the most si*nificant marketin* o((ortunities e"ist amon* the industriali0ed nations' as the! have hi*h
levels of income' one of the necessar! in*redients for the formation of markets. Eo/ever' most industriali0ed
nations also have stable (o(ulation bases' and market saturation for man! (roducts alread! e"istin*. The
develo(in* nations' on the other hand' have *ro/in* (o(ulation bases' and althou*h the! currentl! im(ort limited
*oods and services' the lon*-run (otential for *ro/th in these nations e"ists. De(endent societies seek (roducts that
satisf! basic needs-food' clothin*' housin*' medical care' and education. arketers in such nations must be
educators' em(hasi0in* information in their market (ro*rams. As the de*ree of economic develo(ment increases'
so does the so(histication of the marketin* effort focused on the countries.
The com(etitive environment
Enterin* an international market is similar to doin* so in a domestic market' in that a firm seeks to *ain a
differential advanta*e b! investin* resources in that market. :ften local firms /ill ado(t imitation strate*ies'
Business Fundamentals 2=B A +lobal Te"t
sometimes successfull!. ?hen the! are successful' their o/n nationRs econom! receives a *ood boost. ?hen the!
are not successful' the multinational firm often bu!s them out.
#a(anese marketers have develo(ed an a((roach to mana*in* (roduct costs that has *iven them a com(etitive
advanta*e over I$ com(etitors. A t!(ical American com(an! /ill desi*n a ne/ (roduct' then calculate the cost. If
the estimated cost is too hi*h' the (roduct /ill be taken back to the dra/in* board. In #a(an' a com(an! t!(icall!
starts /ith a tar*et cost based on the (rice that it estimates the market is most /illin* to acce(t. ,roduct desi*ners
and en*ineers are then directed to meet the cost tar*et. This a((roach also encoura*es mana*ers to /orr! less
about (roduct costs and more about the role it should (la! in *ainin* market share. 6riefl!' at #a(anese com(anies
like ;EC' ;issan' $har(' and To!ota' a team char*ed /ith brin*in* a (roduct idea to market estimates the (rice at
/hich the (roduct is most likel! to a((eal to the market. %rom this first im(ortant -ud*ment' all else follo/s. After
deductin* the re&uired (rofit mar*in from the sellin* (rice' (lanners develo( estimates of each element that make
u( the (roductRs cost: en*ineerin*' manufacturin* sales' and marketin*. I$ firms tend to build (roducts' fi*ure ho/
much it costs to build the (roduct' and then ask /hether the (roduct can be sold at a (rofitable (rice. I$ com(anies
tend not to assess /hat the market /ill be /illin* to (a!.
?hat is a com(etitive advanta*eC Eo/ does marketin* contribute to the creation of a com(etitive
advanta*eC
Describe the reasons for stud!in* marketin*.
?hat ad-ustments are necessar! as !ou a((l! marketin* (rinci(les to various cultures<countriesC
List the ste(s in the market se*mentation (rocess.
?hat is the value in conductin* formal marketin* researchC
Discuss several reasons /h! marketers continue to have a difficult time understandin*' (redictin*'
and e"(lainin* consumer behavior.
,resent a dia*ram of the consumer decision (rocess. ?hat is the role of marketin* in each sta*e of
this (rocess.
6riefl! describe the ma-or strate*ies a firm mi*ht use to enter a forei*n market.
Eo/ does the cultural environment affect international marketin* activitiesC
?h! is marketin* critical to the success of a businessC
@eferences
2 #itionary of Mar!eting 1erms' ,eter D. 6ennett' Ed.' American arketin* Association' 2D55 (. =B.
1 QA ;e/ @eci(e for the %amil! Dinner'Q .dwee!' A(ril 19. 2DD1' (. B>.
3 Theodore Levitt' Qarketin* !o(ia'Q Aar,ard Business *e,iew' #ul!-Au*ust' 2D>0' ((. B=->>.
B $helb! D. Eunt and #ohn #. 6urnett' QThe acromarketin*<icro marketin* Dichotom!: A Ta"onomical
odel'Q #ournal of arketin*' $ummer. 2D51 ((. 22-1>.
2==
ore references
2
Isobel Doole' @obin Lo/e' and Chris ,hilli(s' 2nternational Mar!eting +trategy' International Thom(son
6usiness ,ress: London' 2DDD' ((. 2B-2=.
1
Theodore Levitt. QThe +lobali0ation of arkets.Q Aar,ard Business *e,iew. a!-#une 2D53' ((. D1-201.
3
,hili( Hotler' Q+lobal $tandardi0ation-Courtin* Dan*er'Q Hournal of 9onsumer Mar!eting' Mol. 3' ;o.1'
$(rin*' 2D5>' ((. 23-10.
B
$. 6arker and E. Ha!nak' QAn Em(irical Investi*ation of the Differences 6et/een Initiatin* and Continuin*
E"(orters'Q European Hournal of Mar!eters' Mol. 1>' ;o.3' 2DD1.
=
Ibid.
>
Anne Chen and alt Eicks' Q+oin* +lob Avoid Culture Clashes'Q E9 Wee!' A(ril 3' 1000' ((. >5->D.
9
6arker and Ha!nak' o(. cit.
5
Eileen Cassid! Imbach' QI$ Commercial Centers: The %uture of Doin* 6usiness Abroad'Q Business .meria'
;ovember' 2DDB' ((.1=-1>.
D
ichael $el0' Qore $mall %irms Are Turnin* to Trade Intermediaries'Q 1he Wall +treet Hournal' %ebruar!
1' 2DD=' (. 61.
20
#ulia %lunn and @ A. elcher' QEeinekenRs 6attle to $ta! To( 6ottle'Q Business Wee!' Au*ust 2' 2DD5' ((.
>0->1.
22
?arren #. Hee*an' QConce(tual %rame/ork for ultinational arketin*'Q 9olumbia Hournal of World
Business' Mol. 9' ;ovember 2D93' (.>9.
21 TT ;a*le' The $trate*ies and Tactics of ,ricin*' ,rentice-Ean' Inc. En*le/ood Cliffs' ;.#.' 2DDD.
Business Fundamentals 2=> A +lobal Te"t
<. *perations manaement
Editor: ichael # ,esch J$t Cloud Iniversit!' I$AK
Reviewer: @onald % %arina JDaniels Colle*e of 6usiness' Iniversit! of Denver' I$AK
Learnin* ob-ectives:
understand the role of o(erations mana*ement in or*ani0ations
differentiate bet/een strate*ic and tactical o(erations decisions
describe the ke! o(erations mana*ement decisions faced b! mana*ers
understand three of the most im(ortant o(erations mana*ement (ractices: Total Fualit! ana*ement'
$u((l! Chain ana*ement' and #ust-in-Time<Lean :(erations
/hat is operations manaement5
Operations management is the mana*ement of (rocesses that transform in(uts into *oods and services that
add value for the customer. The *oal of o(erations mana*ement is to ma"imi0e efficienc! /hile (roducin* *oods
and services that effectivel! fulfill customer needs. %or e"am(le' if an or*ani0ation makes furniture' some of the
o(erations mana*ement decisions involve the (urchasin* of /ood and fabric' the hirin* and trainin* of /orkers'
the location and la!out of the furniture factor!' and the (urchase of cuttin* tools and other fabrication e&ui(ment.
If the or*ani0ation makes *ood o(erations decisions' it /ill be able to (roduce affordable' functional' and attractive
furniture that customers /ill (urchase at a (rice that /ill earn (rofits for the com(an!.
In another e"am(le' the o/ners of a restaurant must make im(ortant decisions re*ardin* the location' la!out'
and seatin* ca(acit! of the restaurant' the hirin*' trainin*' and schedulin* of chefs and servers' the su((liers of
fresh food at the ri*ht (rices' and the (urchase of stoves' refri*erators' and other food (re(aration e&ui(ment. If
the restaurant o/ners make *ood o(erations decisions' the! /ill be able to meet their customersA needs for
delicious and affordable food that is served in a (leasin* atmos(here. The o/ners in turn /ill be able to char*e a
(rice that earns a (rofit and allo/s the restaurant to sta! in business.
:ne of three strate*ic functions
Operations is one of the three strate*ic functions of an! or*ani0ation. This means that it is a vital (art of
accom(lishin* the or*ani0ationAs strate*! and ensurin* its lon*-term survival. The other t/o areas of strate*ic
im(ortance to the or*ani0ation are marketing and finance. %or e"am(le' a com(an! that makes team -erse!s for
s(ort teams must have stron* marketing abilit! to identif! *rou(s of customers' understand their needs' and
communicate /ith them to /in their business. The com(an! must also mana*e its finances so it can (a! for
buildin* and e&ui(ment e"(enses' bank loans' /orker /a*es' and su((lies. %inall!' the com(an! must have stron*
operations skills so it can (rovide customi0ed team -erse!s that are attractive' durable' affordable and delivered
on time to the customer.
+. ,perations management
The o(erations strate*! should su((ort the overall or*ani0ation strate*!. %or e"am(le' #et6lue airlines is a
successful airline that has an or*ani0ation strate*! of (rovidin* hi*h-value air trans(ortation service to travelers.
#et6lue strives to (rovide fun' comfortable' and safe air service to (o(ular destinations at a (rice that middle-
income (assen*ers can afford. +iven #et6lueAs or*ani0ation strate*!' #et6lue features an o(erations strate*! that
focuses on lo/ costs' com(etent and service-oriented em(lo!ees' and reliable aircraft.
#et6lueAs o(erations strate*! is driven b! its or*ani0ation strate*!. %or e"am(le' #et6lue locates J7location8 is an
o(erations decision areaK its main trans(ortation hub in ;e/ 3ork Cit!' a cit! of 2D million (eo(le that hel(s ensure
that #et6lueAs (lanes fl! at full ca(acit!. In the area of e&ui(ment decisions' #et6lue o(erates onl! one t!(e of
aircraft' the Airbus 330. The Airbus 330 has hi*h (assen*er carr!in* ca(acit! Jto ma"imi0e revenueK' (rovides *ood
fuel econom! and re&uires onl! t/o (ilots Jversus threeK to o(erate. Eavin* one t!(e of aircraft reduces trainin*
costs for (ilots and mechanics' reduces investments in (arts inventories' and enables #et6lue to ne*otiate *reater
discounts on hi*h-volume (urchases from Airbus. In another ke! o(erations area' #et6lue (a!s careful attention to
hirin*' trainin*' and com(ensatin* em(lo!ees /ho can deliver e"cellent service' lo!alt!' and hi*h levels of
(roductivit!.
In addition to an o(erations strate*!' #et6lue also has financial and marketin* strate*ies that su((ort its
or*ani0ation strate*!. :ne (art of its financial strate*! is securin* sufficient amounts of ca(ital to hel( the start-u(
airline establish reliable service and *ain a lo!al clientele. #et6lueAs marketin* strate*! kee(s advertisin* costs
under control b! attractin* free media (ublicit! that em(hasi0es its fun and affordable airline service.
$trate*ic versus tactical o(erations decisions
:(erations decisions include decisions that are strategic in nature' meanin* that the! have lon*-term
conse&uences and often involve a *reat deal of e"(ense and resource commitments. Strategic o(erations
decisions include facilit! location decisions' the t!(e of technolo*ies that the or*ani0ation /ill use' determinin* ho/
labor and e&ui(ment are or*ani0ed' and ho/ much lon*-term ca(acit! the or*ani0ation /ill (rovide to meet
customer demand.
%or e"am(le' the leaders of a ne/ hos(ital must decide /here to locate the facilit! to be accessible to a lar*e
number of (otential (atients. Eos(ital administrators must evaluate the (erformance and cost of a /ide variet! of
health e&ui(ment. Administrators must also assess and (urchase information technolo*ies to kee( (atient records'
fulfill *overnment re*ulations' (rovide accurate and timel! communications' and track financial (erformance.
Doctors' nurses' and staff must be hired and various de(artments J"-ra!' lab' (harmac!' (h!sical thera(!' etc.K
must be arran*ed to ma"imi0e both efficienc! and effectiveness in (atient care.
Tactical o(erations decisions have short to medium term im(act on the or*ani0ation' often involve less
commitment of resources' and can be chan*ed more easil! than strate*ic decisions. Tactical decisions include
/orkforce schedulin*' establishin* &ualit! assurance (rocedures' contractin* /ith vendors' and mana*in*
inventor!. In the hos(ital e"am(le' schedulin* the /orkforce to match (atient admissions is critical to both
(rovidin* &ualit! care and controllin* costs. $electin* a food service vendor is im(ortant to servin* both em(lo!ees
and (atients. Ensurin* that the ri*ht dru*s and su((lies are on hand is achieved b! /orkin* closel! /ith vendors in
the su((l! chain.
2=5
:(erations mana*ement (rovides com(etitive advanta*e4
$trate*ic and tactical o(erations decisions determine ho/ /ell the or*ani0ation can accom(lish its *oals. The!
also (rovide o((ortunities for the or*ani0ation to achieve uni&ue com(etitive advanta*es that attract and kee(
customers.
%or e"am(le' Inited ,arcel $ervice' an international (acka*e deliver! service' formed a (artnershi( /ith its
customer' Toshiba com(uters. Toshiba needs to (rovide a re(air service to its la(to( com(uter customers. The old
a((roach of (rovidin* this service /as cumbersome and time-consumin*: J2K Customers had (ick u( their
com(uters' J1K delivered the com(uters to Toshiba' J3K Toshiba re(aired the com(uters' JBK (icked u( the re(aired
com(uters and delivered them back to the customers. Inder this traditional a((roach' the total time to *et a la(to(
com(uter re(aired /as t/o /eeksYa lon* time for (eo(le to be /ithout their la(to(4 Then the! came u( /ith an
innovative idea for Toshiba to (rovide better service to its customers. Inited ,arcel $ervice hired' trained' and
certified its o/n em(lo!ees to re(air Toshiba la(to( com(uters. The ne/ re(air (rocess is much more efficient: J2K
(icks u( com(uters from Toshiba o/ners' J1K re(airs the com(uters' J3K delivers the com(uters back to their
o/ners. The total time to *et a com(uter re(aired is no/ about t/o da!s. ost Toshiba customers think that
Toshiba is doin* a *reat -ob of re(airin* their com(uters' /hen in fact Toshiba never touches the com(uters4 The
result of this o(erations innovation is better service to Toshiba customers and a stron* and (rofitable strate*ic
(artnershi( bet/een and its customer' Toshiba.
The input-output transformation model
:(erations mana*ement transforms in(uts Jlabor' ca(ital' e&ui(ment' land' buildin*s' materials and informationK
into out(uts J*oods and servicesK that (rovide added value to customers. E"hibit 19 summari0es the transformation
(rocess. The arro/ labeled 7Transformation $!stem8 is the critical element in the model that /ill determine ho/
/ell the or*ani0ation (roduces *oods and services that meet customer needs. It does not matter /hether the
or*ani0ation is a for-(rofit com(an!' a non-(rofit or*ani0ation Jreli*ious or*ani0ations' hos(itals' etc.K' or a
*overnment a*enc!G all or*ani0ations must strive to ma"imi0e the &ualit! of their transformation (rocesses to meet
customer needs.
Business Fundamentals 2=D A +lobal Te"t
E"hibit 19: E"am(le of t!(ical transformation (rocess
The 3 Com(an! is a *ood e"am(le of the strate*ic im(ortance of transformin* in(uts into out(uts that (rovide
com(etitive advanta*e in the market(lace. 3 manufactures a to(-&ualit! adhesive ta(e called 7a*ic Ta(e8. a*ic
Ta(e is used for ever!da! ta(in* a((lications' but it offers attractive features that most other ta(es do not'
includin* smooth removal from the ta(e roll' an adhesive that is stick! enou*h to hold items in (lace Jbut not too
stick! that it can not be removed and read-usted if necessar!4K' and a non-reflective surface. %or several decades'
3 has en-o!ed a substantial (rofit mar*in on its a*ic Ta(e (roduct because 3 en*ineers make the
manufacturin* e&ui(ment and desi*n the manufacturin* (rocesses that (roduce a*ic Ta(e. In other /ords' 3
en-o!s a commandin* com(etitive advanta*e b! controllin* the transformation (rocesses that turn ra/ material
in(uts into the hi*h value-added a*ic Ta(e (roduct. Controllin* the transformation (rocess makes it e"tremel!
difficult for com(etitors to (roduce ta(e of the same &ualit! as a*ic Ta(e' allo/in* 3 to rea( si*nificant (rofits
from this su(erior (roduct.
An o((osite e"am(le of the strate*ic im(lications of the in(ut<out(ut transformation (rocess is 3As decision in
the 2D50s to sto( manufacturin* ME$ ta(e for video (la!ers and recorders. In the ME$ ta(e market 3 had no
(ro(rietar! manufacturin* advanta*e' as there /ere man! Asian com(etitors that could (roduce hi*h-&ualit! ME$
ta(e at lo/er cost. $ince 3 had no (ro(rietar! control over the transformation (rocess for ME$ ta(e that /ould
allo/ the com(an! to (rotect its (rofit mar*ins for this (roduct' it dro((ed ME$ ta(e from its offerin*s. The t/o 3
e"am(les of a*ic Ta(e and ME$ ta(e sho/ ho/ im(ortant the transformation (rocess and o(erations
mana*ement can be to (rovidin* and (rotectin* an or*ani0ationAs com(etitive advanta*e.
A service e"am(le of the strate*ic im(ortance of the transformation (rocess is I;+ 6ank' a bankin* com(an!
that conducts all bankin* transactions throu*h the Internet' (hone' and mail. I;+ maintains no traditional bank
facilities' e"ce(t for the buildin*s that house the em(lo!ees that e"ecute remote transactions /ith I;+As customers.
This strate*! results in tremendous cost savin*s and com(etitive advanta*e to I;+ b! not havin* to s(end ca(ital
2>0
resources on land and buildin*s that traditional banks must s(end. Conse&uentl!' I;+ can offer its customers
hi*her interest rates on savin*s accounts and lo/er interest rates on loans.
*perations decisions
Countless o(erations decisions that have both lon*-term and short-term im(acts on the or*ani0ationAs abilit! to
(roduce *oods and services that (rovide added value to customers must be made. If the or*ani0ation has made
mostl! *ood o(erations decisions in desi*nin* and e"ecutin* its transformation s!stem to meet the needs of
customers' its (ros(ects for lon*-term survival are *reatl! enhanced. a-or o(erations decisions areas include
inventor!' ca(acit!' &ualit!' schedulin*' (rocess t!(e' technolo*!' location' la!out' and su((l! chain mana*ement.
Each of these nine decision areas /ill be discussed in this section.
Inventor! decisions
The ke! &uestion that must be ans/ered for inventor! is 7Eo/ muchC8 Inderstandin* the best inventor! levels
to carr! is critical to the or*ani0ation because too much inventor! and too little inventor! are both costl! to the
or*ani0ation. Inventor! that e"ceeds /hat is needed to satisf! customer demand im(oses unnecessar! costs such as
stora*e' deterioration' obsolescence' theft' and mone! tied u( in inventor! that cannot be used for other (ur(oses.
Too little inventor! means the or*ani0ation cannot meet 200 (er cent of its customer demand and sales revenues
are dela!ed or lost.
%or e"am(le' a restaurant that s(eciali0es in servin* fresh fish needs to make careful (urchasin* decisions so it
has enou*h fresh fish each da! to serve its customers' but not so much that unsold fish must be severel! discounted
or discarded at the end of the da!. Com(uter com(anies such as Dell must carefull! mana*e its com(uter chi(
inventor! so it can meet current customer orders' but not be stuck /ith too much inventor! if a ne/ com(uter chi(
comes out or if vendors reduce (rices.
Ca(acit! decisions
The &uestion mana*ers must ans/er for the ca(acit! decision area is the same as the &uestion for inventor!:
7Eo/ muchC8 Determinin* the or*ani0ationAs ca(acit! to (roduce *oods and services involves both lon*-term and
short-term decisions. -ong-term ca(acit! decisions involve facilities and ma-or e&ui(ment investments. In 1009'
Airbus introduced its $u(er #umbo #et that carries u( to 5=0 (assen*ers and costs I$D 3 billion. The $u(er #umbo
(rovides hu*e amounts of (assen*er carr!in* ca(acit!' but before an airline (urchases this -et' it needs to decide if
it has enou*h (assen*ers to *enerate the revenue to (a! for the (lane and earn (rofits for the airline. A lar*e sin*le
air(lane like the $u(er #umbo ma! not be the ri*ht ca(acit! decision for an airline that serves numerous medium
si0ed cities. :n the other hand' an airline that serves (assen*ers travelin* bet/een ;e/ 3ork Cit!' I$A and
$han*hai' China mi*ht find the $u(er #umbo to be a (erfect choice for meetin* demand because of the lar*e
(o(ulations in each cit!.
Ca(acit! decisions also involve short-term situations. In a *rocer! store' the number of customers that need to
(a! for their *roceries at an! one (oint durin* the da! /ill var! si*nificantl!. To (rovide *ood customer service'
mana*ers must make sure that sufficient cash re*isters and em(lo!ees are on hand to meet check-out demand.
$imilarl!' hotels must make sure that the! have enou*h em(lo!ees to re*ister arrivin* *uests' to clean hotel rooms'
and to (rovide food and bevera*es to customers. These decisions must be made carefull! to avoid e"cessive labor
costs from havin* too man! em(lo!ees for the number of customers bein* served.
Business Fundamentals 2>2 A +lobal Te"t
Fualit! decisions
The decision relatin* to &ualit! is not 7ho/ much8 &ualit! to have. If asked /hether the! su((ort hi*h &ualit! in
their or*ani0ation' virtuall! all mana*ers /ill res(ond enthusiasticall! that the! full! su((ort hi*h &ualit!4 @ather'
the &ualit! of *oods and services is determined b! numerous decisions throu*hout the or*ani0ation that have both
lon*-term and short-term conse&uences for the or*ani0ationAs &ualit! (erformance.
%or e"am(le' /hile all mana*ers ma! sa! the! su((ort &ualit!' ho/ man! /ill su((ort the ca(ital e"(enditure to
(urchase ne/ e&ui(ment that can meet ti*hter tolerance re&uirements more consistentl!C Eo/ man! mana*ers
/ill s(end mone! to send their en*ineers out into the field to talk to customers to better understand necessar!
(roduct (erformance standardsC Eo/ man! mana*ers /ill send teams of &ualit! en*ineers to su((lier facilities to
assist su((liers /ith their &ualit! (ro*ramsC Eo/ much attention and resources does mana*ement *ive to
em(lo!ee skill develo(ment and trainin* in the use of &ualit! tools and in the (hiloso(h! of defect (reventionC The
outcome of these decisions /ill most certainl! affect an or*ani0ationAs abilit! to (roduce outstandin* &ualit! in
(roducts and services.
%or e"am(le' in the air trans(ortation industr!' the (revention of crashes is obviousl! somethin* that ever!one
su((orts. 3et' for the (ast t/o decades in the Inited $tates' the (ress has re(orted on the /eaknesses and ne*lect
of the I$ air traffic control technolo*! that (la!s a critical role in air travel safet!. :ne mi*ht conclude that
althou*h ever!one su((orts safet! in air travel' more investment in modern technolo*! and better decision makin*
is needed to ensure the lon*-term safet! of air trans(ortation. Mirtuall! all or*ani0ations are faced /ith similar
decision-makin* scenarios /hen it comes to the factors that determine &ualit! (erformance.
Another e"am(le is in the health care industr! /here one critical measure is the number of sur*eries /here
forei*n ob-ects Js(on*es' instruments' etc.K are left in sur*er! (atients. $uch incidents are considered to be a
serious oversi*ht and totall! unacce(table. In recent !ears' hos(itals have develo(ed (rocesses for (reventin* these
mistakes. In one a((roach' a member of the sur*ical staff tracks ever! ob-ect that enters the bod! cavit! durin*
sur*er!' then checks that ob-ect off /hen it is removed from the cavit!. An! ob-ect that can not be accounted for
tri**ers an ins(ection of the cavit!' and (erha(s an "-ra! to hel( find the item before the incision is closed.
Fualit! im(rovement efforts re&uire a *reat deal of anal!sis and team/ork' as /ell as a determined effort to
make &ualit! a to( (riorit! in the or*ani0ation. Im(rovin* &ualit! re&uires ever!one to ado(t a 7continuous
im(rovement8 (hiloso(h!' /here ever!one a((roaches their /ork /ith the vie/ that there are al/a!s o((ortunities
to im(rove on the or*ani0ationAs ke! (erformance measures. Continuous im(rovement efforts are com(le"'
multidimensional' and re&uire (artnershi(s amon* /orkers' mana*ement' su((liers' and customers.
$chedulin* decisions
$chedulin* is an o(erations decision that strives to (rovide the ri*ht mi" of labor and machines to (roduce
*oods and services at the ri*ht time to achieve both efficienc! and customer service *oals. %or e"am(le' a hotel must
antici(ate the (eaks and valle!s in demand that ma! occur durin* a da!' durin* the /eek' and at different times of
the !ear. Labor Jfront desk clerks' room service (ersonnel' housekee(ers' bellho(s' etc.K must be scheduled
carefull! to meet customer demand at an! *iven time' /ithout schedulin* e"cess em(lo!ees that /ould im(ose
unnecessar! costs on the hotel. In a hos(ital settin*' schedulin* sur*eries is a ver! im(ortant activit!. $ur*eons'
nurses' su((ort staff' e&ui(ment' su((lies' and o(eratin* rooms must be scheduled carefull! so (atient sur*eries
2>1
can be conducted effectivel! and efficientl!. At colle*es and universities' schedulin* the ri*ht courses /ith the ri*ht
number of classroom seats at the ri*ht times is critical to allo/in* students to *raduate on time.
,rocess decisions
ana*ers must decide ho/ to or*ani0e e&ui(ment and labor to achieve the com(etitive *oals of the
or*ani0ation. There are t/o basic choices for or*ani0in* the /ork(lace to (roduce *oods and services: J2K
intermittent (rocesses' and J1K re(etitive (rocesses.
Intermittent (rocesses or*ani0e labor and e&ui(ment into de(artments b! similarit! of function to serve a
/ide variet! of (roduction re&uirements. %or e"am(le' a health care clinic must cater to the individual needs of
ever! (atient /ho enters the clinic for treatment. :ne (atient ma! have a broken ankle' /hile another (atient ma!
be a (re*nant /oman /ho needs a (renatal care checku(. :ne (atient ma! be a bab! /ith a fever' /hile another
(atient ma! be *ettin* a (rescri(tion medication refilled. The (rimar! or*ani0ational *oal for a health clinic is
effeti,eness in treatin* the individual needs of each (atient' and an intermittent (rocess is often the most suitable
/a! to or*ani0e labor and e&ui(ment to (rovide customi0ed treatment for each individual (atient. L-ra! e&ui(ment
and technicians are or*ani0ed into an 7L-ra! De(artment8. :ther de(artments are created for (ediatrics' lab'
*!necolo*!' (harmac!' (h!sical thera(!' and man! more. ,atients are routed onl! to the de(artments that are
needed for their (articular treatment re&uirements. This (roduction (rocess is called an 7intermittent8 (rocess'
because the activit! of each de(artment ha((ens intermittentl! at irre*ular intervals' de(endin* on the (articular
needs of different (atients JcustomersK at different (oints in time.
Intermittent (rocesses are also used in manufacturin* o(erations /here a /ide variet! of (roducts are
manufactured' or /here (roducts are made to customer s(ecifications. E&ui(ment and labor can be or*ani0ed into
de(artments such as drillin*' (unch (ress' lathe' machinin*' (aintin*' heat treatin*' moldin*' etc. @a/ materials
and com(onents are routed throu*h the facilit! accordin* to the t!(e and order of manufacturin* activities
necessar! to (roduce the finished items. E"hibit 15 illustrates ho/ t/o different (roducts' 7A>38 and 76=8 make
their /a! throu*h an intermittent (rocess la!out.
E"hibit 15: Intermittent (rocess flo/s
Repetitive (rocesses are used to (roduce identical or ver! similar (roducts in hi*h volumes. E&ui(ment and
labor are or*ani0ed in a line flo/ arran*ement to meet ver! s(ecific customer or (roduct (rocessin* re&uirements.
E"am(les include assembl! lines that (roduce (roducts such as com(uters' cars' hambur*ers' automatic car
/ashes' and cafeteria lines. In all of these cases' the (roducts or customers follo/ the same (roduction ste(s to
(roduce a standardi0ed outcome. $ince the (roduction re&uirements to (roduce each unit of out(ut are so /ell
understood' there are man! o((ortunities to achieve hi*h levels of efficienc! in re(etitive (rocess environments.
Effiieny is a ke! *oal in re(etitive (rocess environments. Investments in automation and technolo*! are
financiall! -ustified because the hi*h volume of (roduction s(reads out the investment cost over more
items<customers.
A (a(er mill is a *ood e"am(le of a re(etitive (rocess. The manufacturin* re&uirements are /ell-understood'
ca(ital investment in automation is hi*h' and (roduction volume is e"tremel! hi*h to kee( unit (roduction costs as
lo/ as (ossible.
E"hibit 1D re(resents an e"am(le of a re(etitive (rocess for (roducin* a (roduct such as a small a((liance'
/here ra/ materials and com(onents are assembled to each unit at different sta*es of (roduction. The units flo/
throu*h the facilit! in a uniform (attern until the! are com(leted and shi((ed to the customer.
E"hibit 1D: ,roduct flo/ in a re(etitive (rocess
The t/o main differences bet/een the intermittent and re(etitive (rocesses are (roduct variet! and (roduct
volume.
Intermittent (rocesses are ver! fle"ible in meetin* the individual re&uirements of different (roducts or
customers' but the! tend to be ver! inefficient' /ith hi*h amounts of /aitin* time' /ork in (rocess inventories' and
s(ace re&uirements. @e(etitive (rocesses are ver! efficient at reducin* unit (roduction costs' /aitin* time' and
inventories' but the! are not ver! fle"ible in accommodatin* hi*h (roduct<customer variet!. A com(romise solution
is the cellular (rocess la!out that ca(tures the advanta*es of both intermittent and re(etitive (rocesses.
A cellular (rocess arran*es dissimilar machines and e&ui(ment to*ether in a line that is dedicated to (roducin*
a s(ecific famil! of (roducts that have similar (rocessin* re&uirements. 6! settin* u( multi(le dedicated cells' the
facilit! can efficientl! (roduce a /ide variet! of (roducts JE"hibit 30K. $ince the (roducts /ithin a famil! have
similar (roduction re&uirements' e&ui(ment setu( times' inventories' and lot si0es can be ke(t to a minimum. The
cellular a((roach allo/s each (roduct to be sent throu*h the manufacturin* (rocess one (iece at a time' accordin*
to the immediate set of customer orders. It (rovides /orkers the fle"ibilit! to chan*e a (roduct or customi0e it in
some /a! in res(onse to s(ecific customer re&uirements. The cells are usuall! arran*ed in a I sha(e. This enables
one /orker to vie/ multi(le machines simultaneousl! and (uts all machines /ithin eas! reachin* distance. Cellular
(rocesses minimi0e c!cle times and enable the or*ani0ation to maintain hi*her levels of (roduct volumes' variet!'
and customi0ation.
2>B
E"hibit 30: Cellular La!outs
Technolo*! decisions
There are man! benefits that technolo*! can brin* to an o(erations environment. Automated machiner!'
(ro*rammable e&ui(ment' and mana*ement information s!stems can (rovide s(eed' lo/ unit (rocessin* costs'
labor cost savin*s' increased accurac! and consistenc!' and so(histicated trackin* and decision su((ort s!stems to
increase o(erations efficienc! and effectiveness for both manufacturin* and service environments. The main
dra/back in man! technolo*! decisions is the hi*h fi"ed cost of (urchasin* and im(lementin* the ne/ s!stems. If
mistakes are made in technolo*! (urchases' it can severel! im(act the fortunes of the com(an!.
ana*ers are often biased in favor of ado(tin* leadin* ed*e technolo*!' es(eciall! if the! see their com(etitors
ado(tin* it. %inancial -ustifications for (urchasin* ne/ technolo*! are often overl! o(timistic in estimations of
(a!back (eriods' the costs of im(lementation' and the actual *ains in overall (roductivit! the firm /ill en-o!.
The challen*e for mana*ers in technolo*! is selectin* the ri*ht technolo*! for the ri*ht a((lication. %or e"am(le'
if a manufacturin* com(an! believes that automation /ill increase the firmAs fle"ibilit! to ada(t to a chan*in*
com(etitive environment' &uestions should be asked' such as:
?hat t!(e of fle"ibilit! does the com(an! need to thriveC
Does it need to &uickl! s/itch (roduction across a /ide variet! of (roducts J(roduct mi" fle"ibilit!KC
Does it need to &uickl! (roduce ne/ (roducts for a ra(idl! chan*in* market(lace J(roduct develo(ment
fle"ibilit!KC
Does it need to be able to &uickl! ram( u( (roduction durin* times of hi*h demand' and &uickl! scale do/n
(roduction /hen c!clical or seasonal demand hits do/nturns Jvolume fle"ibilit!KC
Deere U Co manufactures machiner! for the hi*hl! c!clical a*ricultural and construction industries. :ne of the
reasons for DeereAs success over the man! decades is its abilit! to kee( its technolo*! e"(enditures under control so
it can /eather the inevitable declines in demand for its (roducts. Deere mana*ers use a mi" of lo/
technolo*!<labor intensive (roduction methods and automated<(ro*rammable technolo*ies in its manufacturin*
(lants. Careful technolo*! decision makin* is a ma-or reason /h! Deere U Co continues to thrive in s(ite of its
hi*hl! volatile markets.
Business Fundamentals 2>= A +lobal Te"t
Location decisions
There are man! factors that can determine /here an or*ani0ation /ill locate its facilities. %or an! *iven
situation' some factors become more im(ortant than others in ho/ facilit! location affects an or*ani0ationAs
efficienc! and effectiveness.
.ro5iity to $ource$ o! $upply: %irms that (rocess bulk ra/ materials usuall! locate close to the source
of su((l! to reduce trans(ortation costs. ,a(er mills locate close to forests' canneries are built close to
farmin* areas' and fish (rocessin* (lants are located close to the harbors /here the fishin* vessels dock.
.ro5iity to cu$toer$: There are several reasons /h! an or*ani0ation /ould locate close to end
customers. $ervice firms need to be close to customers to be convenient' as is the case for *rocer! stores'
*as stations' fast food restaurants' and hos(itals. Trans(ortation costs can also re&uire (ro"imit! to
customers' as in the case of concrete manufacturin*. ,erishable (roducts often re&uire that the! be
(roduced close to the final market' as is the case for bakeries and fresh flo/ers.
Counity !actor$: Communities ma! offer a number of incentives to entice com(anies' includin*
/aivin* or reducin* ta"es' and (rovidin* access roads' /ater and se/er connections' and utilities.
Communit! attitudes can also (la! a role in an or*ani0ationAs location decision. $ome communities ma!
activel! discoura*e com(anies that mi*ht brin* more (ollution' noise' and traffic to the area. $ome
communities ma! not /ant a (rison to be located in their communit!. :ther communities ma! /elcome
such firms because of the -obs' ta" revenues' and economic diversit! the! (romise.
6abor !actor$: @esearch sho/s that the ma-orit! of location decisions are lar*el! based on labor factors'
since labor is a critical variable for man! firms. Labor factors include the (revailin* /a*e rate in a
communit! for similar -obs' the su((l! of &ualified /orkers' and the avera*e education level of the local
(o(ulation J(ercenta*e of hi*h school *raduates' etc.K. :ther labor factors can include the de*ree of union
or*ani0in* and the *eneral /ork ethic of a communit!' as /ell as other measures of absenteeism and
/orker lon*evit! in a -ob can (la! stron* roles /hen a firm makes a location decision.
4ther !actor$: an! other factors can (la! a role in the location decision' includin* &ualit! of life Jcrime
rates' *ood schools' climate' and recreation o(tionsK' access to ma-or trans(ortation arteries' construction
costs' (ro"imit! of the com(etition' and o((ortunities for future e"(ansion. As mentioned earlier' the
im(ortance of an! location factor can var! *reatl!' de(endin* on the circumstances of the decision.
In the 2DD0s' CI' a ma-or I$ telecommunications com(an!' decided to relocate its en*ineerin* services
division from CIAs head&uarters in ?ashin*ton DC to Colorado $(rin*s' Colorado to reduce labor and facilit!
costs. The decision /as lar*el! unsuccessful due to the hi*h costs of em(lo!ee relocation and the fact that much of
the ethnicall! diverse en*ineerin* /orkforce did not /ant to live in Colorado $(rin*s. Inlike ?ashin*ton DC'
Colorado $(rin*s did not have cultural diversit! to match /ith its diverse and hi*hl! educated /orkforce' it lacked
em(lo!ment o(tions for s(ouses' and the /ork ethic /as more rela"ed due to the beautiful natural settin* that
(rovided unlimited o(tions for outdoor recreation. In short' if CI had (ut more effort into researchin* ho/ /ell
the Colorado $(rin*s location matched its strate*ic re&uirements' it (robabl! could have saved itself millions of
dollars and a *reat deal of internal disru(tion to the or*ani0ation.
2>>
Cha(ter summar!
:(erations mana*ement is a strate*ic function of the or*ani0ation that (roduces the *oods and services that are
offered to the customer. :(erations decisions determine ho/ /ell these *oods and services meet the needs of the
or*ani0ationAs tar*et market' and conse&uentl!' /hether the or*ani0ation /ill be able to survive over the lon* term.
This cha(ter concludes /ith discussions of three 7$(ecial to(ics8 in o(erations mana*ement that deserve s(ecial
attention because the! are /idel! ackno/led*ed as 7best (ractices8 for successful or*ani0ations. The! include Total
Fualit! ana*ement' $u((l! Chain ana*ement' and #ust-In-Time<Lean :(erations.
%pecial topic: Total =uality Manaement
Total Fualit! ana*ement JTFK is the or*ani0ation-/ide mana*ement of &ualit! that includes facilities'
e&ui(ment' labor' su((liers' customers' (olicies' and (rocedures. TF (romotes the vie/ that &ualit!
im(rovement never ends' &ualit! (rovides a strate*ic advanta*e to the or*ani0ation' and 0ero defects is the &ualit!
*oal that /ill minimi0e total &ualit! costs. ?hile this s(ecial to(ic on TF is not a com(rehensive discussion of all
as(ects of TF' several ke! conce(ts /ill be discussed.
Fualit! costs
An im(ortant basis for -ustif!in* TF (ractice is understandin* its im(act on total &ualit! costs. TF is rooted
in the belief that (reventin* defects is chea(er than dealin* /ith the costs of &ualit! failures. In other /ords' total
&ualit! costs are minimi0ed /hen mana*ers strive to reach 0ero defects in the or*ani0ation. The four ma-or t!(es of
&ualit! costs are (revention' a((raisal' internal failure' and e"ternal failure.
Prevention costs are the costs created from the effort to reduce (oor &ualit!. E"am(les are desi*nin* the
(roducts so that the! /ill be durable' trainin* em(lo!ees so the! do a *ood -ob' certif!in* su((liers to ensure that
su((liers (rovide &ualit! in (roducts and services' conductin* (reventive maintenance on e&ui(ment' and
documentin* &ualit! (rocedures and im(rovements. In a traditional or*ani0ation that does not (ractice TF'
(revention costs t!(icall! com(rise the smallest (ercenta*e of total &ualit! costs.
A *ood e"am(le of *ood (roduct desi*n occurs in all Eonda (roducts. Eonda (roduces a /ide variet! of items
includin* automobiles' ATMs' en*ines' *enerators' motorc!cles' outboard motors' sno/ blo/ers' la/n and *arden
e&ui(ment' and even more items. To sa! the least' Eonda en*ines last a lon* time. %or e"am(le' Eonda Accords
t!(icall! run for /ell over 100'000 miles.
Em(lo!ee trainin* is also a ver! im(ortant (revention cost. %or instance' em(lo!ees in a ve*etable<fruit
(acka*in* /arehouse need to kno/ /hat a bad ve*etable<fruit looks like' since customers /ill not /ant to find
s(oiled (roduce in the store. Life*uards at a s/immin* (ool must kno/ (ro(er (rocedures for kee(in* s/immers
safe. In man! circumstances in both manufacturin* and service businesses' the trainin* of em(lo!ees can make an
enormous difference in (reventin* defects.
$u((lier selection and certification are critical (revention activities. A (roduct or service is onl! as *ood as the
su((liers /ho (artner /ith an or*ani0ation to (rovide the ra/ materials' (arts and com(onents' and su((ortin*
services that make u( the final (roducts and services that the end customers receive. %or e"am(le' a home
furnishin*s store mi*ht use an outside subcontractor to install car(etin*' but if the subcontractor fails to sho/ u(
on time' tracks mud into the customerAs home' or behaves in a rude manner' the storeAs re(utation /ill suffer.
$imilarl!' a car manufacturer /ho (urchases defective tires from a su((lier risks incurrin* hi*h costs of recalls and
la/suits /hen the defects are discovered.
,reventive maintenance is necessar! for (reventin* e&ui(ment breakdo/ns. an! manufacturin* com(anies
use so(histicated soft/are to track machine usa*e' and determine o(timal schedules for re*ular machine
maintenance' overhauls' and re(lacement.
Documentin* &ualit! is a necessar! (revention cost because it hel(s the or*ani0ation track &ualit! (erformance'
identif! &ualit! (roblems' collect data' and s(ecif! (rocedures that contribute to the (ursuit of 0ero defects.
Documentation is im(ortant to communicatin* *ood &ualit! (ractice to all em(lo!ees and su((liers.
Appraisal costs are a second ma-or t!(e of &ualit! cost. A((raisal costs include the ins(ection and testin* of
ra/ materials' /ork-in-(rocess' and finished *oods. In addition' &ualit! audits' sam(lin*' and statistical (rocess
control also fall under the umbrella of a((raisal costs.
Ins(ection and testin* of ra/ materials is ver! im(ortant' since substandard ra/ materials lead to substandard
(roducts. @a/ materials used for a brid*e determine the stren*th of the brid*e. %or e"am(le' soft steel /ill erode
a/a! faster than hardened steel. oreover' the concrete brid*e deckin* needs to be solid' as concrete /ith air
(ockets /ill erode and crumble faster creatin* an unsafe brid*e.
%inished *oods and /ork-in-(rocess inventor! also need ins(ectin* and testin*. %or e"am(le' /orker error is
&uite common in the home construction industr!' and this is /h! ins(ections occur fre&uentl! on ne/l!
constructed homes durin* and after the construction (rocess is com(lete. 6uildin* ins(ectors ensure that the house
has the (ro(er framin*' electrical' (lumbin*' heatin*' and so forth.
Fualit! audits and sam(lin* are also im(ortant a((raisal costs. Fualit! audits are checks of &ualit! (rocedures
to ensure that em(lo!ees and su((liers are follo/in* (ro(er &ualit! (ractices. ?ith sam(lin*' a com(an! can
ensure /ith confidence that a batch of (roducts is fit for use. %or e"am(le' a /ooden baseball bat manufacturer ma!
test 20 out of ever! 200 bats to check that the! meet stren*th standards. :ne /eak bat can si*nal that &ualit!
(roblems are (resent.
$tatistical (rocess control J$,CK is the final t!(e of a((raisal cost. $,C tracks on-*oin* (rocesses in
manufacturin* or service environments to make sure that the! are (roducin* the desired (erformance. %or
e"am(le' a restaurant mi*ht statisticall! track customer surve! results to make sure that customer satisfaction is
maintained over time. In manufacturin* /indshields for automobiles' $,C mi*ht be used to track the number of
microsco(ic air bubbles in the *lass to make sure the (rocess is (erformin* to standard.
Internal failure costs are a third cate*or! of &ualit! costs. This cost occurs /hen &ualit! defects are
discovered before the! reach the customer. E"am(les of internal failure costs include scra((in* a (roduct'
re/orkin* the (roduct' and lost (roductivit! due to machine breakdo/ns or labor errors. Internal failure costs are
t!(icall! more e"(ensive than both (revention and a((raisal costs because a *reat deal of material and labor often
has been invested (rior to the discover! of the defect. If a book (ublisher (rints 20'000 books' then discovers that
one of the cha(ters is missin* from ever! co(!' the cost of re/orkin* or scra((in* the books re(resents a ma-or loss
to the com(an!. It /ould have been much chea(er to have (rocedures in (lace to (revent such a mistake from
ha((enin* in the first (lace.
2>5
In the case of internal failure cost due to machine failures' %edE"' and other courier services cannot kee( u(
/ith demand /hen a conve!or belt breaks do/n in the (acka*e distribution center. a-or dela!s and costs occur
/hen such incidents occur. :ther e"am(les include a road construction com(an! havin* a road *rader break do/n'
a tool and die sho( havin* a C;C machine break do/n' and a farmer havin* a combine break do/n durin* harvest
time.
Eternal failure costs are the fourth ma-or cost of &ualit!. E"ternal failure costs /hen the defect is
discovered after it has reached the customer. This is the most e"(ensive cate*or! of &ualit! costs. E"am(les include
(roduct returns' re(airs' /arrant! claims' lost re(utation' and lost business. :ne s(ectacular e"am(le of e"ternal
failure cost /as /hen the Eubbell telesco(e /as launched into s(ace /ith mirrors that /ere *round im(ro(erl!.
?hen the telesco(e /as turned on' instead of a ma*nificent vie/ of stars' (lanets' and *ala"ies' the scientists could
see onl! blurred ima*es. The (rice of correctin* the (roblem /as over I$D 2 billion.
E"ternal failure costs also occur /hen the /ron* meal is delivered to a restaurant customer' /hen a com(uter
breaks do/n shortl! after it /as (urchased' /hen the /ron* kidne! is removed from a (atient' and /hen a (oorl!
desi*ned automobile causes the death of drivers and (assen*ers. 6ecause of the enormous costs of internal and
e"ternal failures' all com(anies should strive for 0ero defects. $uccessful TF (ractice dictates that (ursuin* 0ero
defects /ill result in the minimi0ation of total &ualit! costs b! s(endin* more on (revention and a((raisal activities
in order to reduce the much hi*her costs of internal and e"ternal failure.
TFAs seven basic elements
$uccessful (ractice of Total Fualit! ana*ement involves both technical and (eo(le as(ects that cover the entire
or*ani0ation and e"tend to relationshi(s /ith su((liers and customers. $even basic elements ca(ture the essence of
the TF (hiloso(h!: customer focus' continuous im(rovement' em(lo!ee em(o/erment' &ualit! tools' (roduct
desi*n' (rocess mana*ement' and su((lier &ualit!.
Cu$toer !ocu$: Decisions of ho/ to or*ani0e resources to best serve customers starts /ith a clear
understandin* of customer needs and the measurement of customer satisfaction. %or e"am(le' the @ed
Cross surve!s its blood donors to determine ho/ it can make the blood donation e"(erience more (leasant
and convenient. It collects information on the (lace' date and time donors came in' and asks donors
&uestions of /hether the donation time /as convenient' /hether the! /ere treated /ith res(ect and
*ratitude' ho/ lon* the! had to /ait to donate' and /hether (arkin* /as ade&uate. 6! understandin*
donorsA needs and e"(eriences' @ed Cross mana*ers can determine stren*ths and /eaknesses of the
donation service (rocess and make ad-ustments if necessar!.
Continuou$ iproveent: An or*ani0ational culture that (romotes continuous learnin* and (roblem
solvin* is essential in the (ursuit of 0ero defects. The To!ota ,roduction $!stem JT,$K is a universal
continuous im(rovement s!stem that has been effectivel! a((lied to man! different t!(es of or*ani0ations'
includin* the health care industr!. Essential elements of the T,$ culture include stud!in* (rocess flo/'
collectin* data' drivin* out /asteful non-value-added activities' and makin* ever!one res(onsible for
&ualit! im(rovement. In the case of health care' the T,$ a((roach enabled one hos(ital to anal!0e the
causes of (atient infections from catheters and (neumonia in (atients on ventilators. ?ith sim(le chan*es
Business Fundamentals 2>D A +lobal Te"t
in (rocedures that (revented (atients from *ettin* these secondar! illnesses' the hos(ital /as able to save
I$D B0'000 (er (atient in these cases.
Eployee involveent: Em(lo!ees in a TF environment have ver! different roles and res(onsibilities
than in a traditional or*ani0ation. The! are *iven res(onsibilit!' trainin*' and authorit! to measure and
control the &ualit! of the /ork the! (roduce' the! /ork to*ether in teams to address &ualit! issues' the! are
cross-trained to be able to (erform multi(le tasks and have a *reater understandin* of the total (roduction
(rocess' and the! have a more intimate understandin* of the o(eration and maintenance of their
e&ui(ment. Em(lo!ees are essential to the buildin* of a continuous im(rovement or*ani0ation.
Kuality tool$: Discussion of the details of &ualit! tools e"tends be!ond the sco(e of this cha(ter' but there
are seven basic &ualit! tools that are used b! front-line /orkers and mana*ers in monitorin* &ualit!
(erformance and *atherin* data for &ualit! im(rovement activities. These tools include: cause-and-effect
JfishboneK dia*rams' flo/charts' checklists' control charts' scatter dia*rams' ,areto anal!sis' and
histo*rams. The beaut! of these tools is that the! are eas! to understand and a((l! in on-*oin* &ualit!
efforts.
.roduct de$ign: ,roduct desi*n is a ke! activit! to avoid costl! internal and e"ternal failure costs. %or
e"am(le' /hen a dental office desi*ns the service (rocess' it mi*ht have (atients fill out a form that covers
im(ortant information on *eneral health issues' aller*ies' and medications. This hel(s to avoid future
com(lications and (roblems. $taff' h!*ienists' and dentists are hi*hl! trained to follo/ (ro(er (rocedures'
the facilit! is both functional and (leasant' and the e&ui(ment and tools are state of the art to ensure that
the (atientAs desired outcome is achieved. In a manufacturin* settin*' (roducts should be desi*ned to
ma"imi0e (roduct functionalit!' reliabilit!' and manufacturabilit!.
.roce$$ anageent: 7Fualit! at the $ource8 is an im(ortant conce(t in TF. It means that mana*ers
and em(lo!ees should be focused on the detailed activities in a (rocess /here *ood or bad &ualit! is
created. %or e"am(le' in a To!ota (lant in the Inited $tates in +eor*eto/n' Hentuck!' one of the /ork
stations /as res(onsible for installin* seat belts and visors in ever! vehicle that came alon* the assembl!
line. There /ere 21 (ossible combinations of visors and seat belts that /ould *o into an! (articular vehicle
and the /orker had to select the ri*ht combination and install the items in the vehicle in == seconds. Even
the best /orkers made several errors durin* a shift on this activit!. After stud!in* the (rocess' the /orkers
came u( /ith an idea to (ut all the items for a (articular vehicle model in a blue (lastic tote. ?ith this
chan*e' the /orker onl! had to make one decision (er vehicle. Almost all the errors from the (revious
s!stem /ere eliminated /ith this sim(le solution.
&upplier Guality: The focus on &ualit! at the source e"tends to su((liersA (rocesses as /ell' since the
&ualit! of a finished (roduct is onl! as *ood as the &ualit! of its individual (arts and com(onents'
re*ardless of /hether the! come from internal or e"ternal sources. $harin* !our &ualit! and en*ineerin*
e"(ertise /ith !our su((liers' havin* a formal su((lier certification (ro*ram' and includin* !our su((liers
in the (roduct desi*n sta*e are im(ortant measures to take to ensure that &ualit! at the source e"tends to
the su((lier net/ork.
290
Fualit! a/ards and standards
There are several &ualit! a/ards and standards that are available for or*ani0ations to access. The lar*e ma-orit!
of or*ani0ations that use these (ro*rams use them as tools to hel( im(rove their &ualit! (rocesses and move to/ard
im(lementin* and successfull! (racticin* TF. The alcolm 6aldri*e A/ard is a Inited $tates &ualit! a/ard that
covers an e"tensive list of criteria that are evaluated b! inde(endent -ud*es if an or*ani0ation chooses to com(ete
for the a/ard. In man! cases' or*ani0ations use the 6aldri*e criteria as a *uide for their internal &ualit! efforts
rather than com(ete directl! for the a/ard. The criteria can be accessed from the Internet at:
htt(:<<///.baldri*e.nist.*ov<rnet.
The International :r*ani0ation for $tandardi0ation JI$:K s(onsors a certification (rocess for or*ani0ations that
seek to learn and ado(t su(erior methods for &ualit! (ractice JI$: D000K and environmentall! res(onsible
(roducts and methods of (roduction JI$: 2B000K. These certifications are increasin*l! used b! or*ani0ations of all
si0es to com(ete more effectivel! in a *lobal market(lace due to the /ide acce(tance of I$: certification as a
criterion for su((lier selection. I$: D000 and I$: 2B000 are described on the I$: /eb (a*e at:
htt(:<<///.iso.or*<iso<home.htm .
1he 2+O J444 family addresses M?uality managementM0 1his means what the organi(ation does to
fulfill:
the ustomerCs ?uality re?uirements, and
appliable regulatory re?uirements, while aiming to
enhane ustomer satisfation, and
ahie,e ontinual impro,ement of its performane in pursuit of these ob@eti,es0
1he 2+O $=444 family addresses Men,ironmental managementM0 1his means what the organi(ation
does to:
minimi(e harmful effets on the en,ironment aused by its ati,ities, and to
ahie,e ontinual impro,ement of its en,ironmental performane0
Another (o(ular &ualit! a/ard is the Demin* ,ri0e' /hich is a #a(anese &ualit! a/ard for /hich or*ani0ations
from an! countr! can a((l!. The Demin* ,ri0e /as named after ?. Ed/ards Demin*' an American statistician'
author' and consultant /ho hel(ed im(rove Inited $tates (roduction ca(abilities durin* ?orld ?ar II' but is best
kno/n for his /ork in (ost-/ar #a(an. Ee is /idel! credited /ith assistin* the #a(anese in rebuildin* their nationAs
(roduction infrastructure in the areas of (roduct desi*n' (roduct &ualit!' and testin* throu*h the a((lication of
statistical methods. %lorida ,o/er and Electric /as the first American com(an! to /in the Demin* ,ri0e' due to its
meticulous use of formal a((roaches to &ualit! im(rovement' data-based decision makin*' &ualit! im(rovement
teams' and the careful documentation of (rocesses and (rocedures. ore information on the Demin* ,ri0e can be
found at:
htt(:<<///.-use.or.-(<e<demin*<inde".html
%pecial topic: supply chain manaement
$u((l! chain mana*ement is the business function that coordinates and mana*es all the activities of the su((l!
chain' includin* su((liers of ra/ materials' com(onents and services' trans(ortation (roviders' internal
de(artments' and information s!stems. E"hibit 32 illustrates a su((l! chain for (rovidin* (acka*ed milk to
consumers.
E"hibit 32: Illustration of a su((l! chain
In the manufacturin* sector' su((l! chain mana*ement addresses the movement of *oods throu*h the su((l!
chain from the su((lier to the manufacturer' to /holesalers or /arehouse distribution centers' to retailers and
finall! to the consumer. %or e"am(le' A((le' Inc uses so(histicated information s!stems to acce(t orders for
custom-built com(uters from individual customers all over the /orld. A((le assembles the com(uters in $han*hai'
China' to the customersA s(ecifications. It uses (arts and com(onents that are (rovided b! outside su((liers /ho
can deliver the ri*ht (arts in the ri*ht &uantit! in a timel! /a! to satisf! the immediate (roduction schedule. The
com(leted com(uters are flo/n from $han*hai b! %edE"' reachin* the end-user customers onl! a fe/ da!s after the
orders /ere (laced. A((leAs su((l! chain allo/s it to (rovide fast deliver! of hi*h-&ualit! custom com(uters at
com(etitive (rices.
$u((l! chain conce(ts also a((l! to the service sector' /here service firms must coordinate e&ui(ment'
materials' and human resources to (rovide services to their customers in a timel! manner. %or e"am(le' a retail
store that sells electronic (roducts ma! contract /ith an outside business to (rovide installation services to its
customers. In man! cases' the customer does not even kno/ the installation /as done b! an outside contractor.
Information and communication technolo*ies such as *lobal (ositionin* s!stems J+,$K' barcode technolo*!'
customer relationshi( mana*ement JC@K databases' and the Internet allo/ service businesses to coordinate
e"ternal and internal service su((liers to efficientl! and effectivel! res(ond to customer demand.
The su((l! chain is not -ust a one /a! (rocess that runs from ra/ materials to the end customer. Althou*h
*oods tend to flo/ this /a!' im(ortant data such as forecasts' inventor! status' shi((in* schedules' and sales data
are e"am(les of information that is constantl! bein* conve!ed to different links in the su((l! chain. one! also
tends to flo/ 7u(stream8 in the su((l! chain so *oods and service (roviders can be (aid.
291
6ull/hi( effect
A ma-or *oal in su((l! chain mana*ement strate*! is to minimi0e the bull/hi( effect. The bull/hi( effect occurs
/hen inaccurate or distorted information is (assed on throu*h the links in the su((l! chain. As the bad information
*ets (assed from one (art! to the ne"t' the distortions /orsen and cause (oor orderin* decisions b! u(stream
(arties in the su((l! chain that have little a((arent link to the final end-item (roduct demand. As information *ets
farther from the end customer' the /orse the &ualit! of information *ets as the su((l! chain members base their
*uesses on the bad *uesses of their (artners. The results are /asteful inventor! investments' (oor customer service'
inefficient distribution' misused manufacturin* ca(acit!' and lost revenues for all (arties in the su((l! chain.
%or e"am(le' :(en @an*e #eans Ja fictitious com(an!K are sold in a (o(ular retail store chain. The retail chain
decides to (romote :(en @an*e #eans and reduce the (rice to boost customer traffic in its stores' but the chain
does not tell the :(en @an*e manufacturer of this (romotion (lan. The manufacturer sees an increase in retail
orders' forecasts a lon*-term *ro/th in demand for its -eans' and (laces orders /ith its su((liers for more fabric'
0i((ers' and d!e.
$u((liers of fabric' 0i((ers and d!e see the increase in orders from the -eans manufacturer and boost their
orders for ra/ cotton' chemicals' etc. ean/hile' the retail chain has ended its :(en @an*e (romotion' and sales of
the -eans (lummet belo/ normal levels because customers have stocked u( to take advanta*e of the (romotion
(rices. #ust as end-customer demand falls' ne/ -eans are bein* manufactured' and ra/ materials are bein* sent to
the -eans factor!. ?hen the fallin* end-customer demand is finall! reali0ed' manufacturers rush to slash
(roduction' cancel orders' and discount inventories.
;ot /antin* to *et burned t/ice' manufacturers /ait until finished *oods -ean inventories are dra/n do/n to
minimal levels. ?hen seasonal demand increases -eans (urchases' the retail stores order more :(en @an*e -eans'
but the manufacturers cannot res(ond &uickl! enou*h. A stockout occurs at the retail store level -ust as customers
are (urchasin* -eans durin* the back-to-school sales season. @etail customers res(ond to the stockout b!
(urchasin* the -eans of a ma-or com(etitor' causin* lon*-term dama*e to :(en @an*eAs market share.
9auses of the bullwhip effet
The bull/hi( effect is caused b! demand forecast u(datin*' order batchin*' (rice fluctuation' and rationin* and
*amin*.
!emand forecast updating is done individuall! b! all members of a su((l! chain. Each member
u(dates its o/n demand forecast based on orders received from its 7do/nstream8 customer. The more
members in the chain' the less these forecast u(dates reflect actual end-customer demand.
Order batching occurs /hen each member takes order &uantities it receives from its do/nstream
customer and rounds u( or do/n to suit (roduction constraints such as e&ui(ment setu( times or truckload
&uantities. The more members /ho conduct such roundin* of order &uantities' the more distortion occurs
of the ori*inal &uantities that /ere demanded.
Price fluctuations due to inflationar! factors' &uantit! discounts' or sales tend to encoura*e customers
to bu! lar*er &uantities than the! re&uire. This behavior tends to add variabilit! to &uantities ordered and
uncertaint! to forecasts.
Rationing and gaming is /hen a seller attem(ts to limit order &uantities b! deliverin* onl! a
(ercenta*e of the order (laced b! the bu!er. The bu!er' kno/in* that the seller is deliverin* onl! a fraction
of the order (laced' attem(ts to 7*ame8 the s!stem b! makin* an u(/ard ad-ustment to the order &uantit!.
@ationin* and *amin* create distortions in the orderin* information that is bein* received b! the su((l!
chain.
9ounterating the bullwhip effet
To im(rove the res(onsiveness' accurac!' and efficienc! of the su((l! chain' a number of actions must be taken
to combat the bull/hi( effect:
ake real-time end-item demand information available to all members of the su((l! chain. Information
technolo*ies such as electronic data interchan*e JEDIK' bar codes' and scannin* e&ui(ment can assist in
(rovidin* all su((l! chain members /ith accurate and current demand information.
Eliminate order batchin* b! drivin* do/n the costs of (lacin* orders' b! reducin* setu( costs to make an
ordered item' and b! locatin* su((l! chain members closer to one another to ease trans(ortation
restrictions.
$tabili0e (rices b! re(lacin* sales and discounts /ith consistent 7ever!-da! lo/ (rices8 at the consumer
sta*e and uniform /holesale (ricin* at u(stream sta*es. $uch actions remove (rice as a variable in
determinin* order &uantities.
Discoura*e *amin* in rationin* situations b! usin* (ast sales records to determine the &uantities that /ill
be delivered to customers.
:ther factors affectin* su((l! chain mana*ement
In addition to mana*in* the bull/hi( effect' su((l! chain mana*ers must also contend /ith a variet! of factors
that (ose on-*oin* challen*es:
Increased demands from customers for better (erformance on cost' &ualit!' deliver!' and fle"ibilit!.
Customers are better informed and have a broader arra! of o(tions for ho/ the! conduct business. This
(uts added (ressure on su((l! chain mana*ers to continuall! im(rove (erformance.
+lobali0ation im(oses challen*es such as *reater *eo*ra(hic dis(ersion amon* su((l! chain members.
+reater distances create lon*er lead times and hi*her trans(ortation costs. Cultural differences' time 0ones'
and e"chan*e rates make communication and decision-makin* more difficult. 6oein* and Airbus have
discovered the do/nside of sourcin* from *lobal su((liers. uch smaller su((liers of kitchen *alle!s'
lavatories' and (assen*er seats have been unable to fulfill orders from 6oein* and Airbus' leavin* the latter
unable to deliver (lanes to its airline customers.
+overnment re*ulations' tariffs' and environmental rules (rovide challen*es as /ell. %or e"am(le' man!
countries re&uire that (roducts have a minimum (ercenta*e of local content. 6ein* environmentall!
res(onsible b! minimi0in* /aste' (ro(erl! dis(osin* of dan*erous chemicals' and usin* rec!clable
materials is ra(idl! becomin* a re&uirement for doin* business.
29B
$u((lier selection
Choosin* su((liers is one of the most im(ortant decisions made b! a com(an!. The efficienc! and value a
su((lier (rovides to an or*ani0ation is reflected in the end (roduct the or*ani0ation (roduces. The su((lier must
not onl! (rovide *oods and services that are consistent /ith the com(an!As mission' it must also (rovide *ood
value. The three most im(ortant factors in choosin* a su((lier are (rice' &ualit!' and on-time deliver!.
A com(an! must not onl! choose /ho it /ants as a su((lier' it must also decide ho/ man! su((liers to use for a
*iven *ood or service. There are advanta*es to usin* multi(le su((liers and there are advanta*es to usin* one
su((lier. ?hether to sin*le-source or multi(le-source often de(ends on the su((l! chain structure of the com(an!
and the character of the *oods or services it (roduces.
If a com(an! uses a sin*le su((lier' it can form a (artnershi( /ith that su((lier. A (artnershi( is a lon*-term
relationshi( bet/een a su((lier and a com(an! that involves trust' information sharin*' and financial benefits for
both (arties. ?hen both (arties benefit from a (artnershi(' it is called a 7/in-/in situation8. It is eas! to see ho/
choosin* su((liers is one of the most im(ortant decisions a com(an! makes.
There are advanta*es and disadvanta*es to usin* one su((lier. :ne advanta*e is that the su((lier mi*ht o/n
(atents or (rocesses and be the onl! source for the (roduct. ?ith one su((lier' (ricin* discounts ma! be *ranted
because (urchases over the lon*-term are lar*e and unit (roduction costs for the su((lier are lo/er. The su((lier
ma! be more res(onsive if !ou are the onl! (urchaser of an item' resultin* in better su((lier relations. #ust-in-time
orderin* is easier to im(lement' and deliveries ma! be scheduled more easil!. %inall!' usin* a sin*le su((lier is
necessar! to form a (artnershi(. :ne disadvanta*e is that if that one su((lier e"(eriences a disaster at its
/arehouse like a fire or a tornado' or its /orkers *o on strike' there is no other read! source for the (roduct.
Another (ossible disadvanta*e is that a sin*le su((lier ma! not be able to su((l! a ver! lar*e &uantit! if it is
suddenl! needed. Also' sometimes the *overnment re&uires the use of multi(le su((liers for *overnment (ro-ects.
There are also advanta*es and disadvanta*es to usin* multi(le su((liers. $u((liers mi*ht (rovide better
(roducts and services over time if the! kno/ the! are com(etin* /ith other su((liers. Also' if a disaster ha((ens at
one su((lierAs /arehouse' other su((liers can make u( the loss. If a com(an! uses multi(le su((liers' there is more
fle"ibilit! of volume to match demand fluctuations. :ne disadvanta*e /ith multi(le su((liers is that it is more
difficult to for*e lon*-term (artnershi(s. Information sharin* becomes riskier' lo/er volumes for each su((lier
(rovide fe/er o((ortunities for cost savin*s' and su((liers tend to be less res(onsive to emer*enc! situations.
,artnershi(s are lon*-term relationshi(s bet/een a su((lier and a com(an! that involve trust and sharin* and
result in benefits for both (arties. A *ood e"am(le of a (artnershi( is the (artnerin* bet/een a Deere U Co. farm
e&ui(ment factor! and its su((liers. Deere decided to outsource its sheet metal' bar stock' and castin*s (art
families.
?hen Deere sent re&uests for bids to 210 com(anies' 1B com(anies res(onded to sa! the! /ere interested.
Deere then sent a team of en*ineers' &ualit! s(ecialists' and su((l! chain mana*ers to evaluate each com(an!. :ne
su((lier /as chosen for each of the three (art families. All three of the su((liers that /ere chosen /ere located less
than t/o hours of drivin* time from the Deere (lant.
%or man! !ears' all three su((liers have continued to (rovide outstandin* &ualit!' deliver!' and cost
(erformance to Deere. The su((liers benefited b! *ainin* a lon*-term customer /ith a lar*e amount of (rofitable
business. Deere reali0ed a =0 (er cent dro( in (roduction costs on the three (art families and /as able to better
focus on its mission of manufacturin* farm e&ui(ment.
Conclusion
$u((l! chain mana*ement concerns the develo(ment of communication and information s!stems to link
su((liers to*ether in coo(erative (artnershi(s that (romote advanta*e for all (artici(ants. 6enefits include faster
res(onse times' reduced inventor! costs' increased accurac!' and im(roved &ualit!.
%pecial topic: 2ust-in-time and lean systems
#ust-in-time J#ITK is a mana*ement (hiloso(h! that ori*inated in the 2D90s. Taiichi :hno is credited /ith
develo(in* #IT and (erfected it for To!otaAs manufacturin* (lants in #a(an. The main *oal of #IT is to eliminate
an!thin* that does not add value from the customerAs (ers(ective. ;on-value-added activities are referred to as
7/aste8 in #IT. E"am(les of /aste include:
over(roduction be!ond /hat is needed to satisf! immediate demand
/aitin* time J/ork-in-(rocess' customer /aitin*K
unnecessar! trans(ortation Jmaterial handlin*' customer travel throu*h a facilit!' etc.K
(rocessin* /aste J!ield rates' start-u( costsK
inventor! stora*e /aste Js(ace' deterioration' obsolescence' etc.K
unnecessar! motion and activit! J/aste in /ork techni&ues' etc.K
/aste from (roduct and service defects Jre/ork' scra(' /arrant!' etc.K
There are three essential elements that contribute to the successful (ractice of #IT:
#IT manufacturin* (rinci(les
Total Fualit! ana*ement JTFK
em(lo!ee em(o/erment
#IT manufacturin* (rinci(les
In a manufacturin* settin*' there are si" ma-or /a!s to (ursue #IT *oals: inventor! reduction to e"(ose /aste'
use of a 7demand-(ull8 (roduction s!stem' &uick setu(s to reduce lot si0es' uniform (lant loadin*' fle"ible
resources' and cellular flo/ la!outs.
2n,entory redution to e/pose waste
Inventor! covers u( a lot of /asteful (ractices J(oor e&ui(ment' /eak vendors' bad &ualit!' lon* setu( times'
etc.K. 6! *raduall! lo/erin* inventor!' the /eaknesses of the (roduction s!stem can be revealed and addressed one
b! one. achines can be re(laced or better maintained' vendors &ualit! and deliver! can be im(roved' machine
setu( (rocedures can be streamlined' &ualit! (ractices can be im(lemented' and labor and e&ui(ment can be laid
29>
out more efficientl!. These im(rovements (ermit the or*ani0ation to o(erate /ith less inventor!' less costs' and
faster res(onse times in meetin* customer needs.
#emand-pull prodution system
The traditional a((roach to manufacturin* mana*ement (romotes a stron* focus on machine and labor
utili0ation. The vie/ /as that if mana*ers make sure that /orkers and machines are al/a!s bus!' then surel! the
factor! /ill be (roductive and efficient. This a((roach is called the 7(ush8 s!stem of manufacturin*' /here ra/
material and /ork-in-(rocess is continuousl! (ushed throu*h the factor! in the (ursuit of hi*h utili0ation. The
(roblem /ith this a((roach is that it usuall! (roduces hi*h levels of inventories' lon* lead times' overtime costs'
hi*h levels of (otential re/ork' and /orkers /ho are com(etin* /ith one another rather than /orkin*
coo(erativel!.
In contrast to the (ush s!stem' #IT es(ouses a 7demand-(ull8 s!stem that o(erates on the rule that /ork should
flo/ to a /ork center onl! if that /ork center needs more /ork. If a /ork center is alread! occu(ied /ith /ork
activit!' the u(stream /ork center should sto( (roduction until the do/nstream /ork center communicates a need
for more material. The em(hasis on maintainin* hi*h utili0ation is removed in a #IT environment. The focus of a
#IT environment is on addressin* the challen*es that affect the overall effectiveness of the factor! Jsetu( time
reduction' &ualit! im(rovement' enhanced (roduction techni&ues' /aste elimination' etc.K in meetin* its strate*ic
*oals' rather than allo/in* e"cess inventor! to cover u( inefficiencies that reduce the factor!As com(etitiveness.
Oui! setups to redue lot si(es
The lon*er it takes' and the more e"(ensive it is to setu( e&ui(ment and labor to (roduce an item' the *reater
the &uantit! of items that have to be (roduced in a *iven (roduction run. Traditional (roduction mana*ement
(hiloso(h! (romoted the notion that lon* (roduction runs of the same item /ere the ke! to drivin* do/n unit
costs. The (roblem /as that lar*e (roduction runs created lar*e &uantities of ?I, and finished *oods inventor!
that far e"ceeded the demand. These items /ould conse&uentl! cause hi*h levels of inventor! costs' lon* lead times'
hi*h (otential re/ork' lo/ fle"ibilit! in res(ondin* to customer needs' etc.
Drivin* do/n setu( costs and setu( times are ke! to dramaticall! im(rovin* factor! com(etitiveness in a #IT
environment. In the 2D50s' the 3 com(an! converted a factor! that made a fe/ adhesive (roducts in lon*
(roduction runs into a factor! that made over =00 adhesive (roducts in small (roduction runs. To kee( unit
(roduction costs under control' 3 studied the setu(s on its coatin* machines. $ince the cost of chemical /aste
dis(osal /as a ma-or (art of the cost of chan*in* over a coatin* machine to make another (roduct' 3 shortened
the len*th of hoses that needed (ur*in* and redesi*ned the sha(e of the adhesive solution holdin* (an on the
coatin* machine to be shallo/er. 3 also used &uick-connect devices' dis(osable filters' and /ork teams to s(eed
u( setu(s. The result /as that 3 could maintain lo/ unit costs on its coatin* machines /hile (roducin* small lots
of hundreds of (roducts to meet market demand &uickl!.
Gniform plant loading
The successful (ractice of #IT means havin* the ri*ht &uantities of the ri*ht (roducts in the ri*ht (lace at the
ri*ht time. Drivin* do/n setu( times enables the com(an! to (roduce the (roduct mi" and &uantities that are
demanded in the (resent time (eriod.
Fle/ible resoures
The enem! of #IT is uncertaint!. A #IT environment thrives on (redictabilit! in customer demand' (roduction
(rocesses' su((liers' and /orkers. :f course' uncertaint! cannot be com(letel! eliminated in most or*ani0ational
environments.
The defense a*ainst uncertaint! that cannot be driven out is to im(lement fle"ible resources that can ada(t
easil! to chan*in* circumstances. +eneral-(ur(ose' moveable e&ui(ment that can fulfill a /ide variet! of
(roduction re&uirements is one /a! to im(rove fle"ibilit!. %or e"am(le' drillin* machines /ith &uick-chan*e bits
/hich can be /heeled into (osition to form ne/ /ork cells allo/s the factor! to ma"imi0e efficienc! /hile
(roducin* e"actl! /hat is needed to satisf! immediate demand. Another e"am(le is To!otaAs use of (aint canisters
that attach to (aint s(ra!ers. An! car can be (ainted an! color /ithout havin* to (ur*e hoses in s/itchin* from one
color to another.
ultifunctional /orkers are another /a! to brin* fle"ibilit! to the /ork environment. At Eone!/ellAs heatin*
and coolin* controls (lant' /orkers are trained to o(erate all the machines on their /ork line. The fle"ibilit! that
comes from multifunctional /orkers chan*es the nature of ho/ /ork *ets done. Instead of /orkers bein* trained on
one machine and /orkin* inde(endentl! of one another' multifunctional /orkers have a 7bi* (icture8 vie/ of the
(roduction line' /here ever! /orker understands all as(ects of the line and ho/ to /ork to*ether to meet &ualit!
and schedule *oals re*ardless of the circumstances.
-ine5ellular flow layouts
Earlier in this cha(ter' /e described the efficiencies that re(etitive (rocess la!outs (rovide. @e(etitive (rocess
la!outs are (erfectl! suited for drivin* out non-value-added activities and transitionin* to a #IT environment.
Intermittent la!outs feature do0ens or even hundreds of different (aths throu*h the facilit!. The! are filled /ith
com(le"it!' uncertaint!' and lo/ visibilit!. ?orkers tend to have s(eciali0ed skills' /ork inde(endentl! of other
de(artments' and have little sense of 7o/nershi(8 of the (roducts the! /ork on.
In contrast' cell la!outs (romote #IT *oals b! featurin* unidirectional (roduct flo/s' hi*h visibilit!' and fast
throu*h(ut times. ?orkers /ith multifunctional skills are assi*ned to individual cells and have res(onsibilit! and
control of the (roducts the! (roduce. ?orkers in a cell environment tend to have a *reater sense of o/nershi( and
(ride in their /ork because the! have a 7bi* (icture8 vie/ of the (roduct as it is converted from ra/ material to a
finished *ood. This dee(er understandin* of the (roduction (rocess increases the o((ortunities for /orkers to
contribute ideas for (rocess im(rovements.
Total Fualit! ana*ement
TF /as discussed in detail earlier. TF *oes hand in hand /ith the #IT (hiloso(h! because &ualit! is a ma-or
source of uncertaint! and non-value-added activities in an or*ani0ation /ith (oor &ualit! (ractices. TF (romotes
continuous im(rovement' doin* it ri*ht the first time' desi*nin* &ualit! into (roducts and (rocesses' and
establishin* an overall focus on (revention as the (rimar! &ualit! activit!.
Em(lo!ee em(o/erment
%ront-line em(lo!ees (la! a critical role in successful #IT (ractice. The! /ork in (artnershi( /ith mana*ement
and each other in the continuous (ursuit of e"cellence. There are several /a!s in /hich front-line em(lo!ees
contribute to #IT success:
295
Em(lo!ees /ork to*ether in (roblem-solvin* teams to *ather data and build consensus on ho/ to im(rove
/ork (rocesses.
Em(lo!ees are res(onsible for understandin* the &ualit! measures of their /ork and /hat the! need to do
to meet the needs of internal and e"ternal customers.
Each em(lo!ee is em(o/ered to take action to correct (roblems.
Em(lo!ees have cross-functional skill sets that allo/ them to be assi*ned to areas /hich need hel(' and to
hel( them ado(t a broader J7bi* (icture8K vie/ of the (roduction (rocess.
Inlike a traditional 7(ush8 environment /here line /orkers are relativel! inde(endent of one another in
their /ork activities' #IT em(lo!ees are connected b! the 7demand (ull8 disci(line' /here /ork is not
(roduced unless the do/nstream /ork center needs it. Demand-(ull (romotes the inter-connectedness of
/orkers.
%ront-line em(lo!ees are res(onsible for the basic maintenance of their machines. This hel(s em(lo!ees
have a better understandin* of the condition of their e&ui(ment and its abilit! to meet &ualit! and
(roduction re&uirements.
ana*ement /orks /ith em(lo!ees b! bein* coaches and facilitators rather than authoritative su(ervisors.
ana*ers are char*ed /ith hirin* em(lo!ees /ho can /ork in a (roactive team environment' and (rovide the
trainin* and incentives to build a /ork culture that is focused on continuous im(rovement.
Conclusion: The evolution of #IT into 7lean o(erations8
The #IT (hiloso(h! has evolved from a manufacturin*-focused mana*ement a((roach to a set of mana*ement
(rinci(les that can be a((lied to an! or*ani0ation. 7Lean o(erations8 is a term that is re(lacin* #IT' es(eciall! in
service environments. 7Lean o(erations8 ca(tures the true essence and (o/er of ho/ a culture built around
continuous im(rovement and the (ursuit of value-added activities leads directl! to com(etitive advanta*e in the
market(lace. Lean o(erations is a mana*ement (hiloso(h! for an! or*ani0ation to achieve hi*her &ualit!' increased
(roductivit!' im(roved deliver! s(eed' *reater res(onsiveness to chan*in* markets' and increased customer
satisfaction.
>. %ecurin and manain
e?ternal relationships
Editor: $teven D $heet0 JMir*inia Tech' I$AK
Contributor$: Himberl! ?atkins' $arah El$ha/arb!' ;icholle De(a0 JMir*inia Tech' I$AK
Reviewer: @obin $ @ussell JMir*inia Tech' I$AK
Learnin* ob-ectives
understand the fundamental elements of e"ternal relationshi(s
kno/ the t!(e of common relationshi(s and the (hases of develo(in* relationshi(s
use the characteristics of the business situation to choose the ri*ht t!(e of relationshi(
understand the relationshi( bet/een t!(es of e"ternal relationshi( and business strate*ies
understand the risks associated /ith various business strate*ies
6ntroduction to e?ternal relationships
In toda!As business /orld' or*ani0ations increasin*l! de(end u(on develo(in* e"ternal relationshi(s to remain
com(etitive. This trend occurs for t/o reasons. %irst' or*ani0ations have come to reali0e that the! cannot be first-
rate in ever! (hase of their business Je.*. marketin*' (roduction' information s!stems' etcK. Instead' the! reco*ni0e
that a better strate*! is one in /hich the! focus on core com(etencies' or the thin*s the! do best' and establish
relationshi(s /ith other com(anies to (erform those functions /here the! do not have outstandin* ca(abilities. %or
e"am(le' Ama0on.com offers a /ide variet! of (roducts and even recommends (ersonali0ed su**estions to its
customers. It reali0es' ho/ever' that other com(anies such as %edE" and I,$ have /orld-class com(etence in
deliverin* *oods. That is /h! Ama0on.com customers have their (urchases delivered b! %edE"' I,$ or a countr!As
(ostal service. 3ou do not see Ama0on deliver! trucks and likel! never /ill. $econdl!' information and
communication technolo*ies make it much easier to o(erationall! create seamless relationshi(s. Instant
communications bet/een t/o se(arate com(anies enable them to mana*e a business (rocess as if the t/o
com(anies /ere a sin*le com(an!. 6oth com(anies and the customers benefit from relationshi(s that /ork. The
entire business (rocess of orderin* and deliverin* is /orld class for Ama0on.com. Additionall!' %edE" or I,$
receives more business' and customers benefit from receivin* su(erior service.
E"ternal relationshi(s (rovide access to additional information and financial resources' /hich ideall! results in
increased (rofitabilit! and success. 3et' formin* relationshi(s involves associated risks' and debate continues about
ho/ to best reali0e benefits and minimi0e costs J$treet and Cameron' 1009K. ;evertheless' man! mana*ers no/
a*ree that strate*ies for establishin* and mana*in* e"ternal relationshi(s are necessar! for all or*ani0ations in the
current and future *lobal business environment.
-. (ecuring and managing e.ternal relationships
This cha(ter describes the com(onents of e"ternal relationshi(s to (rovide the back*round needed to
understand and form the ri*ht relationshi(s for or*ani0ations of all si0es. These include the t!(es of common
relationshi(s' the (hases of relationshi( develo(ment' critical factors for successful relationshi(s and the skills
needed to (erform these essential tasks. Levera*in* e"ternal relationshi(s re&uires a strate*ic (ers(ective that
ran*es from obtainin* reliable su((lies of ra/ materials for internal (roduction (rocesses to outsourcin* entire
business (rocesses. E"hibit 31 sho/s that develo(in* the ri*ht relationshi(s de(ends on im(lementin* e"(licit
strate*ies that are built u(on an understandin* of relationshi( fundamentals.
E"hibit 31: Develo(in* relationshi(s
An e"ternal relationshi( is defined as a commerciall! oriented link bet/een t/o business institutions /ith the
intent of increasin* tan*ible and<or intan*ible benefits for one or both of the or*ani0ations involved J$treet and
Cameron' 1009K. T/o common t!(es of e"ternal relationshi(s are market e"chan*es and (artnershi(s' /hich /e
/ill discuss later in this cha(ter.
Trends in mana*ement
The *lobal business environment re&uires mana*ers to inte*rate outside sources and business (artners to
increase efficienc!. Technolo*! has been (roven to be a ke! factor in im(rovin* *ood relationshi(s' /hile also
(rovidin* ca(abilities to evaluate and eliminate (oor relationshi(s J$cannell and $ullivan' 1000K. Com(anies are
(artnerin* to*ether to form virtual or*ani0ational units' /hich /ork to the benefit of core businesses as /e
252
illustrated /ith the Ama0on.com e"am(le in the introduction to this cha(ter. ana*ers must have business
mana*ement skills' technical skills' and a thorou*h kno/led*e of e"ternal relationshi( mana*ement in order to
take o(timal advanta*e of o((ortunities and levera*e the skills and kno/led*e of other or*ani0ations to ma"imi0e
returns on investment.
Trust: the foundation for a successful relationshi(
:ne of the most im(ortant elements in develo(in* a successful' lon*-term relationshi( is trust. Trust affects the
&ualit! of ever! relationshi(' ever! communication' and ever! (ro-ect. :ru$t can be defined as the belief that one
(art! /ill fulfill its obli*ations. Accordin* to #im 6urke' former chairman and CE: of #ohnson U #ohnson' 73ou
canAt have success /ithout trust. The /ord trust embodies almost ever!thin* !ou can strive for that /ill hel( !ou to
succeed8 JCove!' 100>K. This ke! factor must be mutual bet/een all or*ani0ations involved' /hether the! are
su((liers of materials or (roviders of outsourcin* ca(abilities. If mutual trust is established earl! on' all
or*ani0ations /ill benefit throu*h a *reater /illin*ness to share ideas' *oals' and /ork to*ether to solve (roblems
E"hibit 33 reveals trust is a function of five different dimensions.
E"hibit 33: Dimensions of trust
Dependability: Is one (art! makin* and fulfillin* (romises to another JCove!' 100>K. De(endabilit! can
also be e"em(lified via third (art! confirmations. %or e"am(le' a credible source can vouch for a firm /hen
de(endabilit! has been (roven throu*h (ast e"(eriences. ,roduct demonstrations and (lant tours are other
/a!s com(anies can illustrate the ca(abilit! to be de(endable.
Copetence: Is /hen an or*ani0ation a((ears kno/led*eable. Demonstratin* com(etence can be the
fastest /a! to increase trust JCove!' 100>K. A thorou*h understandin* of su((liers' customers' (roducts'
com(etitors' and the industr! demonstrates com(etence. If a mana*er understands the relationshi(s the!
develo(' the or*ani0ation /ill be (erceived as com(etent.
Relation$hip orientation: Is the de*ree to /hich the com(an! (uts the (artner first J?eit0' Castleberr!'
and Tanner' 100=K. A com(an! cannot be successful if mana*ers are onl! concerned about their o/n (rofits
/ithin a transaction. The com(an! has to make their (artner feel valued and can accom(lish this b!
tailorin* a (roduct or service s(ecificall! for its (artner. Creatin* a feelin* of individualit! usuall! results in
a lo!al' reliable (artner.
Eone$ty: Incor(orates truthfulness' sincerit!' and de(endabilit!. %or e"am(le' if a seller has established a
de(endable re(utation' the com(an! is usuall! (erceived to be honest. Eo/ever' illustratin* honest! has
man! other facets as /ell. A *ood (artner or*ani0ation should (rovide all as(ects of the truth' /hether it is
(ositive or ne*ative information. Creatin* a relationshi( based on a foundation of lies is one of the bi**est
mistakes an or*ani0ation can make. ,artners t!(icall! discover the lies' /hich ma! result in the loss of
critical su((lies and<or hi*hl! (rofitable o((ortunities. :ne /a! to combat this is to create a culture that
values and encoura*es honest!. $tudies have' in fact' sho/n that tellin* the truth stren*thens team-
buildin* efforts and increases morale and (roductivit! J$mith' 1009K.
6i)eability: Is findin* a common' friendl! *round bet/een the (artners. The relationshi(s !ou select
should be ones /here !ou /ould like to increase trust' and /here' b! im(rovin* trust' !ou /ould *et far
better results (rofessionall! JCove!' 100>K. This is likel! the least im(ortant of the five dimensions of trustG
ho/ever it is still note/orth! in the formation of an e"ternal relationshi(.
Mar$etin e?chanes and partnerships
In 100=' 6arton A ?eit0' $te(hen 6 Castleberr!' and #ohn % Tanner (ublished their book 7$ellin*: 6uildin*
@elationshi(s8 in /hich the! discuss man! of the as(ects of modern business relationshi(s' includin* market
e"chan*es and (artnershi(s. Accordin* to their book' a market e"chan*e is defined as a relationshi( /here each
(art! is onl! concerned /ith their o/n /elfare. A (artnershi(' conversel!' is based on creatin* a mutuall! beneficial
affiliation for both of the or*ani0ations. arket e"chan*es and (artnershi(s both *enerate commerciall! oriented
connections' /hich classifies the t/o relationshi(s as e"ternal J?eit0' Castleberr!' and Tanner' 100=K.arket
e"chan*e:
A ar)et e5change is a t!(e of relationshi( bet/een a bu!er and seller in /hich each (art! is onl! concerned
about that (articular (art!As benefit J?eit0' Castleberr!' and Tanner' 100=K.
A $olo e5change is a transaction that occurs bet/een the bu!er and seller /here each (ursuesA their o/n
individual self-interest J?eit0' Castleberr!' and Tanner' 100=K. $u((ose !ou are travelin* to visit relatives in a
nearb! to/n on a /arm and sunn! $aturda! mornin*. As !ou (ass a small store that is havin* a sale !ou see a
/ooden bench' much like one !our *randmother had' /ith a I$D 1= sellin* (rice. At this (oint !ou mi*ht (a! the
I$D 1= for the bench' ha**le for a lo/er (rice' or /alk a/a! from the transaction. 3ou decide to make the seller an
offer of I$D 20 for the bench. After minimal ne*otiations the bar*ain (rice of I$D 2= is a*reed u(on.
This transaction is an e"am(le of a solo e"chan*e. The t/o (arties are not interested in or concerned about the
/ell-bein* of the other (art!. ;either !ou' nor the seller' e"(ect to en*a*e in future transactions' and both (arties
are successful in (ursuin* their individual *oals. The consumer receives the bench for the lo/est (ossible (rice'
/hile the seller char*es the hi*hest acce(table (rice. A solo e"chan*e should not be considered an ethical decision'
merel! an uncom(licated' one-time choice.
253
E"hibit 3B: arket e"chan*e
T/o basic relationshi( t!(es
The t/o basic relationshi( t!(es of market e"chan*e and (artnershi(s are divided further based on ei*ht factors
sho/n in column 2 of Table =. Mar!in* values of these factors re(resent situations /here the or*ani0ations reach
*reater levels of inte*ration and (rovide *reater returns to both sides of the relationshi(.
Table =: T!(es of relationshi(s
A*B Mar)et e5change$ A2B .artner$hip$
%actors
involved in the
relationshi(
$olo e"chan*e %unctional
relationshi(
@elational
(artnershi(
$trate*ic
(artnershi(
Time hori0on short term lon* term lon* term lon* term
Concern for
the (art!
lo/ lo/ medium hi*h
Trust lo/ lo/ hi*h hi*h
Investment in
relationshi(
lo/ lo/ lo/ hi*h
;ature of
relationshi(
conflict'
bar*ainin*
coo(eration accommodation coordination
@isk in
relationshi(
lo/ medium hi*h hi*h
,otential
benefits
lo/ medium hi*h hi*h
Funtional relationship
A !unctional relation$hip is a lon*-term market e"chan*e characteri0ed b! lo!alt! J?eit0' Castleberr!' and
Tanner' 100=K. This t!(e of relationshi( (ortra!s the bu!er (urchasin* a (roduct out of routine or (attern. In a
functional relationshi(' (revious (urchases /ill often influence later (urchases. T!(icall!' the bu!er /ill continue to
(urchase from their selected seller as lon* as the (rice and the (roduct sta! relativel! consistent to the ori*inal
transaction. 6u!ers often illustrate this lo!alt! for several reasons. :ne reason a bu!er remains lo!al is sim(l!
convenience. It is easier for the bu!er to avoid the arduous task of searchin* and ne*otiatin* for a (roduct ever!
time a recurrin* (urchase needs to be made' es(eciall! /hen the! are likel! to come to the same conclusion and bu!
a*ain from the (revious su((lier.
%or e"am(le: A bu!er for a school is in char*e of (urchasin* all items that /ill be necessar! for the cafeteria to
function. Assume the school in &uestion is a small elementar! school /ith onl! about one hundred students. The
bu!er must (urchase snacks' cand!' meat' and drinks' -ust to name a fe/. This (articular bu!er uses a /holesaler to
(urchase all necessar! items. This /holesaler has no desire to establish a (artnershi( /ith the schoolG it merel!
/ishes to sell as man! items as (ossible. $imilarl!' the success of this relationshi( /ill not make or break the
schoolAs success as an educational institution. This affiliation is established out of convenience. Eo/ever' if the
vendor be*ins to have (oor service or inflated (rices' the (urchaser /ill sim(l! choose a com(arable /holesaler
/ith little an"iet!.
?ith a functional relationshi(' both (arties are interested in their o/n (rofits' therefore' (rice is usuall! the
most im(ortant factor in the decision makin* (rocess. The relationshi( established bet/een the bu!er and seller is
not (ermanent. 6u!ers /ill often chan*e su((liers to tr! and *et the best (ossible dealG ho/ever' /hen decidin* on
a su((lier other factors are often /ei*hed into the e&uation such as &ualit!' reliabilit!' trust' and commitment.
,artnershi(s
A partner$hip is t/o (arties concerned about the /elfare of each other in develo(in* a /in-/in relationshi(
Johr' 2DDBK. There are t/o t!(es of (artnershi(s: a relational and strate*ic (artnershi(.
*elational partnership
A relational partner$hip is a (artnershi( that develo(s on the (remise of a close' (ersonal relationshi( built
on trust Johr' 2DDBK. ?ith this t!(e of (artnershi( there is an o(en line of communication' and the (arties /ork
to*ether in order to overcome an! (otential (roblems. 6oth sides of the (artnershi( are tr!in* to make mone!' but
the more im(ortant factor is develo(in* a lon*-term' /orkin* relationshi( that /ill continue to *enerate mone!
over time. ?hen relational (artnershi(s are successful' it is often not necessar! to have more than minimal
ne*otiations about (rice. In addition' minor details /ill not be allo/ed to derail or end the relationshi(s because
the *oal is to establish an on*oin* mutuall! beneficial e"chan*e.
@elational (artnershi(s ma! develo( because of (ersonal ties' but more often the! occur due to (rofessional
necessit!. %or e"am(le' ever! !ear lar*e I$ businesses recruit ne/ em(lo!ees usin* booths at career fairs across the
countr!. $uch a career fair (ro*ram is not si*nificant enou*h for the com(an! to enter into a strate*ic (artnershi(
/ith an em(lo!ment service to (erform hirin* at career fairs' but findin* em(lo!ees /ith the necessar! skills is still
ver! im(ortant. @e*ional mana*ers /ill likel! be res(onsible for this -ob and the! ma! form a relational (artnershi(
/ith the or*ani0ations that host the -ob fairs in their area to ensure that /hen the -ob fairs are (lanned the
re(resentative com(an! /ill be included. A relational (artnershi( is more similar to a friendshi( than to a market
e"chan*e. @ather than sho/in* concern onl! for their o/n self interests' (artners /ill offer their time and resources
to continue the relationshi(' because of the e"(ected future benefits of continuin* interactions. #ames Cash ,enne!'
the founder of the I$ de(artment store chain #C,enne!' believed that 7all *reat businesses are built on friendshi(8.
If this ideal is a((lied' a stron* foundation can be formed throu*h relational (artnershi(s.
+trategi partnership
A strategic partner$hip is a lon*-term business relationshi( in /hich the (artner or*ani0ations make
si*nificant investments to im(rove the (rofitabilit! of both (arties Johr' 2DDBK. $trate*ic (artnershi(s are created
to uncover and e"(loit -oint o((ortunities /hile minimi0in* -oint /eaknesses. 6oth (arties /ill contribute
financiall!' and conse&uentl! take si*nificant risks in order to (rovide the (artnershi( /ith a strate*ic advanta*e.
This t!(e of (artnershi( is founded on the basis that both members are de(endent on each other. The (artners /ill
have the same *oals' as /ell as a*ree on the best course of action to achieve those *oals. In order to achieve the
25=
tar*et ob-ective' (artnershi(s must be based on an o(en-door (olic!G the (artnershi( cannot be successful if
information is ke(t confidential or there is a lack of /illin*ness to acce(t risk e&uall!.
An e"am(le of a strate*ic (artnershi( /as evident in 1009 /hen Time ?arnerAs A:L stren*thened their
strate*ic (artnershi( /ith +oo*le. +oo*le invested one billion dollars for a five (er cent stake in A:L. The
a*reement created a *lobal online advertisin* (artnershi(' /hich has made more of A:LRs industr! leadin* content
available to +oo*le users. These strate*ic (artnershi(s tend to be ver! successful because (roducts and services are
created that are not offered b! com(etitors.
6efore enterin* into an! (articular t!(e of (artnershi(' each com(an! should consider all of the (otential
benefits and conse&uences. The ne"t section of this cha(ter /ill hel( /ei*h the various costs and benefits related to
choosin* a relationshi(.
Choosin the riht relationship
ana*ers are res(onsible for establishin* the t!(e of relationshi( that is a((ro(riate for each situation. Ever!
situation should be considered inherentl! different. The d!namics of ever! relationshi( are uni&ue and mana*ers
must customi0e their a*reements to the situation. Therefore' before decidin* /hat t!(e of relationshi( to develo(
several factors need to be considered J?eit0' Castleberr!' and Tanner' 100=K. These factors include market issues
Je.*. maturit!' si0e' and barriersK' the (otential returns of the relationshi(' and the ca(abilities (rovided b! the
(artners Je.*. e"(erience /ith technolo*! or access to innovationsK. In addition' mana*ers must assess the
likelihood of success and other risks. These items include both &uantitative and &ualitative measures that re&uire a
mana*erAs com(lete attention /hen desi*nin* relationshi(s.
In the (revious e"am(le' the strate*ic (artnershi( formed bet/een Time ?arnerAs A:L and +oo*le /as
-ustified' because the com(an! e"(ects a return *reat enou*h to -ustif! the investment. Time ?arnerAs A:L /as a
suitable (artner for +oo*le because the com(an! /as lar*e enou*h to meet +oo*leAs (roduct demands. Conversel!'
+oo*le /ould not have entered into a strate*ic (artnershi( /ith a small' local Internet (rovider' because a smaller
com(an! /ould not have enou*h (roduction ca(abilit! to meet +oo*leAs demand. The idea is that as (artnershi(s
are successful' the com(anies /ill make more mone!' i.e. +oo*le believes benefits /ill e"ceed costs as does Time
?arnerAs A:L.
$trate*ic (artnershi(s ma! be established in order to *ain access into a s(ecific niche or market. The
relationshi( bet/een +oo*le and A:L ma! be an e"am(le of this t!(e of relationshi(. :ther (artnershi(s ma! be
formed in an effort to im(rove a com(an!As ima*e. %or e"am(le' lar*e oil com(anies receive a si*nificant amount of
bad (ress due to (ollution and environmental concerns. Therefore' it ma! be in their best interest to (artner /ith
com(anies attem(tin* to develo( alternative ener*! sources' e.*. solar or /ind (o/er' to *ain *ood/ill amon*
consumers.
A (artnershi( ma! be develo(ed in order to *ain access to technolo*ical innovation. A com(an! ma! find a
relationshi( /ith a lead user beneficial. A lead u$er is someone /ho has invented or resolved a customer issue
months or even !ears ahead of com(etitors in the market(lace. The! (rovide information and *ive com(anies the
abilit! to co-develo( novel (roducts' /hich (rovide a com(etitive ed*e over other market (artici(ants.
The ke! to ever! successful (artnershi( is communication and' as a result' technolo*! should be used as a means
of increasin* communication lines. This ma! mean usin* e-mail to interact /ith customers' or in a much more
com(le" manner' usin* on*oin* data e"chan*e enabled b! information technolo*ies desi*ned to increase efficienc!.
?al-art is a (erfect e"am(le of a com(an! usin* technolo*! in a hi*hl! so(histicated manner. ?al-art has
created a com(etitive advanta*e throu*h mana*in* their inventor! s!stem. Their inventor! is s!stematicall!
(ro*rammed to re(lenish common items as the! reach a minimum level. This inventor! control s!stem has been
central to ?al-art maintainin* lo/ o(eratin* costs and (rovidin* com(etitive advanta*e throu*h (roduct
availabilit!.
%oundations of successful relationshi(s
Earlier /e discussed the im(ortance of trust in a relationshi(. Trust' ho/ever' is onl! one buildin* block of
several involved in the creation of strate*ic (artnershi(s. This section /ill briefl! introduce five foundational
elements and (resent ho/ the! form lon*-term' successful relationshi(s.
These elements include:
mutual trust
o(en and truthful communication
measurable mutual *oals
or*ani0ational su((ort
commitment to mutual *ain
E"hibit 3=: Elements of successful relationshi(
Mutual tru$t: ;ot all buildin* blocks are created e&uall!G the most im(ortant of the five foundational elements
is mutual trust. As (reviousl! mentioned' tru$t is the confidence one (art! has in another to (erform an action as
a*reed. In order for a (artnershi( to be successful' trust must be mutual. As mutual trust *ro/s bet/een (artners'
(arties /ill not limit themselves to contractual re&uirements but actuall! *o to *reat len*ths in order to satisf! the
other (artner' as /ell as stren*then the relationshi(.
259
4pen and truth!ul counication: An additional element in buildin* lon*-term' successful' relationshi(s
is establishin* o(en and truthful communication lines. ,arties that communicate o(enl! and truthfull! have a
better understandin* of each othersA visions' missions and *oals in the relationshi(. :ne /a! this can be
accom(lished is b! al/a!s creatin* environments /here each (art! feels comfortable s(eakin* u(. :nce both
(artners *ain a stron* understandin* of /hat motivates the other (artner' dealin* /ith chan*in* business
conditions becomes si*nificantl! easier. Communications often include the e"chan*e of measures of the efficienc!
of shared business (rocesses.
Mea$urableH utual goal$: A ke! element necessar! for relationshi(s to be successful is havin* both (arties
share measurable' mutual *oals. utual *oals allo/ (arties to (ool to*ether com(an! resources and stren*ths. In
order to ensure *oals are bein* met' the! must be measurable and &uantifiable. $ome e"am(les of measurable
mutual *oals include sales revenue' return on assets' or some (erformance indicator of customer satisfaction.
easures ma! also include (roduction levels' error-rates' or other items that enable inte*ration of the businesses
(rocesses of the (artners. A*reein* on the items to be measured and establishin* a continuous measurement
(ro*ram is necessar! to (rovide o(timal coo(eration amon* (artners and a substantive contributor to establishin*
mutual trust.
4rgani;ational $upport: The su((ort of em(lo!ees throu*hout the or*ani0ation is another ke! element in
creatin* successful relationshi(s. The or*ani0ation as a /hole' from front line members to local and cor(orate
offices' must su((ort the idea of a (artnershi(. $tructure and culture are the underl!in* roots that create
or*ani0ational su((ort. Althou*h it is e"(ected that em(lo!ees su((ort mana*ement decisions' it is necessar! for
mana*ers to ob-ectivel! understand and evaluate the structure and culture of the or*ani0ation /hen desi*nin*
(artnershi( relationshi(s. ,ro(osed (artnershi(s (erceived as contrar! to the e"istin* structure or cultures are
candidates for enhanced scrutin!. :nce a (artnershi( is entered into it is necessar! to develo( (ro*rams such as
trainin* and re/ards to establish the desired (artnershi( behaviors. Establishin* these t!(es of (ro*rams /ill
increase the fre&uenc! of and im(rove the d!namics /ithin the interactions of both (artners. Trainin* teaches
behaviors /hich are needed to achieve (artnershi( *oals and re/ards encoura*e the su((ort of the (reviousl!
tau*ht behaviors.
Coitent to utual gain: The final buildin* block in the foundation of successful relationshi(s relates to
the level of commitment each (artner has in creatin* mutual *ain. $im(l! (ut' (artners look out for one another
and do not take advanta*e of each other. If one (art! has more resources or more efficient o(eratin* (rocedures
than the other' this should not im(act the relationshi(. If (roblems arise /ithin the (artnershi(' both (arties need
to consider the mutual investment each has contributed to the relationshi(. Mutual inve$tent$' or
relation$hip3$peci!ic a$$et$' are the tan*ible investments and resources that are s(ecific to the relationshi( in
nature. Althou*h mutual investments stren*then mutual *ain' the! cannot be easil! transferred if a (artner /ishes
to leave the relationshi(. Thus' it is im(ortant to evaluate the level of intrinsic *ain that has been established
throu*h the (artnershi(. Ideall!' such an anal!sis is (erformed before enterin* the (artnershi(' althou*h it re&uires
the mana*er to make a substantial number of assum(tions.
These foundations of relationshi(s com(rise the broad ran*e of factors mana*ers must consider /hen
develo(in* and im(lementin* durable relationshi(s. In addition' develo(in* relationshi(s consist of a series of
(hases that e"(lains ho/ the! are identified throu*h ho/ the (artners become committed to continuous
im(rovement of the relationshi(. The ne"t section (resents these (hases of relationshi( develo(ment.
,hases of relationshi( develo(ment
$trate*ic (artnershi(s e"(erience four ma-or develo(mental (hases and E"hibit 3> re(resents the life c!cle of
such a relationshi(. The len*th of (hases and transitions bet/een (hases /ill var! due to cultural and<or social
differences. ana*ers should be a/are of the current (hase of the relationshi( and evaluate decisions based u(on
ho/ the! im(act the develo(ment of the relationshi(. Dissolution can occur at an! time /hen incom(atibilities
e"ist bet/een (artners as the relationshi( develo(s.
E"hibit 3>: The relationshi( develo(ment (rocess
The a/areness (hase be*ins before an! transactions actuall! occur. Durin* this (hase' (artners are locatin*'
identif!in* and &ualif!in* various (ros(ects. $ince no transactions take (lace' com(an! ima*e and re(utation are
/ei*hed heavil! durin* this (hase. A/areness means assessin* the business relationshi(s needed to advance
or*ani0ational *oals' evaluatin* (otential areas that /ould benefit from a (artnershi(' and identif!in* (otential
(artners. ,artnershi(s can have various t!(es of relationshi(sG some areas ma! onl! need to be functional' /hereas
others ma! seek to be strate*ic. Conse&uentl!' identif!in* /hich t!(e of relationshi( /ould most benefit the firms is
im(erative and a (rimar! res(onsibilit! of mana*ers
The e"(loration (hase is considered the test for both (arties. Durin* this (hase' (arties en*a*e in e"chan*es to
e"(lore (otential (artnershi( costs and benefits. Althou*h neither side has committed to a relationshi( at this
(oint' each transaction bet/een the t/o (arties tests each of their ca(abilities. ana*ers evaluate the transactions
in terms of the foundations of relationshi(s discussed above' e.*. identif!in* (otential measures that indicate
successful transactions or estimatin* the im(act on or*ani0ational culture should the relationshi( become
established. After both (arties (rove that the! are ca(able of (erformin* as needed' the (artnershi( /ill move to the
e"(ansion (hase. In this (hase' additional business interactions focused on a lon*-term relationshi( are
investi*ated. The e"(ansion (hase ma! be time consumin* because it re&uires e"tensive research to be conducted
both internall! and e"ternall!. The (rimar! activit! of this (hase is com(arin* the results of a series of financial
anal!ses of various (ossible interactions and relationshi( t!(es.
25D
A contract' or at least a verbal commitment' for a certain (eriod of time must take (lace for the commitment
(hase to be*in. This sta*e is usuall! the final and most com(le" sta*e of a strate*ic relationshi(. Durin* this (hase'
the details of the transactions are decided' includin* initial investments that /ill be made into the (artnershi( and
s(ecification of ho/ returns /ill be divided amon* the (artners. The dissolution (hase is the decision to end the
(artnershi(. This ma! occur durin* an! of the various (hases of the relationshi( develo(ment (rocess. Dissolution
ma! arise for a number of reasons' includin* risin* costs' (oor (erformance' or chan*es in cor(orate *oals. The
decision to end the (artnershi( should not be taken li*htl!' but /hen all other o(tions have been e"ercised it ma!
be the correct choice. ?hile relationshi(s /ill follo/ this develo(ment life c!cle' a mana*erAs skills /ill substantiall!
im(act ho/ the relationshi( develo(s and the success of the a*reements for the or*ani0ation. Trainin* and
develo(ment (ro*rams for mana*ers should e"(licitl! include skills for develo(in* relationshi(s.
$kills for buildin* (ositive relationshi(s
T/o ke! skills that (romote (ositive relationshi(s are ne*otiation and facilitation. "egotiation $)ill$ can
assist /ith (roblem solvin* and conflict resolution /ith (artner or*ani0ations. 2acilitation $)ill$ deal /ith the
understandin* of *rou( (rocesses and feedback.
;e*otiation skills are necessar! for mana*ers to ensure the! understand the *oals and tactics of others.
;e*otiation involves understandin* *oals and the im(acts of the ran*e of (ossible outcomes on an or*ani0ation.
Ade(t ne*otiators must be able to identif! com(romises such that both (artners are su((ortive of the resultin*
a*reements.
%acilitation involves listenin* to the vie/s of all (arties and ensurin* that critical issues are heard' re*ardless of
their ori*in. Active facilitation brin*s ob-ectivit! to *rou( (rocesses and results in shared understandin*s of
(otential o((ortunities and the costs of (ursuin* those o((ortunities. Technolo*! can aid mana*ers in facilitatin*
*rou( discussions and recordin* *rou( interactions. In some situations' (rofessional facilitation ma! be
a((ro(riate if either side has reached a (oint /here reachin* a mutual understandin* is difficult.
%trateies for e?ternal relationships
The ra(id chan*e in technolo*! and the develo(ment of the Internet has chan*ed the traditional definitions of
manufacturers' su((liers' and customers. &upply Chain Manageent J$CK is the inte*ration of ke! business
(rocesses that add value for customers and other stakeholders. This added value is created throu*h the inte*ration
of net/orks of su((liers that (rovide (roducts' services' and information. $u((l! chain mana*ement allo/s this
net/ork of coo(eratin* a*ents to (erform one or more su((l! chain functions' (otentiall! reducin* costs and
resultin* in a com(etitive advanta*e for the or*ani0ation.
Business Fundamentals 2D0 A +lobal Te"t
E"hibit 39: ovement throu*h a su((l! chain
The above fi*ure illustrates the movement of (roducts throu*h a su((l! chain net/ork. The su((l! chain be*ins
/hen su((liers send ra/ materials to a factor!. The factor! ma! use the materials in a number of /a!s. The! can
either manufacture subcom(onents or assemble the materials into finished (roducts to be sent to the /arehouse or
distribution center /here customers can *et the (roducts.
In order for the su((l! chain to be successful' or*ani0ations must reco*ni0e that the! are but one (la!er in the
lon* chain that starts /ith su((liers and also includes trans(orters' distributors' and customers. The or*ani0ations
must interact coo(erativel! /ith their channel (artners J+andhi' 1003K. An im(ortant issue relatin* to the
develo(ment of a collaborative su((l! chain is follo/in* s(ecified orderin* and re(lenishment (olicies. An e"am(le
of Collaborative $u((l! Chain ,lannin* JC$C,K is Mendor ana*ed Inventor! JMIK.
9endor Managed Inventory allo/s the su((lier to receive electronic data to maintain constant information
about the manufacturerAs sales and stock levels. The su((lier is then res(onsible for creatin* and mana*in* the
inventor! re(lenishment schedule. MI is defined as a (rocess /here the su((lier *enerates orders for customers
based on demand information sent b! the customer J+andhi' 1003K. MI leads to chan*es in both the bu!ersA and
su((liersA inventor! mana*ement activities. MI has not become a standard /a! of mana*in* the re(lenishment
(rocess in the su((l! chain due to some (ractical issues that have slo/ed do/n its im(lementation in man!
or*ani0ations. :ne (roblem ma! e"ist because the su((lier and manufacturer are un/illin* to share information
because of a lack of trust. In order for MI to be effective' it has to (roduce observable benefits' es(eciall! in the
reduction of inventor! costs.
$ome of the benefits of MI include:
lo/er customer inventories
better forecasts
reduced costs
im(roved services
stren*thenin* com(etitive advanta*e
2D2
stren*thenin* bu!er-su((lier relationshi(s
$imilar to $C and MI' Collaborative ,lannin*' %orecastin*' and @e(lenishment JC,%@K /as develo(ed to
allo/ better communication of control information' /hich enables coordination and o(timi0ation of shared
business (rocesses. C,%@ is defined as an initiative amon* all (artici(ants in the su((l! chain intended to im(rove
the relationshi( amon* them throu*h -ointl! mana*ed (lannin* (rocesses and shared information J$eifert' 1003K.
?hen successful' it also im(roves relationshi(s bet/een (roducers and retailers.
:ne of the first C,%@ (ro-ects /as initiated b! ?al-art and ?arner-Lambert' /hich mer*ed /ith ,fi0er in
1000. This (ro-ect /as intended to reduce inventories across the su((l! chain. It (rovided com(arisons of sales and
order forecasts of each tradin* (artner and hi*hli*hted an! visible forecast differences earl! enou*h for the (artners
to resolve an! (otential issues. ?arner-Lambert a((lied C,%@ to the Listerine mouth/ash (roducts b! sharin* of
forecasts and res(ondin* to inconsistencies bet/een the collaboration (artnersA forecasts. In ?arner-LambertAs
case' ?al-artAs (romotions created lar*e s/in*s in consumer demand' /hich ?arner-Lambert /as una/are of
(rior to C,%@. ?arner-Lambert maintained substantial inventor! as a hed*e in order to (revent su((lies from
runnin* out of stock. ?al-art and ?arner-Lambert inde(endentl! calculated the demand the! e"(ected si"
months in advance. The (artners shared this information' as /ell as the /eekl! forecast' and the! /orked to*ether
to resolve variations bet/een their forecasts on a /eekl! basis. ?al-art be*an (lacin* orders si" months in
advance' instead of nine da!s' so that ?arner-Lambert /as able to construct a smoother (roduction (lan. This
allo/ed ?arner-Lambert to maintain (roduction based on consumer demand for Listerine rather than maintainin*
sufficient stock. ?al-artAs in-stock (osition im(roved and sales increased' /hile inventories dro((ed.
Additionall!' ?arner-LambertAs su((l! mana*ement im(roved substantiall!. :(timal a((lications of C,%@ occur
/hen' for e"am(le' man! other retailers -oin ?al-art in sharin* their (ro-ected demand /ith ?arner-Lambert.
Combinin* demand forecasts from man! retail customers makes it (ossible for ?arner-LambertAs (roduction (lans
to be much better ali*ned /ith total market demands.
6enefits of usin* C,%@ are:
drasticall! im(roved reaction times to consumer demand
hi*her (recision of sales forecasts
direct and lastin* communication
im(roved sales
inventor! reduction
reduced costs
The C,%@ (rocess model is divided into three (hases: (lannin*' forecastin*' and re(lenishment. The e"hibit
belo/ (rovides an overvie/ of the (hases and activities in the C,%@ model.
E"hibit 35: ,%@ ,rocess odel
$ource:
htt(:<<///.scdi*est.com<ima*es<misc<:ri*inal-C,%@-
odel.-(*. Accessed 30 December 1005
,lannin* consists of identif!in* an o((ortunit! for collaboration' then develo(in* an a*reement to collaborate'
as /ell as formin* a collaborative business (lan. %orecastin* is the most im(ortant (art of the model. It (rovides
the mechanism throu*h /hich needs are determined. It is im(rovement of this as(ect of the su((l! chain throu*h
/hich all of these strate*ies (rovide advanta*es over more traditional methods. @e(lenishment involves makin*
and deliverin* the (roduct consistent /ith the needs schedule develo(ed b! the forecast. ore accurate forecasts
lead to (roduction of onl! the needed (roducts' /hich smooths the (roduction schedule and results in (rice
stabilit!. This allo/s for e"istin* ca(acit! to be used to enable other (roducts or to develo( markets for additional
(roduction.
an! of the (rocesses re(laced b! $C' MI' and C,%@ strate*ies involve merel! (roducin* 7the avera*e of this
month over the last 3 threes (lus a small (ercenta*e8. $uch ad hoc strate*ies' althou*h /idel! em(lo!ed' contain
substantial inefficiencies. E"(loitin* these inefficiencies is the incentive for (ursuin* these (ro*rams. Another
reason such (ro*rams are (o(ular /ith mana*ers is that savin*s reali0ed *o directl! to the bottom line as customer
needs are met /hile usin* less or*ani0ational resources.
An effective su((l! chain mana*ement (ro*ram is one that develo(s (rocesses shared amon* all the su((l!
chain members in order to minimi0e the /aste of time and enable fast and reliable reactions to chan*es in demand.
Technolo*! has e"(onentiall! increased the transfer of information bet/een or*ani0ations' resultin* in im(roved
su((l! chain (erformance. T/o common (ractices' #ust-In-Time J#ITK and a*ile inventor! a((roaches' are used to
allo/ su((liers to react more &uickl! to chan*es in customer demand.
Ju$t3In3:ie em(hasi0es minimi0in* inventor! and smoothin* the flo/ of materials to ensure ade&uate and
(rom(t deliver! of com(onents. ,roducts and materials are ordered and delivered 7-ust in time8 as the! are needed
reducin* inventor! costs and ensurin* unneeded materials are not ordered. #IT be*an at To!ota otor Com(an!
but it evolved into a s!stem for continuous im(rovement of all as(ects of the manufacturin* o(erations.
2D3
Lean (roduction is a (hiloso(h! based u(on a collection of mana*ement methods and techni&ues J@ussell'
100>K. ?orkers and machines are multifunctional in lean s!stems. ?orkers are re&uired to (erform various tasks
and hel( in the im(rovement (rocess. The machines are arran*ed in small' I-sha(ed /ork cellsG this structure
enables (arts to be (rocessed in a continuous flo/. ?orkers (roduce (arts one at a time and trans(ort them
bet/een the cells in small lots. The onl! schedules (re(ared are for the final assembl! line. This schedule 7(ulls8
sub-com(onents throu*h (roduction b! makin* re&uests to stations that cascade to (roduction lines. ;othin* is
done until re&uested b! the ne"t station.
The s!stem is best im(lemented /hen su((liers are fe/ in number and are reliable. The su((liersA
manufacturin* s!stem must be fle"ible' because multi(le deliveries ma! be re&uested of the same item in the same
da!. Lean (roduction (roduces items in necessar! &uantities at necessar! times. Conse&uentl!' &ualit! must be
e"tremel! hi*h' as there is little buffer inventor! bet/een /orkstations and (roduction schedules include onl!
re&uested (roducts.
Lean s!stems can (roduce hi*h &ualit! service &uickl! at a lo/ cost. Also' the s!stem res(onds to chan*es in
customer demand. an! retailers use lean s!stems such as .ara and 6lockbuster.
6enefits of usin* lean (roduction are:
reduced inventor!
im(roved &ualit!
lo/er costs
reduced s(ace re&uirements
shorter lead time
increased (roductivit!
*reater fle"ibilit!
better relations /ith su((liers
sim(lified schedulin* and control activities
increased ca(acit!
better use of human resources
*reater (roduct variet!
:utsourcin*
4ut$ourcing is a contractual relationshi( /here an e"ternal or*ani0ation takes res(onsibilit! for (erformin*
all or (art of a com(an!As functions JMita' 100>K. :utsourcin* is the term used to desi*nate a relationshi( in /hich
a (artner com(an! (erforms business functions. Common e"am(les of outsourced functions for com(anies in the
develo(ed /orld are soft/are develo(ment and call centers. The (rinci(le -ustification for outsourcin* functions
like these from' for e"am(le' the I$ to India is that (revailin* /a*e rates for these kinds of tasks are much lo/er
than in the I$ and the Indian (artner com(anies hire and train em(lo!ees /ho s(eak En*lish and are skilled at
Business Fundamentals 2DB A +lobal Te"t
their -obs. ThereAs a difference bet/een outsourcin* and off-shorin*. ?hen a vendor in another countr! (erforms
an outsourced function' off-shorin* is the correct terminolo*! for describin* the relationshi(. The -obs bein*
outsourced in an or*ani0ation do not necessaril! have to be outsourced to another countr!. :ff-shorin* can result
in si*nificant savin*s due to /a*e and currenc! discre(ancies amon* countries. Eo/ever' &ualit! controls must be
maintained to ensure that the (roducts and services (rovided are returnin* the e"(ected results. 4ut$ourcing is
t!(icall! done b! or*ani0ations /ho outsource non-core (rocesses that are inefficient' difficult to mana*e' or too
costl!. Choosin* a su((lier to meet an or*ani0ationAs outsourcin* needs de(ends on the business (rocess bein*
outsourced' the sco(e of the (ro-ect to be outsourced' as /ell as *eo*ra(hic factors. 6usiness (rocesses that are
often considered *ood candidates to outsource include' but are not limited to:
administration Jaudit' ta"K
asset and (ro(ert! mana*ement
finance Jaccountin*' billin*' accounts (a!able' accounts receivableK
human resources Jbenefits administration' (a!rollK
information s!stems Jdevelo(ment and o(erationsK
miscellaneous Jener*! services' customer service' mailroom' food (rocessin*K
(rocurement<lo*istics
6usiness (rocess outsourcin* is becomin* increasin*l! im(ortant. The mana*ement of one or more (rocesses or
functions b! a third (art! is a means for the or*ani0ation to reduce costs. The ke! benefits of outsourcin* are
reali0ed b! or*ani0ations that outsource business (rocesses b! transferrin* the entire function out-of-house. This
enables access to s(eciali0ed kno/led*e and e"(ertise in the areaG sharin* of ne/ methodolo*ies' technolo*ies and
other resourcesG and standardi0in* (rocesses across the or*ani0ation.
An or*ani0ation needs to outline the benefits and risks of outsourcin* /hen decidin* /hether to outsource. The
benefits need to out/ei*h the risks in order for outsourcin* to be efficient and effective JEalve!' 1000K. A t!(ical
benefit<risk anal!sis is:
6enefits:
cost savin*s
increased fle"ibilit!
better customer or em(lo!ee service
hi*her (roductivit!
abilit! to concentrate on the core business
im(lementation of /ide initiatives
movement of assets off books
more resources
2D=
variet! of skills
access to ne/ methodolo*ies and technolo*ies
trainin* e"(ense reduction
*reater fle"ibilit!
@isks:
loss of control
difficult! in mana*in* costs
additional liabilit!
difficult! in brin*in* the business (rocess back in-house
reduced fle"ibilit!
Incertaint! in outsourcin* occurs /hen an or*ani0ation is not sure /hich business (rocess function to
outsource. :r*ani0ations should be overl! inclusive /ith /hat needs to be outsourced. Includin* an unbundled
re&uirement /here the vendor (rovides se(arate (ricin* for certain functions can be hel(ful. Also' deci(herin*
throu*h the com(le"it! of outsourcin* can be easier once determinin* /here the services /ill be (rovided.
The ne"t ste( in assessin* outsourcin* is to identif! (otential vendors that have the desired resources'
ca(abilities' and e"(erience. The follo/in* /ill (rovide beneficial information to hel( make an informed decision:
vendor information from industr! re(orts<surve!
lookin* at industr! (ublications
talkin* to other outsourcin* customers
sharin* *oals and concerns /ith chosen vendors
,otential e"ternal relationshi( obstacles
:utsourcin* offers a number of (otential benefits for com(aniesG ho/ever the! cannot i*nore the obstacles that
come alon* /ith outsourcin*. $ome countries have not achieved the desired benefits from outsourcin*' because
the! have not reali0ed the e"(ected cost reductions antici(ated from outsourcin* their business (rocesses to a third
(art!. The lack of ca(able su((liers and service (roviders is a ma-or (roblem. Losin* control over the outsourced
(rocess is not uncommon. Additionall!' (roblems and issues ma! emer*e due to the inte*ration of services and
s!stems (rovided b! the vendor.
,roblems /ithin the net/orked or*ani0ation usuall! arise due to the failure in identif!in* all stakeholders and
net/ork (artners. All nodes and (artners in the net/orked or*ani0ation have to kno/ and reco*ni0e all the
stakeholders involved. Another (otential (roblem can result from havin* dominant nodes' /hich must be
eliminated in the earl! sta*es of the relationshi(. All nodes /ithin a relationshi( must full! understand the mission
and *oals. Eavin* incom(atible missions and *oals /ill destro! a relationshi( and no benefits /ill be achieved.
Also' (roblems ma! arise from clashin* com(an! cultures. Therefore' /hen choosin* a su((lier or a (artner in the
Business Fundamentals 2D> A +lobal Te"t
net/orked or*ani0ation' havin* similar *oals' missions' and similar /a!s of (erformin* the business (rocesses are
vital for the success of the relationshi(.
Cha(ter summar!
This cha(ter (resents the basics necessar! for develo(in* relationshi(s amon* or*ani0ations. These include the
common t!(es of e"ternal relationshi(s' (hases of relationshi( develo(ment' the buildin* blocks of successful
relationshi(s' and the skills necessar! for develo(in* a variet! of relationshi(s. $everal strate*ies for mana*in*
e"ternal relationshi(s /ere (resented that focus on the inte*ration of the (rocesses of multi(le or*ani0ations to
create 7virtual su((liers8 that benefit from ra(id information e"chan*e and -ust-in-time ad-ustment of sales
forecasts and (roduction ca(acities.
ana*ers must consider the man! factors of each situation and desi*n a uni&ue relationshi( or set of
relationshi(s that enable the or*ani0ation to accom(lish its *oals in the most efficient manner (ossible. 3et
efficienc! is not enou*h' as the needs for fle"ibilit! and &ualit! assurance lead to ever more inte*rated net/orks of
or*ani0ations' /hich re&uire strate*ic (ers(ectives for ma"imi0in* (rofitabilit!. It is e"(ected that ever!
or*ani0ation be involved in a variet! of e"ternal relationshi(s' /here each relationshi( is -ustified accordin* to cost
and &ualit!.
E"ercises
List and describe the four d!namics that should be considered in order to choose the ri*ht relationshi(.
2. ?hat are the t/o basic relationshi( t!(esC
1. ?hat is the difference bet/een a functional relationshi( and a strate*ic (artnershi(C
3. List the five foundational elements involved in the develo(ment of lon*-term' successful relationshi(s.
B. Is an! element more si*nificant than anotherC If so' /hich one and /h!C
=. List the four ma-or (hases involved in the relationshi( develo(ment (rocess.
>. ?hen in the relationshi( develo(ment (rocess does dissolution occurC
9. Define $u((l! Chain ana*ement and state its *oals.
5. $elect a com(an! and determine the different su((liers it has. ?hat criteria does the com(an! most
(robabl! use for its su((liersC
D. Describe ho/ ?al-art has used MI to im(rove its su((l! chain mana*ementC
20. :n /hat basis does a com(an! decide /hether to outsource or notC
22. ?hat are some (otential risks to outsourcin*C
@eferences
De Mita' +lauco and Catherine L. ?an*. QDevelo(ment if :utsourcin* Theor! and ,ractice.Q Idea +rou( Inc.'
100>.
+andhi' I-val. QMendor ana*ed Inventor!: A ;e/ A((roach to $u((l! Chain ana*ement.Q Mir*inia
,ol!technic Institute and $tate Iniversit!. 1003.
2D9
Ealve!' #ohn and 6arbara elb!. Q6usiness ,rocess :utsourcin*: ,rocess' $trate*ies' and Contracts.8 #ohn
?ile! U $ons' Inc. 1000.
ohr' #akki. QCharacteristics of ,artnershi(s $uccess: ,artner Attributes' Communication 6ehavior' and
Conflict @esolution Techni&ues.Q $trate*ic ana*ement #ournal 2=.2DDB 23=-2=1. 21 Dec 1009.
@ussell' @oberta and 6ernard ?. Ta!lor III. Q:(erations ana*ement: Fualit! and Com(etitiveness in a
+lobal Environment.Q #ohn ?ile! U $ons' Inc. 100>.
$cannell' Ed and Tom $ullivan . Q@einin* in e"ternal relationshi(s.Q Info ?orld edia +rou( 25 $E, 1000
10. 1D $E, 1009
htt(:<<infotrac.*ale*rou(.com.e0(ro"!.lib.vt.edu:5050<it/<infomark<9D9<53B<23=1B5D5/25<(urlSrc2T
6IT0TA>=15>=>1Ud!nS334"rnT2BT0TA>=15>=>1UbkmT3BT2B
$eifert' Dirk. QCollaborative ,lannin*' %orecastin*' and @e(lenishment: Eo/ to Create a $u((l! Chain
Advanta*e.Q AAC: 6ooks. 1003.
$mith' ichael. QEonest! as a core value.Q ,ractical $trate*ies ;e/sletter 21 Dec 1009
`htt(:<<///.michaelhsmith(hd.com<honest !.html a.
$treet' Christo(her and Ann-%rances Cameron. QE"ternal relationshi(s and the small business: a revie/ of
small business alliance and net/ork research.Q #ournal of $mall 6usiness ana*ement. A(r 1009 13D-
1=B. 0D $E, 1009.
@. Financial and manaerial
accountinA financin your
orani9ation
Editor: Donald # cCubbre! JDaniels Colle*e of 6usiness' Iniversit! of Denver' I$AK
Reviewer: @o*er H 6aer JC,A' LLCG and %ormer ,artner' Arthur Andersen U Co.' I$AK
Learnin* 0b-ectives
to a((reciate the im(ortance of an accountin* s!stem
to differentiate bet/een financial accountin* and mana*erial accountin*
to understand the basic t!(es of accounts and their characteristics
learn to set u( a chart of accounts for !our or*ani0ation
understand the advanta*es of double-entr! bookkee(in*G t!(es of led*ers and basic re(orts
to learn ho/ to select and use accountin* soft/are
to understand common o(tions for fundin* a start-u(
Introduction
In this cha(ter' /e /ill discuss the (rinci(les of accountin* as /ell as some of the o(tions !ou have for desi*nin*
and installin* an accountin* s!stem for !our business. There are man! com(uter-based accountin* s!stems
available no/' for relativel! lo/ cost' that make it easier for an entre(reneur to use soft/are on a ,C or the Internet
to run an accountin* s!stem. ?e discuss some of the soft/are o(tions !ou ma! /ant to consider in Cha(ter 20'
7Levera*in* /ith information technolo*!8. Althou*h it is (ossible to kee( essential accountin* records manuall!' or
(erha(s on a series of s(readsheets' !ou /ill find that it is much easier and more reliable to sim(l! use accountin*
soft/are from the be*innin*.
3ou ma! need the advice of an accountin* (rofessional to /ork /ith !ou in settin* u( !our accountin* records
and hel(in* !ou select and im(lement a suitable accountin* (acka*e. :n the other hand' !ou ma! be able to handle
the task !ourself. In an! event' startin* !our business /ith a /ell-desi*ned accountin* s!stem tailored to the needs
of !our business /ill be /orth the effort.
/hy an accountin system is important
,rofessional accountants look at the accountin* records and re(orts of a business from t/o (ers(ectives. The
term the! use to describe these t/o (ers(ectives is !inancial accounting and anagerial accounting.
?iki(edia has *ood definitions of both (ers(ectives in order to hel( !ou understand the difference bet/een the t/o.
Business Fundamentals 2DD A +lobal Te"t
/. 0inancial and managerial accounting1 financing your organi'ation
Finanial aountany 3or finanial aounting8 is the field of aountany onerned with the
preparation of finanial statements for deision ma!ers, suh as sto!holders, suppliers, ban!s, employees,
go,ernment agenies, owners, and other sta!eholders0 1he fundamental need for finanial aounting is to
redue prinipal-agent problem by measuring and monitoring agentsC performane and reporting the
results to interested users0
Finanial aountany is used to prepare aounting information for people outside the organi(ation or
not in,ol,ed in the day to day running of the ompany0
7In short' %inancial Accountin* is the (rocess of summari0in* financial data taken from an or*ani0ationRs
accountin* records and (ublishin* in the form of annual Jor more fre&uentK re(orts for the benefit of (eo(le outside
the or*ani0ation.
7%inancial accountanc! is *overned b! both local and international accountin* standards8. J?iki(edia 100DaK.
In addition' financial accountin* records and financial statements are essential sources of information for the
(re(aration of ta" returns.
7ana*ement Jor mana*erialK accountin*' on the other hand' is concerned /ith the (rovisions and use of
accountin* information to mana*ers /ithin or*ani0ations' to (rovide them /ith the basis to make informed
business decisions that /ill allo/ them to be better e&ui((ed in their mana*ement and control functions.
In contrast to financial accountanc! information' mana*ement accountin* information is:
usuall! confidential and used b! mana*ement' instead of (ublicl! re(orted
for/ard-lookin*' instead of historical
(ra*maticall! com(uted usin* e"tensive mana*ement information s!stems and internal controls' instead of
com(l!in* /ith accountin* standards
This is because of the different em(hasis: mana*ement accountin* information is used /ithin an or*ani0ation'
t!(icall! for decision-makin*8. J?iki(edia 100DbK
3ou /ill not need to be terribl! concerned about financial accountin* /hen !our business is -ust be*innin*'
inasmuch as the kinds of information !ou /ill need falls into the cate*or! of internal mana*ement information
rather than information for e"ternal stakeholders. Also' note that financial accountin* re(orts must be (re(ared in
accordance /ith national and international accountin* standards. In the Inited $tates the %inancial Accountin*
$tandards 6oard J%A$6K has been the desi*nated inde(endent entit! for established accountin* re(ortin*
standards since 2D93. Inde(endent auditors of an or*ani0ationAs financial statements must (rovide /ritten
assurance in their re(ort that such statements /ere (re(ared in accordance /ith +enerall! Acce(ted Accountin*
,rinci(les J+AA,K. ?hile' in theor!' there can be man! su((ortable /a!s of (resentin* accountin* information on
such to(ics as business combinations' subse&uent events after the date of an audit' the fair value of financial
instruments and the like' %A$6 /ill t!(icall! s(ecif! the /a!s such information should be re(orted. 3ou can find
more information on %A$6 on their /ebsite at htt(:<<///.fasb.or* .
$ince so man! or*ani0ations are *lobal in sco(e' a relativel! ne/ entit!' the International Accountin* $tandards
6oard JIA$6K has come u(on the scene. Accordin* to their /ebsite' their mission 7is to develo(' in the (ublic
100
interest' a sin*le set of hi*h &ualit!' understandable and international financial re(ortin* standards JI%@$sK for
*eneral (ur(ose financial statements8 JIA$6 100DK. %inall!' /hen !our business reaches the (oint /here !ou need
to issue financial statements to e"ternal stakeholders' Je.*. banks' stockholders' re*ulator! a*encies' etc.K' !our
accountant /ill need to be familiar /ith and' ideall! a member of' the national association of accountants in !our
countr!. The reason for this is that there ma! be national standards for *enerall! acce(ted standards that are' in
some /a!s' uni&ue to !our countr!. E"am(les of national associations are the Institute of Certified ,ublic
Accountants of Hen!a Jhtt(:<<///.ic(ak.com<K' the ala!sian Institute of Certified ,ublic Accountants
Jhtt(:<<///.mic(a.com.m!<K' and the $outh African Association of Chartered Accountants
Jhtt(s:<<///.saica.co.0aK.
Accordin*l!' the balance of this cha(ter is focused on ho/ !ou can use a /ell-desi*ned accountin* s!stem as the
basis for *eneratin* useful information to hel( !ou run !our business.
Basic types of accounts
The si" basic t!(es of accounts used in a t!(ical accountin* s!stem' accordin* to ?iki(edia are:
asset accounts
liabilit! accounts
e&uit! accounts
revenue or income accounts
e"(ense accounts
contra accounts
Each t!(e of account is discussed belo/ Jada(ted from ?iki(edia 100DcK. In subse&uent sections of this cha(ter
/e /ill discuss ho/ the! are used in an accountin* s!stem.
1$$et account$: re(resent the different t!(es of economic resources o/ned b! a business' common
e"am(les of asset accounts are cash' cash in bank' e&ui(ment' buildin*' inventor!' (re(aid rent' *ood/ill'
accounts receivable. Assets are usuall! broken do/n into three cate*ories: Current assets' fi"ed assets' and
intan*ible assets. Current assets are assets /hich could be converted to cash fairl! &uickl! if necessar!'
certainl! in less than a !ear. E"am(les of current assets include cash' cash in bank' inventor!' (re(aid rent'
and accounts receivable. %i"ed assets are assets of a more (ermanent nature like manufacturin* e&ui(ment'
buildin*s o/ned' and the like. Intan*ible assets' like *ood/ill' are monetar! values assi*ned to intan*ibles
like a brand name. It is t!(icall! used /hen accountants need to -ustif! the (urchase (rice of one com(an!
b! another /hen the (rice cannot be -ustified b! the monetar! value of the (urchased com(an!As assets
minus liabilities. Intan*ible assets are be!ond the sco(e of this cha(ter as the! a((l! more to lar*er
cor(orations than to a start-u( business.
6iability account$: re(resent the different t!(es of economic obli*ations b! a business' such as accounts
(a!able' bank loan' bonds (a!able' accrued interest. Current liabilities are liabilities /hich are scheduled to
be (aid /ithin a short (eriod of time' usuall! less than a !ear. E"am(les of current liabilities include
accounts (a!able to creditors' like su((liers' current amounts (a!able to em(lo!ees J(a!rollK and interest
due on short term loans. Lon*-term liabilities Jsometimes called fi"ed liabilitiesK are liabilities of a more
(ermanent nature like loans that are not due in the current !ear Jlon*-term debtK' and the like.
EGuity account$: re(resent the residual e&uit! of a business Jafter deductin* from assets all the
liabilitiesK. In the case of a start-u( com(an! totall! financed b! the founder' it is often called o/nerAs
e&uit! and re(resents the ca(ital (rovided b! the o/ner. If the com(an! is a cor(oration and stock has been
issued to the o/ner and to others' it is often called stockholdersA e&uit!.
Revenue account$ or incoe: re(resent the com(an!Rs *ross income before e"(enses are deducted.
Common e"am(les include sales' service revenue' commissions' and interest income.
E5pen$e account$: re(resent the com(an!Rs e"(enditures to enable itself to o(erate. Common e"am(les
are em(lo!ee costs J(a!roll and frin*e benefitsK' su((lies' soft/are' tele(hone bills' electricit! and /ater'
rentals' de(reciation' bad debt' interest' and insurance.
Contra3account$: from the term ciccia' meanin* to deduct' these accounts are o((osite to the other five
above mentioned t!(es of accounts. %or instance' a contra-asset account is accumulated de(reciation. This
label re(resents deductions to a relativel! (ermanent asset like a buildin*. It accumulates an annual char*e
in reco*nition that a fi"ed asset like a buildin* is not used u( over the course of a !ear' but that it has a
useful life measured in multi(le !ears. $ince in certain countries and under certain economic conditions
real estate tends to steadil! rise in (rice' (erha(s a better e"am(le is a truck (urchased for use in the
business. Its value is more likel! to continue to decrease over the !ears. Even thou*h the market value of a
buildin* mi*ht increase rather than decrease over the !ears' accountants /ill still reduce its value b! an
annual de(reciation char*e each !ear. This is a *ood e"am(le of ho/ financial accountin* differs from
mana*erial accountin* from the o/nerAs (ers(ective. De(reciation on a buildin* or a truck reduces income
for ta" (ur(oses in most countries' so it is to the o/nerAs advanta*e to reflect de(reciation char*es in the
com(an!As accountin* records. :n the other hand' !ou can bet that the o/ner kno/s the true market value
of the buildin* /hen it comes time to sell it4
Chart of accounts
$ettin* u( an a((ro(riate chart of accounts /ill take some careful thou*ht on !our (art because !ou /ant to be
sure that accounts are set u( in each cate*or! Ji.e. assets liabilities' etc.K that /ill enable !ou to accumulate
accountin* transactions in a meanin*ful /a!. As a startin* (oint' !ou should consider the kinds of information !ou
/ill need in order to run !our business. 3ou ma! then *o on to consider other t!(es of information that ma! be
re&uired for financial re(ortin*' as /e discussed earlier. $ettin* u( a chart of accounts is best understood if /e /alk
throu*h an e"am(le. Let us su((ose a !oun* entre(reneur (lans to start a menAs clothin* store and needs to
develo( a chart of accounts. T!(icall!' accounts in a chart of accounts each have an account number. This is no
different than !ou havin* a uni&ue account number for com(anies !ou deal /ith' such as a bank or a tele(hone
com(an!. A number uni&uel! identifies !ou from another customer that mi*ht have e"actl! the same name and is
easier to use in a com(uteri0ed customer accountin* s!stem. In the same /a!' an account number in a chart of
accounts uni&uel! identifies an account and is easier to use in a com(uteri0ed *eneral accountin* s!stem. It is
common to assi*n a ran*e of numbers to each t!(e of account. :ne common /a! is illustrated in Table >:
Table >: @an*e of account numbers in a sam(le chart of accounts
101
Account T!(e Account ;umber @an*e
Asset accounts 200-2DD
Liabilit! accounts 100-1DD
E&uit! accounts 300-3DD
Income accounts B00-BDD
E"(ense accounts =00-=DD
Contra accounts >00->DD' or in the ran*e to /hich the! relate
The ne"t ste( is to decide the breakdo/n of accounts !ou need so that !ou set u( an account for the detailed
information !ou need for each account t!(e. %or e"am(le' startin* /ith the asset account cate*or!' !ou ma! decide
that !ou need to be*in !our business /ith at least the follo/in* accounts:
Table 9: E"am(les of current asset accounts in a chart of accounts
Account ;umber Account ;ame
200 Cash on Eand J,ett! cashK
20= Cash in 6ank
220 Accounts @eceivable
22= Inventor! for resale
210 :ffice e&ui(ment
The same (rocess is follo/ed /ith all of the account t!(es until !our chart of accounts is com(lete' and contains
all of the cate*ories !ou believe /ill be needed in order to accumulate accountin* information in meanin*ful
cate*ories.
%ortunatel!' there are man! sources /here !ou can obtain sample charts of accounts b! t!(e of business that
!ou can use as a *uide and startin* (oint. :ne source of such information can be the national associations Jor
institutesK of (rofessional accountants /e referred to (reviousl! in this cha(ter. Another source is the (roviders of
accountin* soft/are /e /ill discuss later in this cha(ter and in Cha(ter 20. :ne other o(tion is to do an Internet
search for a sam(le chart of accounts for !our t!(e of business. %or e"am(le' /e did a sim(le +oo*le search for a
76ed and 6reakfast8 J6U6K sam(le chart of accounts and found a D5 (a*e document that discusses almost ever!
issue someone /ho /ants to start a 6U6 needs to kno/' includin* a sam(le chart of accounts' be*innin* on (a*e D0
J6uchanan and Es(eseth 100DK.
Basic financial statements
Later in this cha(ter /e /ill discuss some of the other t!(es of re(orts !ou /ill /ant to be able to (roduce in
order to (lan and control !our business finances' but for no/' let us concentrate on the t/o most fundamental
statements of all: The Income $tatement and the 6alance $heet. The Income $tatement is im(ortant because it /ill
tell !ou if !our business /as (rofitable or not for an! *iven (eriod of time. The 6alance $heet /ill sho/ !ou the
financial condition of !our business' /hat !ou o/n' /hat !ou o/e' and the o/nersA financial interest. 3ou /ill
sometimes hear the Income $tatement referred to as the ,rofit and Loss $tatement and the 6alance $heet called the
$tatement of %inancial Condition.
EereAs a sim(le e"am(le of an Income $tatement:
Income $tatement d 6illAs 6ic!cle $ho( d 3ear 100D
$ales
Cost of *oods sold
V10'000
-5000
+ross ar*in V21'000
,a!roll costs
@ent
:ther e"(enses
->000
-1000
-2000
;et Income V3'000.00
The onl! items that need additional e"(lanation are 79ost of goods sold8 and 7gross margin8. The cost of *oods
sold is the total cost the o/ner of a business (aid for (roducts sold. If the o/ner of 6illAs 6ic!cle $ho( sim(l! bu!s
bic!cles from the manufacturer and has them shi((ed to the sho(' the cost of a bic!cle is /hatever bill (aid the
manufacturer (lus the cost of shi((in* it to the sho( and an! labor cost that mi*ht be involved in assemblin* the
bic!cle before (uttin* it on dis(la! for customers to see. The Cost of *oods sold sho/n on the Income $tatement
JI$D 5'000K is the total costs associated /ith all of the bic!cles sold b! 6ill in the !ear 100D. This is the accountin*
conce(t of 7matchin*8. JThe $ales fi*ure of I$D 10'000 is the total of the (rices (aid b! all of the customers /ho
bou*ht bic!cles from 6ill durin* the !earK.
+ross mar*in is sim(l! the difference bet/een $ales and the Cost of *oods sold. It is an im(ortant fi*ure for
o/ners to /atch' and !ou /ill sometimes hear business o/ners talk about their mar*ins or 7mana*in* their
mar*ins8. The *reater the *ross mar*in is the more (rofitable a business is likel! to be. %or e"am(le' see if !ou can
determine /hat 6illAs *ross mar*in and (rofit /ould be if he had to sell his bic!cles at a discount because of
com(etitive (ressure and his sales revenue for the !ear amounted to I$D 29'000 instead of I$D 10'000.
This is' of course' a relativel! sim(le e"am(le to illustrate the *eneral outline of an Income $tatement' but it
should *ive !ou an a((reciation of /h! the Income $tatement is im(ortant to the o/ner of an! business. Am I
makin* mone! or notC And if not' /h! notC
EereAs a sim(le e"am(le of a 6alance $heet:
10B
Table 5: 6alance $heet d6illAs 6ic!cle $ho(d 32 December 100D
1$$et$
Cash on hand and in bank I$D 5'000
Accounts @eceivable 3000
Inventor! d ;e/ 6ic!cles 21000
,arts Inventor! B000
:ffice E&ui(ment 1000
@e(air E&ui(ment 2000
:otal 1$$et$ J&D 70H000
6iabilitie$
Accounts ,a!able I$D 20'000
Loan from 6ank 2='000
:otal 6iabilitie$ 2<000
4wner%$ EGuity <000
:otal 6iabilitie$ and 4wner%$ EGuity J&D 70H000
3ou can see /h! it is called a 6alance $heet. It is because the sum of the asset accounts must e&ual the sum of
the liabilit! and o/nerAs e&uit! accounts. In other /ords' the! must be in balance. 3ou can also see /h! it is
sometimes called a statement of financial (osition. It sho/s the condition of the business' in financial terms' as of a
s(ecific date.
;e"t' /e /ill discuss a short histor! of accountin* and the invention of double-entr! bookkee(in*' a techni&ue
that is of *reat assistance to accountants and bookkee(ers in assurin* the accurac! of accountin* records and the
re(orts that are (re(ared from them.
# short history of accountin and double entry boo$$eepin
There are man! stories of ho/ accountin* be*an' but most /riters a*ree that it has a lon* histor!' *oin* back
='000 !ears or so. Le*end has it that /ealth! individuals' /antin* to kee( track of their (ossessions Jcattle' stores of
*rain' *old ornaments and so forthK' hired scribes to kee( records of additions and deletions to their lists of
(ossessions as the! bou*ht' sold' or traded them. :ne su((oses that that the! /anted to be sure that an! chan*es
/ere le*itimateG that losses /ere not due to theft' and that if 200 cattle /ere (urchased that the herd increased b!
200. %rom time to time' a count of (ossessions /ould be made and com(ared to the records maintained b! the
scribe. An! une"(lained losses /ould be a si*nal that somethin* /as amiss and /orth! of investi*ation.
odern bookkee(in* is *enerall! thou*ht to have been invented durin* the Italian @enaissance Jaround 2BDB
AD' accordin* to one version:
Formal aounting was in,ented by a Franisan friar named -ua Eaioli in $=J= in his paper
M+umma de .rithmetia, :eometria, Eroportioni et EroportionalitaM 3ME,erything .bout .rithmeti,
:eometry and EroportionM801he treatise desribed double-entry boo!!eeping"that for e,ery redit
entered into a ledger there must be a debit, a onept reated by Florentine merhants and hailed by
:oethe as Mone of the most beautiful diso,eries of the human spiritM0 1hree traits shared by
suessful merhants, Mr0 Eaioli wrote, were aess to ash, a onstantly updated aounting
system and a good boo!!eeper0 Ais ontemporary 9hristopher 9olumbus apparently !new that: On
his ,oyage to the 6ew World, he too! a royal aountant to tra! his Mswindle sheet when he started
to figure the ost of gold and spies he would aumulateM, aording to .listair 9oo!eCs $J7P boo!
M.meria0M 3E/euti,e 9aliber '44J8
In m! o(inion' +oethe /as e"a**eratin* /hen he called double entr! bookkee(in* Qone of the most beautiful
discoveries of the human s(iritQ. I can think of man! other discoveries that are more beautiful' but as the old sa!in*
*oes: 76eaut! lies in the e!e of the beholder8 and (erha(s +oethe /as a bookkee(er at heart. At an! rate' the
discover! of double-entr! bookkee(in* /as undeniabl! im(ortant' because' as ?iki(edia e"(lains:
#ouble-Entry Boo!!eeping is a system that ensures the integrity of the finanial ,alues reorded in
a finanial aounting system0 2t does this by ensuring that eah indi,idual transation is reorded
in at least two different 3setions8 nominal ledgers of the finanial aounting system and so
implementing a double he!ing system for e,ery transation0 2t does this by first identifying ,alues
as either a #ebit or a 9redit ,alue0 . #ebit ,alue will always be reorded on the debit side 3left hand
side8 of a nominal ledger aount and the redit ,alue will be reorded on the redit side 3right hand
side8 of a nominal ledger aount0 . nominal ledger has both a #ebit 3left8 side and a 9redit 3right8
side0 2f the ,alues on the debit side are greater than the ,alue of the redit side of the nominal ledger
then that nominal ledger is said to ha,e a debit balane0
Eah transation must be reorded on the #ebit side of one nominal ledger and that same
transation and ,alue is also reorded on the 9redit side of another nominal ledger hene the
e/pression #ouble-Entry 3entered in two loations8 one debit and one redit 3Wi!ipedia '44Jd80
Eere is a sim(le e"am(le to *ive !ou a feel for the /a! that double entr! bookkee(in* /orks:
Let us assume that the o/ner of 6illAs 6ic!cle $ho(' /hich /e discussed above' bou*ht some ne/ bic!cles on
credit' for inventor!. This is ho/ the accounts /ould be affected:
Debit the inventor! d ne/ bic!cles account: I$D 1'000
Credit the accounts (a!able account: I$D 1'000
;e"t let us assume that the o/ner had some e"tra cash and decided to (a! do/n some of our bank loan. This is
ho/ the accounts /ould be affected:
Debit the loan from bank account: I$D 2'000
Credit the cash account: I$D 2'000
;ote t/o thin*s. %irst' a sin*le transaction affects t/o accounts Ja double-entr!K. $econdl!' note that a debit to
an asset account increases the value of the account and a debit to a liabilit! Jor o/nerAs e&uit!K account decreases its
value. $o' /hen I$D 2'000 is (aid to the bank' the debit to the loan from bank account reduces the amount /e o/e
to the bank' and the credit to cash decreases the balance in our cash account.
10>
,eders
The version &uoted above states that debits and credits must be entered into a ledger, so it is im(ortant that !ou
understand /hat this term means' as it ma! be ne/ to !ou. As !ou /ill see from some of the additional sources /e
&uote' oftentimes @ournal and ledger are used to describe the same thin*.
$o' /hat is a led*erC A led*er is sim(l! a collection of the accounts of !our business /here transactions are
recorded usin* the double-entr! bookkee(in* method. If !ou are o(eratin* /ith a com(letel! manual s!stem' !our
led*ers J!ou /ill have more than one' as discussed in a momentK are on (a(er' usuall! in a bound volume (re-
(rinted in a s(ecial /a! to accommodate the recordin* of transactions. If !ou are usin* a (re-coded a((lication
soft/are (acka*e on a ,C for !our accountin* s!stem' !our led*ers /ill be on the com(uter.
T!(es of led*ers
ost or*ani0ations o(erate /ith t/o t!(es of led*ers' the +eneral Led*er and one or more subsidiar! led*ers.
The +eneral Led*er contains a minimum of one (a*e for each account in the chart of accounts. Accordin* to one
authoritative source:
2t is also !nown as :5- and 1he Final Boo! of Entry0 2t is a olletion of all balane sheet, inome, and
e/pense aounts used to !eep the aounting reords of a ompany0 . :eneral -edger is a perpetual
reord of the ati,ity and balanes of the aounts0 Eah ompany has only one :eneral -edger 3Gni,ersal
.ounting '44J8
Eo/ever' some accounts' like accounts receivable or accounts (a!able' are com(rised of the sum of a number of
individual amounts. Let us look at accounts receivable as an e"am(le. $u((ose /e have a balance Ji.e. totalK amount
of I$D 3'1=0 in our accounts receivable account in the +eneral Led*er. @emember' accounts receivable are
amounts our customers o/e us. Therefore' the I$D 3'1=0 balance /e have in our accounts receivable is the sum
total of amounts o/ed to us b! several individual customers. %or the sake of convenience' /e kee( a subsidiar!
led*er of individual accounts receivable as illustrated in E"hibit 3D belo/.
Cu$toer "ae:
Cu$toer 1ddre$$:
Cu$toer CityL&tate:
Cu$toer :elephone "uber:
Cu$toer eail addre$$:
Date Invoice ;umber $ales
Amount
,a!ment
Amount
,a!ment
@eference ;umber
6alance
#une 19' 100D 5903B=D50 I$D 100 I$D
100.00
#ul! >' 100D 5903B>002 I$D 10 I$D
110.00
#ul! 2=' 100D 5903B>21= I$D 100.00 >=5D I$D
10.00
#ul! 10' 100D 5903B>2D5 I$D 2= I$D
3=.00
#ul! 15' 100D 5903B>11= I$D 1= I$D
>0.00
Au*ust D'
100D
I$D >0.00 I$D
0.00
Au*ust 1B'
100D
5903B>==1 I$D == I$D
==.00
E"hibit 3D: Accounts @eceivable $ubsidiar! Led*er e"am(le
The Accounts @eceivable $ubsidiar! Led*er has one (a*e for each customer /ho has earned the ri*ht to be
e"tended credit' and is e"(ected (a! off their outstandin* balance each month. The sum of the customer balances in
the Accounts @eceivable $ubsidiar! Led*er must e&ual the Accounts @eceivable balance in the com(an!As +eneral
Led*er.
In the case of the Accounts @eceivable e"am(le' /hen a sale is entered in the led*er' a corres(ondin* entr! is
made in a $ales #ournal. And' /hen a (a!ment is received and (osted to a customerAs account in the Accounts
@eceivable led*er' a corres(ondin* entr! is made in a Cash @ecei(ts #ournal.
105
$imilar subsidiar! led*ers are created an! time there is a sufficient number of detail accounts to /arrant it.
Detailed accounts ma! be em(lo!ee accounts for (a!roll' or (roduct numbers for inventor!' for e"am(le. $ettin* u(
subsidiar! led*ers and -ournals for s(ecial (ur(oses like this shields the +eneral Led*er from an e"cessive amount
of detail and' at the same time' (reserves the (rinci(le of double-entr! accountin*' makes reconciliations easier
and' in *eneral' (romotes accurac! in a com(an!As accountin* records. In real life' of course' thin*s can *et more
com(licated' but this is the basic a((roach that is follo/ed.
In Cha(ter 20' /e discuss the man! o((ortunities that small businesses have to use com(uter soft/are to set u(
and maintain records of all sorts for their business' from accountin*' (a!roll' customer relationshi( mana*ement'
inventor! control and the like. +oin* much be!ond this is be!ond the sco(e of this cha(ter. 3ou can e"(ect the most
(o(ular accountin* soft/are (acka*es to assume !ou do not kno/ a lot about accountin*. Therefore' most offerin*s
/ill lead !ou throu*h the (rocess of settin* u( a chart of accounts that is a((ro(riate for !our business and hel( !ou
decide /hich basic re(orts !ou should have. :ver and above that' most /ill (ermit !ou to (re(are the advanced
re(orts and anal!ses discussed in the follo/in* section' as /ell as custom re(orts tailored to !our s(ecific needs.
There are several sources on the Internet that com(are the functions' features' and (rices of soft/are (acka*es
for accountin* to hel( !ou make the (ro(er selection. :ne es(eciall! *ood one is 7Accountin* $oft/are @evie/
100D d To(Ten@EMIE?$8 JAccountin* $oft/are @evie/ 100DK.Fuotin* from their /ebsite:
7:(enin* a small business in toda!Rs fast-(aced economic climate can be an e"citin*' com(licated and e"(ensive
endeavor. :n the surface' it seems sim(leY-ust make sure !ouRre sellin* !our *oods for more than it costs to
(roduce them' ri*htC ?ron*. ?ithout (ro(er bookkee(in*' !our bloomin* com(an! can take an abru(t dive
to/ards bankru(tc!.
7This is /h! accountin* is a ke! com(onent in an! small businessRs success. It should (la! a role in ever!
financial decision !ou makeYfrom (urchasin* vehicles' e&ui(ment and su((lies to increasin* (roduction' stockin*
inventor! and determinin* salaries.
76ut if !ou' like most (eo(le' lack an e"tensive back*round in accountin*' /here do !ou be*inC Toda!Rs
accountin* soft/are has the solutionY*ivin* !ou the tools and the information !ou need to kee( !our financial
records in check' /hile aidin* !ou in makin* the most of !our com(an!Rs cash flo/.
7Infortunatel!' there are about as man! soft/are (acka*es for accountin* as there are t!(es of small businesses
and determinin* /hich one best meets the needs of !our com(an! can be a trick! transactionYbut thatRs /here /e
can hel(.
7?ithin this site' !ouRll find articles on accountin* and com(rehensive revie/s to hel( !ou make an informed
decision on /hich accountin* soft/are is ri*ht for !our business. At To(Ten@EMIE?$' /e do the research so !ou
donRt have to4e8 If !ou have access to the Internet' /e hi*hl! recommend e"(lorin* this site for ideas on ho/ to
move for/ard /ith !our accountin* s!stem.
Eere is an e"cer(t from the /ebsite /here the! com(are ten soft/are (acka*es feature b! feature. In the table
re(roduced here' /e onl! sho/ the names of the (acka*es and their (rices. %or more detail !ou /ill need to visit the
Accountin* $oft/are @evie/ 100D /ebsite itself Jsee the end of cha(ter references for the linkK.
Table D: 100D Accountin* $oft/are @evie/ ,roduct Com(arisons
,acka*e ;ame :verall @ankin* ,rice in I$ Dollars
,eachtree Com(lete E"cellent V1BD.DD
3:6 6usiness Essentials Mer! +ood ,lus VDD.00
Fuickbooks ,ro Mer! +ood V295.D=
;et$uite $mall 6usiness Mer! +ood V2255.00
Cou*ar ountain Mer! +ood V2BDD.00
6ookkee(er Mer! +ood V1D.DD
$im(l! Accountin* +ood ,lus V2BD.DD
C3A IM
Accountin* for ?indo/s
+ood ,lus V=D=.00
DacEas! +ood ,lus VBDD.DD
6ottom Line Accountin* +ood V3DD.00
As !ou can see' there is a /ide ran*e of (rices' from I$D 1D.DD to I$D 2BDD.00' and the (acka*e /hich sells for
I$D 1D.DD is rated the same as the one that sells for I$D 2BDD.00. Clearl!' this sho/s that some anal!sis is
necessar! before settlin* on a s(ecific accountin* soft/are (acka*e. 3ou ma! need to en*a*e the service of a
(rofessional accountant or' at least' a collea*ue /ho has studied accountin* and accountin* soft/are (acka*es to
hel( !ou make the ri*ht selection for !our business. Eere is some *ood advice from the Accountin* $oft/are @evie/
100D /ebsite:
7?ith all the accountin* soft/are available' itRs hard to kno/ /hich (ro*ram is the best fit for !our business
finances. 6elo/ are the criteria To(Ten@EMIE?$ used to evaluate small business accountin* soft/are.
Ea$e o! J$e M ?e look for finance soft/are that is sim(le to install' set u(' and understand. The best
accountin* (ro*rams make navi*atin* intuitive' so !ou never have to *uess /here !ou are or /hat to do
ne"t.
1ccounting Module$ M Accountin* modules are cate*ories re&uired to successfull! maintain !our
business finances Jsuch as Accounts ,a!able and Accounts @eceivableK. Does the accountin* soft/are have
all the basic accountin* modules !ouRll needC All the bells and /histles of the soft/are arenRt relevant if the
basics arenRt covered. ?ill the finance soft/are *ro/ /ith !our com(an!C ?e look for accountin* soft/are
that lets !ou *ro/ and customi0e !our s!stem to fit !our individual business needs.
Reporting Categorie$ M Consider accountin* soft/are that offers a /ide ran*e of re(orts. 3ou should be
able to (rint at least one kind of re(ort for ever! module. @e(ortin* features are often built into each
section' but itRs better if !ou can create re(orts from an!/here in the (ro*ram. Customi0able re(orts save
!ou timeG look for accountin* soft/are that /ill let !ou set !our o/n criteria. ?ith detailed financial
re(ortin*' !ou can anal!0e /hat is and isnRt /orkin* for !our business.
120
Eelp Docuentation M Look for email and (hone su((ortG toll-free (hone and live su((ort' online hel(
is a bonus. :nline' /e look for inde"ed hel( to(ics that can be searched easil!. 3ouRll /ant &uick access for
both technical hel( and accountin* hel( for !our soft/are. Accountin* soft/are com(anies should have
&ualified (eo(le Jboth technicians and accountantsK ans/erin* these tou*h &uestions.
7?ith the ri*ht accountin* soft/are' !ou /ill be able to mana*e !our com(an! books &uickl! and easil!8.
JAccountin* $oft/are @evie/ 100DK
#d&anced reports and analyses
This section discusses some of the more common re(orts (re(ared from an accountin* s!stem that have' over
the !ears' (roven to be valuable tools for mana*in* a business.
Cash flo/ forecasts
There is a sa!in* in business that 7Cash is Hin*8. :ne of the /orst thin*s that can ha((en to a com(an! is to run
short of cash une"(ectedl!. This can make it difficult to (a! su((liers and em(lo!ees /ithout scurr!in* around to
raise needed cash &uickl!' and /hen !ou must raise cash &uickl! !ou often find it a difficult and e"(ensive task.
6usiness o/ners are not al/a!s successful in raisin* cash &uickl! and in the /orst cases' must *o bankru(t. This is
/h! cash flo/ forecasts are (re(ared. The! are eas! to (re(are and can be &uickl! done usin* a s(readsheet
(ro*ram. The! can also be (re(ared manuall!. ?hat a cash flo/ forecast does is estimate cash in(uts and out(uts
over a (eriod of time' usuall! at least D0 da!s in order to *ive !ou assurance that !our business /ill have the cash
necessar! to meet its obli*ations to others. If the cash flo/ forecast sho/s' for e"am(le' that !ou are in a deficit
(osition t/o months out' !ou /ill have time to raise the necessar! cash !ou need and avoid a sudden cash crisis.
Cash flo/ forecasts are often (re(ared for lon*er (eriods of time as /ell' de(endin* on circumstances. In addition'
the! are often (re(ared usin* various assum(tions about the future Je.*. *eneral economic conditions' sales *ro/th'
increased e"(enses' etcK.
As one authoritative /ebsite states: 76! kno/in* !our cash (osition no/ and in the future' !ou can:
ake certain !ou have enou*h cash to (urchase sufficient inventor! for seasonal c!clesG
Take advanta*e of discounts and s(ecial (urchasesG
,ro(erl! (lan e&ui(ment (urchases for re(lacement or e"(ansionG
,re(are for ade&uate future financin* and determine the t!(e of financin* !ou need Jshort term credit line'
(ermanent /orkin* ca(ital' or lon*-term debtK.
$ho/ lenders !our abilit! to (lan and re(a! financin*.
7%or a ne/ or *ro/in* business' the cash flo/ (ro-ection can make the difference bet/een succeedin* and
failure. %or an on*oin* business' it can make the difference bet/een *ro/th and sta*nation8.
,re(arin* a cash flo/ (ro-ection is a somethin* like (re(arin* !our bud*et and balancin* !our checkbook at the
same time. Inlike the income statement' a cash flo/ statement deals onl! /ith actual cash transactions.
De(reciation' a non-cash transaction' does not a((ear on a cash flo/ statement. Loan (a!ments Jboth (rinci(al and
interestK /ill a((ear on !our cash flo/ statement since the! re&uire the outla! of cash.
Cash is *enerated (rimaril! b! sales. 6ut in most businesses' not all sales are cash sales. Even if !ou have a retail
business and a lar*e (ercenta*e of !our sales are cash' it is likel! that !ou offer credit Jchar*e accounts' char*e
cards' term (a!ments' la!a/a!' trade creditK to !our customers. Thus' !ou need to have a means of estimatin* /hen
those credit sales /ill turn into cash-in-hand. J$mallbusinessnotes.com 100DK
?orkin* ca(ital anal!ses
?orkin* ca(ital is commonl! defined as the funds a business needs to su((ort its normal o(erations. In some
/a!s' a /orkin* ca(ital anal!sis is similar to a cash flo/ forecast' but it differs in its focus on the o(eratin* c!cle of
the business.
Fuotin* from the /ebsite Entre(reneur.com' 7the o(eratin* c!cle anal!0es the accounts receivable' inventor!
and accounts (a!able c!cles in terms of da!s. In other /ords' accounts receivable are anal!0ed b! the avera*e
number of da!s it takes to collect an account. Inventor! is anal!0ed b! the avera*e number of da!s it takes to turn
over the sale of a (roduct Jfrom the (oint it comes in !our door to the (oint it is converted to cash or an account
receivableK. Accounts (a!able are anal!0ed b! the avera*e number of da!s it takes to (a! a su((lier invoice.
7ost businesses cannot finance the o(eratin* c!cle Jaccounts receivable da!s ] inventor! da!sK /ith accounts
(a!able financin* alone. Conse&uentl!' /orkin* ca(ital financin* is needed. This shortfall is t!(icall! covered b! the
net (rofits *enerated internall! or b! e"ternall! borro/ed funds or b! a combination of the t/o.
7ost businesses need short-term /orkin* ca(ital loans at some (oint in their o(erations. %or instance' retailers
must find /orkin* ca(ital to fund seasonal inventor! buildu( bet/een $e(tember and ;ovember for Christmas
sales. 6ut even a business that is not seasonal occasionall! e"(eriences (eak months /hen orders are unusuall!
hi*h. This creates a need for /orkin* ca(ital to fund the resultin* inventor! and accounts receivable buildu(8.
JEntre(reneur.com 100DK A /orkin* ca(ital anal!sis is (re(ared in a manner similar to /hat /e described for a
cash flo/ forecast in that assum(tions are made about the im(act on /orkin* ca(ital as a result of activities durin*
the forecast (eriod in order to (rovide the business o/ner /ith assurance that ade&uate /orkin* ca(ital to su((ort
o(erations /ill be *enerated b! normal business o(erations. If not' alternative sources of /orkin* ca(ital must be
lined u(' and the earlier such a need is reco*ni0ed' the better.
Brea!-e,en analysis
A break even anal!sis is desi*ned to sho/ !ou ho/ much revenue must be *enerated to cover !our fi"ed and
variable costs. @evenue belo/ the breakeven (oint means the business is losin* mone! and revenue above the
breakeven (oint means the business is (rofitable.
Let us look at a sim(le e"am(le' one that assumes !our business is sellin* onl! one (roduct. In order to calculate
the breakeven (oint !ou /ill need to kno/ three thin*s:
3our fi"ed costs
3our variable cost
3our unit sellin* (rice
121
:nce the breakeven (oint is (assed and revenue continues to rise' !our business /ill be (rofitable. This is /h!
kno/in* !our breakeven (oint in terms of unit sales is so im(ortant. The /ebsite About.com:Entre(reneurs
contains an eas! to understand formula for calculatin* !our breakeven (oint:
To conduct !our breakeven anal!sis' take !our fi"ed costs' divided b! !our (rice minus !our variable costs. As an
e&uation' this is defined as:
(rea)even .oint N 2i5ed Co$t$LAJnit &elling .rice 3 9ariable Co$t$B
This calculation /ill let !ou kno/ ho/ man! units of a (roduct !ou /ill need to sell to break even. :nce !ou have
reached that (oint' !ou have recovered all costs associated /ith (roducin* !our (roduct Jboth variable and fi"edK.
Above the breakeven (oint' ever! additional unit sold increases (rofit b! the amount of the unit contribution
mar*in' /hich is defined as the amount each unit contributes to coverin* fi"ed costs and increasin* (rofits. As an
e&uation' this is defined as:
Jnit Contribution Margin N &ale$ .rice 3 9ariable Co$t$
@ecordin* this information in a s(readsheet /ill allo/ !ou to easil! make ad-ustments as costs chan*e over time'
as /ell as (la! /ith different (rice o(tions and easil! calculate the resultin* breakeven (oint. 3ou could use a
(ro*ram such as E"celAs +oal $eek' if !ou /anted to *ive !ourself a *oal of a certain (rofit' sa! I$D 2 million' and
then /ork back/ards to see ho/ man! units !ou /ould need to sell to hit that number. JThis online tutorial /ill
sho/ !ou ho/ to use +oal $eek.K8JAbout.com: Entre(reneurs 100DK.
,rofitabilit! anal!ses Je.*. b! customer' (roduct' re*ionK
There are man! t!(es of anal!ses that mana*ers (re(are in order to *ain a dee(er insi*ht into the o(erations of
their businesses. :ne of the most im(ortant of these is (rofitabilit! anal!ses. ana*ers' kno/' intuitivel!' that
some customers are more (rofitable than others' that the! make more *ross mar*ins on some (roducts than others'
and if the business has more than -ust local covera*e' that some *eo*ra(hical re*ions are more (rofitable than
others. ?hile it is *ood to kno/ such thin*s intuitivel!' it is better to kno/ them for sure. And kno/in* them for
sure re&uires that s!stematic anal!ses be (re(ared.
Accordin* to ?iki(edia' 7Customer (rofitabilit! JC,K is the difference bet/een the revenues earned from and
the costs associated /ith the customer relationshi( in a s(ecified (eriod8.
7Althou*h C, is nothin* more than the result of a((l!in* the business conce(t of (rofit to a customer
relationshi(' measurin* the (rofitabilit! of a firmAs customers or customer *rou(s can often deliver useful business
insi*hts.
7Fuite often a ver! small (ercenta*e of the firmAs best customers /ill account for a lar*e (ortion of firm (rofit.
Althou*h this is a natural conse&uence of variabilit! in (rofitabilit! across customers' firms benefit from kno/in*
e"actl! /ho the best customers are and ho/ much the! contribute to firm (rofit.
7At the other end of the distribution' firms sometimes find that their /orst customers actuall! cost more to serve
than the revenue the! deliver. These un(rofitable customers actuall! detract from overall firm (rofitabilit!. The
firm /ould be better off if the! had never ac&uired these customers in the first (lace8 J?ik(edia 100DeK.
7The bi**est challen*e in measurin* customer (rofitabilit! is the assi*nment of costs to customers. ?hile it is
usuall! clear /hat revenue each customer *enerated' it is often not clear at all /hat costs the firm incurred servin*
each customer8. $o' accountants tr! and develo( some sort of reasonable method of allocatin* fi"ed and variable
costs to customers. A t!(ical method is to anal!0e each cost and tr! to determine the (ro(ortion attributable to each
customer. A sim(le and clear-cut e"am(le is a situation /here a store has both /alk-in and on-line customers. The
costs of rentin* and maintainin* the (h!sical store could reasonabl! be allocated to the customers /ho (urchase
*oods in (erson' based on the number of visits or more likel! on the amount of sales to each customer. :n-line
customers could have the costs of develo(in* and maintainin* the /ebsite allocated to them. ?ith this information
in hand' a customer (rofitabilit! anal!sis can be (re(ared. It is usuall! (re(ared in descendin* order b! customer
(rofitabilit!' as illustrated in E"hibit B0:
Dour Re$taurant &upply Copany Dear to Date 2009
Customer ;ame +ross $ales Allocated Costs .ro!it
@oseAs @estaurant I$D 21000 I$D 9000 I$D =000
6illAs 6ar 6 F I$D 20000 I$D ==00 I$D B=00
CalAs Coffee $ho( I$D 5000 I$D 3=00 I$D B=00
AliceAs Cafe I$D =000 I$D 3000 I$D 1000
,aulAs ,i00a Eut I$D B000 I$D 3=00 I$D =00
Total I$D 3D000 I$D 11=00 I$D 2>=00
E"hibit B0: Customer ,rofitabilit! Anal!sis
Assume !ou are the o/ner of the restaurant su((l! com(an! illustrated in the e"hibit. ?hat kinds of useful
information can !ou *ather from an anal!sis such as thisC
an! com(anies (re(are a similar t!(e of anal!sis at the *ross mar*in level and ski( the ste( of tr!in* to
allocate costs to individual customers. In this case' cost of *oods sold is substituted for 7allocated costs8 in column
three of E"hibit B0' and column four /ill sho/ *ross mar*in b! customer instead of (rofitabilit! b! customer. %or
man! mana*ers' *ross mar*in b! customer *ives them the essential information the! need /ithout *oin* throu*h
the additional ste( of tr!in* to allocate costs to customers' /hich is clouded b! its inherent inaccuracies.
BudetsB forecastsB and alternati&e scenarios
6ud*ets
Earlier' /e discussed cash flo/ forecasts and ho/ the! are used. An e"tension of the cash flo/ forecast conce(t
is the o(eratin* bud*et. ost or*ani0ations have them. A bud*et is the financial e"(ression of an or*ani0ationAs
o(eratin* (lan for a (eriod of time' usuall! at least a !ear. ,rior to the be*innin* of the !ear' mana*ers (re(are a
(lan for /hat the! ho(e to accom(lish in the comin* !ear in terms of revenue' e"(enses' and net (rofit.
A more formal definition of a bud*et is:
12B
7A budget is a financial document used to (ro-ect future income and e"(enses. The bud*etin* (rocess ma! be
carried out b! individuals or b! com(anies to estimate /hether the (erson<com(an! can continue to o(erate /ith
its (ro-ected income and e"(enses.
A bud*et ma! be (re(ared sim(l! usin* (a(er and (encil' or on com(uter usin* a s(readsheet (ro*ram like
E"cel' or /ith a financial a((lication like Fuicken or Fuick6ooks.
The (rocess for (re(arin* a monthl! bud*et includes:
Listin* of all sources of monthl! income
Listin* of all re&uired' fi"ed e"(enses' like rent<mort*a*e' utilities' (hone
Listin* of other (ossible and variable e"(enses8. J6i0ta"la/.about.com 100DK
Then' as the !ear unfolds' actual income and e"(enses are (osted to the accountin* records' and com(ared to
/hat /as bud*eted' and a variance from bud*et for each item bud*eted Je.*. sales' sellin* e"(enses' advertisin*
costs' etcK is calculated. ana*ers res(onsible for the various income and e"(ense items then e"amine each
variance and' if it is substantial' search for an e"(lanation. %or e"am(le' it is one thin* if electricit! costs are 10 (er
cent hi*her than /hat /as bud*eted for one month because /orkmen /ere usin* (o/er tools to re(air the roof. In
that case' /e can e"(ect costs to return to normal /hen the re(air /ork is com(leted. It is &uite another thin* if
costs are hi*her because the electric com(an! raised its rates. In that case' /e can e"(ect that costs /ill be at least
10 (er cent hi*her in the future.
%orecasts
ost or*ani0ations take bud*et variance to date into consideration each month' and then (re(are a re,ised
budget 3or foreast8 for the balance of the !ear. This ste( is (articularl! im(ortant if variances to date var! from the
ori*inal bud*et in a ma-or /a!. %or e"am(le' if sales are less than (ro-ected because market conditions are less
favorable than antici(ated /hen the bud*et /as (re(ared' mana*ers ma! look for /a!s to increase sales or reduce
e"(enses in order to avoid a loss for the !ear.
$cenarios
There are man! other forecasts that mana*ers ask for in order to tr! and antici(ate /hat the future mi*ht hold
so the! can (re(are contin*enc! (lans in case of unforeseen events. E"am(les of unforeseen events that ma! /ell
affect future outcomes are the arrival of a ne/ com(etitor' a chan*e in the overall economic outlook /hich could
affect costs and<or revenues either (ositivel! or ne*ativel!' or even the arrival of a ne/ com(an! in another line of
business that could raise (revailin* /a*e rates in !our re*ion.
$o' /hat mana*ers like to do is to develo( forecasts of sales' costs' cash' (rofits' interest rates and the like usin*
different assum(tions /hich' of course' result in different outcomes' some *ood and some bad. Another /ord for
such forecasts is senarios0 %or e"am(le' let us assume that a forecast of the income statement for a business at the
end of the !ear assumes that sales /ill *ro/ b! 5 (er cent over the (revious !ear and costs /ill *ro/ b! > (er cent. A
mana*er mi*ht ask for an alternative scenario /here sales increase b! 21 (er cent and costs increase b! D (er cent
and another scenario /here sales decrease b! 3 (er cent and costs increase b! 2 (er cent.
The ?all $treet #ournal had a stor! recentl! on ho/ businesses use scenarios for (lannin* (ur(oses. Fuotin*
from it: 7Each s(rin*' e"ecutives at #D$ Ini(hase Cor(. (lan for three (otential sales scenarios for the comin* fiscal
!ear' /hich be*ins in #ul!. Last !ear' rattled b! financial-market turmoil' the! included an e"tremel! (essimistic
sales outlook and outlined (otential cost cuts.
7The (lannin* (roved useful /hen the econom! stalled and customers be*an dela!in* orders later in the !ear.
7?e kne/ /hat levers to (ull8' sa!s Dave Melle&uette' chief financial officer at the il(atis' Calif.' maker of fiber-
o(tic telecommunications e&ui(ment.
7The e"(erience hi*hli*hts the value of scenario (lannin*' or (re(arin* res(onses to ima*ined chan*es in
conditions. 7ItAs not about (redictin* the future8' sa!s ,eter $ch/art0' a (artner at onitor +rou(' a Cambrid*e'
ass. Consultin* firm. 7$cenario (lannin* is a tool for learnin*8 and makin* better decisions.8 J?all $treet #ournal
100DK.
$ources of financin* for !our or*ani0ation
:nce !ou have !our accountin* s!stem established' !ou can take !our (lans for the initial months and !ears of
o(eration of !our or*ani0ation' and (re(are scenarios of the financial results of o(erations for !our o/n (eace of
mind or as documents to discuss /ith (otential investors. Hee( in mind that (otential investors are interested in
somethin* the! call the 7(ath to (rofitabilit!8 or ,1,. In other /ords' /hile the! e"(ect that !our or*ani0ation /ill
not be (rofitable immediatel!' the! /ill /ant some assurance that it /ill be (rofitable relativel! soon before the!
hel( !ou *et started. ?hile (otential investors ma! like !ou as an individual' the! /ant to be sure the! /ill *et a
return on their investment. The /a! !ou do this is to *o over !our business (lan /ith them' includin* the financial
anal!ses that sho/s them the (ath to (rofitabilit!. The! /ill ask !ou &uestions to make sure !our assum(tions are
reasonable' so make sure !ou do !our 7home/ork8 in advance' antici(ate their &uestions' and have *ood ans/ers
read! for them. The author of Cha(ter 1 discussed several (ossible sources !ou can e"(lore to obtain the start-u(
financin* !ou /ill need:
savin*s
friends and famil!
micro-financers
*overnmental su((ort
barter
bank loans
net/orkin*
online net/ork
membershi(s
&aving$: If !ou have been savin* !our mone! and have accumulated enou*h to (rovide the funds !ou need to
finance !our start-u(' this is the best /a! for !ou to *o. It can be difficult to convince third (arties that !our start-
u( is a *ood investment' and' in some cases' !ou ma! have to relin&uish some de*ree of o/nershi( Jand
12>
mana*ement controlK over !our business to an investor. This can lead to disa*reements /hich' if serious enou*h'
could cause !our investor to demand his or her mone! returned to them at an inconvenient time.
Eo/ever' onl! a small (ercenta*e of entre(reneurs are fortunate enou*h to be able to fund their start-u( costs
/ith (ersonal funds' so most are forced to seekin* fundin* else/here. an! entre(reneurs in the I$' for e"am(le
borro/ from their credit cards or take out a hi*her mort*a*e on their homes to avoid havin* to *et funds from
others. ?hile this is common' it can result in (ersonal financial disaster if the start-u( fails.
2riend$ and !aily: Askin* friends and families to invest is another common /a! that start-u(s are funded.
:ften the (otential entre(reneur is !oun*' ener*etic' and has a *ood idea for a start-u(' but does not have much in
the /a! of (ersonal savin*s. %riends and famil! ma! be older and have some mone! set aside. ?hile !our (arents'
or other famil! members should not risk all of their retirement savin*s on !our start-u(' the! ma! be /illin* to risk
a small (ercenta*e of it to hel( !ou out. $ometimes friends !our o/n a*e are /illin* to /ork for little or no /a*es
until !our cash flo/ turns (ositive. The term 7s/eat e&uit!8 is often used for this t!(e of contribution as the o/ner
/ill often re/ard such lo!alt! /ith a small (ercenta*e o/nershi( of the or*ani0ation in lieu of cash. A variation on
this is barter or trade. As mentioned in Cha(ter 2' this is a method b! /hich !ou could (rovide a needed service
such as consultin*<mana*ement advice in return for the resources needed for !our start u(. This needs to be
accounted for in !our accountin* records also.
"etwor)ingH online networ)$H and eber$hip$ all can be /a!s of meetin* mana*ers /ho have either
successfull! launched a star-u( or /ho are in the (rocess of movin* their or*ani0ation for/ard on the 7(ath to
(rofitabilit!8. Addin* to some of the e"am(les *iven in Cha(ter 2' !ou ma! /ish to consider !our local chamber of
commerce' a @otar! Club' or a local or*ani0ation com(rised of entre(reneurs. %or e"am(le' if !our start-u( is
located in Africa' the Africa 6usiness Communities (ortal could be a *ood source for !ou to locate net/orkin*
o((ortunities in !our communit!. Accordin* to their /ebsite:
7The African continent is en-o!in* a (eriod of un(recedented economic *ro/th. The idea that business is the ke!
to sustainable develo(ment in Africa is *ainin* *round ra(idl! /orld/ide.
7Africa 6usiness Communities is a (ortal /ebsite that brin*s the visitor into the heart of the African econom!' b!
*rantin* access to African entre(reneurs. Currentl! Africa 6usiness Communities hosts 3= Africa business
net/orks' in the future that /ill be hundreds8. JAfrican 6usiness Communities 100DK.
(an) loan$ Jas stated in Cha(ter 2K 7are not usuall! available to earl!-sta*e entre(reneurs unless !ou have a
track record of a (revious success and<or the assets to (ut u( Jas collateralK such as a home !ou o/n in return for
securin* the bank loan8.
1ngel inve$tor$H venture capitali$t$: Menture ca(italists are usuall! not interested in start-u(s. The! tend
to invest in !oun* com(anies after the! have demonstrated that the! are clearl! on a (ath to (rofitabilit! and the!
need additional ca(ital to hel( them *ro/ &uickl!. An*el investors' on the other hand' are interested in start-u(
com(anies and' unlike venture ca(italists /ho tend to seek control of the or*ani0ation' an*el investors like to leave
mana*ement of the or*ani0ation to its founderJsK. An*el investors are al/a!s available to (rovide advice and
counsel' ho/ever. This can be e"tremel! valuable to a !oun* entre(reneur as an*el investors are usuall! successful
entre(reneurs themselves. %or e"am(le' a recent article in 6usiness ?eek ma*a0ine describes a I$D 300 million
an*el investment firm co-founded b! arc Andreessen' of ;etsca(e Communications fame. ;amed Andreessen
Eoro/it0' the firmAs investors Jin addition to AndreessenAs business (artner 6en Eoro/it0K include 7(rominent tech
industr! (la!ers includin* @eid Eoffman' founder of the social net/orkin* site LinkedIn' and ,eter Thiel' former
CE: of the (a!ment service ,a!,al8. The article *oes on to sa! that 7Andreessen Eoro/it0 is e"(ected to
concentrate on makin* investments in technolo*!' /ith an em(hasis on cor(orate services and Internet businesses
that cater to consumers. Investors /ho have heard the firmRs (itch sa! it is ado(tin* a Qsu(er an*elQ strate*! in
/hich a modest-si0e venture firm invests morsels of mone! into man! startu(s. 7The! /ant to s(rinkle as man!
seeds in the *round as (ossible'Q sa!s one investor /ho /as a((roached to invest in the firm but declined8.
7ThereRs a t/ist thou*h: ?hile most su(er an*els finance the first round of a startu( and /ork closel! /ith the
com(an! to launch a (roduct' the investor sa!s Andreessen and Eoro/it0 told him the! intend to take a more
hands-off a((roach: The!Rll invest in 90 or 50 com(anies /ith minimal involvement in most' and then double or
tri(le do/n on the do0en or so /inners that emer*e. The strate*! /ill allo/ Andreessen to back man! more startu(s
than the avera*e venture firm' but /ith less control8 J6usiness?eek.com 100DK.
Micro3!inancer$ If !ou do the +oo*le search su**ested in Cha(ter 2 !ou /ill find a number of or*ani0ations
that *ive small loans to buddin* entre(reneurs in develo(in* economies. :ne such e"am(le is icrofinancin*
,artners in Africa. Eere is a &uote from their /ebsite /here the! describe their (ro*ram:
7icrofinancin* ,artners in Africa J,AK develo(s sustainable businesses and economicall! viable
communities. ?e /ork /ith communit!-based or*ani0ations to create and su((ort fundin* s!stems that furnish
small' collateral-free' lo/-interest business loans. +rants are *iven to or*ani0ations that (rovide business' health
and nutrition classes.
7Mer! often' all that is re&uired are loans as small as V10 to brin* a business into full (roduction. @ealistic
microfinancin* terms' com(rehensive trainin* and the develo(ment of a communit!-based su((ort net/ork result
in a hi*h (ercenta*e of on-time re(a!ments. This fundin* s!stem (rovides the financial basis for the (rovision of
additional trainin*' loans and business creation.
7Iltimatel!' these thrivin* business communities (rovide the economic foundation for communit! develo(ment
(ro-ects' includin* schools' health centers' (o/er sources' etc.8 Jicrofinancin* ,artners in Africa 100DK
The one as(ect of microfinancers is that their loans are trul! 7micro8. The! ma! be too small to be hel(ful in
*ettin* !our business started. 6ut' !ou never kno/. icrofinancin* or*ani0ations can be a *ood (lace to start' and
if !our needs e"ceed their normal limits the! ma! be able to refer !ou to other sources of fundin*. There ma! be
microfinancin* resources available throu*h I; (ro*rams' @otar!.or* and other sources.
%inall!' *overnental $upport is also a (ossibilit!. As an e"am(le' here is a &uote from a /ebsite describin*
*overnment *rants available to start-u(s in the I$' alon* /ith some of the reasons /h! the I$ *overnment is
allocatin* federal funds to (rivate business start-u(s:
7Economic develo(ment is ver! im(ortant for ever! countr!. The economic conditions are un(redictable and
volatile and so ever! countr! needs all the hel( it can *et to im(rove its overall standin*. 6usinesses are the ma-or
contributors to the success of the econom! and so the *overnment is al/a!s /illin* to e"tend the needed financial
aid.
125
7$ome entre(reneurs are hesitant to *et assistance from the *overnment. 6ut if !ouRre one of those
entre(reneurs /ith ca(ital (roblems' donAt hesitate to ask for hel( from the *overnment. The *overnment has a
hu*e fund allocation for the *rants. If !ou /ant to kno/ more about the *overnment *rants' !ou can sim(l! lo* on
to the internet and search for these entre(reneur *rants.
76efore an entre(reneur decides to (ut u( a business' he conducts a lot of studies to determine if the business is
feasible or not. If he can (rove the feasibilit! of his business (ro(osal' the *overnment /ill immediatel! (rovide the
needed ca(ital assistance throu*h the entre(reneur *rants.
7If the /orkin* ca(ital that !ouRve raised from famil!' relatives' and friends are insufficient' tr! to contact the
local *overnment and ask for the re&uirements in order to avail the *overnment entre(reneur *rant. 3ou can either
do this online or !ou can visit the (h!sical office of the local *overnment of !our state or countr!8.
J6usiness$tartI(Assistance.com 100DK
Does !our countr! have a (ro*ram of assistance for entre(reneursC
Cha(ter summar!
In this cha(ter /e discussed the im(ortance of havin* a /ell-desi*ned accountin* s!stem for !our or*ani0ation
as /ell as the distinction bet/een financial and mana*erial accountin*. ?hile both financial and mana*erial
accountin* statements and re(orts are re&uired and im(ortant' mana*erial accountin* statements and re(orts are
more likel! to contain the kinds of information !ou /ill need to hel( mana*e the o(erations of !our or*ani0ation.
?e e"(lained the si" different t!(es of accounts' their characteristics' and ho/ the! are used to create a detailed
chart of accounts /hich is tailored to the s(ecific needs of !our or*ani0ation. ;e"t /e covered the advanta*es of the
s!stem of double-entr! bookkee(in* and ho/' to*ether /ith led*ers and other accountin* records' it enhances the
accurac! of information maintained in an accountin* s!stem' /hether it is manual or com(uter-based.
;e"t' since the cost of com(uters and soft/are has dro((ed to the (oint /here even man! small or*ani0ations
can afford them' /e covered some of the accountin* soft/are (acka*es that are available' their costs' criteria for
selection' and the advanta*es of usin* them.
%inall!' /e discussed the common o(tions for obtainin* funds for !our start-u( or*ani0ation' some of the (ros
and cons of each' and the advanta*e !ou /ill have in a((roachin* lenders or investors /ith accountin* re(orts that
demonstrate a clear (ath to (rofitabilit!.
E"(lain the difference bet/een financial accountin* and mana*erial accountin*. ?hich one is most
im(ortant to o/ner<mana*ers of a start-u( or*ani0ation and /h!C
List and *ive e"am(les of the si" basic t!(es of accounts. ?hat are the characteristics of eachC
?h! is it im(ortant to have a chart of accounts that is tailored to (articular t!(es of or*ani0ations
rather than one chart of accounts that a((lies to all t!(es of or*ani0ationsC
?here can !ou find sam(le charts of accounts that a((l! to !our t!(e of or*ani0ationC
E"(lain the advanta*es of double-entr! bookkee(in*. Do !ou a*ree /ith +oetheAs descri(tion of
double-entr! bookkee(in* as +oethe as Qone of the most beautiful discoveries of the human s(iritQC
,lease discuss the advanta*es and disadvanta*es of usin* com(uter soft/are (acka*es for !our
accountin* s!stem.
?hat sort of difficult! can !ou ima*ine the mana*er of an or*ani0ation /ould be in if the
or*ani0ation did not routinel! (re(are cash flo/ forecasts and /orkin* ca(ital anal!sesC
?h! is it im(ortant for mana*ers to understand the conce(t of a break-even (ointC
,lease *ive e"am(les of ho/ information from a customer (rofitabilit! re(ort could be usedC
?h! is it im(ortant for an or*ani0ation to (re(are and use a bud*et Jor financial (lanKC
,lease *ive e"am(les of alternative scenarios an or*ani0ation should (re(are and ho/ the! mi*ht be
used.
@eferences
JAbout.com: Entre(reneurs 100DK htt(:<<entre(reneurs.about.com<od<business(lan<a<breakeven.htm'
accessed #ul! =' 100D.
JAccountin* $oft/are @evie/ 100DK htt(:<<accountin*-soft/are-revie/.to(tenrevie/s.com<' accessed #ul! B'
100D.
JAfrican 6usiness Communities 100DK htt(:<<///.africabusinesscommunities.com<' accessed #ul! 9' 100D.
J6i0ta"la/.about.com 100DK htt(:<<bi0ta"la/.about.com<od<*lossar!b<*<6ud*et.htm' accessed #ul! >'
100D.
J6uchanan and Es(eseth 100DK 7Develo(in* a 6ed and 6reakfast 6usiness ,lan 100D8' ;orth Central
@e*ional E"tension ,ublication 193' htt(:<</eb.aces.uiuc.edu<vista<(dfT(ubs<bUb.(df' accessed #une
11' 100D.
J6usiness$tartI(Assistance.com 100DK htt(:<<///.businessstartu(assistance.com<a-*overnment-
entre(reneur-*rant--its-easier-then-!ou-think.(h(' accessed #ul! 9' 100D.
J6usiness?eek.com 100DK
htt(:<<///.business/eek.com<ma*a0ine<content<0DT15<bB23D03131B053.htm' accessed #ul! 9' 100D.
JEntre(reneur.com 100DK
htt(:<<///.entre(reneur.com<mone!<mone!mana*ement<financialanal!sis<article12DB0.htmlfi"000H#
Ha12MkUD' accessed #ul! B' 100D.
JE"ecutive Caliber 100DK htt(:<<///.e"ecutivecaliber./s<s!s-tm(l<histor!ofaccountin*<' accessed #une 13'
100D.
JIA$6 100DK htt(:<<///.iasb.or*<' accessed #une 10' 100D.
Jicrofinancin* ,artners in Africa 100DK htt(:<<///.microfinancin*africa.or*<' accessed #ul! 9' 100D.
J$mallbusinessnotes.com 100DK
htt(:<<///.smallbusinessnotes.com<o(eratin*<finm*mt<financialstmts<cash(ro-ection.html' accessed
#ul! B' 100D.
110
JIniversal Accountin* 100DK htt(:<<///.kno/-accountin*.com<*lossar!<inde".(h(CtermlS*UtermidSD0
accessed #une 1= 100D.
J?all $treet #ournal 100DK. Tuna' Cari' 7,endulum is $/in*in* 6ack on 7$cenario ,lannin*8' 1he Wall
+treet Hournal, #ul! >' 100D' (a*e 6>.
J?iki(edia 100DaK htt(:<<en./iki(edia.or*</iki<%inancialTaccountin*' accessed #une 10' 100D.
J?iki(edia 100DbK htt(:<<en./iki(edia.or*</iki<ana*erialTaccountin*' accessed #une 10' 100D.
J?iki(edia 100DcK htt(:<<en./iki(edia.or*</iki<ChartTofTaccounts' accessed #une 10. 100D.
J?iki(edia 100DdK htt(:<<en./iki(edia.or*</iki<Double-entr!Tbookkee(in*Ts!stem' accessed #une 13'
100D.
J?ik(edia 100DeK htt(:<<en./iki(edia.or*</iki<CustomerT(rofitabilit!' accessed #ul! =' 100D.
1C. ,e&erain !ith
information technoloy
Editor$: Donald # cCubbre! JDaniels Colle*e of 6usiness' Iniversit! of Denver' I$AK and +arr! ?oods
JCommerce;e"t LLC' I$AK
Reviewer: @ichard A $cudder JDaniels Colle*e of 6usiness' Iniversit! of Denver' I$AK
Learnin* ob-ectives
define the four com(onents of an information s!stem
identif! ho/ information s!stems can assist a start-u(
understand ho/ to create a /eb (resence for !our or*ani0ation
learn ho/ to use information s!stems to *ain a com(etitive advanta*e
understand ho/ com(anies identif! their information needs and set (riorities
ac&uire an a((reciation of /h! it is im(ortant to mana*e is risks
Introduction
This cha(ter e"(lores ho/ Information $!stems JI$K can be used b! mana*ers to better develo( their business
idea' launch and sustain their businesses. It /ill also e"amine ho/ I$ forms the foundation for o(erations
mana*ement' customer relationshi( mana*ement and financial and mana*erial accountin*.
?hile !ou ma! be familiar /ith the term 7this is the information a*e8 it can mean different thin*s to different
(eo(le. In his famous book' 1he World is Flat' J%riedman 100=K Thomas %riedman e"(lains ho/ I$ has chan*ed
the /a! the /orld /orks. Ee calls the ?orld ?ide ?eb a 7+lobal net/ork for collaboration8 and *ives man!
e"am(les of ho/ man! forms of kno/led*e /ork can no/ be done an!/here in the /orld' that individuals from
different countries can collaborate on (ro-ects /ithout havin* to travel to distant cities to meet each other face-to-
face' and that (ro-ects can be /orked on b! contributors from an!/here in the /orld. E"am(les of these three
(ossibilities are listed belo/' in order to *ive !ou a better a((reciation for /hat is (ossible:
Hno/led*e /ork can be done an!/here. ,erha(s the most common e"am(le of this is soft/are
develo(ment. $oft/are en*ineers in develo(in* economies can develo( (ro*rams under contract from
com(anies in the develo(ed /orld at much lo/er cost. Hno/n as 7outsourcin*8' this is effective because
universities in man! develo(in* economies such as India' China' 6ra0il' and Eastern Euro(e have /ell-
trained (ro*rammers /ho are /illin* to /ork for /a*es above the (revailin* /a*e levels in their home
countries' but less than /hat a trained (ro*rammer earns in a develo(ed countr!.
12. 3e$eraging with information technology
Collea*ues can collaborate on (ro-ects /ithout havin* to travel *reat distances. Mideoconferencin* has
reached the (oint /here individuals can meet 7face-to-face8 over the Internet and have discussions related
to a (ro-ect the! are /orkin* on to*ether. These (roducts can ran*e from ver! so(histicated Jand
e"(ensiveK (roducts like CiscoAs 7Tele(resence8 conferencin* tool JCisco 100DK to relativel! ine"(ensive Jor
even freeK soft/are tools like $k!(e J$k!(e 100DK.
The best e"am(les of a lar*e number of individuals collaboratin* on a common (ro-ect is the so-called 7o(en8
movements: :(en source (ro*rams like Linu" and others /e discuss later in this cha(ter' :(en access to research
-ournals' and the :(en Educational @esources J:E@K initiative /hich (rovide free educational resources over the
Internet develo(ed b! volunteers from all over the /orld' of /hich the te"tbook !ou are readin* from the +lobal
Te"t ,ro-ect is a (rime e"am(le.
6% tools for the start-up orani9ation
6efore /e be*in our discussion of I$ tools for a start-u( or*ani0ation' it is im(ortant to note that it ma! not be
necessar! to use a com(uter-based information s!stem /hen !ou first *o into business. 3ou ma! be able to satisf!
!our information (rocessin* and record-kee(in* needs /ith manual s!stems. Eo/ever' as the (rice of com(uters
dro( and !our business e"(ands' !ou ma! find it /ise' as man! small business o/ners do' to invest in com(uter-
based information s!stems. an! (eo(le use Information $!stems and Information Technolo*! as if the! meant
the same thin*. The! are different' and it is im(ortant for !ou to understand the difference bet/een them. As
illustrated in E"hibit B2' an Information $!stem is com(rised of t/o sub-s!stems' a $ocial sub-s!stem and a
Technolo*! sub-s!stem.
E"hibit B2: An information s!stem
The discussion of the four com(onents of information s!stems as /ell as E"hibit B2 above has been e"tracted
from another book in the +lobal Te"t librar! JInformation $!stems 1005K.
The technolo*! sub-s!stem
An information s!stem ma! not need the use of com(uters to make the accumulation' or*ani0ation' and
re(ortin* of information easier' faster' or more reliable. In !our or*ani0ation earl! sta*es' !ou ma! find it sim(le
enou*h to -ust kee( (a(er records and communicate face-to-face or b! tele(hone rather than use email. Eo/ever'
113
modern or*ani0ations increasin*l! rel! on information technolo*! as the core of their information s!stems and (art
of the reason is that the cost of usin* com(uters has decreased as technolo*! im(roves. ?e define information
technolo*! to include hard/are' soft/are and telecommunication e&ui(ment that is used to ca(ture' (rocess' store
and distribute information.
Eard/are is the (h!sical e&ui(mentYsuch as a (ersonal com(uter' a la(to(' a (ortable com(utin* device' and
even a modern cell (honeYused to (rocess information. $oft/are is the set of coded instructions J(ro*ramsK that
direct the hard/are to (erform the re&uired tasks. A t!(ical e"am(le is +oo*le DocsYa /ord (rocessin* (ro*ram
desi*ned to instruct a com(uter to create te"t documents. Telecommunication s!stems are the net/orkin*
e&ui(ment enablin* users and devices to communicate. An e"am(le of a telecommunication s!stem is a tele(hone
net/ork' /hich allo/s t/o callers to interact b! voice over a distance.
These three elementsYhard/are' soft/are and telecommunication s!stemsYcom(rise the technolo*!
com(onent of an information s!stem.
The (rocess sub-s!stem
As discussed in Cha(ter 9' a (rocess is the set of ste(s em(lo!ed to carr! out a s(ecific business or or*ani0ational
activit!. In other /ords' a (rocess ma(s the set of actions that an individual' a *rou( or an or*ani0ation must enact
in order to com(lete an activit!. Consider the -ob of a *rocer! store mana*er and the (rocess he en*a*es in /hen
restockin* an inventor! of *oods for sale. The store mana*er must:
check the inventor! of *oods for sale and identif! the needed items
call individual su((liers for &uotations and (ossible deliver! dates
com(are (rices and deliver! dates &uoted amon* several su((liers for the same *oods
select one or more su((liers for each of the needed items based on the terms of the a*reement Je.*.
availabilit!' &ualit!' deliver!K
call these su((liers and (lace the orders
receive the *oods u(on deliver!' checkin* the accurac! and &ualit! of the shi((ed itemsG (a! the su((liers
;ote that there are multi(le viable (rocesses that an or*ani0ation can desi*n to com(lete the same activit!. In
the case of the *rocer! store' the timin* and form of (a!ment can differ dramaticall!' from cash on deliver! to direct
transfer of the (a!ment to the su((lierAs bank account /ithin three months of the (urchase. The critical insi*ht here
is that the desi*n of the (rocess must fit /ith the other com(onents of the information s!stem and be ad-usted
/hen chan*es occur. It must also meet the uni&ue needs of the or*ani0ation. %or e"am(le' ima*ine the *rocer!
store mana*er (urchasin* a ne/ soft/are (ro*ram that enables her to *et &uotations from all of the su((liers in the
nearb! re*ions and (lace orders online. Clearl! the (recedin* (rocess /ould need to chan*e dramaticall!' and the
store mana*er /ould need to be trained in the use of the ne/ soft/are (ro*ramYin other /ords' chan*es /ould
also affect the (eo(le com(onent.
,eo(le
The (eo(le com(onent of an information s!stem encom(asses all those individuals /ho are directl! involved
/ith the s!stem. These (eo(le include the mana*ers /ho define the *oals of the s!stem' and the users. The critical
insi*ht here is that the individuals involved in the information s!stem come to it /ith a set of skills' attitudes'
interests' biases' and (ersonal traits that need to be taken into account /hen the or*ani0ation desi*ns the
information s!stem. Mer! often' an information s!stem fails because the users do not have enou*h skills' or have a
ne*ative attitude to/ard the s!stem. Therefore' there should be enou*h trainin* and time for users to *et used to
the ne/ s!stem.
%or e"am(le' /hen im(lementin* an automated (a!roll s!stem' trainin* on ho/ to enter em(lo!eesA account
information' ho/ to correct /ron* entries' and ho/ to de(osit the salaries into each account should be (rovided to
the human resources staff. The benefits of the s!stem should be communicated to both the human resources staff
and the em(lo!ees in order to build u( (ositive attitudes to/ards the ne/ s!stem.
$tructure
The structure Jor or*ani0ational structureK com(onent of information s!stems refers to the relationshi( amon*
the individuals in the (eo(le com(onent. Thus' it encom(asses hierarchical and re(ortin* structures' and re/ard
s!stems. an! of these issues are discussed in Cha(ter =. The structure com(onent (la!s a critical role in an
information s!stem' sim(l! because s!stems often fail /hen the! are resisted b! their intended users. This can
ha((en because individuals feel threatened b! the ne/ /ork s!stem' or because of inherent human resistance to
chan*e. ?hen desi*nin* a ne/ information s!stem the or*ani0ation needs to be co*ni0ant of the current and future
re/ard s!stem in order to create incentives to secure its success.
*elationships between the four omponents
At this (oint it should be clear ho/ information s!stems' /hile enabled b! I$' are not s!non!mous /ith I$. Each
of the four com(onents discussed above can undermine the success of an information s!stemYthe best soft/are
a((lication /ill !ield little result if users re-ect it and fail to ado(t it. ore subtl!' the four com(onents of
information s!stems must /ork to*ether for the s!stems to (erform. Thus' /hen the or*ani0ation decides to brin*
in a ne/ technolo*! to su((ort its o(eration' the desi*n team must ad-ust the e"istin* (rocesses or develo( ne/
ones. The (eo(le involved must be trained to make sure that the! can carr! out the (rocesses. If the skills of these
individuals are such that the! can not (erform the re&uired tasks or be trained to do so' a different set of individuals
need to be brou*ht in to /ork /ith the s!stem. %inall!' the desi*n team must evaluate /hether the or*ani0ational
structure needs to be modified as /ell. ;e/ (ositions ma! need to be created for additional res(onsibilities' and old
-obs ma! need to be eliminated. The transition from the old /a! of doin* thin*s to the ne/ s!stem needs to be
mana*ed' ensurin* that a((ro(riate incentives and a re/ard structure is (ut in (lace.
$ome (ractical advice for start-u(s
Do not invest in I$ solutions until !ou can see that the! /ill (rovide !ou /ith real benefits. The! /ill re&uire
an investment of valuable time and mone! that !ou could (erha(s use more effectivel! in other areas of
!our business.
Installin* I$ s!stems often takes lon*er and costs more than ori*inall! estimated. 3ou should have someone
/ith I$ skills available to hel( !ou *et (ast the troublin* (oints.
@emember that it is usuall! a mistake to be one of the first to use a ne/ technolo*!. It can be risk!' and it is
even more im(ortant that !ou have access to (ersonnel /ith stron* I$ skills.
11=
At the same time' it can be a mistake to /ait too lon* to *ain business benefits from carefull! chosen I$
a((lications' (articularl! if !our com(etition is takin* advanta*e of I$ for efficienc!' effectiveness' and innovation.
Mo&in for!ard !ith information systems
?hen !ou decide it is time to move for/ard /ith levera*in* !our or*ani0ation /ith information s!stems' !ou
/ill a((reciate the effort s(ent on develo(in* a s!stems (lan. The (lan /ill state the kind of hard/are' soft/are'
and communications technolo*ies !ou need' as /ell as the sectors of !our or*ani0ation /hich should receive !our
attention first.
an! small or*ani0ations be*in o(erations /ith manual s!stems to kee( track of their o(erations. The! ma!
have sim(le lists on (a(er for customer' vendor' and em(lo!ee information and kee( a set of accountin* records on
(a(er as /ell. This /as the /a! business information /as ke(t b! all or*ani0ations' lar*e and small' before the
advent of com(uters. ?hen ,Cs became available' their cost /as such that the (o/er of the com(uter /as made
available at lo/ cost and so toda!' most or*ani0ations of an! si0e have at least one ,C or la(to(. 3ou ma! /ell start
out /ith kee(in* records manuall!' but before too lon*' !ou /ill a((reciate ho/ much easier it is to kee( records on
a com(uter and ho/ /ell-desi*ned soft/are a((lications can (rovide !ou /ith valuable information &uickl!' in
man! different /a!s' /henever !ou need it.
:ne issue !ou /ill need to address earl! is !our sourcin* o(tions' i.e. /here /ill !ou obtain !our hard/are'
soft/are' and human resources to hel( !ou ac&uire and mana*e the I$ resources !ou need. In Cha(ter 5' /e
discussed the /a!s that or*ani0ations (artner /ith other or*ani0ations to (erform essential business functions. It is
ver! common for or*ani0ations to (artner /ith another com(an! to su((l! them /ith the s(eciali0ed kno/led*e
needed to ac&uire the ri*ht combination of hard/are' soft/are' and communications services to meet the needs of
the or*ani0ation. ?e /ill discuss these issues later in this cha(ter /hen /e discuss the /a!s or*ani0ations develo(
a s!stems (lan. $uffice it to sa! at this (oint' that !ou /ill have man! o(tions:
%or e"am(le:
3ou can hire an I$ (rofessional if !our needs re&uire a full-time em(lo!ee to mana*e !our I$ (rocesses Jand
if !ou can afford itK. :r*ani0ations that do not need a full-time em(lo!ee and do not have I$ e"(ertise
available in-house or even on a (art-time basis t!(icall! make arran*ements for (art-time su((ort from an
I$ consultin* firm. $ometimes the consultin* firm is a sole (ro(rietorshi(.
3ou can ac&uire !our o/n hard/are Je.*. ,CsK or !ou can bu! time on another or*ani0ationAs hard/are to
run !our soft/are a((lications. In develo(ed economies' there are com(anies like +oo*le and Ama0on that
offer so-called 7cloud com(utin*8 services. The! have develo(ed so much e"(ertise in mana*in* server
farms Ji.e. data centersK that the! no/ sell hard/are ca(acit! on-demand to other com(anies. $imilar
o(tions are available in other (arts of the /orld.
As /ith hard/are' !ou have similar o(tions /ith soft/are. I( until recentl!' if !ou needed a soft/are
(acka*e to do the accountin* for !our or*ani0ation' for e"am(le' !ou had to bu! a (acka*e and install it on
!our o/n com(uter. ;o/' man! soft/are (acka*es can be accessed /ith a sim(le Internet connection and a
/eb bro/ser. The soft/are (acka*e resides not on !our com(uter' but on the vendorAs com(uter Jor
(erha(s another com(uter 7in the clouds8K.
All of the o(tions have their advanta*es and disadvanta*es and /e discuss them later in this cha(ter.
?hile it is certainl! (ossible for !ou to hire a (ro*rammer and have him or her develo( the soft/are (ro*rams
!our or*ani0ations need' it is rare /hen a start-u( com(an! needs to do this as there are so man! soft/are
(ro*rams available for !ou to use Jand some of them are freeK. In all likelihood' !ou /ill be*in to move !our
or*ani0ation into the 7information a*e8 in one of t/o /a!s' either J2K ac&uirin* a suite of commonl!-used (ro*rams
desi*ned for meetin* the needs of both individuals and or*ani0ations' or J1K ac&uirin* soft/are (ro*rams desi*ned
s(ecificall! to meet most needs of a small or*ani0ation. Each of these o(tions is discussed belo/:
Ac&uirin* a suite of commonl!-used (ro*rams
,erha(s the best-kno/n suite of commonl! used (ro*rams is icrosoft :ffice. A basic version of :ffice'
icrosoft :ffice $tandard 1009 includes four (ro*rams:
2. icrosoft ?ord' used for (re(arin* documents
1. icrosoft E"cel' used for (re(arin* s(readsheets Jmost commonl! used for accountin* anal!ses but also
useful for basic record-kee(in* such as customer lists or checkbooksK
3. ,o/er,oint' used for makin* (resentations
B. icrosoft :utlook' used for mana*in* email Jicrosoft 100DK
There are several other o(en-source o(tions available as /ell' t!(icall! at no cost to !ou. $ome of these are:
2. :(en:ffice J:(en:ffice.or* 100DK
1. +oo*le Docs J+oo*le 100DK
3. .oho J.oho 100DK
In addition to bein* free' the o(en source o(tions have the abilit! to read and /rite com(uter file and is format
com(atible /ith the more /idel! used icrosoft (roducts.
?hen to think about usin* database mana*ement soft/are
As !our business *ro/s and !ou need to kee( accurate records on a com(uter be!ond /hat is reasonable to do
/ith a s(readsheet (ro*ram' !ou should consider addin* database mana*ement soft/are.
Haren $tille (laced a *ood com(arison of the features of database and s(readsheet soft/are a /ebsite'
FCI$olutions. In summar!' she states that:
7As a *eneral rule of thumb' databases should be used for data stora*e and s(readsheets should be used to
anal!0e data.
7In a nutshell /e use a database if...
the information is a lar*e amount that /ould become unmana*eable in s(readsheet form and is related to a
(articular sub-ect.
!ou /ant to maintain records for on*oin* use.
the information is sub-ect to man! chan*es Jchan*e of address' (ricin* chan*es' etc.K.
119
!ou /ant to *enerate re(orts based on the information.
Ise a s(readsheet if...
!ou /ant to crunch numbers and (erform automatic calculations.
!ou /ant to track a sim(le list of data.
!ou /ant to easil! create charts and *ra(hs of !our data.
!ou /ant to create Q?hat-ifQ scenarios.
7In most cases' usin* the combination of a database to store !our business records and a s(readsheet to anal!0e
selected information /orks best8. J$tille 100DK
icrosoftAs /idel!-used database mana*ement soft/are is called ACCE$$' and versions of icrosoft :ffice that
use ACCE$$ are available for (urchase. ore information is available on the icrosoft site JicrosoftK. :n the
other hand' o(en source database mana*ement soft/are is also available at no cost to !ou. 3ou ma! /ish to
e"amine one of the follo/in* o(en source (acka*es to see if one of them meets !our needs:
!$FL J!$FL 100DK
.oho Creator J.oho 100DK
:ne of the (revailin* issues /ith usin* o(en source soft/are rather than soft/are !ou (urchase is the level of
su((ort !ou can e"(ect from the soft/areAs creator. If !ou (a! for soft/are' !ou have a ri*ht to e"(ect e"cellent
documentation and su((ort. If the soft/are is free' sometimes documentation and su((ort do not meet the same
standards. uch of the su((ort !ou *et is from the communit! of users. As of this /ritin*' the /orld/ide
communit! for ACCE$$ is much lar*er' and there are man! books /ritten about it. The o(en source databases are
-ust as useful' but findin* information and su((ort can be a more tedious (rocess. Eo/ever' accordin* to the
+artner +rou(' a hi*hl!-res(ected technolo*! research com(an! based in the I$' o(en source database
mana*ement soft/are is becomin* more attractive. In a re(ort released in ;ovember 1005' the! made the
follo/in* observations:
7Durin* 1005' since our last note about o(en-source database mana*ement s!stems JD6$sK' /e have seen an
increase in the interest and use of o(en-source D6$ en*ines in a (roduction environment. As this trend continues
to *ain s(eed' the cost benefits of usin* an o(en-source D6$ is increasin* and the risk of usin* it is decreasin*.
He! findin*s:
Lo/er total cost of o/nershi( JTC:K' com(ared to commercial D6$s' can be reali0ed for non-mission-
critical a((lications.
There are lar*e third-(art! soft/are vendors lookin* to certif! o(en-source D6$s as a (latform for
e"istin* a((lications' includin* $A,.
The ma-or o(en-source D6$ (roducts are no/ available for installation as a (acka*e' /ithout involvin*
the source code' includin* tools to hel( su((ort the D6$ environment.
If the technical ca(abilities of the staff are stron*' use of an o(en-source D6$ in mission-critical
environments is (ossible no/.
@ecommendations:
:(en-source D6$ en*ines can be used toda! for non-mission-critical a((lications /ith reduced risk over
several !ears a*o.
:nl! use an o(en-source D6$ en*ine su((lied b! a vendor /ho controls or (artici(ates in the en*ineerin*
of the D6$ and al/a!s (urchase subscri(tion su((ort /hen used in (roduction environments.
If o(en source is (art of !our overall I$ strate*!' (lan for the use of o(en-source D6$ en*ines in mission-
critical environments in t/o to five !ears.8 J+artner 1005K
Ac&uirin* soft/are (ro*rams desi*ned s(ecificall! to meet most needs of a small or*ani0ation
In the same /a! that :ffice $uites are available /hich can (erform man! of the basic information s!stems
tasks of a small or*ani0ation' there are suites of (ro*rams available to (erform s(ecific functions like
accountin*' (a!roll' customer relationshi( mana*ement' inventor! control and the like. @ecall that /e
discussed com(uter-based accountin* s!stems in considerable detail in Cha(ter D.
JEnter(rise @esource ,lannin* JE@,K s!stems are the analo*ous soft/are solutions for lar*e and medium-
si0ed com(anies.K E"am(les of small business 7suites8 include the follo/in*:
icrosoft has a site devoted to soft/are suite solutions for small businesses at:
htt(:<<///.microsoft.com<business<(eo(leread!<
;et$uite J///.netsuite.comK ;et$uite is in a cate*or! of soft/are called 7soft/are as a service8 J$aa$K. In the
$aa$ model' the soft/are resides on the servers of the soft/are (rovider rather than on the usin* the or*ani0ationAs
com(uter. The advanta*es of this model are that users never have to /orr! about soft/are and data backu(s or
soft/are u(dates. These functions are (rovided at the soft/are com(an!As data centers. $ome $aa$ models char*e
users b! the month' others char*e them at a variable rate' based on the number of transactions (er month and<or
the si0e of their databases. The do/nside for some users /ith $aa$ is that the information is not ke(t 7in-house8.
Althou*h hosted solutions are considered ver! secure' some users /orr! about securit! and (rivac! issues. The
/ebsite'///.1010soft/are.com' com(ares several small business soft/are suites' and has links to the com(aniesA
sites.
There are a number of o(en source initiatives for small business soft/are !ou ma! /ish to investi*ate. :ne such
e"am(le is "Tu(le Jhtt(:<<///."tu(le.or*<K. A com(rehensive list of o(tions is available at $ource%or*e
J///.sourcefor*e.netK. :ur (revious cautions on the use of o(en source soft/are (roducts a((l! here as /ell.
Creatin* a ?eb (resence
Eavin* a /ebsite is no/ considered as necessar! as a (hone or fa" number even an email address for
corres(ondin* /ith customers. $ince the site /ill be a reflection of !our or*ani0ation' its (roduct or service' the
most im(ortant ste( is to research and (lan. %or most businesses' a ?eb site can serve as a resource for
information and to (romote the or*ani0ation' its brand' and the value of the (roduct or services bein* offered. 6ut
11D
man! times' businesses as /ell as individuals create a site for the sake of havin* one' /ithout takin* time to
understand /hat customers and the business e"(ect from a site. ?hen !ou set do/n to create !our site' consider
the follo/in* first:
Decide on a bud*et.
Decide on a name JDomain ;ame or I@LK. Check htt(:<< ///./hois.com to see if the name is alread!
taken.
@e*ister the name JDomain ;ame or I@LK. Lo*in to a re*istrar like htt(:<<///.*odadd!.com and follo/
their instructions for re*istration.
Decide ho/ the site /ill be desi*ned and maintained J/ho /ill handle thisK.
?hat /ill be the content of the siteC
Decide on a hostin* com(an! for the site. There are hundreds' if not thousands of hostin* com(anies /ill
host !our /ebsite for as little as I$D 3.D= (er month. A sim(le +oo*le search /ill turn u( man! candidates
for !ou in !our locale. To *et an a((reciation of the kinds of hostin* services that are available from I$-
based com(anies' *o to htt(:<<hostin*revie/.com.
Decide /hether !ou /ill hire someone to build the site for !ou or if !ou /ant to use one of the man!
tem(late-driven soft/are (acka*es to build it !ourself.
%indin* out /hat kinds of information !our customers /ant' and then desi*nin* and develo(in* !our site to
(rovide u(-to-date' on*oin* resource materials can hel( !ou better (osition !our (roducts or services and serve as a
credible 7*o-to s(ot8. A /eb site can *o from a sim(le one-(a*e site /ith !our name and mission statement to a site
/ith multi(le (a*es that include on-line sales' ne/sletters and discussion forums.
Dno! !hat your customers !ant
@emember that !our ?eb site should be a d!namic communication tool. Isers toda! are conditioned to use the
?eb as a /here-to-turn resource' /here the! e"(ect u(-to-date ne/s' information and ti(s related to !our (roduct
or services. Isers /ill also use the information (rovide to com(are !ou /ith others' s(ecificall! !our com(etition.
%or !ou' it is also another o((ortunit! /here !ou can (romote !our services and serve the communit!. There is
nothin* *ained b! havin* a /ebsite that (osts dr!' out-of-date content. Hee( a (ulse on /hat kind of information
about !our (roduct<services customers are lookin* for' and ho/ and /here the! e"(ect to find it. Do not be too
&uick to list the areas /here !ou feel !ou are stron*estYremember to (ut !ourself in !our customerAs shoes and ask
/hat the! /ant to ask: 7?hat is in it for me J?II%K to visit this /ebsiteC8
An effective site should:
@eco*ni0e the needs of all /ho /ill use !our site' vendors' customers and !es even em(lo!ees' and direct
each to the content that /ill interest them most.
6e eas! to access' read and use /ith /ell-thou*ht-out content' useful links' e-mail addresses or (hone
numbers.
,rovide hel(ful information on ho/ to kee( customers comin* back
ake !our visitors feel confident about choosin* !our or*ani0ation as a (rovider for the (roduct or services for
/hich the! are lookin*.
+ive !our customer a (ositive e"(erience
Hno/in* /hat !our customer /ants to see on !our /ebsite is onl! half the challen*e. In toda!As &uick to find'
instant *ratification environment' !our customers not onl! /ant to find information on !our services and (roduct
&uickl!' the /ant to share it and have a (ositive customer e"(erience /hen the! do. A (ositive e"(erience is one
that not onl! *ives !our customer their needed information but one' that (rovokes (ositive feedback from !our
customer /hen he or she contacts !ou via a ?eb chat or Internet (hone. This *ives customers an incredible abilit!
to &uickl! and easil! influence others as /ell as (rovidin* instant feedback into !our customers bu!in* (atterns and
feelin*s about !our site and com(an!.
If !ou can better understand !our customer' their needs and ob-ectives !ou /ill better understand ho/ to
measure and track the 7voice of the customer8. ?h!C This /ill foster a better customer relationshi( and /ill (rovide
!ou /ith t/o outcomes: J2K havin* !our customer e"tend !our marketin* /ithout additional cost and J1K havin*
customer based testimonies on their e"(eriences that /ill increase !our com(aniesA re(utation of the (roducts or
services !ou offer.
;now the basis
?hether !ou alread! have a site that is an offshoot of a current business !ou have done /ork /ith' or it is a
stand-alone site Jbrochure/areKYor /hether !ou are considerin* creatin* a ?eb site' the information !ou (rovide
is ke!. Lookin* at some of the best kno/n /ebsites' several sites stand out for their information' creativit!'
usefulness and eas! to use. :ne such site' video ho/-to site htt(:<<///.Eo/cast.com' is a *em. At one time or
another /e have all tried to do thin*s /ithout readin* the instructions. Eo/cast.com not onl! addresses this' but
(rovides video as /ell.
The ke! elements of an! site are a user-friendl!' clean a((earance and consistentl! im(rovin* content. As !ou
determine !our needs for a /ebsite' one of the im(ortant *oals should be to allo/ !our customers to access !our site
and avoid the time-consumin* (rocess of surfin* the ?eb for similar (roducts or services. The! can visit !our site
and be taken to useful' informative sites.
The have-toAs of an effective site:
An introduction of !our (roducts or services: /hat is it' /ho uses it and /h! to bu! it
6asic information u( front: contact information' (roduct or services information' etc.
Listin* of (roducts or services' *rou(ed to*ether b! to(ic
;e/s: ,ost the latest information about ho/ !our or*ani0ation is chan*in*' ho/ !our (roducts or services
are bein* acce(ted or /ho is bu!in* them. Consider an e-ne/sletter in ,D% form /ith ti(s readers can hold
onto
Articles: ,ost in ,D% form (roduct information and marketin* material b! !our marketin* or (roduct
develo(ment team on /hat is ne/ or /hat is comin*
132
A contact mechanismYa /a! for customers to ask a &uestion' re&uest information' re*ister for /arrant! of
!our (roduct or services' *et !our ne/sletter or *et a referral
The ne"t la!er of !our site:
/here and ho/ to send a customer information the! are seekin*
(rintable<do/nloadable forms for transmittin*
(roduct<services ti(s and tools
(roduct u(dates
u(comin* events' such as industr! or com(an! seminars' /ith an a*enda and ho/ to re*ister or re&uest
information
communit! outreach information that sho/s ho/ !our or*ani0ation is hel(in* members of the communit!
(eriodic satisfaction surve!s that (oll customers
The enhanced' 7s(ecial customer8 la!er to !our site:
,ass/ord-(rotected forms
(ass/ord-(rotected customer sensitive data
credit card encr!(tion
(ersonal data Ji.e. date of birth' social securit! number' contact info' etc.K
enhanced articles and u(dates
s(ecial (ro*rams and communications
earket !our /ebsite
@e*ister !our /ebsite /ith search en*ines' some re*istration domain sites ma! have this available Jcheck their
(a*es and see if the! do thisK and /hat it /ill cost !ou to have !our /eb site (ulled to the front of the list. The more
search en*ines that !ou re*ister /ith the more the site /ill be dis(la!ed to those lookin* for (roducts or services
!ou offer. ;ote: a number of these sites are fee based' the more times !our site comes u( in a search the more it
ma! cost !ou. At a minimum' !ou should consider re*isterin* !our /eb (a*e /ith both +oo*le and 3ahoo
Jinstruction /ith re*isterin* on these search en*ines can be found on there res(ective sitesK. 6oth of these sites as
/ell as $;.com are the most commonl! used /eb search en*ines sites *loball!.
In this (rocess' /hen !ou vie/ !our /eb (a*e' at the bottom !ou /ill a see bo" called eta Ta*s Jeta ta*s are
te"t /ithin the source code of a /eb (a*e. It (rovides information to search en*ines about the content of a s(ecific
(a*e or siteK This is /here !ou (ut in ke! /ords or (hrases that the search en*ines /ill (ick u( on /hen someone
does a search.
E"am(les:
%ish $tore: %ish' %resh ?ater' %ish %ood' +u((ies' An*el' etc.
,et $tore: Do*' Cat' Eamster' Do* %ood' Cat %ood' etc.
Com(uter $tore: Com(uter' Eard Disk' CD' Eard Drive' DMD' etc.
If !ou are in a business that does not sell on the Internet' !ou ma! /ant to hold off on (a!in* for this o(tion as
local (eo(le /ill *o to !our site from advertisin*' /ord of mouth or local ?eb searches.
As noted earlier' havin* a /eb (resence is a ver! im(ortant (art of a business toda!. 3ou must make sure to take
the time to (lan and desi*n !our site so that it has the (rofessional look and a certain 7(anache8 or st!le that /ill
hel( !our business distin*uish it from others. A site that not onl! /ill encoura*e visitors to return' but offers the
information the! are seekin* the first time the! visit. ?ith careful and thou*htful (lannin* and decision makin*
!ou can create a small business site that can and /ill com(ete /ith lar*er com(anies' enhance !our business and
increase !our mar*ins and (rofits.
Esin information technoloy competiti&ely
Com(etitive advanta*e
?hen !ou are startin* !our business' ver! likel! !ou /ill -ust be interested in substitutin* com(uter-based
information s!stems for kee(in* the basic records of !our business and (re(arin* the re(orts !ou need to be an
effective decision-maker. As !our business *ro/s' ho/ever' !ou should start to think of the (otential benefit of
*oin* be!ond the basics' as lar*er com(anies do' and look for /a!s to use information s!stems for com(etitive
advanta*e. an! (eo(le use the term 7technolo*!-enabled innovation8 to describe this (rocess. $ince it is never too
earl! for !ou to start thinkin* about such innovation' /e /ill cover the to(ic no/.
#ust about all businesses have com(etitors and customers have choices as to /hich businesses the! decide to
(atroni0e. %or e"am(le' !ou' as a customer' ma! have several restaurants to choose from if !ou /ant to bu! a meal.
Each restaurant' therefore' has other restaurants as com(etitors. A restaurant /ill tr! to offer its customers a better
meal at a better (rice so that their business is successful in com(arison /ith the com(etition. This is /hat is meant
b! *ainin* a com(etitive advanta*e. :f course' if a restaurant is the onl! one in a small to/n' its o/ner does not
have to /orr! so much about com(etition Junless someone else decides to o(en a restaurant and com(ete for its
customers. 6usinesses that can *ain an advanta*e over their com(etitors are the ones /ho /ill be successful and' as
/e sa/ in Cha(ter B' most small businesses that start u( are doomed to fail. $o' com(etitive advanta*e is
im(ortant.
,orter and com(etitive advanta*e
In Cha(ter 3' !ou /ere introduced to the ideas of ,rofessor ichael ,orter' /hose ideas on ho/ to achieve a
com(etitive advanta*e' first introduced in the 2D50s
1D
have stood the test of time. @ecall that ,orterAs model
consisted of three main cate*ories:
The %ive %orces odel
Three +eneric $trate*ies
The Malue Chain
1D The information on ichael ,orter needs to be cited.
133
In this section /e /ill discuss ho/ the creative use of information technolo*! and communications technolo*ies
JI$K can hel( or*ani0ations *ain a com(etitive advanta*e. These ideas /ere first e"(ressed in t/o se(arate Earvard
6usiness @evie/ articles
30

Ise I$ to alter the five forces in !our favor. The five forces are illustrated E"hibit B1.
E"hibit B1: ,orterAs %ive %orces odel $ource
$ource:
htt(:<<en./iki(edia.or*</iki<,orterT=TforcesTanal!sis
6u!er (o/er can be reduced b! usin* I$ in /a!s that tend to restrict bu!ersA choices. A *ood e"am(le is the
fre&uent fl!er (ro*rams that are offered b! most commercial airlines around the /orld. ?hen the! enroll in the
(ro*ram' air travelers are a/arded 7miles8 for ever! fli*ht the! take on' for e"am(le' 6ritish Air/a!s. Their
accumulated miles are maintained b! a com(uter s!stem. Travelers can obtain tickets for free fli*hts once as certain
number of miles has been accumulated in their account. This encoura*es travelers to al/a!s use the same airline so
the! can &ualif! for re/ards more &uickl!. %re&uent fl!er (ro*rams' of course' have to kee( track of a lot of
information on the activities of thousands of travelers and /ould not be (ossible to mana*e /ithout com(uter
s!stems. An airline /ithout a fre&uent fl!er (ro*ram is at a com(etitive disadvanta*e to airlines /hich have them.
$u((lier (o/er is hi*h /hen a business must rel! on -ust a fe/ su((liers. %or e"am(le' if there is -ust one store
in a to/n /hich stocks office su((lies' businesses have no/here else to bu! su((lies the! need and ma! be forced to
(a! hi*her than normal (rices. :n the other hand' if a local business is connected to the Internet' it can choose
from man! other su((liers and (ossibl! find chea(er (rices' even /hen the cost of shi((in* is considered.
The threat of ne/ entrants can be reduced /hen I$ is used to erect 7entr! barriers8. Entr! barriers are offerin*s
that a business must make available to its customers if it e"(ects to do business in a certain sector sim(l! because
most or all of its com(etitors offer a certain feature to their customers. An e"am(le is AT machines offered b!
banks. AT machines /ould not be (ossible /ithout the use of com(uters and communications net/orks. If !ou
had to choose bet/een a bank that offered AT machines and one that did not' /hich one /ould !ou chooseC ost
likel! the one /ith AT machines. AT machines are a barrier to enter the bankin* sector in a (articular locale.
30 Cite c%arlane and ,orter<illar.
The threat of substitute (roducts can usuall! be reduced b! usin* I$ to bind customers more closel! to a
business and create /hat is called 7s/itchin* costs8. This means that the I$ s!stems offered b! a business are so
a((reciated b! the customer that customers are reluctant to s/itch to a substitute (roduct. %or e"am(le' there are
man! free o(en content soft/are (roducts that e&uall! com(etitive /ith the costl! brands. .oho' +oo*le Docs'
Thinkfree' are e"am(les. :ne of the reasons man! ,C users do not s/itch to them is that the! /ould have to learn
ho/ to use a ne/ (acka*e. Even thou*h the free (acka*es are eas! to learn' there is a s/itchin* cost involved that
binds users to icrosoft :ffice: The time it /ould take to learn even a relativel! sim(le (acka*e is enou*h of an
obstacle to man! users that the! conclude that s/itchin* is not /orth the effort.
The Intensit! of Intra-Industr! Com(etition can often be increased b! I$-enabled innovations. %or e"am(le' the
*lobal reach of the Internet means that com(etitors for man! (roducts and services can be located an!/here in the
/orld. %or e"am(le' ta" accountin* s(ecialists ma! no/ find themselves com(etin* /ith accountin* s(ecialists in
lo/-cost countries. This is becomin* a common (ractice as com(anies conclude that I$ makes it (ossible for man!
forms of kno/led*e /ork to be (erformed an!/here in the /orld.
Ise I$ to reinforce !our basic strate*ic (ositionin*.
E"hibit B3: ,orterAs three *eneric strate*ies
$ource: htt(:<<en./iki(edia.or*</iki<,orterT*enericTstrate*ies
,orter su**ests that a business cannot be all thin*s to all (eo(le. It must choose bet/een three *eneric strate*ies
As illustrated in E"hibit B3' a business can choose to be a cost leader' it can (ursue a differentiated strate*! for
/hich consumers are /illin* to (a! more' or it can tar*et a se*ment of the market /ith either a lo/-cost or a
differentiated strate*!. %or e"am(le' if /e consider brands of automobiles' the Tata tar*ets a broad market for lo/-
(riced cars' and the $ubaru tar*ets a broad differentiated market for lo/-(riced all/heel drive cars. The a0da
iata tar*ets a se*mented market for lo/-(riced s(orts cars' /hile @olls @o!ce tar*ets a se*mented Jhi*h-(ricedK
market for sedans.
13=
Information s!stems can assist a business in im(lementin* one of ,orterAs three *eneric strate*ies b! usin* I$ to
create o(erational efficiencies' thus lo/erin* manufacturin* costs' for e"am(le. Also' I$ can create a differentiated
model b! havin* a /ebsite that (ermits customers to desi*n a (ersonali0ed version of an automobile and order it
online' much the same /a! that /e can bu! (ersonal com(uters online.
E"hibit BB: ,orterRs value chain
$ource: htt(:<<kook!(lan.(b/iki<f<MalueChain.on*
As discussed in Cha(ter 3' the Malue Chain is a *ra(hical re(resentation of the (rocesses Jor activitiesK involved
in most or*ani0ations. Anal!sts use the value chain frame/ork to look for /a!s to streamline costl! activities or add
value to certain activities throu*h the use of I$. As -ust one e"am(le' an or*ani0ation could use I$ to outsource a call
center service to a lo/er cost location or' it could use I$ to (rovide a /ell-desi*ned /ebsite to offer a differentiated
e"(erience to customers /ho need to contact the or*ani0ation' and embod! a (ersonali0ed call center service for
issues that cannot be resolved b! the customer -ust b! usin* /ebsite features.
Identif! !our information s!stems needs
It is almost al/a!s the case that there are insufficient resources for an or*ani0ation to take advanta*e of all of its
o((ortunities to use I$ to obtain business benefits. $uch resources can be in the form of (ersonnel in an internal I$
De(artment or cash to hire outside consultants or both. 6ecause of this' it is im(ortant that or*ani0ations be sure
the! are usin* their resources on I$ (ro-ects that have the *reatest value to the or*ani0ation. A time-tested /a! of
doin* this is to have a (rocess for settin* I$ develo(ment (riorities that are consistent /ith and ali*ned /ith
or*ani0ational (riorities. In the literature' this is t!(icall! called 7strate*ic ali*nment8. There are three *eneral
a((roaches that or*ani0ations take to settin* (riorities for information s!stems (ro-ects. J$ome (ractitioners sa!
7there is no such thin* as an I$ (ro-ectG there are onl! business (ro-ects8. $uch a (ers(ective em(hasi0es the
im(ortance of obtainin* business benefits from an investment in I$K. The three *eneral a((roaches to settin*
(riorities Jalso kno/n as develo(in* a strate*ic (lan for the I$ functionK are:
2. Eave the I$ de(artment set (riorities
1. Eave a cross-functional steerin* committee set (riorities
3. Conduct a s!stems (lannin* (ro-ect
Each of these a((roaches is discussed in more detail in the follo/in* (ara*ra(hs.
Aa,e the 2+ department set priorities
The (erson in char*e of the I$ functions' (articularl! in lar*er or*ani0ations is called the Chief Information
:fficer or CI:. The CI: is res(onsible for ne/ s!stem develo(ment' s!stems o(erations' and maintenance of
e"istin* s!stems. Ideall!' the CI: has a solid understandin* of the or*ani0ationAs overall strate*! and tactics as /ell
as a *ood understandin* of I$ issues. A com(etent CI: should be able' therefore' to do a *ood -ob of settin*
(riorities for the I$ function. All too often' ho/ever' the CI: is more comfortable /ith technical issues and
undertakes (ro-ects that are interestin* from a technical stand(oint' but offer little in the /a! of business benefits.
:n the other hand' some CI:s have an insufficient command of technical issues and therefore overlook
o((ortunities to use I$ to make their or*ani0ation more efficient' effective' and innovative. %indin* a (erson /ith
the ri*ht blend of business and technical savv! has (roven to be difficult' and' thus' CI: has come to be kno/n' in
some circles as 7Career is :ver8.
Aa,e a ross-funtional steering ommittee set priorities
an! or*ani0ations use a cross-functional steerin* committee to discuss and a*ree on overall (riorities for the
I$ function. All ma-or areas of the com(an! are re(resented' includin*' for e"am(le' accountin*' finance' human
resources' o(erations' and sales and marketin*. Eavin* all areas involved (rovides some assurance that the
or*ani0ationRs needs and o((ortunities are addressed in the (ro(er (riorit! se&uence. The shortcomin*s of this
a((roach' in (ractice' ho/ever is that some heads of areas ma! not be as su((ortive of I$ as the! should be' and the
(rocess can become com(licated /hen or*ani0ational (olitics intervene.
%or e"am(le' the or*ani0ationAs best o((ortunit! for obtainin* business benefits could lie /ith a ne/
information s!stem to track ho/ /ell sales are (erformin* in order to be sure that customer demands /ill be met
6ut this o((ortunit! ma! not be understood or a((reciated b! the sales mana*er. ?ithout the su((ort from the
sales mana*er' the I$ (ro-ect in his or her area /ould be unlikel! to succeed' so the or*ani0ationAs best o((ortunit!
is lost. :n the other hand' it could be the case that the o(erations mana*er has a stron* and (ersuasive (ersonalit!'
and b! force of ar*ument in steerin* committee meetin*s is able to convince others that o(erations (ro-ects should
*et the hi*hest (riorit!.
#e,elop a formal plan for information systems
Even small com(anies /ill benefit from takin* a relativel! short time to develo( a formal (lan for the
information s!stems function. In Cha(ter 2' and else/here in this book' /e have em(hasi0ed the value of havin* a
formal business (lan to *uide the or*ani0ation. an! or*ani0ations take their business (lan do/n another level and
have formal (lans for individual de(artments' such as sales and marketin*' o(erations' and human resources. It is
(articularl! im(ortant to have a /ritten (lan for the information s!stems function as to( mana*ement' must be
assured that the benefits of I$ are bein* a((lied in accordance /ith the overall *oals of the or*ani0ation. I$
(rofessionals call the end result of an I$ (lannin* (rocess 7strate*ic ali*nment8' /hich sim(l! means that the
strate*ic *oals of the I$ function are ali*ned /ith the strate*ic *oals of the or*ani0ation.
In a ver! small or*ani0ation an information s!stems (lan can be develo(ed b! one or t/o individuals. In lar*er
or*ani0ations' it is usuall! develo(ed b! a (ro-ect team' sometimes /ith the assistance of outside consultants. The
im(ortant thin* is that resources devoted to develo(in* an information s!stems (lan have kno/led*e of current
139
and emer*in* information and communications technolo*ies as /ell as a solid understandin* of the or*ani0ationAs
strate*ic (lan. Develo(ment of a formal (lan usuall! involves intervie/in* mana*ers in each or*ani0ational unit to
obtain their (ers(ectives on issues such as:
the overall strate*ic (lan or direction of the or*ani0ation
(lans of individual or*ani0ational units develo(ed in su((ort of the or*ani0ationAs (lan
industr! trends' com(etitorsA strate*ies and common (ractices
le*al and re*ulator! record-kee(in* and re(ortin* re&uirements
current (roblems and o((ortunities /ith o(erational (rocesses
information needs for (lannin* and decision-makin*
Identif!in* business entities Je.*. customers' (roducts' em(lo!ees' etcK and data Ji.e. attributesK re&uired to
describe each entit!.
:nce this is done' (ossible I$ (ro-ects can be determined b! identif!in* natural *rou(in*s of (rocess and data
and<or unmet information needs of mana*ers. ,ossible (ro-ects must then be ranked in (riorit! se&uence.
Technical issues must be considered ne"t' because there are several a((lications that the or*ani0ation eventuall!
uses that often share a common technical (latform Je.*. ,Cs' net/orked ,Cs' etcK. As /e discussed earlier in this
cha(ter' another o(tion is to ado(t the 7soft/are as a service8 J$aa$K a((roach /hen it is available and a((ro(riate.
Technical issues ma! cause a reassessment of the (riorit! se&uence of (ossible (ro-ects. %or e"am(le' it ma! be
easier or more lo*ical to install the or*ani0ationAs first a((lication /hich uses database mana*ement soft/are on a
smaller (ro-ect to let (ersonnel *et familiar /ith the soft/are before movin* on to a lar*er' more risk! (ro-ect. ore
details on current technical conce(t and issues are available in +lobal Te"tAs Information $!stems Te"t' Cha(ter 9'
available at htt(:<<docs.*lobalte"t.terr!.u*a.edu:50D=<anon!mous</ebdav<Informationg10$!stems<Information
g10$!stems.(df . 3ou ma! also like to scan the table of contents of the I$ Te"t for additional readin*s as it covers
man! of the to(ics /e discuss here in much *reater detail.
:nce a (lan is a*reed' it is im(lemented. ost or*ani0ations find it useful to u(date the (lan !earl! at least as
business and technical issues can chan*e &uickl!.
/hat is 6% ris$ manaement5
The I$ risk is the business risk associated /ith the use' o/nershi(' o(eration' involvement' influence' and
ado(tion of information<technolo*! solutions JA((lication' Eard/are' ;et/ork and ,eo(leK /ithin an
or*ani0ation. I$ risk consists of I$-related events that could (otentiall! im(act the business. It is also the
mana*ement of uncertaint! /ithin the functions of I$ so as to (rovide the or*ani0ation /ith assurance that:
the (ossibilit! of a threat occurrin* is reduced or minimi0ed
the im(act' direct and conse&uential' is reduced or minimi0ed
To (rovide this assurance' threats must be identified and their im(act on the or*ani0ation evaluated so that
a((ro(riate control measures can be taken to reduce the (ossibilit! or fre&uenc! of a threat occurrin* and to reduce
or minimi0e the im(act on the business.
Information is a ke! business resource /hich' in order to be of value' must be correct' relevant and a((licable to
the business (rocess and delivered in a timel!' consistent and usable mannerG it must be com(lete and accurate and
(rovided throu*h via the best use of resources J(lanned or un(lannedK' and if sensitive it must have its
confidentialit! (reserved. Information is the result of the combined a((lication of data' a((lication s!stems'
technolo*!' facilities' and (eo(le. I$ @isk ana*ement ensures that the threats to these resources are identified and
controlled so that the re&uirements for information are met.
,ro-ect mana*ement risks
Des(ite the fact that sound s!stem desi*n and installation methodolo*ies have been /ell kno/n for decades' the
IT (rofession is still (la*ued b! troubled or failed (ro-ects' collo&uiall! called 7an :" in the ditch8. $tudies like the
Chaos @e(orts (ublished b! the $tandish +rou( over the !ears have documented the e"tent of IT (ro-ect successes
and failures. %or e"am(le' the latest (ublicl! available re(ort' QCEA:$ $ummar! 100DQ states:
M1his yearCs results show a mar!ed derease in pro@et suess rates, with P' per ent of all pro@ets
sueeding whih are deli,ered on time, on budget, with re?uired features and funtionsM says Him
Hohnson, hairman of 1he +tandish :roup, MForty-four per ent were hallenged whih are late, o,er
budget, and5or with less than the re?uired features and funtions and '= per ent failed whih are
anelled prior to ompletion or deli,ered and ne,er used0M
QThese numbers re(resent a do/ntick in the success rates from the (revious stud!' as /ell as a si*nificant
increase in the number of failuresQ' sa!s #im Crear' $tandish +rou( CI:' QThe! are lo/ (oint in the last five stud!
(eriods. This !earRs results re(resent the hi*hest failure rate in over a decadeQ J$tandish 100DK. 6usinesses have to
be a/are of fi*ures like these before !ou *ive the *o-ahead for an IT (ro-ect. %ailed IT (ro-ects can be disastrous to
an or*ani0ation' even forcin* them to *o out of business.
$ome of the reasons IT (ro-ects fail are:
An inade&uate understandin* of /hat functions and features Ji.e. re&uirementsK the or*ani0ation needs in
the ne/ s!stem. It /ould be like tr!in* to build a buildin* before its desi*n has been com(leted.
,oor (ro-ect (lannin*' task identification' and task estimation. Isuall! this means that essential tasks have
been overlooked or under-estimated meanin* the (ro-ectAs time and cost estimates are too o(timistic.
Lack of (ro(er skills on the (ro-ect team. This /ould be like assi*nin* car(entr! tasks to an electrician.
$ome IT (rofessionals think the! can do an!thin* and this is almost al/a!s not true.
%ailure to address (roblems and<or (ro-ect cham(ion. #ust about ever! IT (ro-ect has (roblems. If the! are
not dealt /ith on a timel! basis the! do not *o a/a! b! themselves' the! -ust *et /orse. It is hel(ful in
addressin* (roblems if a hi*hl!-(laced e"ecutive is a 7cham(ion8 of the (ro-ect and can ste( in and *et
(roblems solved if the (ro-ect team is stru**lin*.
Inade&uate testin*. All too often' a ne/ s!stem is (ut into o(eration before it has been ade&uatel! tested to
be sure it handles all conditions it is likel! to encounter. A s!stem failure after conversion can cause normal
business (rocesses Jlike acce(tin* customer orders' for e"am(leK to fail.
13D
;o fall-back (lan. 6efore convertin* to a ne/ s!stem' the (ro-ect team should have a tested fall-back (lan
the! can revert to in order to kee( business (rocesses /orkin* /hile the ne/ s!stem is ad-usted.
E"ecutive cham(ions should be a/are that IT (ro-ect risks are all too often kno/n to the IT (rofessionals
but are not al/a!s shared /ith others. Therefore' !ou should al/a!s ask that a formal (ro-ect risk
assessment be done at the be*innin* of a (ro-ect and that (lans are in (lace to kee( risks at a minimum.
$ecurit! risks
The bi**est challen*e com(anies face in tacklin* I$ securit! risks is the *ro/in* so(histication of hackers and
other c!ber-criminals. :r*ani0ations must no/ contend /ith a ran*e of hi-tech attacks orchestrated b! /ell-
or*ani0ed' financiall!-motivated criminals. ?hile lar*e or*ani0ations often have inde(endent I$ securit! staffs' it is
likel! that !our start-u( can focus on -ust a cou(le of basic items' such as:
Identif!in* the value of information stored on !our com(uterJsK and makin* sure that access to such
information is restricted to em(lo!ees /ho need to use for le*itimate business (ur(oses. %or e"am(le' !our
customer database and customer (rofitabilit! anal!ses should be (rotected as !ou /ould not /ant such
information to fall into the hands of a com(etitor as the result of actions taken b! a dislo!al em(lo!ee.
Com(uters sometimes break do/n J7crash8K. This is /h! it is im(ortant to have a (rocedure of backin* u(
critical files on a dail! basis' and have /ritten' tested (rocedures to recover needed information from
backu( files &uickl!. :r*ani0ations have *one out of business as a result of failed com(uter s!stems that
/ere not (ro(erl! backed-u(.
If !ou have a /ebsite' !ou /ill need to be sure that it is ade&uatel! (rotected from both internal and e"ternal
threats. ?e discuss Internet risks in the ne"t section.
Internet risks
Com(anies considerin* a /ebsite or Internet-based services need to be a/are of the various risks and
re*ulations that ma! a((l! to these services. :ver the (ast fe/ decades' the Internet has become critical to
businesses' both as a tool for communicatin* /ith other businesses and em(lo!ees as /ell as a means for reachin*
customers. Each da! of the /eek and ever! month' there are ne/ Internet threats. These threats ran*e from attacks
on net/orks to the sim(le (assin* of offensive materials sent or received via the Internet. The risks and (articular
re*ulations that a((l! ma! var! de(endin* on the t!(es of services offered. %or e"am(le' institutions offerin*
informational /ebsites need to be a/are of the various consumer com(liance re*ulations that ma! a((l! to the
(roducts and services advertised online. Information needs to be accurate and com(lete to avoid (otential liabilit!.
$ecurit! of the /ebsite is also an im(ortant consideration. Com(anies and some individuals traditionall! have
relied on (h!sical securit! such as locks and safes to (rotect their vital business information no/ face a more
insidious virtual threat from c!ber-criminals /ho use the Internet to carr! out their attacks /ithout ever settin*
foot in an establishment or someoneAs home. ore often than not' these crimes are conducted from outside the
Inited $tates. $ecurit! measures should (rotect the site from defacement and malicious code.
It is clear that no sin*le risk mana*ement strate*! can com(letel! eliminate the risks associated /ith Internet
use and access. There is no one s(ecial technolo*! that can make an enter(rise com(letel! secure. ;o matter ho/
much mone! com(anies s(end on c!ber-securit!' the! ma! not be able to (revent disru(tions caused b! or*ani0ed
attackers. $ome businesses /hose (roducts or services directl! or indirectl! im(act the econom! or the health'
/elfare or safet! of the (ublic have be*un to use c!ber risk insurance (ro*rams as a means of transferrin* risk and
(rovidin* for business continuit!.
$ummar! of I$ risk mana*ement
ana*in* I$ risk is a dail! decision makin* (rocess aimed at reducin* the amount of losses and threats to a
com(an!. It is a (ro-active a((roach to reducin* e"(osure to data<information loss and ensurin* the inte*rit! of the
a((lications used da!-to-da!. An I$ securit! (lan should include at minimum a descri(tion of the various securit!
(rocesses for s(ecified a((lications' (rocedural and technical re&uirements' and the or*ani0ational structure to
su((ort the securit! (rocesses. A risk assessment should be (erformed first. Identif!in* risks (rovides *uidance on
/here to focus the securit! re&uirements. $ecurit! re&uirements and controls should reflect the business value of
the information assets involved and the conse&uence from failure of securit!. $ecurit! mechanisms should be 7cost
beneficial8' i.e. not e"ceed the costs of risk. It should also include e"(ectations for risk /ithin the overall I$ securit!
(lan.
Cha(ter summar!
an! (eo(le use information s!stems and information technolo*! as if the! meant the same. The! are different'
and it is im(ortant for !ou to understand the difference bet/een them. As /e illustrated in E"hibit B2' an
Information $!stem is com(rised of t/o sub-s!stems' a social subs!stem and a technical subs!stem. The social
subs!stem has t/o (arts: (eo(le and or*ani0ational structure. The technical subs!stem also has t/o (arts:
technolo*! and business (rocesses. The reason it is im(ortant to understand this is that all four (arts of an
Information s!stem must /ork effectivel! if the s!stem is to meet the needs for /hich it /as desi*ned and installed.
Information s!stems can be ver! (o/erful tools to hel( !ou run !our or*ani0ation. :n the other hand' in a start-
u(' be sure !ou need the su((ort of information s!stems before !ou invest in them. It ma! be that !ou can handle
!our o(erations manuall! for a time and avoid the cost and time investin* in a com(uter-based I$ re&uires.
If !ou do decide to move for/ard /ith com(uter-based information s!stems it is /ise to develo( a (lan first' and
make sure !ou are (roceedin* in an orderl! manner. There are three *eneral a((roaches to develo(in* an I$ (lan.
3ou /ill also find that !ou have man! o(tions available for hard/are and soft/are' and the o(tions can var! /idel!
in initial (urchase (rice and the kind of su((ort (rovided b! the vendor. If !ou see value in havin* a /ebsite there
are some *enerall!-acce(ted (rinci(les !ou should follo/ to make !our /ebsite effective.
an! or*ani0ations have found /a!s to use I$ for com(etitive advanta*e. ichael ,orterAs frame/orks' the five
forces model' the three *eneric strate*ies' and value chain have (roven to be useful tools in comin* u( /ith ideas
for innovative information s!stems.
%inall!' /hen an or*ani0ation has valuable information stored in com(uters' it is e"(osed to risks from errors
and from various internal and e"ternal threats. It is im(ortant for mana*ers to evaluate the risks and come u( /ith
cost-effective measures to be sure the or*ani0ation is ade&uatel! (rotected from loss or dama*e to valuable
information.
1B2
Describe the four com(onents of an information s!stem. ?h! is it im(ortant to consider each of
them /hen desi*nin* and installin* an information s!stemC
Inder /hat circumstances mi*ht it be /ise for a start-u( entre(reneur to (ost(one investin* in
com(uter-based information s!stems for the or*ani0ationC
?hat are the ma-or o(tions !ou have for obtainin* hard/are' soft/are and su((ort from I$
(rofessionalsC
Define a 7soft/are suite8. ?hat are the advanta*es of usin* a soft/are suite instead of a number of
stand-alone soft/are a((licationsC
?hen should !ou consider usin* database mana*ement soft/are instead of a s(readsheetC
Discuss the advanta*es and disadvanta*es of o(en source soft/are a((lications for a start-u(
or*ani0ation
?hat are the ob-ectives of a ?ebsiteC ?ho benefits the most from !our or*ani0ationAs /eb (resenceC
?hen havin* a /eb (resence /hat is the sin*le most im(ortant ob-ectiveC ?hat is the *reatest risk to
a /ebsiteC
+ive at least three e"am(les of or*ani0ations that have used I$ in innovative /a!s to *ain com(etitive
advanta*e. %or each e"am(le' /hich of ,orterAs frame/ork elements does it illustrateC
?hat are the three *eneral a((roaches for settin* an or*ani0ationAs I$ (rioritiesC ?hat are the
advanta*es and disadvanta*es of eachC
?h! is im(ortant for start-u( entre(reneurs to (a! attention to I$ risk mana*ementC
Eo/ do mana*ers decide ho/ much attention and resources the! should devote to I$ risk
mana*ementC
@eferences
J%riedman 100=K %riedman' Thomas' 7The ?orld is %lat8 2st edition' %arrar' $traus and +irou"' 100=' I$6;
0-39B-1D155-B.
J+artner 1005K %einber*' Donald 7The +ro/in* aturit! of :(en-$ource Database ana*ement $!stems8
htt(:<<media(roducts.*artner.com<re(rints<sunmicros!stems<volume2<article1<article1.html Accessed
#anuar! 32' 100D.
J+oo*le 100DK htt(:<<///.*oo*le.com<intl<en<o(tions<
JInformation $!stems 1005K Information $!stems 1005' +lobal Te"t.
Jicrosoft 100DK htt(:<<store.microsoft.com<microsoft<:ffice-$uites<
J!$FL 100DK htt(:<<///.m!s&l.com<
J:(enoffice 100DK htt(:<<///.o(enoffice.or*<
J$tandish 100DK htt(:<<///2.standish*rou(.com<ne/sroom<chaosT100D.(h(' accessed #ul! 19' 100D
J$tille 100DK htt(:<<///.&cisolutions.com<dbinfo2.htm
J.oho 100DK htt(:<<0oho.com<
1B3
11. Competiti&e intellience
Editor: #ames ? 6ronson JThe Iniversit! of ?isconsin' I$AK
Contributor$: Hellie +oldfien' @!an ?olford
Reviewer: ?illiam A Dra*o' JIniversit! of ?isconsin' I$AK
Learnin* ob-ectives
At the conclusion of this cha(ter' !ou should be able to:
define com(etition and com(etitive intelli*ence
differentiate bet/een (arallel (roducts and substitute (roducts
state the *oals of com(etitive intelli*ence
discuss (ublic sources of information for com(etitive intelli*ence
understand the role of industr! structure in com(etitive intelli*ence
com(lete a com(etitor anal!sis
Introduction
Chances are com(etition for !our firmAs (roduct is alread! /ell established. :ther firms can be in direct
com(etition /ith !ou /hen the! offer a similar (roduct and tar*et the same customers. The! can be indirectl!
com(etin* /ith !ou b! offerin* a similar (roduct or service' but tar*etin* a different demo*ra(hic. Com(etition can
come from overseas. Com(etition can come from another firm in the same cit!. Com(etitors are all around !ou
/hether !ou choose to be a/are of it or not. @eco*ni0in* and dealin* /ith com(etition is necessar! to !our business
success.
?hat ever! firm is com(etin* for are bu!ers or customers. Customers are the final evaluator of !our (roduct. If
the! (refer !our (roduct above those of com(etitors' !ou /ill receive their business and the sales /hich /ill kee(
!ou in business. Even a *reat business idea /ill fail unless it attracts bu!ers.
Definition
Copeting !ir$ offer functionall! interchan*eable (roducts to the same bu!ers. Copetition occurs /hen
com(etin* firms attem(t to attract bu!ers b! offerin* (roducts /ith *reater (erceived benefit. Common benefits
include (rice' service' re(utation' and ima*e' but ma! include virtuall! an!thin* else associated /ith a (roduct that
the bu!er values. A bu!erAs (erce(tions of /hat constitutes a benefit ma! var! /idel! based on the nature of the
(roduct. $ince the actions taken b! one com(etitor to attract bu!ers are likel! to affect the (erformance of other
com(etitors' com(etin* firms are said to be interdependent>
Coke and ,e(si are interde(endent. An attem(t b! ,e(si to attract bu!ers Jincrease salesK throu*h an
advertisin* cam(ai*n /ill decrease the sales of Coke. Coke ma! counter this advertisin* cam(ai*n /ith its o/n
Business Fundamentals 1BB A +lobal Te"t
11. 4ompetiti$e intelligence
advertisin* or it ma! elect to take another com(etitive action such as a tem(orar! reduction in the (rice of Coke.
Eo/ Coke chooses to react to ,e(si /ill be based on an anal!sis of ho/ the firms have acted in (ast situations. The
industr!As copetitive dynaic$ is the on*oin* series of com(etitive actions and com(etitive res(onses that
take (lace as Coke and ,e(si com(ete for customers.
Copetitive intelligence is the s!stematic collection and anal!sis of (ublicl! available information about
com(etitors. Intelli*ence about com(etitors is ke! to understandin* the actions the! are currentl! takin* to attract
bu!ers. Com(etitive intelli*ence ma! also allo/ the firm to (redict a com(etitorAs future actions and take measures
to (reem(t or minimi0e the im(act of those actions. The ob-ective of a firmAs com(etitive intelli*ence is to
understand its com(etitors.
E"ercise
It should be eas! to envisa*e Coke and ,e(si as interde(endent com(etin* firms. Can !ou come u( /ith five
more e"am(les of interde(endent com(etin* firms' e.*. Eonda and To!ota' 6oein* and Airbus'...
?h! !ou have com(etitors Jor ho/ bu!ers have mana*ed to survive /ithout !our (roduct and
/h! !ou need bu!ers more than bu!ers need !ouK
Entre(reneurs commonl! underestimate the im(act of com(etition. Entre(reneurs /ho do underestimate the
im(act of com(etition are failin* to consider the fact that (otential bu!ers are currentl! mana*in* /ithout the
entre(reneurAs (roduct. There are three ar*uments for /h! (otential bu!ers are mana*in* /ithout the
entre(reneurAs (roduct or service:
2. (arallel (roducts e"ist in the market
1. reasonable substitutes e"ist in the market
3. (arallel (roducts and substitutes do not e"ist' but the (ublic does not (erceive' or is not a/are' of the
benefits offered b! the entre(reneurAs (roduct or service
.arallel product$ are those that are functionall! interchan*eable /ith the entre(reneurAs (roducts' but var!
-ust enou*h on the (roductAs (erceived benefits to e"ist in the market(lace. %or e"am(le' man! communities have
areas /here a number of restaurants e"ist in close (ro"imit! to one another. These restaurants all offer the
customer a (re(ared meal' but ma! var! as to nationalit! or t!(e of cuisine' com(le"it! and ori*inalit! of
(re(aration' level of service' seatin*' and other dimensions for /hich the bu!in* (ublic (erceives a benefit.
An entre(reneur o(enin* a ne/ restaurant in (ro"imit! to e"istin* restaurants ma! be offerin* a heretofore
unavailable national cuisine' but the entre(reneur still has man! com(etitors. In this market of (arallel
com(etitors' the entre(reneur /ill be successful onl! if bu!ers (erceive that the ne/ restaurant offers desirable
benefits that are unavailable from e"istin* restaurants. The ne/ restaurant must *enerate enou*h sales to *enerate
a (rofit. In realit!' /hat often ha((ens is that the ne/ restaurant /ill initiall! *enerate a stron* trade as bu!ers tr!
the restaurantAs novel offerin*s. Eo/ever' in a fe/ months the ne/ restaurant /ill fail unless it has found the
means of offerin* a mi" of (erceived benefits not available in com(etin* restaurants. This su**ests that the
entre(reneur must learn enou*h about /hat bu!ers or customers need or /ant and enou*h about ho/ com(etitors
are attem(tin* to meet those needs' that the entre(reneur can offer enou*h (erceived benefits to kee( customers
returnin* indefinitel!. Learnin* about bu!ers and com(etitors is the role of com(etitive intelli*ence.
1B=
$ubstitutes often e"ist for the entre(reneurAs (roduct. &ub$titute$ are (roducts that fill the same function but
ori*inate in different industries. 6u!ers ma! have a (reference for a substitute due to the substituteAs *reater
(erceived benefit. %or e"am(le' the basic construction material for houses varies *reatl! on a *eo*ra(hic basis.
?ood housin* tends to be favored /here /ood is abundant and relativel! ine"(ensive' and a similar ar*ument can
be made for the /ood substitutes' brick and stone. The entre(reneur is unlikel! to be more than mar*inall!
successful if s<he attem(ts to sell bricks /here /ood remains abundant and chea(. $<he ma! be mar*inall!
successful because /ood housin* often has brick fi"tures and trim. Eo/ever' in a market /here /ood is becomin*
more costl! due to a lack of abundance' brick ma! become an attractive substitute for /ood. Inderstandin*
substitutes (lace in the market is the role of com(etitive intelli*ence.
,erha(s the most difficult situation for an entre(reneur e"ists /here there currentl! e"ists no functionall!
interchan*eable (roduct. It ma! a((ear that a com(lete lack of com(etition /ould be to the entre(reneurAs
advanta*e' but this is seldom the case. In those instances /here firms offerin* similar (roducts can be found in
other markets' the most likel! e"(lanation for a lack of com(etitors is a market that /ill not sustain the firm. The
market ma! be too small' or too seasonal' or the customer demo*ra(hic ma! be ske/ed' etc. The entre(reneur
should (roceed cautiousl! /hen a su(erficial ins(ection su**ests a (otential market lackin* an established
com(etitor. A more thorou*h investi*ation /ill often reveal failed attem(ts to establish a market for the (roduct.
This investi*ation is one of the roles of com(etitive intelli*ence.
In the rare instance /here the entre(reneur has discovered or invented a uni&ue (roduct' s<he t!(icall! faces a
trul! dauntin* task. ,otential bu!ers must be educated as to the e"istence and benefit of the ne/ (roduct.
Educatin* bu!ers and establishin* a market for a ne/ (roduct is e"(ensive. Infortunatel! for the entre(reneur' it is
often the follo/-on firms that are successful. In the electronics industr!' the ori*inators of the (ersonal com(uter'
video *ame console' and (ersonal data assistant (rovided the infrastructure for successful follo/-on firms' but /ere
unable to ca(itali0e on their o/n innovative (roducts.
E"ercise
A business that faces both (arallel (roducts and substitutes is likel! to have a difficult time in the
market(lace. E"am(le of businesses that have both (arallels and substitutes include *rocer! stores. ,arallels
include *rocer! stores /ith sli*htl! var!in* themes' /arehouse stores' e.*. $amAs club and Costco' and
natural food stores. $ubstitutes include s(ecialt! food stores' e.*. bakeries' dair! stores' and butcher sho(sG
restaurantsG and take-out sho(s. ;ot sur(risin*l! *rocer! store (rofit mar*ins are lo/. ?hat other businesses
are characteri0ed b! com(etition that includes both (arallel (roduct and substitutesC Is the avera*e (rofit
mar*in for these businesses lo/' i.e. ` = (er cent of salesC
6mportance and oals of competiti&e intellience
Detectin* com(etitive threats
Detectin* com(etitive threats is crucial to ever! business. icrosoft has concerns /ith +oo*leAs *ro/in* market
share. %ord attem(ts to avoid losin* market shares to To!ota. A local su(ermarket is concerned /ith another
su(ermarket o(enin* u( in the area and takin* its customers a/a!. ?hen businesses are able to detect a
com(etitive threat' the! are better e&ui((ed to handle that threat. $te(s ma! be taken to ensure that the im(act of
the ne/ threat is minimi0ed.
Business Fundamentals 1B> A +lobal Te"t
Com(etition is the effort of t/o or more firms' actin* inde(endentl!' to obtain the business of a bu!er b!
offerin* the most favorable benefits. Com(etitive intelli*ence is the (ur(oseful and coordinated monitorin* of
com(etitors' /herever and /hoever the! ma! be' /ithin a s(ecific market(lace. Com(etitive intelli*ence allo/s the
firm to make informed decisions about the outcomes of its actions in the market(lace. %or e"am(le com(etitor A'
throu*h the scannin* of ne/ buildin* (ermits in the local ne/s(a(er' discovers that com(etitor 6 has taken out a
(ermit for the construction of a ne/ buildin* on 6As (ro(ert!. %rom this information' and other le*al sources'
com(etitor A ma! dra/ some conclusions as to the (ur(ose of com(etitor 6As ne/ buildin* and take actions
desi*ned to minimi0e the im(act of 6As ne/ buildin*. The *oal of com(etitive intelli*ence is to detect threats
ori*inatin* from com(etitors in all their forms.
Eliminatin* or lessenin* sur(rises
A firm needs to closel! monitor the actions of its com(etitors. Detectin* com(etitive threats earl! allo/s the firm
to take actions to miti*ate the threat. Com(etitive threats ma! come from a number of different sources' includin*
ne/ entrants' substitutes' com(etitors' and even su((liers in the form of a (rice increase. %or e"am(le' if a local
com(etitor is buildin* a ne/ retail outlet that /ill ca(itali0e on the industr!As latest trends' the firm /ill have to
decide /hether to follo/ suit. ,erha(s a com(etitor has traditionall! held a ma-or sale on a (articular holida!' the
firm /ill need to decide /hether to follo/ suit' or *ive u( sales /hile its com(etitor holds the sale.
Enhancin* com(etitive advanta*es b! lessenin* reaction time
A firm that has (lanned for most common threats /ill be (re(ared to move &uickl! in the face of a threat.
,re(aredness allo/s the firm to move (ast its less /ell (re(ared com(etitors as the! devote valuable time and other
resources reactin* to the threat. ?hile com(etitors are reactin*' the firm can move to increase its com(etitive
advanta*e over the com(etition.
%or e"am(le' a truckin* com(an! mi*ht (lan for an escalation in fuel (rices. The truckin* com(an! can do this
in various /a!s' but the most common is to 7bu!8 a contract that *uarantees the firm the ri*ht to (urchase fuel at a
fi"ed (rice for some s(ecified (eriod of time. $hould fuel (rices increase durin* the (eriod the contract is in effect'
the truckin* firm is (rotected b! its fuel contracts. The fuel contracts in turn allo/ the truckin* firm to honor
e"istin* &uotations and contracts /ith its customers. 6! honorin* its &uotations and contracts in the face of
escalatin* fuel (rices the truckin* firmAs re(utation and *ood /ill /ith its customers increases' furtherin* the
truckin* firmAs com(etitive advanta*e.
%indin* ne/ o((ortunities
Iltimatel!' a firm must be able to *ro/ in order to survive in the business /orld. The abilit! to *ro/ is onl!
limited b! the ima*ination of the decision makers of the com(an!. ;e/ ideas turned into (atents for ne/ (roducts'
bu!in* a com(etitor in order to increase market share and economies of scale' and establishin* a sales force in a
nei*hborin* countr! are -ust a fe/ of the /a!s that a com(an! can continue to *ro/.
There are three (rinci(le avenues em(lo!ed b! businesses to develo( ne/ o((ortunities for *ro/th.
2. %ind /a!s to increase the sales of e"istin* (roducts to e"istin* customers. 6usinesses can accom(lish this
*oal b! findin* ne/ a((lications for the use of e"istin* (roducts b! current customers. This (rocess is
kno/n as ar)et penetration.
1B9
1. Mar)et developent is the (rocess of findin* ne/ customers for the firmAs e"istin* (roducts. There are
t/o choices for market develo(ment' the firm can look to ne/ *eo*ra(hic markets or the firm can turn to
a ne/ demo*ra(hic market. %or e"am(le' a firm that sold e"ercise e&ui(ment that traditionall! tar*eted
the 25-3B !ear-old male demo*ra(hic mi*ht find that the! could sell the same e&ui(ment to a 2>-31 !ear-
old female demo*ra(hic. The onl! ne/ cost the firm /ould incur is the cost of marketin* e"istin* (roducts
to the ne/ demo*ra(hic.
3. .roduct developent is the (rocess of creatin* ne/ (roducts for customers. ,roduct develo(ment is
often accom(lished b! askin* customers /hat t!(es of (roducts /ould make their -ob easier. :nce a
viable need is established' the firm can develo( a (roduct to meet that need.
Mer! fe/ firms can afford to stand still for lon*. Com(etitors are constantl! lookin* for o((ortunities and those
o((ortunities missed b! !our firm' /ill not be missed b! all !our com(etitors. Com(lacenc! in toda!As business
environment /ill &uickl! lead to !ears of dedicated /ork bein* usur(ed b! com(etitors.
6nformation collection methods
Information or data on (roducts' su((liers' com(etitors' and industries has never been more available. The
Internet (ermits access to information and data from a /ide ran*e of sources. :ften' there is sim(l! too much data'
and data of dubious &ualit!. ?hen accessin* data the entre(reneur needs to evaluate data on its timeliness' source'
and relevance.
Internet
Internet search en*ines make it (ossible to &uickl! access information on seemin*l! an! sub-ect. Infortunatel!'
because an!one can establish and then fail to maintain a /ebsite' Internet data is often dated' unreliable' and of
dubious value. This (laces a burden on the entre(reneur to check Internet data carefull! before usin* it.
;onetheless' there is much useful information to be found on the Internet at *overnment' or*ani0ation' and
cor(orate /ebsites. The information from these sources *enerall! consists of reliable facts and fi*ures. %re&uentl!'
these facts and fi*ures /ill need to be mani(ulated b! the entre(reneur in order to be rendered in a useful form.
In toda!As market' there are fe/ (roducts and services that are not rated b! a third (art!' e.*. consumer
or*ani0ations' ma*a0ines' commercial sellers' and blo*s. Eo/ever' the &ualifications and im(artialit! of third (art!
raters ma! be &uestionable. The entre(reneur should not rel! on a sin*le source for (roduct revie/s and e"ercise
due dili*ence b! checkin* multi(le sources for (roduct ratin*s. The entre(reneur should bear in mind that his<her
firm and (roducts /ill eventuall! be rated on the Internet and check to see that the firmAs ratin* is favorable.
Euman intelli*ence
Euman intelli*ence can !ield the most timel! and accurate information' but it is the most resource intensive
form of information to collect. Euman intelli*ence often tends to take the form of o(inion rather than the facts and
fi*ures found in documents. This leaves the entre(reneur in the (osition of evaluatin* the veracit! of o(inions. Like
(roduct revie/s' /hich can also be a matter of o(inion' the entre(reneur should rel! on multi(le sources. The
entre(reneurAs net/ork should be the source of his<her human intelli*ence. The net/ork can be au*mented b!
introductions from net/ork members to others closer to the information ob-ective. ,artici(ants in trade sho/s and
trade or*ani0ations are e"cellent sources of information as are su((liers' customers' and em(lo!ees.
%ee based com(anies
%ee based com(anies' such as Eoovers' Le"is;e"is' and the credit re(ortin* com(anies are in the business of
collectin* and com(ilin* information on businesses and individuals. Their revenue is earned throu*h the sale of the
information the! collect. %or the most (art' the! make no attem(t to assess the s(ecific validit! of the information
the! sell. @ather' the! tend to rel! on the fact that on avera*e' their information is &uite reliable. The overall trend
for fee based information is that reliabilit! tends to increase /ith (rice. %ee based com(anies can be a useful source
of information on com(etitors that mi*ht not be other/ise available. %or e"am(le' credit re(orts are available for
com(etin* firms and credit re(orts can !ield a *ood deal of information about a firmAs financial condition.
,ublic documents
,ublic documents can be an e"cellent source of information on com(etitors. an! t!(es of (ublic documents are
available over the Internet' /hile others ma! onl! be available at records offices. %or e"am(le' buildin* (ermits are
t!(icall! re(orted in ne/s(a(ers and can often be accessed online' /hile buildin* (lans are usuall! available onl!
throu*h a visit to the (ublic (lannin* office. A visit to the (lannin* office ma! be /arranted if a com(etitor is
buildin* a ne/ (lant. The (lans /ill !ield a *ood deal about the (ro-ect from /hich a kno/led*eable com(etitor can
deduce (lant and /arehouse ca(acit!. $imilarl!' the annual re(ort that a (ublic com(an! files /ith the *overnment
is another e"am(le of a document that ma! !ield a *ood deal of information about a com(etitor.
There are a number of or*ani0ations that are concerned /ith the collection and use of com(etitive data. Internet
sites /ith a focus on com(etitive intelli*ence include:
htt(:<<cio.com<
htt(:<<///.sci(.or*<
htt(:<<///.brint.com<
htt(:<<fuld.com<
E"ercise
$elect a (ublicl! traded com(an! of interest to !ou. Isin* the Internet as an access (oint' find the follo/in*
for the (revious !ear: J2K annual sales' J1K (rofits as a (ercenta*e of sales' e.*. (rofits<sales' J3K number of
em(lo!ees' JBK sales (er em(lo!ee' e.*. sales<em(lo!ees' and J=K best sellin* (roduct or service.
The industry en&ironment
?hat is an industr!C
The term indu$try loosel! refers to an! *rou( of businesses that share a (articular t!(e of commercial
enter(rise. This *rou(in* of firms is also likel! to *enerate (rofits in a similar manner' or at least share related
activities. In the business /orld' it is common to hear mana*ers discuss (articular industries as a /hole' for
e"am(le' bthe automobile industr!A or bthe ma*a0ine industr!A.
In a more formal sense' the ;orth American Industr! Classification $!stem J;AIC$'
htt(:<<///.census.*ov<e(cd<///<naics.htmlK defines hundreds of different industries. The ;AIC$ is a commonl!
used s!stem to *rou( businesses. The ;AIC$ t!(icall! identifies an industr! /ith a si" di*it code' /ith each
additional di*it narro/in* the definition of the industr!. $imilar classification s!stems include the International
$tandard Industrial Classification JI$IC' htt(:<<unstats.un.or*<unsd<cr<re*istr!<re*cst.as(CClS29K from the Inited
1BD
;ations and the +eneral Industrial Classification of Economic Activities /ith the Euro(ean Communities J;ACE'
htt(:<<///.ltck.se<,r-32<nacekod<nacecode.htmK. Data is *athered and re(orted for the industr! based on the si"
di*it code. Data t!(icall! re(orted includes demo*ra(hic measures for the industr! includin* em(lo!ment' number
of business' and total sales. Data is not re(orted for individual firms. an! different a*encies and businesses use
these cate*ories for statistical studies' business com(arisons' and benchmarks. Locatin* the industr! for a business
throu*h the ;AIC$ or similar classification scheme can be a useful e"ercise in *atherin* com(etitive intelli*ence.
%or e"am(le' the avera*e number of em(lo!ees and sales of firms in the industr! can be found and from this
information critical benchmarks like sales (er em(lo!ee ma! be calculated.
Industr! structural characteristics
Industries have s(ecific structures and the entre(reneur needs to learn and understand the si*nificance of the
structure for his<her industr!. Industr! structure includes si0e measures' e.*. industr! sales' number of firms' and
number of em(lo!ees. @ate of *ro/th and the industr! *ro/th curve are an im(ortant element of industr! structure
as is the e"tent to /hich an industr! is unioni0ed. There ma! be man! more elements of industr! structure.
Industr! structure is one determinant of com(etition. %or e"am(le' com(etition in an industr! com(rised solel! of
union em(lo!ers /ill be &uite different than in an industr! com(rised of both union and non-union firms.
Com(etition is also affected b! the e"tent to /hich the *overnment is a lar*e bu!er' or (erha(s the onl! bu!er' as in
the defense industr!.
Conce(t of strate*ic *rou(s
$trate*ic *rou(s e"ist /ithin most industries. A $trategic group is a set of firms /ithin an industr! that
em(lo! similar (ractices in order to achieve com(arable *oals. An e"am(le of a strate*ic *rou( /ithin the food
service industr! /ould be fast-food chains. The fast-food chains differentiate themselves from other restaurants b!
offerin* &uick-service' (o(ular foods' and relativel! lo/ (rices. ?ithin the same industr! /e can find a number of
other strate*ic *rou(s such as famil! restaurants' ve*etarian restaurants' and coffee houses. Althou*h fast-food
chains and ve*etarian restaurants both accom(lish the same (ur(ose' i.e. (rovidin* a (re(ared meal' their tar*et
audience' their methods of marketin*' and other methods of doin* business are decidedl! different. Com(etition
bet/een firms /ithin a strate*ic *rou( is more direct than com(etition bet/een firms located in different strate*ic
*rou(s.
Com(etitive rivalr! amon*st firms in the same strate*ic *rou( can be ver! intense' es(eciall! since the! are
usuall! com(etin* for the same customers. Consider ,e(si and Coca-Cola versus fruit -uice. ,e(si and Coca-Cola
are com(etin* for cola drinkers' and the! market their (roducts com(etitivel! a*ainst each other. Althou*h the
customer could -ust as easil! have a *lass of fruit -uice' ,e(si and Coca-Cola are not a**ressivel! marketin* a*ainst
the -uice industr!. The fruit -uice customer has different /ants and needs than the cola customer' so the t/o
strate*ic *rou(s do not com(ete directl! for the same clientele.
He! success factors in an industr!
0ey $ucce$$ !actor$ A0&2B are areas of critical (erformance necessar! for success in a s(ecific industr!. A
firm cannot e"(ect to be com(etitive in its industr! /ithout an understandin* of the industr!As ke! success factors.
He! success factors are a function of both customer needs and com(etitive (ressures. H$%s are t!(icall! identified
b! com(letin* a list in res(onse to t/o &uestions:
2. ?hat do customers in m! industr! /antC
1. Eo/ do successful firms survive the industr!As com(etitive (ressuresC
+rocer! $tore H$%
Customer Com(etition
Cleanliness 6ar*ainin* (o/er over su((liers
%reshness ;umber of local com(etitors
$election' includin* take-out Location relative to com(etitors
Com(etitive (rices
Location U (arkin*
$ervice U (leasant e"(erience
The entre(reneur must be a/are of the ke! success factors JH$%K in his<her industr!. @esources should be
directed to activities that increase com(etitiveness on H$% and not /asted on activities that are not critical to H$%s.
E"ercise
$ince /e all have decided (references' it follo/s that a table of H$%s constructed b! one (erson is likel! to
omit' or overstate' an industr!As H$%s. $elect a common t!(e of business-industr! /ith /hich !ou have some
familiarit!' e.*. floral arran*ements' coffee house' or bic!cle sales.
Construct a table of He! $uccess %actors b! askin* !ourself the &uestions: ?hat do customers in m!
business-industr! /antC Eo/ do successful firms survive the industr!As com(etitive (ressuresC
;o/ ask the &uestions of t/o other (eo(le /ho have been customers of the business-industr!. Are !ou
*ettin* a*reement on !our list of H$%s' or /ill !ou need to ask more (eo(le for their o(inions to establish a
clear list of H$%sC
.orter3s : forces and the analysis of competitors
,orterAs five forces' first covered in Cha(ter 3 as a methodolo*! for assessin* industr! attractiveness' (la!s an
im(ortant role in com(etitor anal!sis. The five forces (ers(ective of com(etitor anal!sis vie/s each force as a
determinant of the level of com(etition in the industr!. The level of com(etition in turn determines the firmAs
abilit! to o(erate (rofitabl! in the industr!.
6ar*ainin* (o/er of bu!ers
A firmAs bu!ers or customers have var!in* needs and /ants. eetin* customersA needs re(resents a cost to the
firm. ?hen the firm can easil! meet the customerAs needs the firmAs cost is relativel! lo/. 6ecause the firm can
easil! *ive the customer /hat he<she values' the firm is in a stron* bar*ainin* (osition and sales are likel! to
*enerate health! (rofits. ?hen the customerAs needs are not easil! met' the cost to the firm increases. 6ecause the
firmAs (roduct is less attractive to the customer' the firm must lo/er (rices or take other ste(s to entice the
customer to make a (urchase. Inder these conditions the firmAs (rofits are likel! to be lo/. Conse&uentl!' the firm
1=2
can be seen as al/a!s bar*ainin* /ith customers for the firmAs (otential (rofits. The firm is in the stron*est
bar*ainin* (osition /hen it understands its bu!erAs needs. Inderstandin* bu!er needs is the role of marketin* and
ma! be vie/ed as a form of com(etitive intelli*ence.
6u!ers are in a (articularl! stron* bar*ainin* (osition /hen the! can easil! s/itch from the firmAs (roduct to a
com(etitorAs e&uivalent (roduct. %or e"am(le' a firm that has man! com(etitors offerin* a similar (roduct /ill have
customers /ith si*nificant bar*ainin* (o/er. If the customer is not ha((! /ith the (roduct offered b! one firm'
the! can sim(l! choose to *o to another firm that (rovides the same item. %or this to be a (o/erful bar*ainin* tool
for the customer' the s/itch from one firm to another must be cost-efficient and eas!. Conversel!' if a firm has
desirable (roducts and com(etin* (roducts are (erceived as less desirable' customers /ill have reduced bar*ainin*
(o/er. If it is e"(ensive or burdensome to s/itch (roducts' customers /ill also lose bar*ainin* (o/er. A *ood
e"am(le of a firm in this coveted (osition is A((le /ith their i,od (roduct. ?hile other ,3 (la!ers are on the
market' none have the market share and desirabilit! en-o!ed b! i,od.
Customers almost al/a!s have choices and the! /ill vote for their chosen firms /ith their (urchases. Customers
/ill vote a*ainst firms b! sim(l! /alkin* a/a!. It is im(ortant to balance the needs of the customer /ith the *oals
of the firm.
6ar*ainin* (o/er of su((liers
Like bu!ers' su((liers are com(etin* for the firmAs (rofits. $u((liers /ant to char*e the firm more for in(uts and
the firm /ants to (a! the su((lier less for those same in(uts. Conse&uentl!' com(etitive intelli*ence e"tends to
su((liers and it is in the firmAs interest to kno/ as much as (ossible about their su((liers. $u((liers ma! offer
e"clusive territories' financin*' advertisin*' dis(la!' and other incentives to the firm to encoura*e the use or sale of
the su((lierAs (roduct. The firm should evaluate and select its su((liers carefull! in order to take full advanta*e of
an! and all cost savin*s offered b! su((liers.
In man! industries it is common for bu!ers to form coo(eratives in order to increase their bar*ainin* (o/er
relative to su((liers. The coo(erative' sometimes com(rised of hundreds of smaller firms' is able to use its
combined bu!in* (o/er to bar*ain /ith su((liers for better (rices and terms. %or e"am(le' in ;orth America'
bu!er coo(eratives are &uite visible in the retail hard/are industr! as re(resented b! the 7Ace8' 7Eard/are Eank8'
and 7True Malue8 hard/are stores. Des(ite the (otentiall! anta*onistic relationshi( bet/een the firm and its
su((liers' su((liers often offer benefits that can im(rove the firmAs com(etitive (osition in the industr!.
Threat of ne/ entrants
Entre(reneurs re(resent the threat of a ne/ com(etitor for e"istin* businesses. It is normall! in the interest of
e"istin* firms to (revent ne/ com(etitors from becomin* established. Conse&uentl!' it is in the best interest of the
entre(reneur to learn as much as (ossible about e"istin* com(etitive businesses so that the entre(reneur can tar*et
their /eaknesses. The entre(reneur should also attem(t to learn enou*h about e"istin* businesses so that he<she
can antici(ate and attem(t to minimi0e the retaliation from e"istin* businesses. @etaliation ma! take man! forms
from (olitical actions desi*ned to dela! or (revent the ne/ business from o(enin* to dee( (rice cuts intended to
force the ne/ business out of the market.
Threat of substitute (roducts
Entre(reneurs often seem una/are of the com(etitive threat (osed b! substitute (roducts. :ne of the reasons
entre(reneurs ma! be una/are of substitute (roducts is that b! definition' substitutes come from another industr!.
Des(ite all the (otential /arnin*s' the retail and recorded music industries /ere hardl! (re(ared for the
conse&uences /hen millions of customers s/itched from CD (urchases to do/nloaded iTunes. Thus' the
entre(reneur needs to monitor not onl! his<her o/n industr! for (otential com(etitors' but also must scan other
industries that (ose a (otential threat.
The intensit! of com(etitive rivalr!
The intensit! of the rivalr! amon*st the firms in a *iven industr! /ill have an effect on the (rofits of all firms
/ithin that industr!. ?ithin an industr!' /hen firms are fiercel! com(etitive' the cost of com(etition /ill increase
because /hen one firm acts' other firms /ill feel the need to counteract. Costs for advertisin* and (romotions'
(rofits lost throu*h (rice reductions' and com(etitive rivalries occurrin* over the research and develo(ment of ne/
(roducts /ill erode the (rofits of com(etin* firms.
The firms /ithin an industr! are likel! to be (la*ued b! similar (roblems. :ne common (roblem that
entre(reneurs (refer to avoid is associated /ith industries /ith hi*h fi"ed costs. Ei*h fi"ed costs are common in
manufacturin*' communications' and trans(ortation industries. ?hen a (roduct is encumbered b! a hi*h fi"ed
cost' the firm /ill usuall! make ever! effort to recover at least a (ortion of those fi"ed costs and ma! resort to
offerin* bu!ers a ran*e of incentives' from drastic (rice cuts to rebates' to move the (roduct. These incentives are
often met /ith a s/ift com(etitive res(onse on the (art of industr! com(etitors. These com(etitive actions can
drive all (rofits out of the industr!.
A (roblem accom(an!in*' or similar' to hi*h fi"ed costs can be found in mature industries. ?hen industr!
*ro/th slo/s' com(etition t!(icall! heats u(. This occurs because the firms /ithin the slo/ *ro/th industr! are
com(etin* for the same (ool of bu!ers and often that (ool of bu!ers is in decline. A*ain' the com(etitive actions
taken b! firms to attract this (ool of bu!ers /ill drive (rofits out of the industr!.
@ivalr! also intensifies /hen consumers see little differentiation bet/een the (roducts offered b! firms /ithin an
industr!. %or e"am(le' fe/ consumers see the difference bet/een various brands of ketchu( and are likel! to sim(l!
(urchase the brand that has the lo/er (rice. ?hen consumers see little difference bet/een (roducts /ithin an
industr!' these (roducts become kno/n as commodities. As e"(ected' rivalr! bet/een I$ ketchu( makers Eein0
and EuntAs is intense.
Ei*h fi"ed costs' industr! maturit!' and commodit!-like (roducts contribute to a hi*h-level of com(etition
/ithin an industr!' but there are often other factors that drive com(etition. The entre(reneur needs to stud! and
understand the industr! and if (ossible' avoid industries /here the level of com(etition is hi*h as this means the
(rofit (otential is lo/. $till' the entre(reneur ma! identif! an under served niche or a need that the entre(reneur is
uni&uel! &ualified to fill' in /hich case entr! into the industr! ma! be (rofitable for the entre(reneur.
In com(arison' firms that are hi*hl! differentiated from their rivals often are not en*a*ed in stron* com(etition
because these firms kno/ that their (roduct is meetin* a need for their consumer base and their customers are
*oin* to return to fulfill that need.
1=3
Methods of e&aluatin competitors
Identif!in* com(etitors and their relative advanta*e
An understandin* of the industr! and the ke! success factors for the industr! allo/s the entre(reneur to assess
the (erformance of com(etitive firms. The (rocess starts /ith the identification of com(etitors. In man! markets
com(etitors /ill alread! be kno/n to the entre(reneur. In other markets' the numbers and identities of com(etitors
ma! be less obvious. :(eratin* under the assum(tion that the vast ma-orit! of businesses need to communicate
/ith the (ublic' the best (lace to start /ith com(etitor identification is /ith directories and other official and semi-
official listin*s. In man! countries' and for most markets' the business tele(hone director! should be the startin*
(oint. Cit! and other directories contain additional information on com(etitors' includin* o/nershi(' ke!
em(lo!ees' and the number of em(lo!ees. $ome (roducts /ill /arrant an Internet search as com(etition ma! (rove
to be re*ional' national' or even international. After assemblin* a list of com(etitors the entre(reneur should
develo( a method for collectin* information on his<her most immediate com(etitors' i.e. those com(etitors /ho
/ill be com(etin* for the same customers. %or smaller businesses' sim(l! creatin* a file folder for each immediate
com(etitor should be sufficient.
The entre(reneur /ill need to collect more detailed information on his<her most immediate com(etitors. The
entre(reneur should be (arsimonious in his<her a((roach to collectin* information and one means of bein*
(arsimonious is to focus on information related to the industr!As ke! success factors JH$%K. Com(etitor information
ma! come from a /ide ran*e of sources includin* visits to the com(etitorAs (lace of o(eration' /ord-of-mouth from
su((liers and other third (arties' com(etitorAs advertisements' ne/s(a(er archives' Internet searches' and (ublic
records. $ince the best indicator of future (erformance is (ast (erformance' the entre(reneur should (a! close
attention to the lon*evit! and historical (erformance of com(etitors.
Eavin* collected information' the entre(reneur is in a (osition to make com(arisons bet/een his<her firm and
the firmAs immediate com(etitors. A s(readsheet or table is commonl! em(lo!ed for this assessment. @elevant
information be!ond ke! success factors is commonl! included in the com(arison and ma! include si0e measures'
re(utation' a*e' lar*est customers' ke! su((liers' and almost an!thin* else deemed relevant to the com(etitive
environment.
Copetitor 1naly$i$
ODP Indu$tryH *27 Mar)et
Entre(reneurAs
%irm
Com(etitor
A
Com(etitor
6
Com(etitor
C
Com(etitor
D
He! $uccess
factor 2
He! $uccess
factor 1
Business Fundamentals 1=B A +lobal Te"t
He! $uccess
factor 3
He! $uccess
factor B
He! $uccess
factor =
%irmAs a*e
ana*erAs
re(utation
arket share
or rankin*
:ther relevant
considerations
The entre(reneur should (a! (articular attention to the mana*ement ca(abilities of his or her o/n firm and
com(etin* firms. The &ualit! and the st!le of mana*ement /ill (la! the ma-or role in establishin* the com(etitive
environment. The methods for collectin* information on mana*ement ca(abilit! are similar to those used for
collectin* information on com(etitorsYthe firm should rel! on /ord-of-mouth' the Internet Jes(eciall!
mana*ement rankin* /ebsites' such as ///.-oost.comK' trade (ublications' civic or*ani0ation' and industr! events.
Listenin* to com(etin* mana*ers /ill (rovide an invaluable insi*ht into the industr! environment.
E"ercise
Ise the chart above to com(lete anal!sis for the firm and industr! of !our choice.
Cha(ter summar!
Copetitive intelligence is the s!stematic collection and anal!sis of (ublicl! available information about an
industr! and its com(etitors. Com(etitive intelli*ence (ermits the firm to: J2K understand the industr!As structure
and its (otential im(act on the firmAs (erformance' and J1K industr! com(etitorsA relative (osition in the
market(lace. The -udicious use of com(etitive intelli*ence allo/s the firm to antici(ate com(etitorsA actions and act
to minimi0e the im(act of those actions. Throu*h the use of com(etitive intelli*ence the firm /ill im(rove its
(erformance in the market(lace.
@eferences
htt(:<<///.census.*ov<e(cd<///<naics.html
1==
htt(:<<///.21mana*e.com<methodsT(orterTfiveTforces.html
Dussau*e' ,ierre and 6ernard +arrette' ?ill itchell J1000K. 7Learnin* from com(etin* (artners: outcomes
and durations of scale and link alliances in Euro(e' ;orth America and Asia8. &trategic Manageent
JournalG 12' 1: DD-21>.
Davison' Lei*h J1002K. 7easurin* com(etitive intelli*ence effectiveness: Insi*hts from the advertisin*
industr!=> Copetitive Intelligence ReviewG Molume 21' Issue B: 1= d 35.
Dorf' @ichard C. and Thomas E. 6!ers J1005K. :echnology 9enture$: 2ro Idea to Enterpri$e'
1
nd
edition. ;e/ 3ork: c+ra/ Eill.
+rant' @obert . J1005K. Conteporary &trategy 1naly$i$' >th edition. alden' A: 6lack/ell
,ublishin*.
#ohnston' Lisa J1009K. 7i,od' ,3 Accessories ,ile :n8. :#ICE Maga;ineG %ebruar! 21: 21.
,inkerton' @ichard L. J2DDBK. 7Com(etitive intelli*ence revisited: A histor!' and assessment of its use in
marketin*8. Copetitive Intelligence Review' =' B: 13-32.
3oun*' +re* J2DDDK. 7$trate*ic value anal!sis for com(etitive advanta*e8. Copetitive Intelligence
Review' 20' 1: =1->.
Business Fundamentals 1=> A +lobal Te"t
11. Business ethics in a
nutshell
Editor: 6uie $ea/ell JDaniels Colle*e of 6usiness' Iniversit! of Denver' I$AK
Reviewer: #ames :AToole JDaniels Colle*e of 6usiness' Iniversit! of Denver' I$AK
%ramin* the structure and content of business ethics is a (resum(tuous undertakin*' but one I believe to have
real merit. The reader mi*ht s(end a lifetime as student and (ractitioner in the most e"citin* field of a((lied ethics:
business ethics.
/hat is ethics5
Ethics is the branch of (hiloso(h! concerned /ith the meanin* of all as(ects of human behavior. Theoretical
Ethics' sometimes called ;ormative Ethics' is about discoverin* and delineatin* ri*ht from /ron*G it is the
consideration of ho/ /e develo( the rules and (rinci(les JnormsK b! /hich to -ud*e and *uide meanin*ful decision-
makin*. Theoretical Ethics is su(remel! intellectual in character' and' bein* a branch of (hiloso(h!' is also rational
in nature. Theoretical Ethics is the rational reflection on /hat is ri*ht' /hat is /ron*' /hat is -ust' /hat is un-ust'
/hat is *ood and /hat is bad in terms of human behavior.
6usiness ethics is not chiefl! theoretical in character. Thou*h reflective and rational in (art' this is onl! a
(relude to the essential task behind business ethics. It is best understood as a branch of ethics called a((lied ethics:
the disci(line of a((l!in* value to human behavior' relationshi(s and constructs' and the resultin* meanin*.
6usiness ethics is sim(l! the (ractice of this disci(line /ithin the conte"t of the enter(rise of creatin* /ealth Jthe
fundamental role of businessK.
There are three (arts to the disci(line of business ethics: (ersonal' (rofessional and cor(orate. All three are
intricatel! related' and it is hel(ful to distin*uish bet/een them because each rests on sli*htl! different
assum(tions and re&uires a sli*htl! different focus in order to be understood. ?e are lookin* at business ethics
throu*h a trifocal lens: close u( and (ersonal' intermediate and (rofessional' and on the *rand scale Jutili0in* both
farsi*hted and (eri(heral visionK of the cor(oration.
In s(ite of some recent bad (ress' business e"ecutives are first and foremost human bein*s. Like all (ersons'
the! seek meanin* for their lives throu*h relationshi(s and enter(rise' and the! /ant their lives to amount to
somethin*. $ince ethics is chiefl! the disci(line of meanin*' the business e"ecutive' like all other human bein*s' is
en*a*ed in this disci(line all the time' /hether co*ni0ant of it or not. Therefore' /e should be*in b! lookin* at ho/
humans have historicall! a((roached the (rocess of makin* meanin*ful decisions. Eere are four ethical a((roaches
that have stood the test of time.
12. #usiness ethics in a nutshell
,ersonal ethics: four ethical a((roaches
%rom the earliest moments of recorded human consciousness' the ethical disci(line has entailed four
fundamental a((roaches' often called ethical decision-makin* frame/orks: Itilitarian Ethics Joutcome basedK'
Deontolo*ical Ethics Jdut! basedK' Mirtue Ethics Jvirtue basedK' and Communitarian Ethics Jcommunit! basedK.
Each has a distinctive (oint of de(arture as /ell as distinctive /a!s of doin* the fundamental ethical task of raisin*
and ans/erin* &uestions of value. It is also im(ortant to understand that all four a((roaches have overla(s as /ell
as common elements' such as:
Ipartiality: /ei*htin* interests e&uall!
Rationality: backed b! reasons a rational (erson /ould acce(t
Con$i$tency: standards a((lied similarl! to similar cases
Rever$ibility: standards that a((l! no matter /ho QmakesQ the rules
These are in a sense the rules of the ethics *ame' no matter /ith /hich school or a((roach to ethics one feels
most closel! to identit!.
:he Jtilitarian approach is (erha(s the most familiar and easiest to understand of all a((roaches to ethics.
?hether /e think about it or not' most of us are doin* utilitarian ethics much of the time' es(eciall! those of us in
business. The Itilitarian asks a ver! im(ortant &uestion: QEo/ /ill m! actions affect othersCQ The! then attem(t to
&uantif! the im(act of their actions based on some least common denominator' such as ha((iness' (leasure' or
/ealth. Therefore' Itilitarians are also called 7conse&uentialists8' because the! look to the conse&uences of their
actions to determine /hether an! (articular act is -ustified.
QThe *reatest *ood for the *reatest numberQ is the motto of the Itilitarian a((roach. :f course' definin* Q*oodQ
has been no eas! task because /hat some (eo(le think of as *ood' others think of as /orthless. ?hen a
business(erson does a cost benefit anal!sis' he<she is (racticin* Itilitarian ethics. In this case' the least common
denominator is usuall! mone!. Ever!thin* from the cost of steel to the /orth of a human life must be *iven a dollar
value' and then one -ust does the math.
The %ord ,into automobile /as a (roduct of -ust such reasonin*. Thirt! !ears a*o' e"ecutives at the %ord otor
Com(an! reasoned the cost of fi"in* the *as-tank (roblem /ith their ,into /ould cost more than the benefit of
savin* a fe/ human lives. $everal tanks did e"(lode' (eo(le died' and the com(an! lost la/suits /hen -ud*e and
-uries refused to acce(t these e"ecutivesA moral reasonin*.
:ne of the most familiar uses of outcome-based reasonin* is in le*islative committees in re(resentative
democracies. Eo/ man! constituents /ill benefit from a ta" credit and ho/ man! /ill be diminished is the &uestion
before the @evenue Committee at ta" rectification time. @e(resentative democracies make most decisions based on
the Itilitarian (rinci(le of the *reatest *ood for the *reatest number. Democratic *overnments are naturall!
ma-oritarian' thou*h in constitutional democracies there are some thin*s that cannot be decided b! doin* the math
Jaddin* u( the votesK. $ome &uestions should never be voted on. The founders of our nation e"(ressed this
fundamental conce(t /ith three /ords: ertain unalienable rights.
1=5
Enter the Deontological Ethici$t$. Immanuel Hant is the &uintessential deontolo*ical Jdut! basedK ethical
theorist. Hant' /ho lived in ei*hteenth centur! ,russia' /as one of the most ama0in* intellects of all time' /ritin*
books on astronom!' (hiloso(h!' (olitics and ethics. Ee once said' 7T/o thin*s fill the mind /ith ever ne/ and
increasin* admiration and a/e ... the starr! heavens above and the moral la/ /ithin.8 %or Hant there /ere some
ethical verities as eternal as the stars.
Deontolo*ical sim(l! means the stud! Jor scienceK of dut!. Hant did not believe that humans could (redict
future conse&uences /ith an! substantial de*ree of certaint!. Ethical theor! based on a *uess about future
conse&uences a((alled him. ?hat he did believe /as that if /e use our facilit! of reason' /e can determine /ith
certaint! our ethical dut!. As to /hether or not doin* our dut! /ould make thin*s better or /orse Jand for /homK'
Hant /as a*nostic.
Dut!-based ethics is enormousl! im(ortant for Jthou*h consistentl! i*nored b!K at least t/o kinds of folks:
(oliticians and business (eo(le. It is also the ke! to a better understandin* of our res(onsibilities as members of
teams. Teams Jlike /ork *rou(s or (olitical cam(ai*n committeesK are narro/l! focused on achievin* ver! clearl!
defined *oals: /innin* the election' successfull! introducin* a ne/ (roduct' or /innin* a sailboat race. $ometimes a
coach or a boss /ill sa!' 7Look' -ust do /hatever it takes.8 Ethicall!' 7/hatever it takes8' means the ends -ustif! the
means. This /as HantAs fundamental criticism of the Itilitarians.
%or Hant' there /ere some values JdutiesK that could never be sacrificed to the *reater *ood. Ee /rote: 7$o act as
to treat humanit!' /hether in th! o/n (erson or in that of an! other' in ever! case as an end /ithal' never as a
means onl!.8 %ello/ team members' em(lo!ees' cam(ai*n staffs' customers' (artners' etc. are al/a!s to some
e"tent means to our various *oals JendsK' but the! are also (ersons. And (ersons' Hant believed' cannot be -ust
used' the! must also be res(ected in their o/n ri*ht' /hether or not the *oal is achieved. Ee called this absolute
respet for persons a Cate*orical Im(erative.
In an! team situation the *oal is critical' but treatin* team members /ith res(ect is im(erative. Teams fall a(art
/hen a team member feels used or abused Jtreated as less im(ortant than the overall *oal itselfK. +reat leaders
carr! the double burden of achievin* a /orth/hile end /ithout causin* those /ho sacrifice to achieve the *oal bein*
treated as merel! e"(endable means. ,ersons are never merel! a means to an end. The! are ends in themselves4 ?e
o/e that understandin* to Immanuel Hant.
It is one thin* to understand that there are duties /hich do not de(end on conse&uencesG it is &uite another to
develo( the character to act on those duties. This is /here Aristotle J35B-311 6.C.K comes in. Aristotle /rote the
first s!stematic treatment of ethics in ?estern Civili0ation: 6iomahean Ethis.
Toda! /e call his a((roach to ethics virtue ethic$. %or Aristotle and other +reek thinkers' virtue meant the
e"cellence of a thin*. The virtue of a knife is to cutG the virtue of a (h!sician is to healG the virtue of a la/!er is to
seek -ustice. In this sense' Ethics becomes the disci(line of discoverin* and (racticin* virtue. Aristotle be*ins his
thinkin* about ethics b! askin*' 7?hat do (eo(le desireC8 Ee discovers the usual thin*sY /ealth' honor' (h!sical
and (s!cholo*ical securit!Ybut he reali0es that these thin*s are not ends in themselvesG the! are means to ends.
The ultimate end for a (erson' Aristotle tau*ht' must be an end that is self-sufficient' 7that /hich is al/a!s
desirable in itself and never for the sake of somethin* else8. This end of ends Aristotle desi*nates /ith the +reek
Business Fundamentals 1=D A +lobal Te"t
/ord eudemonia' usuall! translated b! the En*lish /ord ha((iness. 6ut ha((iness does not do Aristotle or his
ethics -ustice. 3es' eudemonia means ha((iness' but reall! it means so much more. The (roblem is not /ith
AristotleAs +reek /ord eudemonia' the (roblem is in our En*lish /ord ha((iness.
Ea((iness in En*lish comes from the ancient /ord hap' meanin* chance' as in ha((enstance. 7?h! are !ou
smilin*8' /e ask' 7did !ou /in the lotter!C8 %or Aristotle ha((iness /as not somethin* one ac&uired b! chance.
Ea((iness /as the *rand /ork of livin*G the ver! (ractice of bein* all that !ou can be. %ulfillment and flourishin*
are far better /ords to translate the conce(t contained in the +reek /ord eudemonia. %or Aristotle' this state of
virtue is achieved not b! accident but throu*h intent' reason and (ractice.
Aristotle thou*ht that one discovers virtue b! usin* the uni&ue *ift of human reasonin*' that is' throu*h rational
contem(lation. 7The une"amined life is not /orth livin*'8 said $ocrates almost 200 !ears before Aristotle. Like
Aristotle and AristotleAs teacher ,lato' $ocrates kne/ that /e humans need to en*a*e our brains before /e o(en our
mouths or s(rin* into some decisive action. %or Aristotle' the focus of that brain /ork /as chiefl! about ho/ to
balance bet/een the fears and e"cesses in /hich the human condition al/a!s abounds. 6et/een our fears JdeficitsK
and e"uberances Je"cessesK lies a s/eet s(ot' the golden mean' called virtue.
At times of (h!sical (erilYsa! in a bi* storm on a small sailboatYa cre/ member ma! be immobili0ed b! fear
and unable to function' thus (uttin* the lives of ever!one on the sailboat in dan*er. :r the o((osite could ha((en. A
devil-ma!-care attitude in the face of real dan*er can as easil! lead to disaster. Coura*e is the virtue located at the
mean bet/een co/ardliness and rashness. 3et' identif!in* such a virtue and makin* that virtue (art of oneAs
character are t/o &uiet different thin*s. Aristotle thus distin*uishes bet/een intelletual ,irtue and pratial
,irtue. ,ractical virtues are those develo(ed b! (ractice and are a (art of a (ersonAs character' /hile intellectual
virtue is sim(l! the identification and understandin* of a virtue.
,ractice is ho/ one learns to deal /ith fearG (ractice is ho/ one learns to tell the truthG (ractice is ho/ one learns
to face both (ersonal and (rofessional conflicts. ,ractice is the *enius of AristotleAs contribution to the develo(ment
of ethics. Ee sho/ed that virtues do not become a (art of our moral muscle fiber because /e believe in them' or
advocate them. Instead' virtues become characteristics of our selves b! our e"ercisin* them. Eo/ does one learn to
be brave in a storm at seaC 7#ust do it.8
The ultimate *oal behind develo(in* characteristics of virtue is eudemonia' a full flourishin* of our self' true
ha((iness. ,ractitioners of the #udaic-Christian tradition tend to think of ethics Jor moralit!K as the business of
fi*urin* out ho/ to be *ood rather than bad. That is not the true end of ethics so far as Aristotle /as concerned.
The end is a state of fulfillmentG the ultimate *oal is becomin* /ho !ou trul! are and reali0in* the (otential !ou
/ere born /ithYbein* at !our best in ever! sense.
#ust as the virtue of the knife is to cut and the virtue of the boat is to sail' the virtue of the self is to become the
best of /ho it can be. This is ha((iness JeudemoniaK. #ust as the /ell-trained athlete seeks to be in the 0one Jthe
state of (erfect (erformance achieved b! (racticeK' Aristotle /rote about the trul! virtuous life and the (ursuit of
eudemonia. #ust as a (erfectl! trimmed sailboat *lides throu*h the /ater' effortlessl! in s!nch /ith the /aves and
the /ind' the man or /oman in a state of eudemonia has achieved the state of earthl! fulfillment.
1>0
All three a((roaches to ethics described above are (rinci(all! focused on the individual: the sin*ular conscience'
rationall! reflectin* on the meanin* of dut! or res(onsibilit!' and in the case of Mirtue ethics' the ethical athlete
(racticin* and inculcatin* the ca(acit! to achieve the state of eudemonia. Counitarian Ethic$ has &uite a
different (oint of de(arture: the communit! Jor team' or *rou(' or com(an!' or cultureK /ithin /hich the individual
en*a*es him<herself is the critical conte"t for ethical decision-makin*.
The Communitarian asks the im(ortant &uestion' Q?hat are the demands JdutiesK that the communit!JiesK of
/hich I am a (art make on meCQ The $cottish ethicists ?. D. @oss Jhimself a student of AristotleK focused his o/n
ethical reflections on the &uestion of' Q?here do ethical duties come fromCQ Eis ans/er /as that the! come from
relationshi(s. ?e kno/ our duties to/ard fello/ human bein*s b! the nature and &ualit! of our relationshi(s /ith
them. The duties /e o/e a collea*ue in the /ork(lace is different from the duties /e o/e a s(ouseG those duties are
different from the duties /e o/e our countr!. The Communitarian asks us to look out/ard' and to face u( to the
duties of bein* social creatures. ?e define ourselves' and our res(onsibilities' b! the com(an! /e kee(.
Communitarians are &uite critical toda! of the attitude of so man! in our societ! /ho' /hile adamant about their
individual ri*hts' are ne*li*ent of their social duties. The 7me *eneration8 has created a need for a ne/ breed of
ethicists /ho insist that' from famil! and nei*hborhood to nation and *lobal ecos!stem' the communities in /hich
/e live re&uire us to acce(t substantial res(onsibilities. Environmentalists' nei*hborhood activists' feminists' and
*lobalists are some of the *rou(s loosel! identified toda! /ith the Communitarian ovement.
Amitai Et0ioni' in +pirit of 9ommunity: *ights, *esponsibilities and the 9ommunitarian .genda described the
(rinci(les of this some/hat disor*ani0ed movement. Eti0ioniRs thesis is that /e must (a! more attention to
common duties as o((osed to individual ri*hts. :ur nei*hborhoods' he believes' can a*ain be safe from crime
/ithout turnin* our countr! into a (olice state. :ur families can once a*ain flourish /ithout forcin* /omen to sta!
home and not enter the /orkforce. :ur schools can (rovide' Qessential moral educationQ /ithout indoctrinatin*
!oun* (eo(le or violatin* the %irst AmendmentRs (rohibition of establishin* reli*ion.
The ke! to this social transformation is the communitarian belief in balancin* ri*hts and res(onsibilities:
Q$tron* ri*hts (resume stron* res(onsibilities.Q Et0ioni states the Communitarian A*enda:
9orreting the urrent imbalane between rights and responsibilities re?uires a four-point agenda: a
moratorium on the minting of most, if not all, new rights) reestablishing the lin! between rights and
responsibilities) reogni(ing that some responsibilities do not entail rights) and, most arefully,
ad@usting some rights to the hanged irumstanes0
Eere' if nothin* else' is a frontal attack on the Libertarian mindset of our a*e.
Communitarianism is not ne/' at least if one defines it as an a((roach to ethics and value referencin* si*nificant
communities of meanin*. ost of the /orldRs *reat reli*ions are in this sense communitarian. It is from a
communit! of faith that the faithful develo(s a sense of self and res(onsibilit! Jor in Confucian thou*ht' the
e"tended famil! /hich nurtures this develo(mentK. Ethics cannot be se(arated from the ethos of the reli*ious or
familial communit!. The modern communitarian movement ma! or ma! not be reli*iousl! inclined' !et it is clearl!
a (art of a tradition of ethical a((roach as old as human association.
In the conte"t of teams' the communitarian a((roach to ethics has much to commend itself. Eo/ much of oneAs
(ersonal a*enda is one /illin* to sacrifice for the overall *oal of /innin* a sailboat raceC Inder /hat conditions is
one /illin* to let the values or culture of the team alter oneAs o/n ethical inclinationsC To /hat e"tent do the
relationshi(s one has /ith team members *ive rise to duties that one is /illin* to honorC Eo/ /illin* is one to
share the credit /hen the team succeedsC Eo/ /illin* is one to acce(t blame /hen the team loosesC Inder /hat
conditions /ould one break /ith the teamC If @oss is correct that duties come from relationshi(s' (a!in* attention
to such &uestions about the com(an! /e kee( ma! be more than a social obli*ationG (erha(s' our ethical dut!.
There are t/o (ervasive ethical a((roaches not treated here: ethical e*oism and The Divine Im(erative. Each
has a broad and dedicated follo/in* and each is dee(l! (roblematic to the ethical maturin* of an! societ!. 6riefl!'
and /ith (e-orative intent' here is /hat these e"treme' !et interestin*l! similar a((roaches assert.
The ethical e*oists sa! that ethics is a matter of doin* /hat feels ri*ht to the individual conscience. If one asks'
Q?h! did !ou do thatCQ The ans/er is' Q6ecause I felt like it.Q The a((roach is often dressed u( /ith statements
about bein* true to !ourself: Qlet !our conscience be !our *uideQ' or Qdo the ri*ht thin*Q. 6ut ho/ does one kno/
/hat is true for the selfC Eo/ does one develo( a conscienceC Eo/ is one to kno/ that doin* /hat is ri*ht J/hat
feels ri*ht to !ouK is the ri*ht thin* to doC
If nothin* else' ethical e*oism is a conversation sto((er4 Eo/ does one communicate to collea*ues' friends'
children or an! other human bein* /hen the reference (oint of behavior or ethical -ud*ment is -ust about ho/ one
feels insideC Eo/ does a civil societ! emer*e if /e civilians cannot deliberate in common' understandable lan*ua*e
about our motives' intents' values' or dutiesC In essence' ethical e*oism is the ethics of teena*ers rebellin* a*ainst
bein* ans/erable to outside authorit!. To teena*ers' to enter the ethical dialo*ue is to take the radical risk of havin*
oneAs values and actions challen*ed. A((arentl!' there are man! of us /ho are -ust not *ro/n u( enou*h to risk
that4 6etter to re(eat the mantra: QI did /hat m! conscience dictated.8
#ust as there is no (ossible meanin*ful ethical dialo*ue /ith the Ethical E*oist' nor is there much ho(e of
creative en*a*ement /ith Divine Im(erialists. %or this *ro/in* communit!' ethics is the sim(le business of doin*
/hat +od tells one to do. There is therefore no reason or need for discussion. The issue is conversion' not
conversation. In a constitutional democrac! like ours /ith a fundamental commitment to Qthe non-establishment of
reli*ionQ' the Divine Im(erialist is stuck /ith a difficult dilemma: either to make all ethical in&uir! Q(ersonalQ Jthat
is' no social or (olitical value deliberationK' or take the a!atollah a((roach and brin* no state into conformit! /ith
the revealed /ill of +od. Divine Im(erialists do not deliberate. The! dictate' sim(l! because there is nothin* to
deliberate about. +od has s(oken. It is in the book.
The fla/ in the Divine Im(erialistsR a((roach is &uite clear to ever!bod! but them: If +od is *ood' then Ee must
reveal onl! *ood la/s and rules. This creates t/o alternatives. The first is that there is a reference for Q*oodQ a(art
from the Divine itself. The onl! other' that +od is unde(endableG that +od is arbitrar!G surel! this is unacce(table.
+od is not onl! *ood' but +od /ills the *ood. +odAs /ill' then' becomes a realit! discoverable even a(art from belief
in a (articular re(resented manifestation of +od. @eli*ion' at its best' should understand that faith confers no
s(ecial status of ethical insi*ht. 6elievers' a*nostics' non-believers can' and do' contribute to the cultureRs
continuin* stru**le to understand /hat is *ood' /hat is -ust' /hat is true. That is /h! democracies Jas o((osed to
states founded u(on some QDivine @i*ht of Hin*sQK survive.
1>1
. Eostsript on 6arrati,e Ethis0 Amon* the (rofessions' (articularl! medicine' la/ and counselin*' narrative
has become a (o/erful tool in develo(in* ethical insi*hts and (ers(ective. To tell a stor! is to invite (artici(ation
from the hearer' and it is to also a means of communicatin* the richness and com(le"it! of human dilemmas.
;arrative Ethics is sim(l! dia*nosis throu*h stor!. Its benefit over the four traditional ethical a((roaches is that
stor! invites both ethical en*a*ement and ethical creativit!.
In business' as in la/' a *reat deal of teachin* is done throu*h the use of cases. This is nothin* more or less than
usin* the (eda*o*! of narrative ethics. The narrative invites the hearer into the com(le"it! of issues involved in
(ersonal' (rofessional and or*ani0ational dilemmas' and (rovides a road throu*h the com(le"it! to the sim(licit!
on the other side.
:liver ?endell Eolmes' an American -urist /ho /rote stunnin*l! com(rehensible decisions' even in some of the
most com(le" cases ima*inable' has a famous &uote: 7I /ould not *ive a fi* for sim(licit! this side of com(le"it!'
but I /ould *ive m! life for the sim(licit! that lies on the other side of com(le"it!.8 It is the role of narrative to lead
us throu*h the thickets of over/helmin* com(le"it!' to the clarit! of enriched sim(licit!.
:f course' there are some (eo(le /ho con*enitall! can not sto( to ask for directions /hen lost in lifeAs thickets.
%or them' stor!tellin* is a /aste of time. The male mantra' 7-ust cut to the chase8 comes to mind. This ma! in (art
e"(lain /h! /omen Jfeminist like ar*aret ?heatle!' for e"am(leK have such a fondness for narrative. At all sta*es
of the ethical decision-makin* (rocess' narrative is a useful tool of anal!sis for e"(osin* the facts' conflicts' feelin*s'
and values that are the stuff of the human (redicament.
Manaement: the meta profession
In 2D21 Louis D 6randeis addressed the *raduatin* students of 6ro/n Iniversit!. Tradition dictated that the
*raduatin* class /as divided bet/een those receivin* learned degrees in the (rofessions of la/' medicine and
ministr! from those in the s!ill based disiplines' such as business mana*ement. The future $u(reme Court -ustice
did an interestin* thin* that *raduation da!: he turned a/a! from the (rofessional de*ree candidates to/ard the
business de*ree candidates' and said:
Each commencement season /e are told b! the colle*e re(orts the number of *raduates /ho have selected the
(rofessions as their occu(ations and the number of those /ho /ill enter business. The time has come for
abandonin* such a classification. 6usiness should be' and to some e"tent alread! is' one of the (rofessions.
6randeis minced no /ords in definin* /hat (rofessionalism /as all about. It /as:
.n oupation for whih the neessary preliminary training is intelletual in harater, in,ol,ing
!nowledge and to some e/tent learning, as distinguished from mere s!ill) whih is pursued largely
for others, and not merely for one<s own self) and in whih the finanial return is not the aepted
measure of suess0
$(oken to cler*!' (h!sicians and la/!ers in 2D22, these /ords /ould have had a familiarYif unheededYrin*.
6ut to businessmenC 6randeisA intuition about the decisive character of business mana*ement for human /elfare
has been borne out across the tortured !ears of this (ast centur!. Eis ar*ument' ho/ever' that business
mana*ement /as essentiall! (rofessional in character is debated still.
The three characteristics of (rofessionalism cited b! 6randeis address detail the nature of the re&uisite
res(onsibilit!' and are the cru" of /h! it is still controversial to call business mana*ement a (rofession:
%irst. A (rofession is an occu(ation for /hich the necessar! (reliminar! trainin* is intellectual in character'
involvin* kno/led*e and to some e"tent learnin*' as distin*uished from mere skill.
$econd. It is an occu(ation /hich is (ursued lar*el! for others and not merel! for oneRs self.
Third. It is an occu(ation in /hich the amount of financial return is not the acce(ted measure of success.
?ithin 6randeisA three (arado"ical (ronouncements lies the ans/er to /hat it means to be a (rofessional in
business.
The (arado" of skill
All (rofessions re&uire uni&ue skills. ?hile demonstrated (roficienc! in (articular skills is necessar! for
admission into a (rofession' skill master! alone is not sufficient to define the (rofessional. If it /ere' a sur*eon
/ould be sim(l! a (lumber em(lo!ed to mend human (i(es and valvesG a la/!er sim(l! a car(enter craftin*
to*ether le*al /ords and (hrases into motions' /ills or contractsG a teacher sim(l! an actor skilled at (resentation
or lecturin*. ?hile the sur*eon must be e"traordinaril! skilled in the crafts of incision and suturin*' /hile the
la/!er must be ade(t at the craft of le*al /ord-smithin*' and the teacher a master of the (ractical arts of
communication' such skills are not the essence of /ho the! are as (rofessionals' nor are the! the be and end all of
their (ractices. Inderstandin* this difference is the ke! to the classic distinction bet/een a trade and a (rofession.
6oth trades and (rofessions re&uire the (ractice and (erfection of si*nificant skills' but a trade is com(letel!
defined b! its commensurate skillG a (rofession is not. As 6randeis e"(lains: 7A (rofession is an occu(ation for
/hich the necessar! (reliminar! trainin* is intellectual in character involvin* kno/led*e' and to some e"tent
learnin*' as distin*uished from mere skill.8 I /ould add that it is not -ust in 7(reliminar! trainin*8 that intelli*ence
and learnin* are re&uired' but in all as(ects of the (ractice of the continuin* (rofessional life.
In a time /hen ever!one /ants to be called (rofessional' a real dan*er lurks in 6randeisA distinction' an elitism
Jbmere skillAK' a snobber!' a class bias that is ina((ro(riate both to the trades(erson and the (rofessional. :nce' the
trades /ere a source of enormous (ride and distinction. Throu*h edieval *uilds a revolution in human /orth and
/ork /as set in motion and the foundations of the industrial and technolo*ical revolutions laid. Throu*h the *uild
structure' the skills of trades /ere (assed from *eneration to *eneration' and the (ride of association /ith &ualit!
and inte*rit! maintained.
6ut the (rofessions /ere somethin* else entirel!. Called The Learned ,rofessions as the iddle A*es !ielded to
the @enaissance' the ,riesthood' La/' and edicine obviousl! re&uired ri*orous trainin* in (articular skills' but
the a((lication of these (articular skills re&uired a dimension of commitment and inte*rit! not necessitated of a
trade. The /isdom to counsel human bein*s in the midst of s(iritual' emotional' (h!sical or le*al crisis necessaril!
re&uires more than techni&ue. It re&uires a learned and (racticed /isdom: an ethic. It is one thin* to entrust !our
bathroom to a (lumber' another thin* entirel! to entrust !our life to a heart sur*eon. Those /illin* to assume the
uni&ue burdens of the s(iritual' (h!sical' and le*al care for humans in e"istential need /ere desi*nated' or set
a(art' as learned (rofessionals.
1>B
As I /rite this cha(ter' I am in the (rocess of recoverin* from o(en heart sur*er!. The e"(erience of (uttin* m!
life in the hands of a (h!sician is vivid. I am also sittin* in m! home that is bein* e"tensivel! remodeled. I am
fortunate to have a relationshi( /ith t/o e"cellent (ersons: Dick' m! heart sur*eon and Crai*' the skilled
construction craftsman Jcar(enter' (lumber and electricianK restorin* our home. 6oth are hi*hl! skilled and /ise
men. Dick' ho/ever' is inte*ral to the care and counselin* that *uided me and m! famil! throu*h m! decision to 7*o
under the knife8. Crai* is full of sa*e /isdom about the (ublic and forei*n affairs of our times' but in no sense is m!
life vulnerable to his livel! and /ise insi*hts that /e share /hile he restores m! kitchen and re(laces the bedroom
/indo/.
E"actl! three /eeks a*o Dick' sat on the side of m! bed in a Denver' Colorado hos(ital surrounded b! t/elve
members of m! famil! and talked to me about the alternatives for dealin* /ith a most une"(ected heart (roblem.
Ee sho/ed me the ver! /orrisome (ictures of several (artiall! blocked arteries' and told me that' in his o(inion' I
had no choice but to have &uadru(le b!(ass sur*er!. Dick said he /ould send m! file to an!one I /ished for a
second o(inion' but felt I should reach a decision soon. ! kids asked all sorts of nervous and carin* &uestions and
he res(onded o(enl! and full!. ;ever have I been /ith someone as obviousl! o(en and trust/orth! at a time /hen
so much /as at stake for me.
As I made m! decision to move for/ard /ith this (ersonal ordeal' I /ould learn from friends in the communit!
that Dick /as one of the most skilled sur*eons in the countr!. That /as reassurin*. 6ut I alread! kne/ he /as a
(rofessional: a (erson /ise and carin* enou*h for me to trust m! life to.
The (arado" of the (ublic (led*e
A (rofession is literall! so called a (rofession because the as(irant to the office is orall! s/orn to s(ecific (ublic
commitmentsYhe<she (rofesses (ublicl! le*al and ethical obli*ations uni&ue to the vocation of la/!er' (h!sician'
counselor or (riest. The (ublic (led*e is the (ortal condition into the uni&ue relationshi(s afforded the vocation.
6e clear' it is not (rimaril! a (rivile*e the (rofessional assumes' rather it is fundamentall! self-im(osed burdens.
;o one is forced to s/ear the! /ill (ut anotherAs interest above their o/n' !et this is the condition of all
(rofessionalism.
There is a tension bet/een a (rofessionAs (ublic res(onsibilit! and its commitment Jalso made (ublicl!K to the
(rivate' vulnerable client. 6randies includes both in the observation that' 7A (rofession is an occu(ation /hich is
(ursued lar*el! for others and not merel! for oneself8. The (arado" of 7the other8 is the (arado" of the (ublic
(led*e.
Fuite a *reat deal is made of the s(ecial relationshi( bet/een (rofessionals their (arishioners' (atients' or
clientsYthe sanctit! of the confessional' the doctor (atient relationshi(' or the la/!er client relationshi(Yeach
s(ecial' (rivate and (rotected both in la/ and ethics. Thinkin* of the confessional booth' the e"amination room'
and the la/!erAs office the idea of a uni&uel! (rotected (rivac!' of almost a sacred s(ace' emer*es. Assuredl! the
(riest' doctor and la/!er are s/orn to hold sacred the disclosures /ithin this 0one of (rofessionall! (rotected
communication. 6ein* a (rofessional means nothin* less than /illin*l! and (ublicl! affirmin* that the clientAs'
(atientAs or (arishionerAs interest shall come before oneAs o/n interests.
%or man! (rofessionals the matter sto(s /ith the (led*e: 7I s/ear the (atientAs interests comes first' end of
discussion.8 3et this commitment to the vulnerable client is onl! half the issue' as the business and (rofessional
Business Fundamentals 1>= A +lobal Te"t
crises of our times illustrate. ;ot onl! is the (riest s/orn to care for (articular souls' he is also s/orn to see to the
care of 7the (eo(le of +od8' the moral /elfare of the (arish' the salvation of the /orld. ;ot onl! is the doctor s/orn
to (ut the interest of the (atient above his o/n' but the health of the (atientAs famil!' nei*hborhood' and the (ublic
is also his (rofessional obli*ation. The la/!er is not sim(l! em(lo!ed to re(resent the (articular client' but also
s/orn to be an 7officer of the court8. ?hile accountants ma! be em(lo!ed b! Arthur Anderson to do the books for
the Enron Cor(oration' the! also are s/orn to kee( the interests of the (ublic uncom(romised Jafter all' /e call the
(rofession Certified Eubli AccountantsK.
I kno/ of no (rofessional comfortable /ith the tension inherent in this (ublic (led*e. ;o one likes hard choicesG
no one likes moral ambi*uit!G each of us /ishes to live in a /orld /here thin*s can be reduced to some least
common ethical denominator Jfor e"am(le' a sin*le dut!K. ?hen teachin* business students' the mantra of ilton
%riedman is the dronin* undertone of almost ever! class discussion: 7the business of business is business8' the sole
res(onsibilit! of the business e"ecutive is to increase shareholder return.
3et' the ver! essence of (rofessional res(onsibilit! is to address the difficult and unavoidable ethical tensions
bet/een (ublic and (rivate interestYthe (riest /ho hears the confession of a disturbed and homicidal (arishioner
intent on killin* !et a*ainG the la/!er /ho discovers that a client has misre(resented the facts of his case' and is
askin* for a (lea to the court based in lies and distortionsG the doctor /ho is asked to (rescribe e"traordinaril!
e"(ensive treatments to a (atient too ill' or old to have an! reasonable chance of curative benefitG or the en*ineer
/ho is told that she is bound b! a confidentialit! a*reement' in s(ite of her certain conviction that a (lane' brid*e'
or s(ace shuttle is likel! to fail and (otentiall! cause e"tensive loss of life. These are not (lot summaries for
Eoll!/oodG in an infinite variet!' the! are the stuff of (rofessional life in the com(le" /orld of the t/ent!-first
centur!.
It is b! desi*n' and not b! accident' that (rofessionals are thrust continuall! into such Eobson choice
(redicaments. The (rofessionalAs (ublic (led*e is an acce(tance of ethical burdens not incumbent on the rest of
societ!. It is an ackno/led*ment of the realit! of human e"istence /here thin*s do not come out even' /here real
ethical insi*ht must be e"ercised and /here beni*n outcomes are far from assured. $omeone must live in the land
bet/een the rock and the hard (lace' and those /ho do so are desi*nated 7(rofessional8.
I think of (rofessionals as the value bearers for societ!' those (articularl! burdened and (racticed to address the
most difficult and sensitive human ethical dilemmas. I do not mean to im(l! that a business (erson' la/!er' doctor'
(s!chiatrist' or teacher is better in some moral sense than an!one else. Instead' that the! have a*reed to assume a
uni&ue ethical burden' to /ork at the transaction (oint /here issues of si*nificant human value are on the line. The
(rofessional is s/orn not to desert this (ost' to be there to counsel' reflect and bear /ith the human condition in the
midst of transition and crisis. This is' to me' the essence of (rofessional (racticeYthe (ractice of raisin* the value
content of human decisions and choices. That is the (rofessionalAs s/orn burden' it is the ver! nature of the ethic
that defines /ho the (rofessional is.
All this said' it astounds me that an!one /ould /ant the title of (rofessional. 6ut to make sure this (oint is
underlined' let us consider the 7,arado" of (a!8' (erha(s the most com(le"in* of all to the business (rofessional.
1>>
The (arado" of (a!
I am /atchin* a s(orts sho/ on the evenin* ne/s. A local s(ortscaster is intervie/in* a member of the Earlem
+lobetrotters' /ho are in to/n for a *ame. The intervie/ *oes somethin* like this:
$(orts +u!: Al' I /as sur(rised !ou never turned (ro.
Al: ?hat do !ou meanC I am a (ro' I *et (aid (rett! *ood for (la!in* ball.
$(orts +u!: ?ell !eahC 6ut I meant !ou never tried out for the ;6A.
Al: :h' /ell I like (la!in* for the +lobetrotters better ...
Almost ever!one assumes that bein* (rofessional means *ettin* (aid Jand (aid /ellK for oneRs /ork. There are
(rofessionals and there are amateurs' the former *et (aid' /hile the amateurs do it for the love of it. ?ell' no.
:ri*inall!' the (rofessions /ere too im(ortant to receive /a*es in the usual sense. ,rofessionals /ere not (aid for
their /orkG instead' (rofessionals received an honorarium' a *ratuit! from the communit! intended both to honor
and disassociate the vocation from the necessities of the market' to free the vocation for the selfless task of carin*
for others.
Three da!s before m! heart sur*er! I ha((ened to /atch a $i"t! inutes (iece on a cardiolo*! *rou( in
California /hich /as (rescribin* and (erformin* unnecessar! b!(ass sur*er! in order to increase their (racticeAs
revenues. It /as chillin*. I thou*ht of a case /e use in business school about ho/ $ears some !ears a*o (ressured
em(lo!ees in their auto servicin* division to increase revenues b! (ushin* unneeded air filters' mufflers' and break
re-linin*s' etc. 6ut' heart sur*eons re-ali*nin* ethical res(onsibilit! due to market de(endenc!C I think the
edieval notion of honoraria for (rofessionals ma! make a lot of sense in this time of trium(hant ca(italism. There
are some values the market is not desi*ned to dictate.
I love to tease business students about the matter of (a! and the (o/er of mone!. I ask' 7Considerin* the boldest
(rofessionA /hat had !ou rather be kno/n for: doin* it for mone!' or doin* it for loveC8 In the realm of love makin*'
most us (refer to have non market forces determine the dimensions of our intimate lives. Let us hear it for true
amateurs4
In a real sense' (rofessionals indeed do it for love. It is difficult to ima*ine bearin* the burden of a (h!sician'
la/!er' counselor' or a (rofessor /ithout havin* a dee( and effusive (assion for /hat one does. ,rofessionals
cannot leave their /ork at the office' because /hat the! do is /ho the! are. As I have discovered' teachin* is the
most re/ardin* thin* I can think of doin*. I do not -ust teachG I am a teacher. I am *lad I am (aid for m! /ork' but
truth be kno/n I /ould do it for free. I /alk a/a! from a class /here the students and I have reall! 7lit it u(8' and I
do not even have /ords to sa! ho/ *ood it feels. I can describe historicall! and intellectuall! /hat a (rofessional
should be' but even better' I also kno/ /hat it feels like. ;o amount of mone! can com(ensate for that feelin*.
Consider the burdens of true (rofessionalism that skill alone is not sufficient to &ualif!: one is (ublicl! (led*ed
to /ork on the unrelentin* tension bet/een the /elfare of the client and the *ood of the societ!G and that is not the
criteria b! /hich success /ill be -ud*edY/h! /ould one choose to 7turn (roC8 I have onl! one ans/er: (rofessions
are ri*htl! desi*nated as vocations. ?e become (riests' la/!ers' (h!sicians' (rofessors because /e cannot do
an!thin* elseG /ho /e are cannot be achieved outside the realm of /hat /e are im(elled to do.
Corporate %ocial 0esponsibility
The le*al and historic roots of the modern cor(oration reach /ell back into the ei*hteenth centur!' but it /as in
the Industrial @evolution of the nineteenth centur! that this trul! e"traordinar! form of human or*ani0ation came
into its o/n and' the t/entieth centur!' became the dominant economic force on earth. Consider its ama0in*
characteristics concentration of mana*ement' accumulation of ca(ital' shieldin* of o/nershi( from liabilit!' and
bein* *ranted a le*al e"istence not necessaril! bounded b! either s(ace or timeYboth ubi&uitous and eternal4 As
/ell' ho/ever' consider its fearsome (ros(ects vis-h-vis its lack of accountabilit!' its deficit of democratic
*overnance' its often-uncivili0ed com(etitive en*a*ement /ith all other sectors of societ!' not to mention its
transcendence of both national soverei*nt! and le*al -urisdiction. And there !ou have it. Is the Trans-national
Cor(oration the ans/er to the fundamental issues of human survival' or the fundamental threat to life itselfC In
short' /ill the cor(oration of the t/ent!-first centur! be a corru(t @obin Eood' or a virtuous $heriff of
;ottin*hamC
Cor(orations are not natural (ersons. Cor(orations are fictitious' cor(orations are -uridical (ersons created b!
la/. The (oint is this: the ethical considerations one mi*ht use /hen dealin* /ith a friend' associate' or stran*er'
are si*nificantl! different /hen the sub-ect is the cor(oration.
+ettin* this strai*ht is criticall! im(ortant to an ade&uate understandin* of business ethics. ,eo(leYtheir
behavior and the (roducts of their /ork and intellectYare -ud*ed ethicall! and le*all! based chiefl! on their
intentions. Ethical anal!sis of the behavior of natural (ersons be*ins /ith considerations of /hat a (erson meant b!
/hat he or she did' said' or (roduced. In contrast' ethical anal!sis involvin* the entit! /e call 7the cor(oration8
must forever be*in and end in la/ and (ublic (olic!. ?ith reference to the (olitical econom! that brou*ht forth the
beast. The le*al entit!' kno/n as the cor(oration' /as created to shield investors from liabilities be!ond the limit of
their investment Ja result that neither sole (ro(rietorshi(s nor (artnershi(s could accom(lishK /ith the le*islative
intent of facilitatin* the a**re*ation of (rivate ca(ital. This le*al e"(eriment be*un 2Dth centur! has succeeded
s(ectacularl!.
%or (eo(le to survive' the! need (h!sical and emotional nourishment' and familial and social su((ort.
Cor(orations survive solel! b! their abilit! to return value to their shareholders. Eence' cor(orations are
conse&uential critters' Itilitarian to the core. A friend ma! for*et a lunch date and hurt !our feelin*s' but /hen he
sa!s' 7IAm reall! sorr!' I canAt believe I for*ot.8 3ou sa!' 7Ee! I missed !ou' but itAs :H. LetAs tr! a*ain ne"t /eek.8
?hen a com(an! launches a ne/ (roduct and if the 200 million dollar venture tanks' shareholders do not /ant to
hear about ho/ sorr! mana*ement is that thin*s did not /ork out' or that mana*ement meant /ell. It /ill do the
CE: no *ood to sa!' 7! heart /as in the ri*ht (lace.8
?hen /e talk about the ethical criteria for -ud*in* the behavior of cor(orations /e s(eak not of intent' but
res(onsibilit!: &uite literall!' the ca(acit! to res(ond. Cor(orate ethics is the ethics of cor(orate social
res(onsibilit! JC$@K' not cor(orate (ersonal res(onsibilit!. The res(onsibilit! of a cor(oration is sha(ed b! t/o
realities: the obli*ations created b! societ! throu*h J2K la/ and (ublic (olic! Jle*al res(onsibilitiesK' and J1K the
obli*ations created b! cor(orate culture' i.e. stakeholder Jcustomers' em(lo!ees' nei*hborhoods' natural
environmentsK obli*ations. The t/o overla( and reinforce each other' but their limits lie /ithin the boundaries of a
com(an!As tan*ible ca(acities.
1>5
Cor(orate ethics is reall! about *ainin* understandin* of /hat are called 7mi"ed motives8. ?hen natural
(ersons have mi"ed motivesY!ou *ive a hundred bucks to the o(era because !ou /ant !our boss' /ho su((orts the
o(era' to think /ell of !ouY/e someho/ kno/ that this is not an unambi*uousl! laudable act. 6ut /hen a com(an!
that makes com(uters *ives 200 la(to(s to the (ublic school s!stem' and does so /ith the ho(e that e"(osin*
children to their brand of com(uters /ill lead to increased salesYthis 7doin* *ood to do /ell8 is not onl! laudable' it
is res(onsibleYres(onsible both to shareholders and the stakeholders.
Cor(orations as a matter of fact' can onl! act /ith 7mi"ed motives8. 6! la/' the! are created to serve the bottom
line of returnin* /ealth to investors. The la/ sa!s cor(orations have a fiduciar! res(onsibilit! Jfiduciar! S the
hi*hest standard of lo!alt! and trust o/ed b! a*ents to (rinci(lesK to their shareholders' /ho are the le*al o/ners of
the cor(oration. To do *ood' a cor(oration must do /ell. As a business ethicist' I ar*ue the reverse: to do /ell' a
cor(oration must do *ood. ,eo(le have consciences' and some /ould sa! soulsG cor(orations have neither.
Cor(orations are creatures of la/ and (ublic (olic!' the! are cultural creationsG as such' the! have uni&ue cultures
of their o/n. Cor(orate ethics is therefore reall! about the creation of a culture of res(onsibilit! /ithin the
cor(oration.
Dr L!nne ,a!ne of Earvard Iniversit! has made a ma-or contribution to the understandin* of C$@ and ho/ it is
achieved in her distinction bet/een com(liance based or*ani0ations and inte*rit! based or*ani0ations. In realit!'
C$@ is a (roduct of both com(liance Jle*al and re*ulator! constraintsK and inte*rit! Jthe internal culture and self
re*ulator! environmentK. This is underscored b! ne/ la/s such as +arbanes-O/ley .t of '44' and the almost t/o
decade old I$ %ederal $entencin* +uidelines J(olic! *uidelines established in (art to determinin* cor(orate
criminal (unishment in I$ %ederal CourtsK.
+arbanes O/ley is (articularl! interestin* *iven ,a!neAs com(liance<inte*rit! construct' in that it re&uires both
inte*rit! structures Jsuch as a cor(orate board of ethics' and internal (rotections for /histleblo/ersK and increases
fines for violation of anti-trust and other federal statutes re*ulatin* inter-state cor(orate behavior. Thus'
cor(orations are creatures of la/ and (olic! and are re*ulated e"ternall!. Cor(orations have no conscience (er se'
but like an! social s!stem can develo( a *uidin* culture' maintained throu*h education and reinforced b! the habits
and interactions of the (eo(le /ithin the cor(oration.
In a /orld of over si" billion (eo(le' there is little alternative to lar*e and com(le" or*ani0ations desi*ned to
feed' house' heal' and hel( meet basic human needs. The multinational cor(oration is here to sta!G the issues of
ho/ these behemoths are *uided and controlled is far from settled. Eo/ the humans /ho /ork and mana*e these
or*ani0ations maintain their o/n inte*rit! /ithin the Itilitarian cultures of the multinational cor(oration is a
cha(ter of histor! /e are onl! be*innin* to /rite.
The $ocial Contract bet/een societ! and the multinational cor(oration toda! is bein* radicall! rene*otiated.
The cascadin* colla(ses of the Dotcoms' the Enron' ?orldcom' and Aldel(hia scandals' and no/' the meltdo/n of
ca(ital markets across the *lobe (ortends a turbulent future indeed for both the cor(oration and the business
(rofessional. 3et' it is in such times that fundamental chan*es most often emer*e. Those /ho dare to ride these
currents of chan*e /ill emer*e in a ne/ order of (olitical econom!.
Business Fundamentals 1>D A +lobal Te"t
14. #ddin products and
ser&ices
Editor$: +eor*e .inkhan' Anastasia Th!roff' An-a @em(el' and Eon*bum Him JThe Iniversit! of +eor*ia'
I$AK
Reviewer: 6ettina Corn/ell JIniversit! of ichi*an' I$AK
Learnin* ob-ectives
After readin* this cha(ter' !ou should:
understand the strate*ic im(ortance of addin* and deletin* (roducts. understand some methods /hich can
be a((lied to assist in this decision-makin* (rocess
understand some different a((roaches for *eneratin* ne/ (roduct ideas
be familiar /ith various /a!s of classif!in* (roducts and innovations
be able to discuss innovations related to business models
kno/ the basic methods for evaluatin* innovations
be able to discuss the related to(ics of failed innovation and (roduct deletion
Introduction
The t/ent!-first centur! market(lace is d!namic and fast chan*in*. As a result' or*ani0ations are under (ressure
to evaluate their e"istin* (roduct line and to make continuous decisions about addin* ne/ (roducts or deletin*
e"istin* (roducts. %or instance' the *ra(h in E"hibit B= sho/s ho/ an or*ani0ation must establish a series of
successful (roducts' if that or*ani0ation /ants to maintain a consistent stream of sales or else *ro/ sales over time.
:ne reason for this (attern is the (roduct life c!cle. As sho/n in the *ra(h' no (roduct lasts forever' and sales levels
can fluctuate dramaticall! over time. The com(an! illustrated in E"hibit B= has marketed 5 different (roducts over
time. In the (ast' four of these (roducts have been deleted Jthe (roducts labeled as A' 6' C' and %K. As a result' the
sales level in the most current (eriod de(ends u(on the success of the remainin* four (roducts. If the firm has a
*oal to increase sales in the comin* !ears' then it is im(erative for that firm to introduce a ne/ *rou( of successful
(roducts.
:r*ani0ations invest a lot of mone! to create ne/ (roducts that (erform effectivel!. ;onetheless' firms often
stru**le to convince (eo(le to incor(orate these ne/ (roducts into their routines JArts 1005K. %or e"am(le' it took
25 !ears for micro/ave ovens to *ain acce(tance in +reece JTellis' $tremersch' and 3in 1003K. The ultimate success
of ne/ (roducts de(ends on consumers acce(tin* them JArts 1005K.
The term 7(roduct8 refers to both *oods and services. A (roduct is an!thin* that can be offered to a market to
satisf! a /ant or need. There are a number of /a!s to classif! (roducts' and those methods are discussed later in
1". 5dding products and ser$ices
the cha(ter. In this cha(ter' /e discuss the follo/in* to(ics: JaK ?here do innovations come fromC JbK (roduct
cate*oriesG JcK Innovation throu*h business modelsG JdK Evaluatin* innovationsG JeK ?hen innovation fails: deletin*
(roductsG and JfK cha(ter summar!. In the ne"t t/o sections' /e briefl! discuss innovations and their ori*ins.
E"hibit B=: $ales of individual (roducts and total sales
/here does inno&ation come from5
?e define 7innovation8 as an idea or (roduct that is ne/ to the s(onsorin* or*ani0ation. A 7discontinuous
innovation8 has the (otential to alter e"istin* consum(tion (atterns' or else create ne/ ones. %or e"am(le' (ortable
audio e&ui(ment has evolved from the radio' to the cassette ta(e (la!er' to the com(act disk (la!ers and to the
di*ital audio (la!er. At the e"treme' a discontinuous innovation results in the creation of a ne/ *eneric cate*or! of
(roducts' such as the +,$ navi*ation s!stem.
In contrast' 7continuous innovations8 involve introducin* a ne/ entrant into an e"istin* cate*or!. Continuous
innovations do not challen*e established (atterns of consum(tion behavior. A *ood e"am(le of this t!(e of
innovation is the smart (hone. %or this (roduct' consumers alread! kno/ /hat a (hone is and ho/ to o(erate it.
%rom this (ers(ective' the o(eration of a smart (hone can be vie/ed as a combination of the functions associated
/ith a mobile (hone and the functions of a (ersonal di*ital assistant J,DAK. In a more recent offerin*' a smart
(hone combines the functions of ,Cs and acs throu*h a((l!in* the soft/are and o(eratin* s!stems of each. As a
result' consumers can access their current kno/led*e about e"istin* (roducts and then easil! *ras( the 7smart
(hone8 conce(t.
:n the one hand' the (rocess of innovation is the life blood of an or*ani0ation. ;e/ (roduct innovations are
res(onsible for em(lo!ment' economic *ro/th' technolo*ical (rocess' and hi*h standards of livin* J$ouder 2D59K.
In a marketin* conte"t' innovation is crucial for the develo(ment of successful ne/ (roducts Jboth *oods and
servicesK. :n the other hand' it is a challen*e to develo( and evaluate these innovations. In brief' /here do
innovative ideas come fromC ?e describe five sources of innovation: technical breakthrou*hs' non-technical idea
develo(ment' ideas that emer*e from environments' serendi(it!' and (ur(oseful develo(ment. These various
strate*ies are outlined in Table 20 and described in more detail in the follo/in* section.
192
Technical breakthrou*hs refer to (roduct innovations that result from technical develo(ments. ;e/ brands that
have emer*ed from this (rocess include ,3 (la!ers' +,$ navi*ation devices' and cell (hones. In the lon* run' it is
consumers /ho decide ho/ ne/ technolo*ies /ill be used. %or instance' +u*lielmo arconi created the radio-
tele*ra(h so that shi(s could communicate /ith each other on the hi*h seas in 25DB. Eo/ever' other a((lications
emer*ed' and ever!da! uses eventuall! multi(lied. %or instance' in 2D12' the @adio$hack Cor(oration /as formed
in 6oston to sell e&ui(ment to 7ham8 o(erators. The com(an! took its name from the small /ooden buildin* for
radio e&ui(ment on shi(s. As more families ado(ted radios' it /as a real challen*e to develo( content. Eventuall!'
the advertisin* business model /as created' and the funds that /ere (rovided b! advertisers /ere used to s(onsor
the develo(ment of (o(ular content Je.*. music' dramatic sho/s' variet! sho/sK J.inkhan 100=K.
;on-technical develo(ment is another (ath to (roduct innovation. This a((roach involves findin* a niche in the
market /ithout makin* radical chan*es to the basic (roduct cate*or! Ji.e. in terms of the underl!in* technolo*!K.
76uild a 6ear ?orksho(8 (rovides a *ood e"am(le of this st!le of innovation. Inlike other conventional stuffed
animal manufacturers' the 6uild a 6ear ?orksho( allo/s customers to choose their bearAs bod!' sound' clothin*'
stuffin*' and heart. %or e"am(le' a customer can choose' a lo/er-(riced (a(er heart /ith their /ish' or the! can
invest in a hi*her-(riced electronic heart. After customers make choices' the! then observe the (roduction (rocess
in the sho(. In this /a!' customers create their o/n custom-desi*ned to!. This business model does not rel! on
develo(in* ne/ technolo*!. Eo/ever' there is a modified (roduction (rocess' as the stuffin* and se/in* machine
are located in the retail store.
Ideas that emer*e from environments refer to innovations that result from im(ortin* (roducts from other
cultures. +ood e"am(les of this st!le of innovation are ?al-mart in China and IHEA in the Inited $tates.
Traditionall!' there /ere no lar*e-scale retail stores in Asian nations' such as #a(an' Horea' China or India. Instead'
small retailers or mom-and-(o( stores dominated. Lar*e-retail stores are no/ achievin* success in Asian nations'
throu*h im(ortin* the idea of economies of scale' /hich' in turn enable one-sto( sho((in* and lo/er (rices.
$imilarl!' IHEA achieved *reat success in the I$ and China throu*h im(ortin* the idea of a /arehouse-t!(e retail
settin* from Euro(e. IHEA offers hi*h-&ualit! furniture and home interior (roducts for lo/er (rices. Consumer
assembl! is often re&uired.
$erendi(it! (la!s a role in (roduct innovation. The /ord serendi(it! derives from 7serendi('8 /hich means 7$ri
Lanka8 in ,ersian. The fair! tale' The Three ,rinces of $erendi(' tells the stor! of three men /ho continuousl!
discover somethin* that is com(letel! unrelated to /hat the! ori*inall! set out to find. Thus' the term 7serendi(it!8
describes a situation /here one accidentall! discovers somethin* fortunate' /hile lookin* for somethin* else
entirel!. %or e"am(le' (enicillin /as discovered &uite b! accident /hen Ale"ander %lemin* discovered that a mold
contaminatin* one of his e"(eriments (ossessed (o/erful antibacterial (ro(erties.
,ur(oseful develo(ment occurs /hen there is a stron* need for certain *oods or services. As described b! ,lato
in The @e(ublic: 7;ecessit! is the mother of invention.8 In other /ords' this t!(e of innovation occurs /hen
e"istin* (roduct lines cannot satisf! current needs or current demand. As a result' or*ani0ations are /illin* invest
considerable funds Je.*. in terms of research and develo(ment or marketin* researchK to create a successful
innovation. A *ood e"am(le of (ur(oseful develo(ment is the heav! investment that (harmaceutical firms make to
discover ne/ (rescri(tion dru*s. %or ins(iration' (harmaceutical scientists rel! u(on current develo(ments in
chemistr!' (h!sics' (lant biolo*!' and folk healin* methods. In some instances' this kind of innovation mi*ht result
from marketin* research' /here considerable demand is forecast in the market(lace.
Table 20: different sources of innovation
$ource of
Innovation
Definition E"am(les of Innovation
Technical
breakthrou*h
Innovation that results from technical
develo(ment.
,3 (la!ersG +,$
navi*ation s!stemG ?ireless
Internet service
;on-technical idea
develo(ment
%indin* niche markets /ithout makin* radical
chan*es to the basic (roduct cate*or!. Does not rel! on
ne/ technolo*!.
b6uild a bear /orksho(GA
%ro0en !o*urt stores
Idea from outer
environment
Im(ortin* ideas from other cultures' (laces' and
settin*s
IHEA in the I$G 3o*a or
Taek/ondo in ?estern nations
$erendi(it! Innovation throu*h an accident' /hen lookin* for
somethin* else
L-ra!sG ,enicillin
,ur(oseful
develo(ment
Innovation that derives from heav! investment'
once stron* demand is reco*ni0ed
,rescri(tion dru*sG ,encils
/ith erasers
It is also (ossible to create a ne/ business model. ?al-art is a *ood e"am(le here' as the retailer a((lies the
(hiloso(h! of lo/ (rices and cost cuttin* to ever! as(ect of its o(erations' includin* lo*istics' em(lo!ee
com(ensation' mana*erial (hiloso(h!' (acka*in*' merchandisin*' ne*otiations /ith su((liers' and so forth. This
manner of innovation is discussed in more detail in the section /hich follo/s' 7,roduct Cate*ories.8
,roduct cate*ories
There are a number of /a!s to classif! (roducts Jsee Table 20 and E"hibit B>K. %or instance' a (roduct can be
classified b! durabilit! and tan*ibilit!. ,acka*ed *oods are tan*ible and are consumed in one or a fe/ uses' such as
in the case of beer' soa(' or fuel. Durable *oods are tan*ible and survive man! uses. Consumer e"am(les include
furniture' TMs' com(uters' clothin* and automobiles. Accordin* to one convention' a durable *ood lasts more than
one !ear. ;on-durable *oods are tan*ible' but the! (rovide benefits for a short time. +ood e"am(les include: *um'
shavin* cream' *as' batteries' and cosmetics. There are also controlled *oods /hich are often restricted b!
*overnment action' due to their (otential dan*er or addictive nature. +ood e"am(les include: ci*arettes' alcohol'
tobacco' firearms' and even some over-the-counter dru*s.
6usiness-to-business J616K (roducts refer to *oods bou*ht b! individuals or or*ani0ations for further
(rocessin* or for use in doin* business. E"am(les in 616 include: buildin*s' flour (urchased b! a commercial
baker' crude oil' steel for automobile manufacture' insurance (olicies for com(an! buildin*s' and business
consultin* services. 6usiness-to-customer J61CK (roducts refer to *oods that individual customers (urchase for
193
(ersonal and famil! use' such as (assen*er cars' hairdr!ers' TMs' medical insurance (olicies' and car(et cleanin*
services for the home.
Convenience (roducts are (roducts that consumers /ant to (urchase fre&uentl!' immediatel!' and /ith a
minimum of effort. E"am(les here include: soft drinks' ci*arettes' fast foods' ne/s(a(ers' (ublic trans(ortation
and cand! bars. $ho((in* *oods are (urchased onl! after consumers make com(arisons /ith com(etin* *oods
based on such attributes as (rice' &ualit!' st!le' or color. E"am(les in this cate*or! include: ,3 (la!ers' (assen*er
cars' clothin*' furniture' and houses. $(ecialt! (roducts are (roducts /ith uni&ue characters. 6u!ers often (ri0e
such *oods and make a s(ecial effort to obtain them. E"am(les in this *rou( include collectable items' en*a*ement
rin*s' vacation homes' !achts' art /orks' lu"ur! cars' and s(ecial concert tickets.
E"hibit B>: @ou*h Classification of ,roducts
Table 22: Classif!in* (roducts
Cate*or! ;ame Definition E"am(le
+ood A tan*ible (h!sical entit! Table' electronics'
soda' cand! bar
$ervice An intan*ible result of the a((lication of human and
mechanical efforts to (eo(le or ob-ects.
Eaircut' dr!-cleanin*'
*ardenin*
Durable ,roducts that (rovide benefit for a lon* time and are not
used u( /hen used once.
Automobile' house'
machines
;on-durable ,roducts that (rovide benefit for a short time. ilk' laundr!
deter*ents' tissue (a(er
Controlled +oods
,roducts that need to be re*ulated due to their (otential
dan*er or addictive (otential.
Tobacco' alcohol'
firearms'
(harmaceuticals
6usiness-to-business +oods bou*ht b! individuals or or*ani0ations for further
(rocessin* or for use in doin* business.
(lastics for a car
manufacturer' insurance
(lan for (lants
Consumer The *oods individual consumers (urchase for (ersonal or
famil! use.
Canned sou(' medical
insurance
Convenience ,roducts that consumers /ant to (urchase fre&uentl!'
immediatel!' and /ith a minimum of effort.
Che/in* *um' beer'
ci*arettes' fast food
$ho((in* ,roducts (urchased onl! after the consumer has made
com(arisons /ith com(etin* *oods on such bases as (rice'
&ualit!' st!le' or color.
TM' automobile'
house
$(ecialt! ,roducts /ith uni&ue characteri0ations that cause the
bu!er to (ri0e them and make a s(ecial effort to obtain
them.
Lu"ur! s(orts car'
-e/elr!'
6nno&ation throuh business models
A *ood business model is a stor! that e"(lains ho/ an enter(rise is desi*ned to /ork Jar*retta 1001K. A
business model identifies sources of com(etitive advanta*e and describes the firmAs (ath/a! to (rofitabilit! and
success. %rom a marketin* (ers(ective' the business model describes customers and /hat the! value. %rom a
mana*erial (ers(ective' the business model describes ho/ an or*ani0ation makes (rofit. $ee E"hibit B9.
In this section' /e revie/ some emer*in* models in the music industr!' in order to illustrate ho/ such models
can serve as a source of innovation. That is' a traditional /a! for or*ani0ations to remain (rofitable is to introduce a
series of related *oods. As sho/n earlier in E"hibit B=' the or*ani0ation introduces ei*ht (roducts Jlabeled A
throu*h EK. :ver time' the sales for (roduct A be*in to decline' so the or*ani0ation is under considerable (ressure
to introduce ne/ successful (roducts. If E"hibit B= re(resents the cumulative sales for a record label' then (roduct
A mi*ht be a hi(-ho( CD' /hile (roduct 6 is a CD created b! a rock artist. In this section of the cha(ter' /e (resent
an alternative source of innovationYthe innovation that results from successfull! introducin* ne/ business models.
All our e"am(les are derived from the music industr!' but related industries Je.*. films' booksK are under*oin*
similar transformations and creatin* similar o((ortunities for entre(reneurs.
E"am(les of business models from the music industr!
$ince the late 2DD0s' the availabilit! of online music has caused a lot of confusion in the market(lace. Traditional
business models are no lon*er a((licable for e"(lainin* the current business o((ortunities. The music industr! in
the t/ent!-first centur! (rovides a classic illustration of a 7disru(tive technolo*!8' /hereb! ne/ technolo*ies drive
out established technolo*ies and established /a!s of doin* business.
Eere' /e briefl! revie/ ei*ht business models in the music industr!. ?e distin*uish amon* these models via five
characteristics: current im(lementation' feasibilit!' le*alit!' consumer satisfaction' and record label satisfaction
J$ee Table 3K. ;ote that some of these models are currentl! im(lemented' /hile others are s(eculative in nature.
19=
1raditional business model
In this business model' the artists create music and tr! to be si*ned b! a record label. After the artist is si*ned b!
a record label' then that or*ani0ation (rovides a number of services' includin* financin* music recordin* and
(roductionG or*ani0in* concert toursG (roducin* and sellin* merchandiseG marketin* the bandAs creationG
(romotin* the band throu*h e"(osure on mass mediaG and more.
;e"t' the record label delivers the recorded music to manufactures /ho re(roduce and (acka*e the music. The
su((l! chain members are in char*e of distribution' includin* an effort to *ain coo(eration from ke! retail outlets.
%inall!' the retailers market and sell the (acka*ed *oods to the final consumers J$later' $mith' 6ambauer' +asser'
and ,alfre! 100=G see E"hibit B9K.
E"hibit B9: $i"-ste( model
#igital musi stores
This model su**ests that the retailers move online and offer content directl! to consumers throu*h /ebsites.
This a((roach is similar to the traditional model' but there is an em(hasis on the online deliver! of content J$later
et al.' 100=K. Ama0on /as one of the first com(anies to im(lement this model in the 2DD0s. $ince the debut of this
model' t/o ma-or modifications have been made. %irst' consumers can no/ (urchase di*ital do/nloads of the
music' rather than receivin* a (h!sical (roduct' such as CDs. This offers an intan*ible and instantaneous a((roach
to bu!in* music. The second lar*e modification is also related to di*ital do/nloadin*' as users no lon*er have to
bu! an entire CD. an! di*ital music stores offer free sam(lin* of each son* /hich allo/s customers to (revie/
tracks that the! /ant to (urchase. The A((leAs iTune store successfull! im(lements this model in the t/ent!-first
centur!.
Open ontent
This model is derived from the 7Ancillar! ,roducts and $ervices8 model that the 6erkman center formulated in
100= J$later et al. 100=K. :ne main assum(tion here is that nothin* can be done to sto( the ille*al sharin* of
music. In order for the model to be successful' the content creator' record com(anies' and consumers must
encoura*e the use of (eer-to-(eer net/orkin*. Thus' ever! music do/nload from this business model is free of
char*e. This model is different in that free file sharin* is encoura*ed. Eo/ever' there is a concerted effort to find
other sources of revenue J6erkman Center 1003K. :ther sources of income ma! include tourin*' sellin* band
(ara(hernalia' endorsements' and fan clubs. This model is ille*al under current la/s in the I$ and man! other
countries as it violates e"istin* co(!ri*hts. ;ote that' in most conte"ts' o(en-content sharin* is le*al as lon* the
o/ner si*ns a contract that allo/s such distribution.
There are conflictin* vie/(oints on the o(en content model. :n one e"treme' there (eo(le like Lars Ilrich' the
Drummer for etallica' /ho is outra*ed that this could even be an o(tion. Accordin* to Ilrich' 7The ar*ument I
hear a lot' that music should be free' must then mean the musicians should /ork for free. ;obod! else /orks for
free' /h! should musicians JIlrich and c+uinn 1000KC8 :n the other e"treme are (eo(le /ho ar*ue that
co(!ri*hts are irrational since the! den! consumers the ri*ht to use creative /orks and suffocate the creativit! of
Internet users JLessi* 100BK.
At first *lance' the o(en-content model a((ears to be ver! radical' as it differs so much from other models.
;onetheless' it has *ained considerable attention in the last fe/ !ears. This a((roach is ver! satisf!in* for
customers' but is a ma-or threat for record labels and channel members.
.rtist-entered website hub
This business model uses one lar*e /ebsite as a database for music. Content creators contact the /ebsite directl!
and set the (rice of their music. The /ebsite sets a minimum do/nloadin* fee to cover costsG the fee is set on a
monthl! basis Jor on a (er-do/nload basisK. Customers access the /ebsite and (urchase all the music the! /ant'
kno/in* that the artist receives most of the (rofit.
$ome /ebsites are alread! im(lementin* this model. %or instance' CD 6ab! sells inde(endent music that comes
directl! from the artist. $ince this model cuts out several middlemen' CD 6ab! claims that artists receive I$D >-21
(er album versus the I$D 2-1 that artists t!(icall! receive throu*h their record labels. There are currentl! 1B5'5D2
artists on CD 6ab! and over I$D 59'0=1'059 dollars have *one directl! to the artist since the com(an! o(ened for
business in 2DD5 JEefflin*er 1005K.
ArtistAs (ersonal /ebsite
Another (otential model encoura*es users to access the artistAs (ersonal /ebsites to (urchase music. This
a((roach allo/s the artists to have the most control over their music. The band @adiohead tested this model durin*
the debut of their seventh album 7:nl! in @ainbo/s.8 The band alienated themselves from their record label' EI'
and offered the album solel! from their /ebsite @adiohead.com. Customers /ho visited the site /here allo/ed to
decide /hat the! /ere /illin* to (a! for the album JT!an*iel 1009K.
Althou*h this model is attractive for (o(ular artists' it is (otentiall! troublesome for artists /ho are not /ell
kno/n. Lesser kno/n artists have *reat difficult! standin* out in a cro/ded market. This model also eliminates the
record label.
6on-traditional reord labels
Currentl!' inde(endent record labels are s(routin* u( in une"(ected (laces. In 1003' the Cracker 6arrel :ld
Countr! $tore created an American @oots record label called C6 music' Ltd J@omero 1003K. $tarbucks' the
eternall! (o(ular coffee house launched their o/n record label in arch of 1009. Their (lan involves si*nin* artists
Je.*. ,aul cCartne!K and sellin* records throu*h $tarbucks stores Jhtt(:<<///.starbucks.com<K.
1a/-the-de,ie model
This model follo/s the o(en content model' in that music is (rovided free of char*e for music do/nloads.
Eo/ever' such do/nloads are tracked' and a sales ta" is (laced on all devices that are sold to (la! back do/nloaded
files. The mone! *enerated from ta"es is then used to (a! back artists. :f course' this model is s(eculative in
nature. At (resent' there is not a reliable method for trackin* all do/nloads. In addition' devices sold outside of the
I$ /ould be difficult to ta".
199
+ummary of new business models
A ma-or (ur(ose in describin* these music business models is to illustrate ho/ innovations do not have to be
tied to the success of a ne/ *ood or service. @ather' an or*ani0ation can innovate b! introducin* a ne/ method of
doin* business' and such innovation has the (otential to 7turn the /orld u(side do/n8 Ja la +oo*le or %acebookK.
Table 21: usic 6usiness odels
odel
Currentl!
im(lementedC
%easibleC
Currentl!
le*al or ille*alC
Consumer
satisfaction
@ecord label
satisfaction
Traditional ;o
;ot
an!more
Le*al ;o 3es
Di*ital music
stores
3es 3es Le*al 3es 3es
,eer-to-(eer
$tores
3es 3es Le*al 3es 3es
:(en $ource 3es 3es Ille*al 3es ;o
Artist
centered /ebsite
hub
;o 3es Le*al 3es ;o
ArtistAs
(ersonal /ebsite
3es 3es Le*al 3es ;o
;on-
traditional
7record lables8
3es 3es Le*al
3es
if used /ith
other models
;o
to traditional
record labels
Ta"-the-
device
;o ;ot reall! Le*al C ;o
)&aluatin ne! products
?hen an or*ani0ation adds a ne/ (roduct' there is both (otential benefit and risk. As a result' or*ani0ations
im(lement formal s!stems for evaluatin* ne/ (roducts. In (articular' there is a concerted effort to forecast
(ro-ected sales and thus reduce some of the financial risk. ?hile evaluatin* ne/ (roducts' there is also the
(ossibilit! of *eneratin* innovative ideas that can later *o throu*h the testin* (rocess. Idea *eneration is an
essential (art of marketin* strate*! and is critical to the success of a com(an!. ?hen such (roduct ideas move
further alon* in the (rocess' a ke! ste( is to create a (rotot!(e or /orkin* version of the ne/ offerin*. A*ain'
market testin* is crucial at ever! sta*e in the develo(ment (rocess.
Eere' /e briefl! discuss three main alternatives for evaluatin* ne/ additions to the (roduct line: laborator!
tests' e"(ert evaluations' and customer evaluations JIrban and Eauser 2DD3K. ?ith res(ect to customer
evaluations' /e distin*uish bet/een central-location tests and home-use tests JCrask' %o" and $tout 2DD=K.
The laborator! tests (rovide information re*ardin* the (erformance of ne/ (roducts in e"treme settin*s. %or
e"am(le' a ne/ co(! machine can be tested at various /ork loads' such as numbers of co(ies and s(eed (er minute
to test the relationshi( bet/een /orkload and (a(er -am. A disadvanta*e for the laborator! test is that it ma! not
full! re(resent real-life conditions. Consumers are famous for findin*s ne/ /a!s to abuse (roducts' and the! are
not such skillful o(erators as lab testers.
E"(ert evaluators can be used at all (hases of the ne/ (roduct develo(ment (rocess. %or instance' e"(erts can
be used to estimate /hether or not a ne/ (roduct idea /ill be acce(ted in the market(lace before a (rotot!(e even
e"ists. E"(erts also (la! a role later in the (rocess. %or instance' a ne/ (assen*er car can be tested b! a car e"(ert'
/ho (rovides a J(ublishedK revie/ that covers to(ics such as: handlin*' comfort' ease of use' st!lin*' acceleration'
miles (er *allon' and so forth. E"(ert evaluation is relativel! lo/ in cost' as -ust a fe/ e"(erts can (rovide estimates
about the behaviors of man! customers. At the same time' the small number of e"(erts on each (ro-ect ma! lead to
biased forecasts.
In later sta*es of develo(ment' customers can be recruited to evaluate (rotot!(es. There is an attem(t to test
ne/ (roducts under conditions that are relativel! close to actual use. Eere' /e distin*uish bet/een t/o t!(es of
customer evaluations: central-location evaluation and home-use evaluation.
Central-location tests are conducted at desi*nated locations such as sho((in* malls' s(ortin* events' and colle*e
cam(uses. ,artici(ants are recruited b! email' tele(hone' and (rint ads. T!(es of central-location tests include:
Discrimination test: conducted to determine the (ercenta*e of customers /ho can distin*uish bet/een
(roduct alternatives.
,aired com(arison test: res(ondents evaluate a (air of o(tions and then state their (reference bet/een the
o(tions.
@ound robin test: all (ossible (roduct (airs are evaluated' usin* a format /here consumers com(are t/o
(roducts at a time.
6lind test: a ne/ (roduct is com(ared to e"istin* (roducts.
Inder the home-use test' customers are invited to use a ne/ (roduct as (art of their ever!da! life. The home use
test is usuall! more e"(ensive than the central-location evaluation' but it is more realistic. ,o(ular t!(es of home-
use tests include:
,aired com(arison test: (artici(ants evaluate t/o (roducts in normal usa*e situation and (rovide
evaluations for both (roducts.
$in*le-(roduct home-use test Jmonadic testK: (artici(ants evaluate one (roduct after usin* that (roduct for
a s(ecified time (eriod.
19D
,roto-monadic home-use tests: a h!brid desi*n /here (artici(ants are asked to use a certain (roduct for a
s(ecific time (eriod and then evaluate. ;e"t' (artici(ants follo/ a similar (rocedure for a second test
(roduct.
/hen inno&ation fails: deletin products
,roduct failure
In *eneral' a (roduct fails /hen it does not meet the ob-ectives that /ere established b! the s(onsorin*
or*ani0ation. %ailure rates var! b! industr!. %or instance' failure rates for ne/ (acka*ed *oods ran*e from 9= (er
cent to D0 (er cent Jcatalinamarketin*.comK. ?hen considerin* 7innovative8 ne/ (roducts' +ourville J100=K
estimates that a((ro"imatel! half of all such (roducts fail. It often costs more to launch an innovation nationall!
than to develo( the *ood or service in the first (lace.
In the follo/in* section' /e describe ?al-artAs failure as it tried to enter the +erman market. :ur (ur(ose is to
use this one e"am(le to illustrate ke! reasons that ne/ (roducts fail and subse&uentl! must be deleted. $ee Table 22
for a listin* of ma-or reasons that cause (roducts to be deleted. Table 22 includes a descri(tion of 23 reasons that
(roducts fail. ;ote that the ?al-art e"(erience in +erman! (rovides concrete e"am(les for 20 of these ke!
reasons. In the table' the reasons for (roduct deletion are divided into = *rou(s: JaK arket $tructure J$KG JbK
6usiness odel J6KG JcK Culture JCKG JdK ,olitics<re*ulation J,K: and JeK ,roduct failure J,%K. These same
cate*ories are hi*hli*hted in the sections /hich follo/.
Case' e"am(le of (roduct failure: ?al-art in +erman!' 2DD9 to 100>
?al-art is the bi**est food retailer in the /orld and has a (resence in several nations. In some nations Je.*.
the I$' Canada' ChinaK' ?al-art is a *reat success. Eo/ever' ?al-art has failed in some countries
Je.*. +erman!' $outh HoreaK. %irst' /e describe ?al-artAs failure in Euro(eAs lar*est econom!. $econd'
/e use ?al-artAs e"(eriences in +erman! to illustrate some ke! (rinci(les related to (roduct failure and
(roduct deletion Jsee Table 22K. ?al-artAs e"(eriences are also an e"am(le of the im(ortance to ada(t to
culture /hen startin* a business in a ne/ countr!.
The +erman *rocer! industr!
There is fierce com(etition in the +erman *rocer! industr!' due to the increasin* number of discount
su(ermarket chains JH,+ 100>K. As a result' there is lo/ (rofitabilit! in the food retail sectorG (rofit
mar*ins ran*e from 0.= (er cent to 2 (er cent /hich is one of the lo/est (rofit mar*ins in Euro(e
J%rankfurter @undschau 1009K. 6! contrast' (rofit mar*ins in +reat 6ritain are = (er cent' in this same
sector. In (articular' etro is a tou*h com(etitor' and it alread! a((lies some of ?al-artAs successful
strate*ies Je.*. related to economics of scale and lo/ (ricesK. :f course' ?al-art is interested in other
metrics be!ond (rofit Je.*. shareholder /ealth' market shareK' but' as indicated above' (rofitabilit! and
mar*ins are of ke! concern to retailers.
?al-art: strate*ic conce(t
?al-art is the /orldAs lar*est retailer /ith a((ro"imatel! >'=00 stores /orld/ide J6usiness 100>K. The
main feature of ?al-artAs business model is to cut costs Jcontinuousl!K and therefore offer lo/er (rices
than their com(etitors. %or instance' ?al-art has introduced ne/ lo*istical technolo*ies such as radio-
fre&uenc! identification J@%IDK to o(timi0e its lo*istic (rocesses. @%ID is an automatic identification
method' rel!in* on storin* and remotel! retrievin* data usin* devices called @%ID ta*s or trans(onders.
?al-art tries to minimi0e labor costs b! offerin* minimal health care (lans. ?al-art (ressures its
su((liers to cut costs' on a continuous basis. In brief' ?al-artAs mana*ers are constantl! seekin* out
/a!s to cut costs' and some of their successes are (assed on to sho((ers' in terms of lo/er (rices.
?al-artAs entr! into the *erman market
In 2DD9' ?al-art ac&uired over 12 stores from the su(ermarket chain 7?ertkauf.8 :ne !ear later' ?al-art
bou*ht an additional 9B stores from the su(ermarket chain 7Inters(ar8. As a result' ?al-art became the
fourth bi**est o(erator of su(ermarkets in +erman! JLebensmittel0eitun* 100>K. The ob-ective /as to
e"(and to =00 stores in +erman!. Eo/ever' the number of stores never e"ceeded the D= stores that /ere
ori*inall! (urchased in the first t/o !ears. ?al-artAs (osition in the market(lace deteriorated over the
!ears. In 1001' ?al-art had some financial difficulties due to a lo/ turnover /hich resulted in the
dismissal of some em(lo!ees. At the end of 100>' ?al-art /as bou*ht out b! 7etro8' one of +erman!As
lar*est retail *rou(s. %inall!' ?al-art left the +erman market /ith a loss of one billion dollars before ta"
Jana*er-a*a0in 100>K.
is-ste(s in the *erman market
In *eneral' there are five ke! issues related to ?al-artAs ultimate /ithdra/al from +erman!: J aK market
structureG JbK business model Jthese first t/o are discussed to*ether hereKG cK cultural and
communicationG JdK (olitics and re*ulationG and JeK (roduct<service failure. Each of these issues is
discussed in turn. ;ote also that these five issues are hi*hli*hted in Table 22.
arket structure and business model
A retailer that /ants to follo/ ?al-artAs strate*! of lo/ (rices needs to e"(and ra(idl!. In +erman!' there
not enou*h a((ro(riate locations to su((ort such e"(ansion Jsee Table 22K. As (reviousl! mentioned'
?al-art did not build their o/n stores but took over 12 e"istin* 7?ertkauf8 su(ermarkets that had a
totall! different business model. The stores themselves /ere ver! small and had a limited ran*e of *oods.
A related (roblem is that these stores /ere located far a(art' /hich resulted in hi*h lo*istical costs.
?hen enterin* a ne/ market' it is im(ortant to antici(ate com(etitorsA reactions. In +erman!' ?al-artAs
bi**est com(etitor' etro' /anted to e"(and their storesG at the same time' etro /anted to (revent ?al-
art from e"ecutin* their e"(ansion (lans J$en*e 100BK. an! times' a (roduct has to be deleted
because the com(etition is too stron*.
?ith the strate*! of 7Ever! da! lo/ (rices'8 ?al-art is ver! successful in the Inited $tates and also in man!
other countries. In +erman!' there is e"treme com(etition in the retail food sector. Therefore' the
+erman customer is &uite accustomed to the lo/ (rices that are offered b! numerous discount
su(ermarket chains. %or this reason' ?al-artAs strate*! of offerin* lo/ (rices did not create sufficient
com(etitive advanta*e Jsee Table 22K.
Culture and communication
152
?hen (roducts are introduced' it is im(ortant to consider cultural factors. In this case' cor(orate culture
(la!ed a ke! role. ?al-artAs to( e"ecutives decided to o(erate the +erman locations from their offices in
the Inited Hin*dom. Thus' ?al-artAs 7cor(orate lan*ua*e8 /as En*lish. Eo/ever' man! of the older
?al-art mana*ers in +erman! do not s(eak En*lish. As a result' there /ere often breakdo/ns in
communication. $ome mana*ers of the ac&uired stores did not sta! on after the ?al-art ac&uisition.
He! business connections /ere lost. As a result' several ke! su((liers Je.*. Adidas' $amsonite' ;ikeK
declined to /ork as su((liers for ?al-art. ?al-art did not -ust lose im(ortant su((liersG the! also lost
an im(ortant (art of their ran*e of *oods J$en*e 100BK. The situation could have been im(roved b!
retainin* and communicatin* effectivel! /ith the +erman mana*ers /ho had kno/-ho/ about the local
market Jsee Table 22K.
,olitics and re*ulation
The mana*ers of ?al-art /ere not sufficientl! familiar /ith the la/s and re*ulations in +erman!' as the!
violated them several times. :ne of ?al-artAs fundamental (rinci(les is to sta! union free. Eo/ever' in
+erman!' unions have a (o/erful (osition. Throu*h collective bar*ainin* and related tactics' the! can
have a stron* influence on (olitical decision makin*. Mer.di is a +erman union in the service sector. ?ith
1.B million members' it is one of the lar*est inde(endent' trade unions in the /orld JMer.di 1005K.
Accordin* to the +erman Commercial Code' all incor(orated com(anies are obli*ated to (ublish a financial
statement' includin* a (rofit and loss statement. Due to the fact that ?al-art refused to (ublish their
financial statements for the !ears 2DDD and 1000' Mer.di sued in a court of la/. ?al-art /as sentenced
to (a! a fine. The covera*e of this la/ suit in the +erman (ress led to a ne*ative (ublic ima*e for ?al-
art.
After the e"(ansion strate*! failed due to the lack of suitable store locations' ?al-art be*an a (rice /ar to
drive small com(etitors out of business. The intention /as to take over the stores of the insolvent
su(ermarket chains and convert them into ?al-art stores. :ne (art of the (rice /ar /as to introduce a
(rivate label called 7$mart 6rand8 and sell most of these (roducts belo/ manufacturin* costs. The
reaction of man! com(etitors /as to decrease their (rices' /hich led to a (rofit setback for the entire
industr!. Eo/ever' the %ederal Cartel :ffice interceded and sto((ed the (rice /ar because there is a la/
in +erman! that en-oins com(anies from sellin* *oods belo/ manufacturin* costs on a continuin* basis
JHnorr and Arndt 1003K.
,roduct< service failure
?al-art (lanned to introduce a so(histicated customer service (ro*ram /hich threatened man! of its
com(etitors because +erman discount su(ermarket chains often do not (rovide *ood customer service.
Therefore' *ood customer service' combined /ith lo/ (rices' could have been a ne/ market niche in
+erman!. :ne (art of ?al-artAs customer service (ro*ram /as called the 7ten foot rule8. Ever! ten feet'
a service em(lo!ee offered some hel( to the customer JHnorr and Arndt 1003K. Eo/ever' the customer
reaction /as rather ne*ative' because customers /ho normall! do their *rocer! sho((in* in discount
su(ermarket chains are used to self-service. The! do not necessaril! e"(ect to talk /ith em(lo!ees.
Therefore' the 7ten foot rule8 /as (erceived as rather anno!in* and did not result in a re(utation for
(rovidin* *ood customer service.
?al-art also im(orted the idea of (lacin* a 7*reeter8 at the entrance to the store. A*ain' +erman customers
/ere not used to this custom' and the! did not ado(t this 7service8 /ith an! enthusiasm.
Conclusion of ?al-art ini-case
?al-art tried to a((l! its I$ success formula in an unmodified manner to the +erman market. As a result'
the! didnAt have sufficient kno/led*e about the market structure and ke! cultural < (olitical issues. In
addition' structural factors (revented ?al-art from full! im(lementin* its successful business model.
Also' there /ere some instances of (roduct or service failure. The final outcome /as that ?al-art had to
abandon its offerin*s in +erman!
Table 23: ,roduct failure: e"am(les from ?al-martRs investment in +erman!
@easons for %ailure E"am(les of ?al-art in +erman!
Insufficient demand J$ < 6K ?al-artAs lo/ (rice strate*! didnAt create an!
com(etitive advanta*e since man! +erman local
retailers /ere alread! usin* that strate*!.
E"istin* com(etitors are too stron* J$K ?al-artAs bi**est com(etitor' etro' took s(ecific
counter-measures to (revent ?al-art from e"ecutin*
their e"(ansion (lan.
%ailure to develo( and communicate uni&ue sellin*
(ro(ositions JI$,K J6K
The (rofit mar*ins in the +erman retail industr!
/ere alread! lo/ before ?al-art entered. ?al-art
/as not able to convince +erman consumers that their
(rices /ere reall! that much lo/er than the com(etition.
Ine"(ected chan*e in the environmentY Economic
do/nturn
;<A for ?al-art case
Com(etin* ne/ technolo*! successfull! introduced ;<A for ?al-art case
Chan*e in culture Ji.e. chan*e in cor(orate culture'
chan*e in consumer taste or fashionK JCK
?al-art did not ada(t /ell to the +erman
cor(orate culture.
Chan*in* standard of *overnment re*ulations J,K ana*ers /ere not familiar /ith +erman la/s and
re*ulations' so there /ere violations. In *eneral' ?al-
artAs anti-union (olicies conflicted /ith the stron*
+erman union. ?al-art also tried to sell their (roducts
belo/ manufacturin* costs' /hich is ille*al in +erman!.
The (rice is too hi*h' so trial is discoura*ed ;<A for ?al-art case
,oor (romotion<communication (lan JCK Lan*ua*e barrier bet/een En*lish-s(eakin*
mana*ers and older +erman business (eo(le /ho donAt
153
s(eak En*lish.
In retailin*' failure to secure attractive sites J$K There /ere not enou*h a((ro(riate locations for
?al-art stores available in +erman!.
,roduct failure J,%K tores /ere often located far a(art. As a result'
lo*istics costs /ere hi*h. :ne of ?al-artAs main
success factors is to minimi0e costs' but this *oal /as
restricted b! hi*h lo*istical costs.
,oor service &ualit!Ydurin* or after sales J,%K ome of ?al-artAs methods for (rovidin* service
/ere not acce(ted b! +erman customers. %or instance'
the customers did not like the conce(t of the 7*reeter8.
%ailure to *et cor(oration from ke! su((l!-chain
members J6K
$everal ke! su((liers refused to su((l! *oods' for
fear of tarnishin* their cor(orate ima*e.
;otes for Table B: The reasons for deletion are divided into five cate*ories accordin* to the follo/in* le*end:
$: arket structureG 6: 6usiness modelG C: Culture and communicationG ,: ,olitics and re*ulationG ,%:
,roduct failure
Cha(ter summar!
;e/ (roducts im(rove (eo(leAs lives' chan*e markets' and affect thever!da! /orld around us JArts 1005K. %rom
an or*ani0ational (oint of vie/' successful ne/ (roducts are essential for the survival of a firm. At the same time' an
or*ani0ation must reco*ni0e /hen it is time to /ithdra/ a (roduct from the market. As sho/n in %i*ure 2' this
/ithdra/al ma! take (lace after some !ears of success in the market(lace. Alternativel!' such (roduct deletion ma!
occur before the (roduct is even launched Jsee the section on 7Evaluatin* Innovations8K. $ometimes' clear and
strai*htfor/ard reasons e"ist to e"(lain /h! consumers do not acce(t a ne/ (roduct. :ther times' a clear ans/er is
missin* JArts 1005K. In this cha(ter' /e hi*hli*ht man! of the ke! mana*erial decisions associated /ith addin* and
deletin* (roducts. ?e em(hasi0e the im(ortant role of marketin* research and market-based insi*hts.
Discuss various /a!s to classif! innovations and (roducts. Describe ho/ these classification schemes
contribute to mana*erial kno/led*e and describe ho/ the! are related to the (rocess of innovation.
Isin* information from the ?al-art case that is discussed in the cha(ter' describe some decisions
that mana*ement handled /ell.
$u((ose that !ou are in char*e of e"(andin* ?al-artAs o(erations to %rance. Describe some actions
that !ou /ould take to increase the (robabilit! of success in that nation.
3our business (artner comes to !ou /ith a ne/ (roduct idea. $(ecificall!' she has -ust returned from
a tri( to the ;etherlands. 6ased on her e"(eriences there' she /ants !our com(an! to start e"(ortin*
a s(ecialt! beer J+ul(emerK from the ;etherlands to the I$. 3our firm has s(ecific e"(ertise terms of
distributin* beer in the eastern Inited $tates' and !ou have some interest in !our (artnerAs idea.
Describe ho/ !ou /ould evaluate this idea of addin* of +ul(emer to !our (roduct line.
A re(orter from the ;e/ 3ork Times asks !ou to forecast /hich method of distributin* (o(ular
music /ill be the most (o(ular in the !ear 102B. ?rite a (ress release on this to(ic. 6e certain to
(rovide a -ustification for !our (rediction.
Discuss five business models that are (o(ular for distributin* (o(ular films. ,redict /hich of these
models /ill be the most successful' five !ears from no/. ,rovide a convincin* -ustification for !our
(rediction.
3our ne(he/ is a drummer' and he has -ust formed an alternative rock band. Eis band is -ust
be*innin* to achieve some local success in $eattle' ?ashin*ton. 3our ne(he/ vie/s !ou as a 7ne/
(roduct e"(ert8' so he asks !our advice about ho/ to increase the (o(ularit! and (rofitabilit! of his
bandAs o(erations. ake five s(ecific recommendations to hel( !our ne(he/ and to -ustif! !our
re(utation as 7an e"(ert8.
Table B (rovides a descri(tion of some reasons that ne/ (roducts fail. Add three more factors to this
list.
Discuss some different /a!s that firms tr! to develo( innovations. %or each method that !ou identif!'
(rovide a s(ecific e"am(le of a (roduct that /as develo(ed follo/in* this a((roach.
Ima*ine that !ou /ant to start !our o/n business. ?hat (roduct /ould sellC In t/o (ara*ra(hs'
describe !our business model.
Case: 7A((les: ;e/ton and ,i((in8
A((le Inc. Jformerl! A((le Com(uter Inc.K /as founded in 2D9> b! $teve #obs' $teve ?o0niak' and @onald
?a!ne. $teve #obs is still ver! active /ith the com(an!.
A((le has a lon* histor! of addin* successful ne/ (roducts to its line u(. Eo/ever' in some instances' A((le
(roducts have failed in the market(lace' and' subse&uentl!' the! /ere deleted. %or instance' both the
hand-held ;e/ton and the *amin* machine ,i((in /ere dro((ed from the A((le lineu(. $ee
htt(:<<///.forbes.com<1005<20<1D<a((le-(roduct-flo(s-tech-(ersonal-c"Ta*T2030a((le.html.
Isin* this /ebsite and others' *ather some information about the ;e/ton and the ,i((in. Then' usin* the
information from this cha(ter Je.*. see Table BK' discuss some reasons that ;e/ton and ,i((in failed. To
/hat e"tent did these t/o (roducts fail for the same reasonsC Identif! one of A((leAs successful (roducts
Je.*. the i,hone' the i,odK and describe ho/ the (roduct mana*ers have been able to avoid some of the
(roblems that sank the ;e/ton and the ,i((in.
@eferences
Arts' #oe( J1005K' Essa!s on ;e/ ,roduct Ado(tion and Diffusion' Amsterdam: the %ree Iniversit!.
6erkman Center J1003K. QCo(!ri*ht and Di*ital edia in a ,ost-;a(ster ?orld'8 @esearch ,ublication ;o.
1003-0=' +artner+1 and The 6erkman Center for Internet and $ociet! at Earvard La/ $chool.
htt(:<<c!ber.la/.harvard.edu<(ublications.
15=
6usiness J100>K: 7?orldRs 6i**est @etailer ?al-art Closes I( $ho( in +erman!8 htt(:<<///.d/-
/orld.de<d/<article<0'12BB'12219B>'00.html
Crask' .' %o"' @. #.' and $tout' @. +. J2DD=K. arketin* @esearch: ,rinci(les and A((lications. Ea*le/ood
Cliffs' ;#: ,rentice Eall.
%rankfurter @undschau J1009K: 7Ende einer E"(ansion7 htt(:<<///.le"isne"is.de<e-
solutions<academic<de<inde".html' 05.02.1005.
+ourville' #.T. J100=K' 7The Curse of Innovation: ?h! Innovative ;e/ ,roducts %ail'8 $I ?orkin* ,a(er
$eries' = JBK.
+uto/ski' +eor*e J100>K' 7Lessons to be Learned from ?almartAs %ailure in Horea'8 $eekin* Al(ha Ja!
1BK' article 222B2. htt(:<<seekin*al(ha.com<article<222B2-lessons-to-be-learned-from-/almart-s-failure-
in-korea-/mt
Eefflin*er' ark J1005K' 7:nline India usic @etailer Ac&uired'8 Di*ital edia ?ire' Au*ust =.
Hnorr' AG Arndt' A. J1003K: 7?al-art in Deutschland d eine verfehlte Internationalisierun*sstrate*ie'8 in:
Hnorr' A. et al. JErs*.K: aterialien des ?issenschaftssch/er(unktes i+lobalisierun* der ?elt/irtschaft'8
6and 1=' 6remen 1003.
H,+ J100>K: 7$tatus &uo und ,ers(ektiven im deutschen Lebensmittelein0elhandel8
htt(:<<///.k(m*.de<librar!<(df<0>0D0BT$tatusT&uoTundT,ers(ektivenTimTdeutschenTLebensmittel
ein0elhandelT100>Tde.(df' 10.21.1009.
Lebensmittel0eitun* J100>K: 7?al-art in Deutschland d ein jberblick8
htt(:<<///.l0net.de<links<hotlinks<(a*es<(rotected<sho/=3>9D.html' 10.21.1009.
Lessi*' La/rence J100BK' %ree Culture: Eo/ 6i* edia Ises Technolo*! and the
La/ to Lock Do/n Culture and Control Creativit!. ;e/ 3ork: The ,en*uin ,ress.
ana*er-a*a0in J100>K: 7etro kbernimmt ?al-art Deutschland8
htt(:<<///.mana*erma*a0in.de<unternehmen<artikel<0'1515'B15D>0'00.html' 10.21.1009.
ar*etta' #. J1001K. ?hat ana*ement Is: Eo/ it ?orks and ?h! ItAs Ever!oneAs 6usiness. ;e/ 3ork: %ree
,ress.
,ress)starbucks.com J1009K' 7,aul cCartne! %irst Artist $i*ned to ;e/ Eear usic Label'8 $eattle' arch
12'
htt(:<<///.starbucks.com<aboutus<(ressdesc.as(CidS9=D
@omero' A. J1003K' Cracker 6arrel :ld Countr! $tore Creates ;e/ American @oots @ecord Label. @etrieved
:ctober 2' 1005' from ?orld usic Central:
htt(:<</orldmusiccentral.or*<article.(h(<1003222B29B9=BB92
$en*e' H. J100BK: 7Der %all ?al-art: Institutionelle +ren0en lkonomischer +lobalisierun*.8
htt(:<<///./iso.unidortmund.de<is<dienst<de<te"tonl!<content<MB<MB1<(df<a(-so00B.(df'12.21.1009
$later' D.' $mith' .' 6ambauer' D.' +asser' I.' and ,alfre!' #. J100=' #ul! 9K. Content and Control:
Assessin* the Im(act of ,olic! Choices on ,otential :nline 6usiness odels in the usic and %ilm
Industries. @etrieved $e(tember 2' 1005' from The 6erkman Center for Internet and $ociet!:
htt(:<<c!ber.la/.harvard.edu<
$ouder' ?. E. J2D59K. ana*in* ne/ (roduct innovations. Le"in*ton' A: D.C. Eeath and Com(an!.
Tellis' +err!' $te(han $tremersch' and E. 3in J1003K' 7The International Takeoff of
;e/ ,roducts: The @ole of Economics' Culture' and Countr! Innovativeness'8 arketin* $cience' 11 J1K'
255-105.
T!ran*iel' #. J1009K' @adiohead sa!s: ,a! /hat !ou /ant. @etrieved Au*ust 2=' 1005' from Time
Entertainment: htt(:<<///.time.com<time<arts<article<0'5=DD'2>>>D93'00.html
Ilrich' L.' and c+uinn' @. J1000' #ul! 2K. Lars Ilrich' @o*er c+uinn Testif! 6efore $enate #udiciar!
Committee on Do/nloadin* usic on the Internet. JD. Ha*en' Intervie/erK C;;.
Irban' +. L. and Eauser' #. @. J2DD3K. Desi*n and arketin* of ;e/ ,roducts J1nd ed.K. Ea*le/ood Cliffs'
;#: ,rentice Eall.
Merdi J1005K htt(:<<international.verdi.de<ver.diTfremds(rachi*</asTistTver.diT-
TeineTeinfuehrun*TaufTen*lisch
.inkhan' +eor*e . J100=K' 76usiness odels' Advertisin*' and Emer*in* Technolo*!'8 American Academ!
of Advertisin* ;e/sletter' 2 J;o. BK' B-=.Addin* (roducts and services
159
1%. 6nternational business for the entrepreneur
17. 6nternational business for
the entrepreneur
1uthor$: Mlad alamud' 3ev*eni! @otenber*
Editor: Dou*las Allen
Reviewer$: Dean urra! 3oun* JThom(son @ivers Iniversit!' CanadaK Timoth! 6 %olta J,urdue Iniversit!K
Contributing author$: ?esle! $cott Cables' @icardo Cubillos' ike Davis' Messelin Dotkov' Loiuse Do!le'
6arbara +abhauer' +lenna +a*liardi' elissa Earrison Eiatt' Hatie Eoltmeier' Alisa #effre!' Ale"ia #ennin*s' Tim
,itner' Ashle! @andall' Da* #ohan $undb!' ;athalie Tr!on' #effre! ?iant' $arah ?ilson
Introduction
In astu-' a remote area in the Chitral district of ,akistanRs ;orth ?est %rontier ,rovince' a !oun*' recentl!
divorced /oman /ith three children feared that she /ould not be able to make ends meet. Tradition held that
/omen should not /ork outside the home' further com(licatin* her efforts to *enerate income.
;evertheless' in 2DD5' she a((lied to the A*a Hhan @ural $u((ort ,ro*ramme JAH@$,K for trainin* in se/in*.
$oon after her course' she took out an AH@$, loan' /hich included business trainin*' to bu! a se/in* machine. $he
then set u( a business stitchin* and sellin* read!-made clothes.
As /ith all AHA loans' the credit (acka*e included t/o t!(es of micro-insurance: @s. 200 JI$D 2.>0K for loan
insurance that (aid the outstandin* balance in case of her death or (ermanent disabilit!' and another (olic! that
/ould ensure a @s. 20'000 benefit for funeral-related costs in case of her accidental death. The micro-insurance
shielded the /omanRs children from debt should she have suffered death or disabilit!.
E"hibit B5: The credit (acka*e included t/o t!(es of
micro-insurance that has shielded the /omanRs children
from debt should she have suffered debt and in-ur!.
155
$he has taken several other loans for machiner! and material. Each time she has (aid back her loan in full and
on time. Eer monthl! income has risen over si"-fold from @s 2000 JI$D 2>K to @s. 9000 JI$D 210K in four !ears
J1000-100BK. $he has been able to send her three children to a (rivate school' e"tend her one room house' and set
u( a sho( near the home. E!*iene and health have im(roved thanks to better food and the installation of a (ro(er
toilet. As of 100B' she had saved over @s 30'000 JI$D =00K.
,erha(s most im(ortantl!' she has *one be!ond subsistence to hel( those /ho are less fortunate than herself.
$he has hired si" em(lo!ees and conducts se/in* classes for other /omen in the communit!. In 100B' in
reco*nition of her efforts' s. $hahira /as the reci(ient of the to( (ri0e in the Inited ;ations +lobal
Entre(reneurshi( A/ard for ,akistan.
%or s. $hahira' *lobali0ation can (la! an im(ortant role in her business. ?ith the success of her se/in*
com(an! in her home countr!' ,akistan' she no/ has the o((ortunit! to e"(and into ne/ markets' (artner /ith
another com(an!' and continue to *ro/ her com(an! as a /hole. Conversel!' *lobali0ation has ne*ative
im(lications for her com(an! as /ell that include increased com(etition' and the risk of cultural issues that /ould
lead to her com(an! not succeedin* in a ne/ market. As an u(-and-comin* entre(reneur' s. $hahira must take
into consideration all factors of *lobali0ation as she continues to o(erate her business.
%or more information about this case' and others like it' visit the A*a Hhan A*enc! for icrofinance /ebsite
htt(:<<///.akdn.or*.
Flobali9ation: opportunities and threats to de&elopin country business
To succeed in business toda!' it is critical to understand the chan*in* *lobal business /orld and the
environment in /hich a business o(erates. ;ot onl! are entre(reneurs faced /ith the internal factors affectin* their
business' the! must also understand the e"ternal environment in /hich the! o(erate.
In the Inited $tates and ?estern Euro(e' *lobali0ation has been hi*hl! controversial and s(arked (rotests
driven b! fears of outsourcin* -obs' cedin* authorit! to international or*ani0ations and declinin* labor and
environmental standards. Mie/s of *lobali0ation in lo/er income countries' ho/ever' are more (ositive. A recent
,e/ surve! found that there /as more enthusiasm for forei*n trade and investment in less industriali0ed countries
than in industriali0ed ones. In sub-$aharan Africa' =>g of res(ondents thou*ht' 7*ro/in* *lobal trade and business
ties are ver! *ood for m! countr! JDollar' 1003K.8 In develo(in* countries in Asia' 39g had a (ositive vie/ of
*lobali0ation' /hile onl! 15g of res(ondents in the Inited $tates and ?estern Euro(e had such a vie/ JDollar'
1003K. This section discusses the conce(t of *lobali0ation and its (ositive and ne*ative im(lications for develo(in*
countr! business.
This cha(ter /ill utili0e e"am(les of lar*e cor(orations' as these firms incor(orate all necessar! as(ects re&uired
to run a successful business.
What is globali(ationN
+lobali0ation is difficult to define because it has man! dimensionsYeconomic' (olitical' cultural and
environmental. The focus here is on the economic dimension of *lobali0ation. Economic *lobali0ation refers to the
7&uickl! risin* share of economic activit! in the /orld NthatO seems to be takin* (lace bet/een (eo(le in different
countries8 J?orld 6ank 6riefin* ,a(er' 1002K. ore s(ecificall!' economic *lobali0ation is the result of the
increasin* inte*ration of economies around the /orld' (articularl! throu*h trade and financial flo/s and the
movement of (eo(le and kno/led*e across international borders JI% Issue 6rief' 1000K.
Case: Inited $tates Domestic Automaker' %ord
;o/here are the effects of *lobali0ation seen more drasticall! than in the automobile industr!' es(eciall! for
the Inited $tates 76i* 38 automakers: +eneral otors' Chr!sler' and %ord.
%ordAs histor! dates back to the odel T created b! Eenr! %ord' /ith the *oal of buildin* a car for ever!
famil!. Toda!' %ord is in dire com(etition /ith not onl! their domestic com(etitors' but also no/ forei*n
car manufacturers such as To!ota' Molks/a*en and E!undai.
At the current (ace' the automotive market is a((roachin* a =0<=0 s(lit bet/een Inited $tates and overseas-
based control of the I$ market. As a result' %ord is challen*ed to constantl! reevaluate and revam( its
market strate*!. This is evident' as %ord decided that it /as more cost-effective to bu! e"istin* net/orks
than to start from scratch' b! brin*in* #a*uar' Molvo' a0da' Aston artin and Land @over under its
control. Eo/ever' %ord has recentl! decided to sell its stake in both #a*uar and Land @over to the Indian
automaker' Tata' and ma! divest other divisions as /ell.
Toda!' %ord faces a number of im(ortant &uestions. As the *lobali0ation of the auto industr! continues' ho/
should %ord market its vehiclesC ?hat tar*et markets should %ord a((eal toC Eo/ can it continue to
im(rove (roduction and &ualit! and adhere to the needs of even more demandin* customersC And' ho/
should %ord (osition itself' as a com(an!' in the face of formidable com(etitionC
?hile the future of %ord is uncertain' one thin* is clear' *lobali0ation /ill continue to affect the /a! domestic
and forei*n com(anies do business.
E"hibit BD: +lobal arket $hare' 1009-1005 JEdmunds.com' 1009KAs
this fi*ure su**ests' the 76i* Three8 must ada(t to chan*es in the market
and *lobali0ation factors to remain ke! (la!ers in the automotive market. At
one (oint in 1009' for the first time in histor!' I$ automakerAs share of their
home market fell belo/ =0 (er cent.
1D0
Elements of economic *lobali0ation
The *ro/th in cross-border economic activities takes five (rinci(al forms: J2K international tradeG J1K forei*n
direct investmentG J3K ca(ital market flo/sG JBK mi*ration Jmovement of laborKG and J=K diffusion of technolo*!
J$ti*lit0' 1003K.
International yrade: An increasin* share of s(endin* on *oods and services is devoted to im(orts and an
increasin* share of /hat countries (roduce is sold as e"(orts. 6et/een 2DD0 and 1002' the (ercenta*e of e"(orts
and im(orts in total economic out(ut J+D,K rose from 31.3 (er cent to 39.D (er cent in industriali0ed countries'
and from 33.5 (er cent to B5.D (er cent in lo/ and middle-income countries J?orld 6riefin* ,a(er' 1002K. In the
2D50s' about 10 (er cent of industriali0ed countriesA e"(orts /ent to less industriali0ed countriesG toda!' this share
has risen to about 1= (er cent' and it a((ears likel! to e"ceed 33 (er cent b! 1020 JFureshi' 2DD>K.
The im(ortance of International trade lies at the root of a countr!As econom!. In the constant chan*in* business
market' countries are no/ more interde(endent than ever on their (artners for e"(ortin*' im(ortin*' thereb!
kee(in* the home countr!As econom! afloat and health!. %or e"am(le' ChinaAs econom! is heavil! de(endent on the
e"(ortation of *oods to the Inited $tates' and the Inited $tates customer base /ho /ill bu! these (roducts.
2oreign Direct Inve$tent A2DIB: Accordin* to the Inited ;ations' %DI is defined as 7investment made to
ac&uire lastin* interest in enter(rises o(eratin* outside of the econom! of the investor8.
Direct investment in constructin* (roduction facilities' is distin*uished from (ortfolio investment' /hich can
take the form of short-term ca(ital flo/s Je.*. loansK' or lon*-term ca(ital flo/s Je.*. bondsK J$ti*lit0' 1003K. $ince
2D50' *lobal flo/s of forei*n direct investment have more than doubled relative to +D, J?orld 6riefin* ,a(er'
1002K.
Capital ar)et !low$: In man! countries' (articularl! in the develo(ed /orld' investors have increasin*l!
diversified their (ortfolios to include forei*n financial assets' such as international bonds' stocks or mutual funds'
and borro/ers have increasin*l! turned to forei*n sources of funds J?orld 6riefin*' ,a(er' 1002K. Ca(ital market
flo/s also include remittances from mi*ration' /hich t!(icall! flo/ from industriali0ed to less industriali0ed
countries. In essence' the entre(reneur has a number of sources for fundin* a business.
Migration: ?hether it is (h!sicians /ho emi*rate from India and ,akistan to +reat 6ritain or seasonal farm
/orkers emi*ratin* from e"ico to the Inited $tates' labor is increasin*l! mobile. i*ration can benefit
develo(in* economies /hen mi*rants /ho ac&uired education and kno/-ho/ abroad return home to establish ne/
enter(rises. Eo/ever' mi*ration can also hurt the econom! throu*h 7brain drain8' the loss of skilled /orkers /ho
are essential for economic *ro/th J$ti*lit0' 1003K.
Di!!u$ion o! technology: Innovations in telecommunications' information technolo*!' and com(utin* have
lo/ered communication costs and facilitated the cross-border flo/ of ideas' includin* technical kno/led*e as /ell
as more fundamental conce(ts such as democrac! and free markets J$ti*lit0' 1003K. The ra(id *ro/th and ado(tion
of information technolo*!' ho/ever' is not evenl! distributed around the /orldYthis *a( bet/een the information
technolo*! is often referred to as the 7di*ital divide8.
As a result' for less industriali0ed countries this means it is more difficult to advance their businesses /ithout
the technical s!stem and kno/led*e in (lace such as the Internet' data trackin*' and technical resources alread!
e"istin* in man! industriali0ed countries.
;e*ative effects of *lobali0ation for develo(in* countr! business
Critics of *lobal economic inte*ration /arn that J?atkins' 1001' 3usuf' 1002K:
the *ro/th of international trade is e"acerbatin* income ine&ualities' both bet/een and /ithin
industriali0ed and less industriali0ed nations
*lobal commerce is increasin*l! dominated b! transnational cor(orations /hich seek to ma"imi0e (rofits
/ithout re*ard for the develo(ment needs of individual countries or the local (o(ulations
(rotectionist (olicies in industriali0ed countries (revent man! (roducers in the Third ?orld from accessin*
e"(ort marketsG
the volume and volatilit! of ca(ital flo/s increases the risks of bankin* and currenc! crises' es(eciall! in
countries /ith /eak financial institutions
com(etition amon* develo(in* countries to attract forei*n investment leads to a 7race to the bottom8 in
/hich countries dan*erousl! lo/er environmental standards
cultural uni&ueness is lost in favor of homo*eni0ation and a 7universal culture8 that dra/s heavil! from
American culture
Critics of economic inte*ration often (oint to Latin America as an e"am(le /here increased o(enness to
international trade had a ne*ative economic effect. an! *overnments in Latin America Je.*. ,eruK liberali0ed
im(orts far more ra(idl! than in other re*ions. In much of Latin America' im(ort liberali0ation has been credited
/ith increasin* the number of (eo(le livin* belo/ the I$D V2 a da! (overt! line and has (er(etuated alread!
e"istin* ine&ualities J?atkins' 1001K.
,ositive effects of *lobali0ation for develo(in* countr! business
Conversel!' *lobali0ation can create ne/ o((ortunities' ne/ ideas' and o(en ne/ markets that an entre(reneur
ma! have not had in their home countr!. As a result' there are a number of (ositives associated /ith *lobali0ation:
it creates *reater o((ortunities for firms in less industriali0ed countries to ta( into more and lar*er markets
around the /orld
this can lead to more access to ca(ital flo/s' technolo*!' human ca(ital' chea(er im(orts and lar*er e"(ort
markets
it allo/s businesses in less industriali0ed countries to become (art of international (roduction net/orks
and su((l! chains that are the main conduits of trade
%or e"am(le' the e"(erience of the East Asian economies demonstrates the (ositive effect of *lobali0ation on
economic *ro/th and sho/s that at least under some circumstances *lobali0ation decreases (overt!. The
s(ectacular *ro/th in East Asia' /hich increased +D, (er ca(ita b! ei*htfold and raised millions of (eo(le out of
(overt!' /as based lar*el! on *lobali0ationYe"(ort-led *ro/th and closin* the technolo*! *a( /ith industriali0ed
1D1
countries J$ti*lit0' 1003K. +enerall!' economies that *lobali0e have hi*her *ro/th rates than non-*lobali0ers
J6ha*/ati and $rinivasan' 1001K.
Also' the role of develo(in* countr! firms in the value chain is becomin* increasin*l! so(histicated as these
firms e"(and be!ond manufacturin* into services. %or e"am(le' it is no/ common(lace for businesses in
industriali0ed countries to outsource functions such as data (rocessin*' customer service and readin* "-ra!s to
India and other less industriali0ed countries J6ha*/ati et al' 100BK. Advanced telecommunications and the
Internet are facilitatin* the transfer of these service -obs from industriali0ed to less industriali0ed and makin* it
easier and chea(er for less industriali0ed countr! firms to enter *lobal markets. In addition to brin*in* in ca(ital'
outsourcin* hel(s (revent 7brain drain8 because skilled /orkers ma! choose to remain in their home countr! rather
than havin* to mi*rate to an industriali0ed countr! to find /ork.
%urther' some of the alle*ations made b! critics of *lobali0ation are ver! much in dis(uteYfor e"am(le' that
*lobali0ation necessaril! leads to *ro/in* income ine&ualit! or harm to the environment. ?hile there are some
countries in /hich economic inte*ration has led to increased ine&ualit!YChina' for instanceYthere is no /orld/ide
trend JDollar' 1003K. ?ith re*ard to the environment' international trade and forei*n direct investment can
(rovide less industriali0ed countries /ith the incentive to ado(t' and the access to' ne/ technolo*ies that ma! be
more ecolo*icall! sound J?orld 6ank 6riefin* ,a(er' 1002K. Transnational cor(orations ma! also hel( the
environment b! e"(ortin* hi*her standards and best (ractices to less industriali0ed countries.
E"hibit =0: The fortune at the bottom of the (!ramid J,rahalad and $tuartK
+lobali0ation and the small business entre(reneur
As the case in the be*innin* of this cha(ter demonstrates there are economic' social' and (olitical factors an
entre(reneur faces /hen establishin* their business. This cha(ter /ill utili0e this case' and man! others like it' to
sho/ ho/ business leaders like s. $hahira can incor(orate the to(ics covered in the follo/in* (a*es into their
business.
8arnessin technoloy for lobal business success
:ver the last decade' the Internet has revolutioni0ed the /a! com(anies do business. %or an entre(reneur' the
Internet is a *reat tool for doin* business both internationall! and domesticall!. Information about com(etitors'
market trends' and *lobal industries is also easil! accessible and can hel( determine the (ath that an or*ani0ation
takes.
E"hibit =2: Technolo*! has become a critical as(ect of a
com(an!As o(eratin* environment.
T!(es of technolo*!
2nternet
The Internet is one of the most cost effective /a!s to (romote (roducts and services around the /orld. ;o other
advertisin* medium reaches as man! (eo(le as the Internet. Isin* s(eciali0ed soft/are and other tools' it is no/
easier than ever to build and run a successful /ebsite /ithout a hi*h level of com(uter skills. T!(ical information
found on a com(an!As /ebsite includes a descri(tion of the firm' a (rofile of the mana*ement team' (roducts and
services offered' and the /a! customers can contact the com(an!.
Ehone, Fa/ and +M+
Com(anies in less industriali0ed countries ma! not have viable access to the Internet due to a lack of
infrastructure. %or entre(reneurs facin* this issue' (hone' fa" and $$ te"t messa*es are alternative /a!s in /hich
to do business. Doin* business via (hone and fa" is not difficult. Com(anies can send marketin* materials or
1DB
receive orders via fa". The use of (hone for marketin* and sales o(tions is also ver! useful. Cold calls for marketin*
are still effectiveG like/ise orders can be made and received over the tele(hone. $endin* and receivin* $$ te"t
messa*es is ra(idl! becomin* a feasible alternative and allo/s for immediate communication.
Technolo*! for the business entre(reneur
There are multi(le /a!s to im(lement and levera*e technolo*! into a business. If s. $hahira chooses to do this'
there are ine"(ensive alternatives /ith *ro/in* benefits for her and her com(an!. 6! usin* ne/ techni&ues to run
and establish her business' s. $hahira /ould be able to com(ete on a *reater scale /ith com(anies in her industr!.
Doin business across cultures
?hile man! similarities e"ist amon* businesses' there are d!namics that must be taken into consideration in an
increasin*l! *lobal environment' such as multicultural em(lo!ees and var!in* e"(eriences in countries outside that
of the business. It is essential to take these differences seriousl! and not assume that individuals have similar
values.
Eost countr! research and cultural im(lications
Cultural issues can be divided into t/o cate*ories' e"(licit and im(licit. E"(licit culture issues are related to
characteristics that one can see or (erceive. Im(licit culture issues' on the other hand' are related to attitudes and
values' s!mboli0ed in the fi*ure belo/.
E"hibit =1: The :nion eta(hor of Culture JIli-n and %a!olle' 100BK
E"(licit culture e"ists on the outer la!er and is the observable realit! of the lan*ua*e' food' buildin*s' houses'
monuments' a*riculture' shrines' markets' fashions and art. These (roducts are visible in (eo(leAs behaviors'
clothes' food' music and theater.
The middle la!ers include norms' values' and attitudes but are not directl! visible. ;orms are the mutual sense a
*rou( has of /hat is ri*ht and /ron* that can develo( on a formal level such as /ritten la/' or on an informal level
Business Fundamentals 1D= A +lobal Te"t
such as social control. Malues determine *ood from bad' and are closel! related to the ideals shared b! a *rou(. A
value in one culture ma! differ vastl! from that of another' and therefore these differences must be studied and
taken into consideration /hen doin* business across cultures.
Cross-culture trainin*
The creation of a stable and health! /ork(lace made u( of (eo(le of var!in* cultural back*rounds is a matter of
increasin* im(ortance in the *lobal business environment. Em(lo!ers must take into consideration the im(act
cultural diversit! can have on both the homo*eneit! of the /ork(lace and (otential le*al im(lications for im(ro(er
discrimination.
The ob-ective of trainin* (ro*rams is to foster the four characteristics of (re(aredness' sensitivit!' (atience' and
fle"ibilit! in mana*ers and other (ersonnel JC0inkota et al' 100=K. ethods of trainin* ma! ran*e from factual
(re(aration involvin* books and lectures to e"(eriential trainin* involvin* simulations and field e"(erience. $ome
to(ics to be addressed in trainin* mi*ht be' but are not limited to:
comfort levels of traineesA /ith (eo(le of a different back*round
im(act of traineesA behaviors on others
understandin* stereot!(es
transformin* kno/led*e into em(ath!
embracin* diversit! as a source of stren*th
learnin* a ne/ lan*ua*e
6usinesses /ith diverse cultural back*rounds must maintain an environment suited for ever! constituent so
that the ob-ectives of the business can be efficientl! met. Installin* cultural diversit! trainin* (ro*rams can hel(
accom(lish this b! definin* /hat cultural intelli*ence is' teachin* em(lo!ees to acce(t and /ork effectivel! /ith
others from different cultural back*rounds' and takin* advanta*e of advice from those /ho have cross-cultural
e"(erience.
Cultural classification
Cultures can either be distin*uished accordin* to descri(tive characteristics or the! can be broken u( into value
cate*ories' /hich are essentiall! dimensions of national culture.
EofstedeAs %ive dimensions of national culture
+eert Eofstede' a leadin* e"(ert in cultural values classification' develo(ed a model of five dimensions of
natural culture that hel( to e"(lain basic value differences in culture. The model distin*uishes cultures accordin* to
the follo/in* five different dimensions:
,o/er distance
Individualism<collectivism
asculinit!<femininit!
Incertaint! avoidance
1D>
Lon*-term orientation
E"hibit =3: EofstedeRs five cultural dimensions
Aofstede<s & 9ultural #imensions
The ,o/er Distance Inde" J,DIK focuses on the de*ree of e&ualit!' or ine&ualit!' bet/een (eo(le in the countr!Rs
societ!. The Individualism JIDMK focuses on the de*ree the societ! reinforces individual or collective' achievement
and inter(ersonal relationshi(s. The asculinit! JA$K focuses on the de*ree the societ! reinforces' or does not
reinforce' the traditional masculine /ork role model of male achievement' control' and (o/er. The Incertaint!
Avoidance Inde" JIAIK focuses on the level of tolerance for uncertaint! and ambi*uit! /ithin the societ!. These
dimensions are measured on a scale from 0 to 200' include 9= countries or re*ions' and scores are determined b!
7hi*h8 or 7lo/8 rankin*s /ithin each cate*or!.
Cultural values determine the /a! (eo(le think and behave. International marketers must understand man!
subtle differences that ma! affect the /a! their marketin* is made and (erceived in forei*n markets. :ne medium
in /hich man! such differences reside is lan*ua*e. 6ecause lan*ua*e is a reflection of culture' some /ords cannot
be cross-culturall! translated' /hich im(lies that it is often better to have local co(!/riters /rite and translate
marketin* and advertisin* content to avoid cultural misunderstandin*s. 6ecause of this (henomenon' *lobal
advertisin*' /hich is a main com(onent of *lobal marketin*' often relies on s!mbol reco*nition to conve! meanin*
in their ads' instead of /ords.
The a((roach to discussin* culture' as it relates to *lobal marketin*' in most te"tbooks is a three-(ron*ed
a((roach. %irst' the conce(t of culture is defined' second' the various com(onents of culture are identified' and
third' vivid e"am(les of cultural differences are (rovided. The dire conse&uences of firms not takin* these
differences into account are invariabl! described' as adherence to local culture is considered one of the most
im(ortant' if not the most im(ortant' com(onents of success in international marketin* JEofstede' 2DD>K.
Ethical considerations
ana*ers of businesses that conduct o(erations in an increasin*l! *lobal environment face a dilemma /hen
selectin* and a((l!in* ethics to decisions in cross-cultural settin*s. Althou*h ethical values ma! be similar across
cultures in man! cases' the a((lication of those values to certain situations ma! var!. Ethics can be described as the
science of human dut!. It is u(on the ethical standards of a (erson that -ud*es /hether or not an action is ri*ht or
/ron*.
6efore a com(an! does business across borders' it must first decide /hat its motivation is re*ardin* ethical
conduct' /hich /ill determine /hat kind of behavior is to be e"(ected from em(lo!ees.
.olitical and leal ris$ in international business
,olitical and le*al risks are t/o ver! im(ortant as(ects of runnin* a business of /hich an entre(reneur should be
a/are. %ailure to reco*ni0e these risks and ad-ust accordin*l! could (otentiall! hinder the (erformance of the
overall business.
?hat is (olitical riskC
,olitical risk is *enerall! defined as the risk to business interests resultin* from (olitical instabilit! or (olitical
chan*e. ,olitical risk e"ists in ever! countr! around the *lobe and varies in ma*nitude and t!(e from countr! to
countr!. ,olitical risks ma! arise from (olic! chan*es b! *overnments to chan*e controls im(osed on e"chan*e
rates and interest rates J6arlett et al' 100BK. oreover' (olitical risk ma! be caused b! actions of le*itimate
*overnments such as controls on (rices' out(uts' activities' and currenc! and remittance restrictions. ,olitical risk
ma! also result from events outside of *overnment controls such as /ar' revolution' terrorism' labor strikes' and
e"tortion.
,olitical risk can adversel! affect all as(ects of international business from the ri*ht to e"(ort or im(ort *oods to
the ri*ht to o/n or o(erate a business. A:; J///.aon.comK' for e"am(le' cate*ori0es risk based on economicG
e"chan*e transferG strike' riot' or civil commotionG /arG terrorismG soverei*n non-(a!mentG le*al and re*ulator!G
(olitical interferenceG and su((l! chain vulnerabilit!.
Eo/ to evaluate !our level of (olitical risk
Forms of in,estment and ris!
%or a firm considerin* a ne/ forei*n market' there are three broad cate*ories of international business: trade'
international licensin* of technolo*! and intellectual (ro(ert!' and forei*n direct investment. A com(an!
develo(in* a business (lan ma! have different elements of all three cate*ories de(endin* on the t!(e of (roduct or
service.
The choice of entr! de(ends on the firmAs e"(erience' the nature of its (roduct or services' ca(ital resources' and
the amount of risk itAs /illin* to consider J$chaffer et al' 100=K. The risk bet/een these three cate*ories of market
entr! varies si*nificantl! /ith trade ranked the least risk! if the com(an! does not have offices overseas and does
not kee( inventories there. :n the other side of the s(ectrum is direct forei*n investment' /hich *enerall! brin*s
the *reatest economic e"(osure and thus the *reatest risk to the com(an!.
1D5
Erotetion from politial ris!
Com(anies can reduce their e"(osure to (olitical risk b! careful (lannin* and monitorin* (olitical
develo(ments. The com(an! should have a dee( understandin* of domestic and international affairs for the
countr! the! are considerin* enterin*. The com(an! should kno/ ho/ (oliticall! stable the countr! is' stren*th of
its institutions' e"istence of an! (olitical or reli*ious conflicts' ethnic com(osition' and minorit! ri*hts. The
countr!As standin* in the international arena should also be (art of the considerationG this includes its relations
/ith nei*hbors' border dis(utes' membershi( in international or*ani0ations' and reco*nition of international la/.
If the com(an! does not have the resources to conduct such research and anal!sis' it ma! find such information at
their forei*n embassies' international chambers of commerce' (olitical risk consultin* firms' insurance com(anies'
and from international businessmen familiar /ith a (articular re*ion. In some countries' the *overnments /ill
establish a*encies to hel( (rivate businesses *ro/ overseas. +overnments ma! also offer (olitical risk insurance to
(romote e"(orts or economic develo(ment. ,rivate businesses ma! also (urchase (olitical risk insurance from
insurance com(anies s(eciali0ed in international business. Insurance com(anies offerin* (olitical risk insurance
/ill *enerall! (rovide covera*e a*ainst inconvertibilit!' e"(ro(riation and (olitical violence' includin* civil strife
JI$ $mall 6usiness AdministrationK. Careful (lannin* and vi*ilance should be (art of an! com(an!As (re(aration
for develo(in* an international (resence.
:o,ernment poliy hanges and trade relations
A *overnment makes chan*es in (olicies that have an im(act on international business. an! reasons ma!
cause *overnments to chan*e their (olicies to/ard forei*n enter(rises. Ei*h unem(lo!ment' /ides(read (overt!'
nationalistic (ressure' and (olitical unrest are -ust a fe/ of the reasons that can lead to chan*es in (olic!. Chan*es
in (olicies can im(ose more restrictions on forei*n com(anies to o(erate or limit their access to financin* and
trade. In some cases' chan*es in (olic! ma! be favorable to forei*n businesses as /ell.
To solve domestic (roblems' *overnments often use trade relations. Trade as a (olitical tool ma! cause an
international business to be cau*ht in a trade /ar or embar*o J$chaffer et al' 100=K. As a result' international
business can e"(erience fre&uent chan*e in re*ulations and (olicies' /hich can add additional costs of doin*
business overseas.
China establishes a ne/ em(lo!ment contract la/ for 1005 J///.aon.comK
In an effort to (romote better em(lo!ment relationshi(s bet/een em(lo!ers and em(lo!ees' and
establish stricter *uidelines for Em(lo!ment (ractices' the ,eo(les @e(ublic of China J,@CK (assed
a ne/ em(lo!ment contract la/ in #une 1009 /hich became effective on #anuar! 2' 1005. This
Alert (rovides hi*hli*hts of the ne/ la/ and the effect it /ill have on em(lo!eesA ri*hts and their
em(lo!erAs le*al liabilit!.
Introduction
:n #une 1D' 1009 at the 15th session of the standin* committee of the 20th ;ational ,eo(leAs
Con*ress' a ne/ em(lo!ment contract la/ /as ado(ted /hich took take effect on 2 #auar! 1005.
This la/ re&uires all em(lo!ers to enter into contracts /ith their em(lo!ees /ithin 30 da!s of full-
Business Fundamentals 1DD A +lobal Te"t
time em(lo!ment and sets out *uidelines for their im(lementation. 6! incor(oratin* ne/ le*al
(rovisions /ith e"istin* la/s from the current ,@C labor la/' the committee ho(es to meet three
main ob-ectives: J2K to clarif! the em(lo!ment contract s!stem b! clearl! identif!in* both the
em(lo!er and the em(lo!ee liti*ation ri*hts and duties J1K (rovide (rotection of an em(lo!eeRs
le*itimate ri*hts and interests and J3K construct and develo( harmonious<stable /ork relations. All
re*ulations that affect em(lo!ees such as com(ensation' /ork hours' rest' leave' /ork safet! and
h!*iene' insurance' benefits' em(lo!ee trainin*' /ork disci(line or /ork &uota mana*ement must
be a((roved b! the em(lo!ee re(resentative con*ress or b! all the em(lo!ees and determined /ith
a trade union Jto be established b! all em(lo!ersK or em(lo!ee re(resentatives. @ules' re*ulations
and decisions havin* a direct bearin* on em(lo!ees shall be made (ublic or be communicated to
the em(lo!ees b! the em(lo!er. The labor administration authorities of ,eo(leAs +overnments at
the count! level and above' to*ether /ith the trade union and enter(rise re(resentatives /ill
establish a com(rehensive tri-(artite mechanism for the coordination of em(lo!ment
relationshi(s. The trade union /ill also assist em(lo!ees /ith em(lo!ment contracts in accordance
/ith the la/.
Increa$ed 6egal 6iability
Em(lo!ers
Certain articles in the ne/ la/ /ill establish increased le*al liabilit! and (ossible criminal char*es
for em(lo!ers /hose actions cause an em(lo!ee to suffer harm' such as:
2. An em(lo!erAs internal rules or re*ulations violate the la/s.
1. An em(lo!ment contract is not delivered to an em(lo!ee or lacks an! of the mandator! clauses
/hich the la/ re&uires.
3. An em(lo!eeAs resident ID cards' files or contract (a(ers are retained b! an em(lo!er ille*all! or
the em(lo!er collects an unre&uired financial *uarantee from an em(lo!ee.
B. An em(lo!er uses violence or threats to com(el an em(lo!ee to /ork' orders them to (erform
dan*erous o(erations or (rovides an unsafe or (olluted environment resultin* in harm.
=. An em(lo!er conducts business /ithout the re&uired le*al &ualifications.
>. An em(lo!er terminates a contract in violation of the la/.
Em(lo!ees
Em(lo!ees that terminate a contract in violation of the La/ or breach an! confidentialit!
obli*ations or com(etition restrictions sti(ulated in the contract can be held liable for dama*es
sustained b! the other (art!.
#oint Liabilit! for Em(lo!ers<Em(lo!ees and<or Third ,arties
300
2. If an em(lo!er hires an em(lo!ee /hose contract /ith another em(lo!er has not !et been
terminated or ended' causin* the other em(lo!er to suffer a loss' it shall be -ointl! and severall!
liable /ith the em(lo!ee for dama*es.
1. A staffin* firm that violates the la/ ma! be sub-ect to fines and have their business license
revoked. If the em(lo!eeJsK the! (laced suffers harm as a result' both the staffin* firm and
com(an! that acce(ted the em(lo!ee shall be -ointl! and severall! liable for dama*es.
3. A contractor hirin* em(lo!ees in violation of the la/ /ho suffer harm /ill result in -oint liabilit!
for the or*ani0ation that em(lo!ed such contractor and the contractor.
B. ;e*li*ence on the (art of a labor administration authorit! to act in accordance /ith the la/ /ill
also result in them bearin* liabilit!.
,enalties for an Em(lo!erAs ;on-Com(liance
?ithin the ne/ la/ there are financial (enalties for non-com(liance /ith the terms of
em(lo!er<em(lo!ee contract *uidelines' /hich include failure to conclude a /ritten contract /ithin
the 30 da! (eriod' settin* an ille*al (robationar! (eriod' ille*all! retainin* an em(lo!eeAs resident
ID card or other (a(ers' etc. An em(lo!er that fails to (a! an em(lo!ee his salar!' (a!s belo/ the
local minimum /a*e rate' fails to (a! overtime or terminates a contract /ithout (a!in* the
em(lo!ee severance or /ithout cause /ill also (a! var!in* dama*es as sti(ulated in the ne/ la/.
&uary
The ne/ em(lo!ment contract la/ /ill enhance em(lo!eesA ri*hts in strivin* for better
em(lo!ment terms and /orkin* conditions. Therefore' all com(anies' includin* forei*n com(anies
/ho have invested in local subsidiar! or re(resentative offices in the ,@C should re-e"amine their
local and master directorsR and officersR liabilit! (olicies' as /ell as an! em(lo!erAs liabilit!
e"(osures and relevant local or *lobal (olicies. Althou*h the level of com(liance and the de*ree to
/hich the ne/ la/ /ill be enforced is not !et kno/n' it is im(ortant to be full! (re(ared for a 2
#anuar! 1005' not onl! b! revie/in* all em(lo!ment contracts' em(lo!ee handbooks and internal
*uidelines' but also b! takin* stock of an! subcontractin* a*reements or the use of staffin*
com(anies and their (olicies.
Fuestions
Eo/ can the establishment of ChinaAs ne/ em(lo!ment contract benefit other countries that are
lookin* to institute a ne/ la/ like this oneC Eo/ /ould this affect countries tradin* /ith China
toda!C Eo/ /ill this ne/ em(lo!ment contract affect com(anies doin* business in ChinaC
?hat is le*al riskC
Le*al risk is the risk arisin* from failure to com(l! /ith statutor! or re*ulator! obli*ations
Jhtt(:<<///.ffiec.*ovK.
+enerall!' all la/s in the host countr! /ill a((l! to an entre(reneurAs local business o(erations. E"am(les
include filin* (rocedures' em(lo!ment la/' environmental la/' ta" la/' and o/nershi( re&uirements. The ?orld
6ank has a rather e"tensive countr! business la/ librar! /hich can be accessed from their /ebsite. This can be
hel(ful in the initial (hases of considerin* the le*al ramifications of direct investment in a *iven countr!.
an! countries limit forei*n o/nershi( of assets and le*all! force forei*n com(anies into a -oint venture /ith a
local (artner in order to do business there. ,oland' for e"am(le' limits forei*n o/nershi( of farmland and /ill
continue to do so for another decade under a*reements /ith the EI JDadak' 100BK.
It is im(ortant to remember that /hile doin* business outside of the home countr! certain home countr! la/s
/ill still a((l!. A((licable la/s differ from countr! to countr!' but one common e"tension is em(lo!ment la/.
The e"tent of -urisdiction be!ond national boundaries varies /idel!. In anti-trust for instance' the Inited $tates
la/ covers onl! situations /here the violation affects the I$' Jmeanin* that it does not matter /here the act causin*
the violation took (laceK' /hile the EI considers onl! /here the antitrust offense /as im(lemented J$haffer et al.'
100=' (*s >=9->>BK.
In order to minimi0e e"(osure to le*al risks arisin* from confusion and e"cess cost' a com(an! should seek le*al
advice if (ossible. In makin* such arran*ements' /ritten contracts should be used. This can minimi0e confusion in
case of liti*ation.
,olitical and le*al risk for the small business entre(reneur
?hile s. $hahira ma! be accustomed to a certain set of rules and re*ulations in her home countr! of ,akistan'
she must antici(ate ne/ and other la/s /hen e"(lorin* the (ossibilit! of e"(andin* internationall!. ?hile s.
$hahira and her small business of runnin* a se/in* com(an! faces different (olitical and le*al risk than those of a
lar*er com(an!' she is still liable and must understand the la/s and re*ulations that she ma! face in an! countr!.
Flobal mar$etin: assessin potential mar$ets o&erseas
Case: To!ota has a vehicle for ever! market
Each market has uni&ue cultural characteristics and conte"tual circumstances that must be considered. %or
e"am(le' in the Inited $tates roads tend to be /ideG hi*h/a!s can accommodate a broad arra! of vehicles
/ith a hi*h number of lanes' and (eo(le demand a mi" of cars based on their needs. Conversel!' in
Euro(e roads tend to be narro/' and the market demands smaller' more fuel-efficient vehicles. Therefore'
/hile a To!ota B@unner tends to sell e"tremel! /ell in the Inited $tates' it /ould not be a ver! (o(ular
model in Euro(e for these ver! reasons. As a result' To!ota invests billions of dollars ever! !ear into
market research and market develo(ment to make sure the! meet the needs and /ants of its customers' in
each s(ecific countr! that the! sell their vehicles in. This has led to To!otaAs success in the I$ automotive
market' as our earlier case su**ested. ?ith their f2 sellin* sedan' To!ota Camr!' a /ide arra! of h!brid
models' trucks and $IMs to meet the Inited $tates constantl!-chan*in* e"(ectations' To!ota is' ar*uabl!'
the stron*est (la!er in the automotive industr!.
?hat is *lobal marketin*C
:ne of the inevitable &uestions that surfaces concernin* *lobal marketin* is: ho/ does *lobal marketin* trul!
differ from domestic marketin*' if at allC There has historicall! been much discussion over commonalities and
301
differences bet/een *lobal and domestic marketin*' but the three most common (oints of vie/ u(on /hich
scholars a*ree are the follo/in*. %irst' all marketin* is about the formulation and im(lementation of the basic
(olicies kno/n as the B ,As: ,roduct' ,rice' ,lace' and ,romotion. $econd' international marketin*' unlike domestic
marketin*' is understood to be carried out 7across borders8. Third' international marketin* is not s!non!mous /ith
international trade J,err!' 2DD0K. ,erha(s the best /a! to distin*uish bet/een the t/o is sim(l! to focus on the
te"tbook definition of international marketin*. :ne com(rehensive definition states that' 7international marketin*
means identif!in* needs and /ants of customers in different markets and cultures' (rovidin* (roducts' services'
technolo*ies' and ideas to *ive the firm a com(etitive marketin* advanta*e' communicatin* information about
these (roducts and services and distributin* and e"chan*in* them internationall! throu*h one or a combination of
forei*n market entr! modes J6radle!' 100=K8.
The B ,A$ of the arketin* i" J;et6A' 1005K
E"hibit =B: he B ,A$: ,roduct' ,rice' ,lace and
,romotion are as(ects of the marketin* mi" that are
*enerall! controllable
As the follo/in* table demonstrates' man! decisions affect the marketin* mi" J;et6A' 1005K:
Table 2B: All of these issues must be reconsidered in each market. The marketin* mi" /ill a((ro(riatel! var! as
different circumstances dictate.
,roduct Decisions
6rand ;ame
%unctionalit!
$t!lin*
Fualit!
$afet!
,rice Decisions
,ricin* strate*! J(rice skimmin*' (rice (enetration'
etc.K
Molume discountin* and /holesale (ricin*
$easonal (ricin*
6undlin*
,acka*in*
@e(airs and $u((ort
?arrant!
Accessories and services
,rice fle"ibilit!
,rice discrimination
,lace Decisions
Distribution Channels
arket covera*e Jinclusive' selective' or e"clusive
distributionK
Inventor! ana*ement
?arehousin*
:rder (rocessin*
@everse lo*istics
,romotions Decisions
,ush' ,ull $trate*ies
Advertisin*
,ersonal $ellin*
$ales ,romotions
,ublic @elations and ,ublicit!
Im(ortance of culture on markets
6ecause international marketin* is closel! correlated to the cultures in /hich a firm /ishes to sell its (roduct'
culture itself must be anal!0ed to understand the best /a! to inte*rate into both e"istin* and emer*in* forei*n
markets. There are five essential areas /ithin /hich culture must be continuall! studied in order to achieve success
in dealin* /ith culture as it affects international marketin*.
These are JTian' 1005K:
culture im(acts on marketin* Jinternational versus domesticK
cross-cultural dimensions of marketin* research
cross-cultural as(ects of marketin* mi" J(roducts' (rice' (romotion' and (laceK
cross-cultural marketin* education and (rofessional trainin*
and cross-cultural (ractice in electronic marketin*
9ross-ultural mar!eting ours when a onsumer<s ulture differs from that of the mar!eter<s own ulture0
Consumer behavior diver*es across countr! lines /ith increased /ealth' *lobali0ation' and technolo*!G it does
not conver*e JDe ooi-' 100=K. This sim(le fact (roves the im(ortance of culture kno/led*e in cross-cultural
marketin* endeavors. In fact' the im(ortance of cross-cultural stud! has ins(ired a definition se(arate from that of
30B
international marketin*. Cross-cultural marketin* is defined as the strate*ic (rocess of marketin* amon*
consumers /hose culture differs from that of the marketerRs o/n culture at least in one of the fundamental cultural
as(ects' such as lan*ua*e' reli*ion' social norms and values' education' and the livin* st!le JTian' 1005K.
. standardi(ed mar!eting model utili(es the same funtions in all mar!ets0 9on,ersely, a ustomi(ed
mar!eting strategy adheres to the needs and wants of a partiular target mar!et0
+lobal brandin*Ycreation of a marketin* strate*!
An im(ortant decision that international marketers must make is /hether to utili0e standardi0ed marketin*'
treatin* all markets in the same manner' or customi0ed marketin*' adherin* to local customs and traditions for
*reater effectiveness. This is an im(ortant distinction /hen anal!0in* the creation' (erce(tion' and trends in *lobal
brandin*. In most countries and cultures' marketers do not com(ete /ith individual (roducts' but rather /ith
com(etin* brands markets. an! /riters have reasoned that a standardi0ed a((roach to international markets is
the most desirable strate*!. The main ar*uments include that sales /ill increase /hen a com(an! can market a
consistent (roduct ima*e across different *eo*ra(hical markets' and that cost can be reduced throu*h the
formulation and im(lementation of a sin*le standardi0ed marketin* (lan. $till others ar*ue that because fe/
markets are com(arable across countr! lines' it is necessar! to ada(t the marketin* mi" to ensure that sufficient
customi0ation e"ists to satisf! consumer needs in each market. Additionall!' not all com(anies are able to ado(t a
standardi0ed strate*! as its a((ro(riateness varies from industr! to industr!. :ne must remember that even /ithin
markets there is *reat diversit! of behavior and taste. In the face of intensel! increasin* com(etition and
*lobali0ation' studies sho/ that (eo(le increasin*l! (refer brands /ith roots in their national or re*ional tradition.
This /ould indicate that most firms should lean to/ards marketin* customi0ation in order to satisf! the
increasin*l! nationalistic consum(tion tendencies of their consumers J6radle!' 100=K.
+lobal marketin* and the small business entre(reneur
?hile marketin* the (roducts of the hi*hl! successful se/in* com(an! that s. $hahira has started in ,akistan
ma! not be somethin* that she is lookin* to do toda!' it is critical for her' and small businesses like the one she has
set u(' to understand /hat it /ould take to market to a com(letel! different set of clients' in a ne/ countr!.
Com(anies like To!ota and Coca-Cola have created a dominant brand across the /orld /ith their *lobal
brandin* and (ositionin* strate*ies' and as a result have sustained tremendous financial benefits from doin* so.
Flobal finance: initial considerations
As the *lobal econom! has become more inte*rated' ever! com(an! and individual is affected b! the
develo(ments of the markets and the economies of countries other than their o/n. Entre(reneurs /illin* to venture
into the *lobal financial market(lace ma! find lo/er-cost financin* alternatives than are available in their home
countr!. The! ma! also /ant to obtain financin* in the local markets the! choose to serve. As a result' /ith constant
economic chan*es' and fluctuations in the market(lace' alon* /ith trade barriers bein* lo/ered around the /orld'
the entre(reneurs of tomorro/ cannot limit their finance kno/led*e to -ust their home countr!' but can be o(en to
lookin* at alternative sources to fund their business o(erations. Entre(reneurs /ill find that understandin* the
functionin* of the *lobal financial market(lace is a ke! element of their kno/led*e and skill base' and a ke! as(ect
of furtherin* their business.
International currenc! market
E/hange rates
The (rice of one countr!As currenc! in units of another countr!As currenc! is kno/n as a forei*n currenc!
e"chan*e rate. E"chan*e rates can be &uoted in t/o /a!s. :ne /a!' kno/n as a direct &uote' is to state the number
of domestic units of currenc! (er one unit of forei*n currenc!. If an e"chan*e rate is an indirect &uote' the e"chan*e
rate is stated as the number of forei*n units (er one unit of domestic currenc! J6eenhakker' 1002K.
%or a I$ com(an! tradin* I$ dollars
JVK for $/iss %rancs JCE%K
Direct Fuote V0.9=<C
E%
Indirect Fuote CE%2.1=
<V
E"hibit ==: Indirect &uote e"am(le
%orei*n e"chan*e market
The forei*n e"chan*e J%ore"K market is the mechanism' /hich facilitates the (urchase and the sale of forei*n
currencies. The %ore" is a financial market /here the (artici(ants e"chan*e one monetar! unit for another
currenc!. The market o(erates continuousl!' 1B hours a da!' because a financial center is al/a!s o(en some/here
in the /orld. The interconnection of the markets makes continuous tradin* (ossible JCarrada-6ravo' 1003K.
The forei*n e"chan*e market is *enerall! divided into five basic currenc! markets based on (ricin* (rocedures
rulin* the e"chan*e' the time to maturit!' the de*ree of freedom available' the convertibilit! of currencies' and ho/
the currencies are &uoted JCarrada-6ravo' 1003K.
In addition' the forei*n e"chan*e market is one of the most traded and li&uid instruments in the financial /orld'
and serves as a barometer of broader financial market conditions and risk a((etite.
Introduction to currenc! risk
Currency ri$) is the (otential conse&uence from an adverse movement in forei*n e"chan*e rates JCo!le'
1000K. :r*ani0ations are e"(osed to currenc! risk /hen involved' directl! or indirectl!' in international trade and
finance. Currenc! risk arises because e"chan*e rates are volatile in the short and the lon*-term and the future
movements of e"chan*e rates cannot be (redicted. Com(anies /ill as a result suffer losses due to adverse e"chan*e
rate movements /hen e"(osed to forei*n currencies JCo!le' 1000K.
Eedging is the term used to describe the actions that reduce or eliminate an e"(osure to risk JCo!le' 1000K.
Common /a!s of hed*in* currenc! risk involve:
transferrin* the risk to !our tradin* (artner b! (lacin* the transaction in !our domestic currenc!
structurall! hed*in* !our risk b! off settin* income a*ainst e"(enditure in the same currenc!
(urchasin* derivatives in the forei*n e"chan*e market JCo!le' 1000K
30>
Introduction to derivatives
A financial derivative is a financial instrument /here the (rice is derived from the value of an underl!in* asset
often used to mana*e risk e"(osure. There are three classes of derivatives.
%utures: A futures contract is a 7commitment to e"chan*e a s(ecified amount of one asset for a s(ecified amount
of another asset at a s(ecified time in the future8 J6utler' 1003K.
:(tions: An o(tions contract 7*ives the o(tion holder the ri*ht to bu! or sell an underl!in* asset at a s(ecified
(rice and on a s(ecified date8 J6utler' 1003K.
$/a(s: A s/a( is an 7a*reement to e"chan*e t/o liabilities Jor assetsK and' after a (rearran*ed len*th of time' to
re-e"chan*e the liabilities Jor assetsK8 J6utler' 1003K.
Finanial deri,ati,es are a ,ery omple/ system of agreements0 2t is wise to onsult a ban!ing professional for
ad,ie on how to implement0
International accountin* standards board
The International Accountin* $tandards Committee JIA$CK %oundation' formed in arch 1002' is the (arent
bod! of the International Accountin* $tandards 6oard JIA$6K. The IA$6' formed on A(ril 2' 1002' has assumed
accountin* standard-settin* res(onsibilities from its (redecessor bod!' the IA$C JInternational Accountin*
$tandard 6oards: About Is' n.d.K.
The ob-ectives of the IA$6 are:
To develo(' in the (ublic interest' a sin*le set of hi*h &ualit!' understandable and enforceable *lobal
accountin* standards
To hel( (artici(ants in the /orldAs ca(ital markets and other users make economic decisions b! havin*
access to hi*h &ualit!' trans(arent' and com(arable information
To (romote the use and vi*orous a((lication of those standards
To brin* about conver*ence of national accountin* standards and international accountin* standards to
hi*h &ualit! solutions JEusse!' 100=K.
E"hibit =>: The /a! the IA$6 functions
J///.iasb.or*K
E,en though the 2.+B standards are not enfored internationally at this time, the standards are ?ui!ly being
proessed0 1herefore, a ompany loo!ing to go international should abide by 2.+B standards0
+lobal finance and the small business entre(reneur
?ith the A*a Hhan @ural $u((ort ,ro*ramme JAH@$,K micro-loan' s. $hahira has be*un to venture into the
*lobal financial market(lace. ?hile the fundin* from the loan /as sufficient for s. $hahiraAs small business at the
time' u(on e"(ansion' she /ill re&uire additional sources of ca(ital. Inderstandin* the home countr!As financial
s!stem' and the alternative fundin* sources available abroad' is a ke! element of furtherin* her se/in* com(an!.
*rani9ational structure and human resources manaement
:ne of the fundamental challen*es facin* com(anies of all si0es is determinin* ho/ to or*ani0e and staff their
o(erations. This task becomes even more com(le" /hen a com(an! decides to do business across national borders.
A small business o/ner ma! start out as the onl! em(lo!ee in his or her com(an!. In this case or*ani0ation and
staffin* sim(l! involves the efficient allocation of the o/nerAs time and attention to the various tasks associated
/ith the business. As the com(an! *ro/s' more em(lo!ees /ill (robabl! be hired. ?hen this occurs' it is useful to
e"(licitl! look at ho/ tasks can be allocated across em(lo!ees in a s!stematic /a!. As the com(an! *ro/s still
lar*er' it is often useful to be*in or*ani0in* the com(an! into de(artments.
In man! cases' a com(an!As earl! moves overseas involve reactin* to an a((arentl! random or une"(ected
overseas business o((ortunit!. At first' such business ma! be conducted an!/here in the or*ani0ation on an ad hoc
basis. As a com(an! e"tends its o(erations overseas' it takes on additional com(le"it! as decisions have to be made
/hich address *lobal and local (roduct desi*n' local res(onsiveness to individual markets' cross-border financin*'
etc. As the international side of the business *ro/s' man! com(anies conclude that a reor*ani0ation of some t!(e
can better handle the current international business demands' and better (osition the com(an! to take full
advanta*e of international o((ortunities as the! arise. In the follo/in* section' several common international
or*ani0ation structures are briefl! described.
305
International division
,erha(s the sim(lest start for man! or*ani0ations is to ado(t /hat is kno/n as an international division. ?ith
the addition of an international division' the domestic or*ani0ation ma! remain relativel! unchan*ed /hile an
additional side structure is added. This additional structure Jin collaboration /ith the domestic structureK takes on
the res(onsibilit! for virtuall! all international business. This structure assumes that there are skills associated /ith
doin* business overseas that /ill transcend the t!(ical business lines. arket assessments' com(liance /ith
e"(ort<im(ort re*ulations' arran*in* shi((in*' identification of local re(resentatives' establishment of dedicated
sales offices' (roduction facilities' etc. are all e"am(les of tasks often assi*ned to the international division.
.d,antages: The international division is effective in consolidatin* international activit! under one area of
res(onsibilit!. $uch a division develo(s international e"(ertise that can serve all areas of the or*ani0ation. This
eliminates the need for ever! (art of the or*ani0ation to master the ins and outs of doin* business overseas Jthis can
sometimes be &uite com(le"K.
#isad,antages: :n the other hand' the e"istence of an international division encoura*es the or*ani0ation to
a((roach their business in an artificiall! dichotomous manner. ,art of the business or*ani0ation focuses (rimaril!
on the home countr! market' /hile the international division serves 7the rest of the /orld8. In most or*ani0ations
such a structure lends itself to a continuin* (reoccu(ation /ith the home countr! market.
As a com(an! becomes more serious about overseas business' it often finds it useful to ado(t a more
so(histicated *lobal structure. %our e"am(les of such or*ani0ations are included belo/.
+lobal functional structure
A *lobal functional structure is often ado(ted b! com(anies /ith a ver! limited (roduct sco(e. A CE: /ill
oversee a number of business functions that have been identified as critical to business o(erations. 6ecause the
(roduct mi" is sin*ular or limited' the CE: can coordinate the /ork of the functions and brin* the resources of each
to bear on the (roduct line. In this case' the CE: serves as the common denominator bet/een the functions.
.d,antages: In man! or*ani0ations' the (rimar! sources of e"(ertise are functionall! based. Therefore'
economies of scale can be achieved b! *rou(in* these resources b! function. In the case of human resources' for
instance' a central human resources function can serve as a consultant to all (arts of the or*ani0ation on issues such
as (a! and (erformance evaluation. This eliminates the redundanc! occurrin* /hen multi(le (arts of the
or*ani0ation attem(t to develo( such (ro*rams on their o/n. A functional or*ani0ation also enables the
or*ani0ation to standardi0e (olicies' (ractices and (rocedures that can be carried out throu*hout the or*ani0ation.
#isad,antages: The (rimar! focus on business functional activit!' often distracts or*ani0ations from s(ecific
(roduct re&uirements' customer needs' and *eo*ra(hic idios!ncrasies. ?ith the to( of the or*ani0ation servin* as
common denominator and arbiter bet/een the functions' strate*ies ma! not reflect realities on the *round as
decisions are made /ithout the benefit of close interaction /ith customers and dee( understandin* of local
circumstances.
E"hibit =9: A *lobal structure
,roduct structure
A *lobal (roduct structure is often chosen in com(anies /ith an arra! of diverse (roduct lines. Each (roduct line
is assi*ned to its o/n or*ani0ation unit so that decision-makin* is focused on the (roduct characteristic and the
customers /ho /ill be tar*eted. In man! cases' the (roduct unit /ill have its o/n functional or*ani0ationYin
essence' o(eratin* as a stand alone business in the conte"t of the lar*er or*ani0ation. In man! cases' a (roduct unit
/ill be mana*ed /ith full (rofit and loss res(onsibilit!.
.d,antages: The main advanta*e of a (roduct structure is that it focuses attention and resources to/ard a sin*le
(roduct and the customers to/ard /hich that (roduct is tar*eted. Decisions are o(timi0ed for the success of the
(roduct and distractions are minimi0ed.
#isad,antages: @edundancies often e"ist across (roduct or*ani0ations as functional res(onsibilities are
du(licated under each (roduct or*ani0ation. Economies of scale and sco(e are more difficult to achieve as this
or*ani0ation structure encoura*es less coo(eration and coordination across the (roduct units.
E"hibit =5: A (roduct structure
320
Area<*eo*ra(hic structure:
An area structure is often chosen b! com(anies /ho /ant to em(hasi0e *eo*ra(hicall! s(ecific strate*ies and
focus decision-makin* on local needs. :r*ani0ations ma! be divided u( into re*ional and countr! structures /here
countr! mana*ers o(erate rather autonomous businesses su((orted b! an arra! of local functions. In this case' the
countr! or*ani0ation often o(erates as a fairl! self-contained business /ith substantial local authorit! as /ell as
(rofit and loss res(onsibilit!.
.d,antages: The countr! or*ani0ation is ca(able of sensin* and understandin* local conditions and is able to
formulate strate*ies /hich effectivel! meet the needs of local stakeholders. ,olicies in areas such as human
resource mana*ement can be tailored to meet the needs and e"(ectations of local em(lo!ees' (roduct mi" and
desi*n can be o(timi0ed for local conditions' and the or*ani0ation can res(ond more &uickl! to chan*in*
circumstances on the *round.
#isad,antages: The disadvanta*es of the area structure are similar to those of the (roduct structure. Economies
of scale /ill be harder to achieve as different localities develo( and im(lement ver! different (roduct strate*ies on
one hand' and invest resources in develo(in* local functional e"(ertise and effort /hich ma! /ell be du(licated
unnecessaril! across *eo*ra(hic units.
E"hibit =D: Area<*eo*ra(hic structure
atri" structure:
A matri" structure is often ado(ted in or*ani0ations that /ould like to o(timi0e decisions across multi(le
or*ani0ation dimensions. In other /ords' the! /ould like to achieve economies of scale /here a((ro(riate' but do
not /ant to lose the abilit! to res(ond to (roduct<customer and *eo*ra(hic needs more effectivel!.
A matri" or*ani0ation simultaneousl! utili0es t/o or more dimensions J(roduct' *eo*ra(hic' function' etc.K to
or*ani0e the com(an!As /ork. In this case' t/o or more dimensions ma! have direct links to the head of the
or*ani0ation Jsee E"hibit B5K and ke! individuals throu*hout the or*ani0ation ma! actuall! re(ort to more than one
dimension. As can be seen in E"hibit B5' the oran*e -uice (roduct mana*er re(orts to the head of the or*ani0ation'
as does the head of the finance function. In this e"am(le' the finance officer in the oran*e -uice (roduct *rou(
re(orts to t/o individuals: the head of finance and the head of the oran*e -uice *rou(. At the same time' a
*eo*ra(hic dimension ma! re&uire that the function and (roduct heads interact as coe&uals /ith an! number of
countr! mana*ers or re*ional heads as /ell.
.d,antages: The matri" allo/s functional efficiencies to be achieved /hile also allo/in* for the mana*ement of
discrete (roduct lines. ,roduct mana*ers remain focused on s(ecific customer and (roduct issues' !et can ta( into
the s(eciali0ed su((ort s!stems offered b! stron* functions. ?here a *eo*ra(hic dimension is included in the
structure' countr! mana*ers or other local (ersonnel can devote their attention to the develo(ment of location
s(ecific strate*ies. Communication and information sharin* ma! be facilitated throu*h the multi(le dimensions.
#isad,antages: The matri" is com(le" and often involves additional coordination costs. Confusion and
ambi*uit! ma! result from multi(le re(ortin* relationshi(s as a sin*le individual ma! receive conflictin* direction
from their various su(ervisors.
Chief E"ecutive
:fficer
Tooth(aste $oa( :ran*e #uice 6atteries
;orth America
$outh America
Euro(e
Asia
E"hibit >0: atri" structure
6e!ond the matri":
Each of the above or*ani0ational choices clearl! offers advanta*es and disadvanta*es.
?hile some t!(e of hierarch! e"ists at the heart of most or*ani0ation desi*ns' man! or*ani0ations are findin*
that the t!(ical (!ramid sha(ed or*ani0ation no lon*er meets their needs. The! are lookin* for o(tions that allo/
*reater fle"ibilit! and res(onsiveness. $uch or*ani0ations ma! le*itimi0e informal relationshi(s bet/een various
or*ani0ational (arts and levels. The! ma! rel! more on teams as coordinatin* mechanisms and the! ma! activel!
encoura*e collaboration and sharin* across business units. $uccessful *lobal or*ani0ations in the 12st centur! /ill
balance hierarchical control J/hich remains critical in most or*ani0ationsK on one hand' /ith less ri*idit!' more
fle"ibilit! and em(hasis on individual em(o/erment on the other.
$taffin* choices in a *loball! far-flun* com(an!
$taffin* choices in a far-flun* *lobal com(an! are more com(le" as /ell. Issues of cost' cultural savv!'
familiarit! /ith local conditions' lan*ua*e skill' famil! issues' and more must all be considered carefull! as staffin*
decisions are made. In addition to man! of the standard human resources challen*es that inevitabl! arise'
determinin* /here em(lo!ees /ill be sourced from re(resents one of the most im(ortant decisions facin*
321
com(anies as the! set u( o(erations abroad. In *eneral' em(lo!ees ma! come from an! of the follo/in* sources:
the head&uarters JhomeK countr!' the host JlocalK countr!' or a third countr! Jneither home' nor hostK. These
choices are outlined briefl! belo/.
Ethnocentric $ta!!ing involves staffin* overseas (ositions /ith home countr! (ersonnel. These 7e"(atriates8
are usuall! assi*ned to fairl! senior or technical (ositions in the overseas or*ani0ation. An e"am(le of this staffin*
choice /ould be /hen a #a(anese com(an! sets u( an office in the Inited $tates and sends a #a(anese e"ecutive
from their head&uarters in Tok!o to staff the ne/ office in Chica*o.
Advanta*es: Eome countr! staff' /hen sent overseas' are familiar /ith the home countr! o(erations and culture.
6ecause of this' the! ma! be able to better communicate /ith head&uarters' access needed resources' and ta( into a
home-countr! net/ork. In addition' the home countr! ma! kno/ these (eo(le /ell from (ast collaboration that can
lead to hi*h levels of trust and confidence bet/een the (arties. %amiliarit! /ith the com(an! often means that these
individuals brin* s(ecial com(an!-s(ecific e"(ertise alon* /ith them' as /ell as technical skills and kno/led*e
related to the com(an!As (roduct offerin*. The! ma! also brin* *eneral technical' or mana*erial skills that ma! be
in short su((l! in the host countr!. Ethnocentric staffin* offers the additional benefit of buildin* a *lobal mindset
amon* the home countr! /orkforce. Those individuals /ho are sent overseas as e"(atriates /ill often return home
/ith a more *lobali0ed (ers(ective.
Disadvanta*es: Eome countr! em(lo!ees are e"(ensive. an! com(anies estimate that sendin* an e"(atriate
overseas costs about 1-= times their annual salar!. This means that sendin* an e"ecutive and their famil! overseas
can cost hundreds of thousands of dollars or more (er !ear. The home countr! em(lo!ee is usuall! less familiar
/ith the local culture and em(lo!ment conditions' and the em(lo!ee and the famil! ma! find it hard to ada(t to the
ne/ local livin* and /orkin* conditions. In fact' accordin* to /idel! cited research' failure of the s(ouse and of the
famil! to ada(t to local cultural differences are t/o of the most fre&uent reasons that an em(lo!ee assi*ned to an
overseas (ost /ill fail to com(lete their assi*nment. Ethnocentric staffin* (ractices are also sometimes critici0ed for
(reventin* talented local em(lo!ees from fillin* the (ositions held b! e"(atriates.
.olycentric $ta!!ing involves hirin* local (ersonnel to fill needed overseas (ositions. %or e"am(le' under this
model' a $outh African com(an! settin* u( an office in 6ra0il /ould hire a 6ra0ilian to fill an o(en (osition.
Advanta*es: A (ol!centric staffin* strate*! is much less e"(ensive than the ethnocentric model. @elocation costs
are usuall! much lo/er and a standard com(ensation (acka*e consistent /ith the local market is usuall! sufficient.
Local em(lo!ees are usuall! more familiar /ith the local culture and lan*ua*e and ma! have access to net/orks and
relationshi(s /ith local stakeholders.
Disadvanta*es: Talent is often short in host countries. Lack of familiarit! /ith the home countr! conditions'
culture and lan*ua*e ma! become a barrier to effective communication /ith the head&uarters staff. Lack of
familiarit! /ith head&uarters o(erations ma! make it difficult for the local staff to access needed resources and
assistance.
-eocentric $ta!!ing involves staffin* a location /ithout re*ard for the em(lo!eesA (lace of ori*in. Com(anies
sim(l! scan their *lobal /orkforce for the best &ualified candidate to fill a (osition. In this model' a Chinese
com(an! mi*ht fill a (osition in their e"ico office /ith an em(lo!ee from the Inited Hin*dom.
Advanta*es: The *eocentric model offers the most em(lo!ment fle"ibilit! and choice to the com(an!. The
com(an! can search the entire *lobal /orkforce to find the most &ualified candidate for a certain (osition.
:((ortunities for cross-cultural develo(ment are e"tended to com(an! em(lo!ees no matter /hich countr! the!
come from. The additional *lobal interaction takin* (lace can foster team/ork across countries and a better cross-
border understandin* of com(an! o(erations. A cadre of *loball! savv! em(lo!ees /ith e"(erience in multi(le
com(an! locations can be a (o/erful asset as the com(an! continues to seek additional overseas o((ortunities.
Disadvanta*es: +eocentric staffin* can be as e"(ensive as ethnocentric staffin* (ractices. Em(lo!ees and
families often have to be relocated across countr! boundaries and lon* distances. +eocentricall! (laced em(lo!ees
ma! be unfamiliar /ith local (ractices.
Regiocentric $ta!!ing involves staffin* /ithin a *lobal re*ion. In this case' a Horean com(an! mi*ht fill a
(osition in Ital! /ith a $(anish em(lo!ee.
Advanta*es: oves are often made over shorter distances as em(lo!ees are relocated. Cultural and lin*uistic
differences ma! be less (ronounced. Em(lo!ees *ain the benefits of cross-cultural e"(erience as the! /ork outside
their home countr!.
Disadvanta*es: Costs of relocation often remain fairl! hi*h. ?hile cross-cultural (ers(ective is built' a trul!
*lobal (ers(ective ma! still be lackin*. It is also im(ortant to note that cultural and lan*ua*e differences /ill often
be si*nificant factors even /ithin re*ion.
All of the above models have stren*ths and /eaknesses /hich must be seriousl! considered. In most com(anies
/ith multi(le em(lo!ees in overseas locations a mi"ed strate*! /ill often make the most sense both in terms of
efficienc! and effectiveness. A fe/ select (ositions ma! best be filled /ith either home countr! or third countr!
nationals /hile the vast ma-orit! of em(lo!ment (ositions are usuall! filled b! local em(lo!ees. 6ecause cross-
cultural difference /ill be encountered in almost an! overseas staffin* confi*uration' si*nificant investment in
cross-cultural skills trainin* /ill be e"tremel! valuable.
Trends and challen*es in a *lobal E@ environment
E@ leaders in the 12st centur! /ill be challen*ed to address a number of issues to ensure availabilit! of skilled
staff' re*ardless of /hich staffin* o(tion the ;C (ursues. As the *lobal environment continues to develo(' ;Cs
are challen*ed to address the shorta*e in *lobal skills and cross-cultural communication barriers. The successful
;C /ill be able to ada(t to the chan*in* environment b! *lobali0in* their E@ s!stems and function' and
*lobali0in* the /orkforce mindset. These efforts must also be ali*ned /ith business and or*ani0ational ob-ectives
and /ill re&uire E@ (rofessionals to ado(t a ne/ /a! of thinkin* to identif! and im(lement ne/ /a!s of *ettin*
/ork done.
E@ s!stems in the ;C must be ali*ned /ith *lobal business im(eratives both in terms of (a! and (erformance
s!stems. As the number of overseas transfers increases' ;Cs must look to develo( *eneral (olicies and
com(ensation (acka*es rather than ne*otiatin* these on a case-b!-case basis in order to obtain efficienc! and
consistenc! of (rocess. $!stems must also be in (lace for succession (lannin* on a local level as /ell as a *lobal
level. Currentl! man! ;Cs are not o(eratin* an effective e"(atriate (i(eline' either not sendin* the most effective
individuals to host countries or failin* the re(atriate them effectivel!. The trend to/ards increasin* reliance on
32B
inte*rated s!stems should contribute to better access across borders and re*ions to better serve e"(atriate
relocation and business decisions.
Another o((ortunit! for ;Cs in re*ards to creatin* a *lobal /orkforce /ill be to standardi0e and revisit
current e"(atriate com(ensation (acka*es to include soft benefits. Intil no/' individuals have often not been
/illin* to take (ositions abroad because the incentives are solel! financial. Eistoricall!' s!stems have not been in
(lace to re(atriate smoothl! the individual and famil! follo/in* com(letion of their overseas assi*nment. an!
em(lo!ees find themselves out of their home E@ s!stem' and therefore are not made a/are of (ossibl! enticin* -ob
o((ortunities at home. This can be im(roved *reatl! sim(l! b! creatin* ali*nment and communication bet/een the
home and international E@ de(artment.
Corporate %ocial 0esponsibility and sustainable de&elopment in the lobal en&ironment
The to(ics surroundin* Cor(orate $ocial @es(onsibilit! JC$@K have become more com(le" due to the
*lobali0ation of the econom! and the issues that arise from com(anies com(etin* in international markets.
Com(anies are manufacturin* *oods' hirin* local labor' utili0in* ra/ materials and resources e"tracted from the
environment in international locations.
This hei*htened a/areness of C$@ and sustainable develo(ment has been endorsed b! an increased
res(onsiveness to ethical' social' environmental and other *lobal issues. In recent !ears' com(anies have been the
center of scandals re*ardin* accountin* (ractices' dama*es to the environment' inade&uate treatment of em(lo!ees
and /orkers and the effect of its (roducts on the societ!.
%or e"am(le' in #anuar! 100D' the Chairman of one of IndiaAs lar*est technolo*! com(anies' $at!am Com(uter
$ervices Ltd.' said he fabricated ke! financial results' includin* a fictitious cash balance of more than I$D 2 billion
J$heth' 100DK. Cases like this' and others such as Enron Cor(oration and ?orldcom in the Inited $tates' (rom(t
concerns about cor(orate *overnance and accountin* standards *loball!. %urther' cor(orate fraud (uts into
&uestion one of the fundamental reasons of /h! shareholders invest in (ublic com(anies' the need for
trans(arenc!.
As a result' com(anies are res(ondin* to increased (ublic e"(ectations of res(onsibilit! and incor(oratin* the
conce(t of C$@ into their o(eratin* (lans and strate*!.
E"hibit >2: Cor(orate $ocial @es(onsibilit! JC$@K is a conce(t /hereb!
com(anies inte*rate ethical' social' environmental' and other *lobal issues into
their business o(erations and in their interaction /ith their stakeholders
Jem(lo!ees' customers' shareholders' investors' local communities' *overnmentK'
all on a voluntar! basis
+oure: industr!(la!er.com
Cor(orate $ocial @es(onsibilit! and sustainable develo(ment defined
Traditionall!' C$@ has been defined as the cor(orationAs res(onsibilit! to com(l! /ith the la/s and
res(onsibilities to its shareholders. This conce(t of C$@ has evolved to include the or*ani0ationAs res(onsibilit! for
its im(act on different stakeholders such as em(lo!ees' customers' investors' local communities' and *overnment.
A broader conce(t is that C$@ involves the commitment on the (art of the com(an! to ado(t behavior that /ill
result in the im(rovement of the &ualit! of life of its stakeholders /hile contributin* to the economic develo(ment
of its business. To im(rove the /elfare of its communit!' the com(an! ma! take on broad environmental and social
endeavors.
The ?orld 6usiness Council for $ustainable Develo(ment defines C$@ as 7the continuin* commitment b!
business to behave ethicall! and contribute to economic develo(ment /hile im(rovin* the &ualit! of life of the
/orkforce and their families as /ell as of the local communit! and societ! at lar*e8 J/bcsd.or*K. This definition
outlines the role of enter(rises as active (artners in the communities in /hich the! o(erate' rather than the more
traditional vie/ of enter(rise as a se(arate' self-re*ulatin*' (rofit-makin* entit!.
C$@ ,ositives and ;e*atives
ilton %riedman' in his book' 9apitalism and Freedom' ar*ues that:
32>
1here is one and only one soial responsibility of business"to use its resoures and engage in ati,ities
designed to inrease its profits so long as it stays within the rules of the game, whih is to say, engages in
open and free ompetition without deeption or fraud0
$tockholder /ealth ma"imi0ation commands that cor(orate mana*ement should a**ressivel! seek to ma"imi0e
stockholder returns b! /orkin* to increase share (rices and to continuall! *ro/ the dividends (aid to shareholders
JC0inkota' 100=K.
Conversel!' accordin* to ,rofessor Archie 6. Carroll:
9orporate soial responsibility in,ol,es the ondut of a business so that it is eonomially profitable, law
abiding, ethial and soially supporti,e0 1o be soially responsible then means that profitability and
obediene to the law are foremost onditions when disussing the firm<s ethis and the e/tent to whih it
supports the soiety in whih it e/ists with ontributions of money, time and talent 39arroll,$J%P80
CarrollAs C$@ model contains four cate*ories of cor(orate res(onsibilit! or*ani0ed from most to least im(ortant.
Accordin* to Carroll' the 7histor! of business su**ests an earl! em(hasis on the economic and then le*al as(ects
and a later concern for the ethical and discretionar! as(ects8 JCarroll' 2D9DK. Economic obli*ations are' therefore'
seen to be moderated b! ethical res(onsibilities or social e"(ectations and norms. Discretionar! res(onsibilities *o
be!ond ethical res(onsibilities and include (hilanthro(ic measures. In 2DD2' Carroll (resented his C$@ model as a
(!ramid' and su**ested that althou*h the com(onents are not mutuall! e"clusive' it 7hel(s the mana*er to see that
the different t!(es of obli*ations are in constant tension /ith one another8 JCarroll' 2D9DK.
E"hibit >1: CarrollAs C$@ ,!ramid: A three-dimensional conce(tual model
of cor(orate social (erformance.
There is no indication that C$@ Jcor(orate /ealth ma"imi0ationK and (rofitabilit! Jstockholder /ealth
ma"imi0ationK are mutuall! e"clusive JC0inkota' 100=K. Cor(orate /ealth ma"imi0ation su**ests that com(anies
consider and balance short-term *oals a*ainst lon*-term societal *oals of continued em(lo!ment' communit!
citi0enshi( and (ublic /elfare needs JC0inkota' 100=K. The successful multinational enter(rises of the comin*
centur! /ill be those that find the uni&ue balance bet/een financial ob-ectives and C$@.
C$@ and $ustained Develo(ment initiatives
There are a number of (ro-ects and initiatives that are sha(in* the *oals and (rinci(les of cor(orate social
res(onsibilit! and sustainable develo(ment' such as:
OE9# 3Organi(ation for Eonomi 9ooperation and #e,elopment8 is an international or*ani0ation /ith
3= industriali0ed countries as (artici(ants' /hich account for 9> (er cent of the /orld trade. The themes
that this or*ani0ation addresses include environmental' human ri*hts' labor issues' and information
disclosure.
G6 6orms on the *esponsibilities of 1ransnational 9orporations and Other Business Enterprises with
*egard to Auman *ights. The com(letion of these norms /as (ossible throu*h discussions /ith unions'
business' and ;+:s. The norms include clarification of cor(orate social res(onsibilities of com(anies in
countries /here the! o(erate' and also refer to human ri*hts in the /ork(lace.
I-O 32nternational -abor Organi(ation8 and its 1ripartite #elaration focuses on the 7social as(ects of the
activities of multinational enter(rises' includin* em(lo!ment creation in the develo(in* countries8
J+overnin* 6od! of International Labor :ffice' 10Bth sessionK. The (rinci(les established b! this
or*ani0ation are ado(ted voluntaril!' and thus its reach is limited since non-com(liance cannot be
sanctioned.
Inited ;ationsR +lobal Com(act /as established in 2DDD b! Inited ;ationsR $ecretar! Hofi Annan as a
voluntar! international initiative. ,artici(ant com(anies are asked to demonstrate their su((ort to ten
different international (rinci(les of human and labor ri*hts' anti-corru(tion and environmental (rotection'
to seek solutions to the challen*es of *lobali0ation and (romote res(onsible cor(orate citi0enshi(. The
initiative has more than 1'=00 business (artici(ants from D0 countries around the /orld.
;yoto Erotool /as a*reed on in 2DD9 to reduce *reenhouse *as emissions b! 1021. A total of 2D>5
countries and the EEC have ratified the (rotocol Jenvroliterac!.or*' 1009K.
C$@ and cor(orate strate*!
A distinction must be made bet/een charit! and C$@. Charit! refers to a com(an!As efforts to donate mone! or
resources to an or*ani0ation or a cause' (romotin* and allo/in* em(lo!ees to volunteer in the communit!' and the
establishment or endorsement of foundations. Conversel!' C$@ is a conce(t that involves a com(an! takin* into
consideration the different stakeholders involved /hen makin* a business decision. The :r*ani0ation for Economic
Coo(eration and Develo(ment identified C$@ to be an inte*ral (art of a com(an!As value s!stem and strate*!
Jintranet.csreuro(e.or*K. %or a com(an! to full! inte*rate C$@' to( mana*ement must inte*rate social
res(onsibilit! into the strate*ic level of the decision-makin* (rocess in order to develo( a frame/ork for economic
decisions made at different levels of the or*ani0ationAs hierarch!.
325
The (roblem that a com(an! /ill encounter if C$@ is not inte*rated into the or*ani0ation strate*! is that
mana*ement and em(lo!ees could b!(ass social res(onsibilit! considerations and C$@ becomes (ersonal ethics
rather than C$@. To ado(t a C$@ strate*! the or*ani0ation needs to take the follo/in* ste(s:
Define C$@ for their (articular business.
Inderstand motivations underl!in* its commitment.
Establish (olicies and *oals to achieve C$@.
Establish measures to monitor their accom(lishments in C$@ Jbsr.or*K.
Case: 6uilt to Last b! #im Collins
Eo/ im(ortant is Cor(orate $ocial @es(onsibilit! JC$@K as a core value for the to( com(anies in the /orldC
In the book Built to -ast' b! #im Collins the results of a si"-!ear research (ro-ect into /hat makes endurin*
*reat com(anies is outlined. Collins listed 25 com(anies identified as 7visionaries8 .A visionar! com(an!
is defined as one that is a leader in its industr!' is /idel! admired b! kno/led*eable business(eo(le' made
an im(rint on the /orld' had multi(le *enerations of CE:As' had multi(le (roduct<service life c!cles' and
/as founded before 2D=0. The list of 25 included com(anies such as %ord' +eneral Electric' #ohnson U
#ohnson' $on!' and ?al-mart.
%rom 2D1> throu*h 2DD0 these com(anies out(erformed the *eneral stock market b! fifteen times.
A ke! attribute of the findin*s is that all of these hi*hl! (rofitable com(anies have sound social values and
C$@ is an im(ortant com(onent of their success. This stud! sho/s the relevance of C$@ and the
im(ortance of stron* core values for a successful or*ani0ation.
$uccessful Im(lementation of C$@ and $ustainable Develo(ment
Tetra ,ak Colombia /orked /ith a small rec!clin* com(an! in Colombia to develo( a technolo*! the! named
Eco(lak. The technolo*! utili0es 200 (er cent of the residuals of tetra (ack carton (acka*es to obtain the material
that can be used in the (roduction of roofs and chi(boards. ?ith this technolo*!' Tetra ,ack has built 1B houses for
lo/-income families to date.
This com(an! did not onl! take into consideration environmental issues in the rec!clin* of /aste from (acka*esG
but it also /orked /ith a local rec!cler to (roduce this technolo*!. Additionall!' this initiative created -obs'
develo(ed kno/led*e in local businesses' and hel(ed families in the communit! /ho (robabl! /ould not have had
access to a home. Each house /as built usin* 2 million (acka*es and consisted of 1 bedrooms' 2 bathroom' 2
kitchen' and a livin* room. The houses /ere also (rovided /ith electricit! and /ater.
Tetra ,ak Colombia is currentl! /orkin* /ith the *overnment to coordinate this effort and is still buildin*
houses that are (eriodicall! a/arded to lo/ income (eo(le of the communit! Jtetra(ak.comK.
C$@' $ustainable Develo(ment' and the %uture of 6usinesses
,eter Drucker' in his article' 1he 6ew Meaning of 9orporate +oial *esponsibility' e"(lained that 7the (ro(er
social res(onsibilit! of business is to tame the dra*on that is to turn a social (roblem into economic o((ortunit!
and economic benefit' into (roductive ca(acit!' into human com(etence' into /ell-(aid -obs' and into /ealth8
J6erkhout'1009K.
As evidenced in the case of Tetra ,ack Colombia' a com(an! /ith C$@ and sustainable develo(ment ali*ned into
its strate*! can be effective in /orkin* /ith its communit! to solve a social (roblem. In this case' Tetra ,ack
Colombia /as able to utili0e /aste that im(acted the environmentG /orked /ith the *overnment to coordinate
efforts to im(rove the /elfare and the &ualit! of life of its communit!G /orked /ith com(anies in the communit! to
develo( kno/led*e and ne/ technolo*iesG and create ne/ -obs and alternative' environmentall! friendl! ne/
sources of material.
Accordin* to the ?orld 6usiness Council for $ustainable Develo(ment' 76! 10=0' 5=g of the /orldAs (o(ulation
of some nine billion (eo(le /ill be in Jless industriali0edK countries. If these (eo(le are not b! then en*a*ed in the
market(lace' business cannot (ros(er and the benefits of a *lobal market /ill not e"ist. Clearl! it is in our mutual
interest to hel( societies shift to a more sustainable (ath.8
Com(anies /ill increasin*l! be called u(on to (artici(ate to address challen*es of social and environmental
roots' both locall! and *loball!. $ustainable develo(ment business o((ortunities e"ist ever!/here and in all forms.
$uch o((ortunities include rec!clin*' reducin*' and reusin*. Im(roved efficiencies' biotechnolo*!' and
miniaturi0ation are other ideas. Innovative leadershi( in life e&ualit! issues is becomin* more and more of a trend
toda!. It is no doubt that uni&ue economic and environmental needs e"ist in industrial and less industriali0ed
countries. C$@ o((ortunities and challen*es include (romotin* *ood labor (ractices and diversit!' su((ortin*
health and education (ro*rams in the communit!. There are fe/ limits in the desi*n and im(lementation of sociall!
res(onsible initiatives for a com(an!.
C$@ and the small business entre(reneur
%or a small business entre(reneur' like s. $hahira' her com(an! (rofits from its relationshi( /ith the
communit!. Its stakeholders' /hich include customers' the local communit!' and the *overnment' are all critical
as(ects to the com(an!As *ro/th in the future. As a result' s. $hahira must consider social and environmental
im(acts of her decisions' in addition to the /a!s that the! /ill make an economic im(act to her business.
Cha(ter summar!
This cha(ter (resents the t!(es of *lobal challen*es that s. $hahiraAs business could be (resented /ith in the
future. As she has done so effectivel! in her home countr!' internationall! s. $hahira has the o((ortunit! to *ro/
her com(an!' and even (resent her model to other small entre(reneurs to inte*rate into their businesses. It is
im(ortant to note ho/ever' that the issues discussed onl! be*in to (resent the common challen*es amon* ne/
entre(reneurs. This is -ust an introductor! start into the -ourne! of e"tendin* a small business into ne/'
international markets.
@eferences
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6artlett' Christo(her A.' and $umantra' +hoshal' and 6irkinsha/' #ulian.8Transnational ana*ement'
%ourth Edition.8 c+ra/ Eill: Ir/in' 100B.
6eenhakker' Eenri. 7The +lobal Econom! and International %inancin*.8
Fuorum 6ooks' 1002.
6erkhout' Tom. 7Cor(orate +ains.8 Alternatives #ournal' 100=.
6ha*/ati' #a*dish' Arvind ,ana*ari!a and T.;. $rinivasan. 7The uddles :ver :utsourcin*.8 #ournal of
Economic ,ers(ectives' %all 100B' D3-22B.
6ha*/ati' #a*dish and T.;. $rinivasan. 7Trade and ,overt! in the ,oor Countries.8 American Economic
@evie/ ,a(ers U ,roceedin*s' a! 1001.
6radle!' %rank. 7International arketin* $trate*!8. ,rentice Eall' Toronto' %ifth Edition. 100=.
76usiness $ocial @es(onsibilit!.8 1009' available at ///.bsr.or*.
Carrada-6ravo' %rancisco. 7ana*in* +lobal %inance in the Di*ital Econom!.8
,rae*er ,ublishers' 1001.
Carroll' Archie. 7 A Three Dimensional Conce(tual odel of Cor(orate $ocial ,erformance.8 Academ! of
ana*ement @evie/' 2D9D.
Carroll' Archie. 7Cor(orate $ocial @es(onsibilit!: ?ill Industr! @es(ond to Cut-6acks in $ocial ,ro*ram
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7Cor(orate $ocial @es(onsibilit!.8 available at ///.industr!(la!er.com.
Co!le' 6rian. 7Eed*in* Currenc! E"(osure.8 +lenlake ,ublishin*' 1000.
Co!le' 6rian. 7Introduction to Currenc! @isk.8 +lenlake ,ublishin*' 1000.
7C$@ Euro(e.8 1009' available at ///.intranet.csreuro(e.or*.
7C$@: eetin* Chan*in* E"(ectations.8 2DDD' available at ///./bcsd.or*.
C0inkota' ichael and offett' ichael and @onkainen' Ilkka. 7International 6usiness.8 Thomson
$outh/estern: 9th Edition' 100=' >1.
C0inkota' ichael' and @ivoli' ,ietra and @onkainen' Ilkka. 7International 6usiness d >th Edition.8 The
Dr!den ,ress' 1001.
Dadak' Casimir. 7The case for forei*n o/nershi( of farmland in ,oland.8 Cato #ournal' Mol. 1B' ;o. 3' %all
100B' available at
htt(:<<///.cato.or*<(ubs<-ournal<c-1Bn3<c-1Bn3->.(df
De ooi-' arieke. 7+lobal arketin* and Advertisin*. Inderstandin* Cultural ,arado"es8. $a*e
,ublication: $econd Edition' 100=.
Dollar' David. 7The ,oor Like +lobali0ation.8 3ale+lobal' #une 13' 1003' available at
htt(:<<!ale*lobal.!ale.edu<article.(rintCidS2D3B.
Edmunds Auto :bserver. 7A Eistoric 3ear for I$ Mehicle $ales.8 1009' available at
htt(:<<///.autoobserver.com<1005<02<1009-a-historic-!ear-for-us-vehicle-sales.html.
7Environmental Literac! Council.8 1009' available at ///.enviroliterac!.or*.
%ederal %inancial Institutions E"amination Council J%%IECK. 7Le*al @isk.8 Available at
htt(:<<///.ffiec.*ov<ffiecinfobase<booklets<@etail<retailT03e.html.
%riedman' ilton. 7The $ocial @es(onsibilit! of 6usiness is to increase its ,rofits.8 ;e/ 3ork Times
a*a0ine' 2D90.
7+lobali0ation: Threat or :((ortunit!C8 International onetar! %und Issue 6rief' A(ril 21' 1000 Jcorrected
#anuar! 1001K' available at htt(:<<///.imf.or*<e"ternal<n(<e"r< ib<1000<0B2100.htm.
Eofstede' +eert. 7Cultures and :r*ani0ations: $oft/are of the ind: Intercultural Coo(eration and Its
Im(ortance for $urvival.8 c+ra/-Eill' 2DD>.
Eusse!' @o*er and :n*' Audra. 7International %inancial @e(ortin* $tandards Desk
@eference.8 #ohn ?ile! U $ons' 100=.
7International Accountin* $tandards 6oard: About Is.8 available at
///.iasb.or*<About]Is<About]Is.htm.
Haut0' +erhard. 7Take !our 6usiness +lobal. Eo/ to Develo( International arkets8. Entre(reneur ,ress'
100B.
La/son' #. 7Deliverin* on $trate*!.8 $(ectra-#ournal of the C' #une 100>.
;et6A:6usiness Hno/led*e Center. 7The arketin* i": The B ,As of arketin*.8 1005' available at
htt(:<<///.netmba.com<marketin*<mi".
,err!' Anne C. ArticleG 7International versus Domestic arketin*: %our Conce(tual ,ers(ectives.8 Euro(ean
#ournal of arketin*' 2DD0' B2-=B.
,rahalad' C.H. and $tuart L. Eart. 7The %ortune at the 6ottom of the ,!ramid.8 $trate*! ] 6usiness' available
at htt(:<<///.strate*!-business.com<(ress<article< 22=25C(*SallUtidS130.
Fureshi' .ia. 7+lobali0ation: ;e/ :((ortunities' Tou*h Challen*es.8 %inance U Develo(ment' arch 2DD>'
30-33.
$chaffer' @ichard' and Earle' 6everle! and A*usti' %iliberto. 7International 6usiness La/ and its
Environment: >th edition.8 ?est Le*al $tudies in 6usiness' Thomson Cor(' 100=.
$heth' ;ira- and @an*e' #ackie and Anand' +eeta. 7Cor(orate $candal $hakes India.8 ?all $treet #ournal' A-
2' 100D.
311
$ti*lit0' #ose(h E. 7+lobali0ation and the +ro/th in Emer*in* arkets and the ;e/ Econom!.8 #ournal of
,olic! odelin* 1=' 1003' =0=-=1B.
Tian' @obert +uan*' ,h. D. ArticleG 7arketin* in the 12st Centur!: Cross-cultural Issues8. 1005' available at
///.stud!overseas.com<america<usaed<crosscultural.htm.
7Tetra ,ak.8 1009' available at ///.tetra(ak.com.
Ili-n' #an and %a!olle' Allaine. 7To/ard Coo(eration bet/een Euro(ean $tart I(s: The (osition of the
%rench' Dutch' and +erman Entre(reneurial and Innovative En*ineer.8 In Terrence 6ro/n U #an Ili-n
JEds.K' Entre(reneurshi(' Innovation' and Culture' 10B-131' 100B. Cheltenham: Ed/ard Ed*ar.
?atkins' Hevin. 7akin* +lobali0ation ?ork for the ,oor.8 %inance U Develo(ment' arch 1001' available
at htt(:<<///.imf.or*<e"ternal<(ubs<ft<fandd<1001<03< /atkins.htm.
?ild' $usan Ellis. . 7?ebsterAs ;e/ ?orld La/ Dictionar!.8 ?ile! ,ublishin*' 100>.
3usuf' $hahid. 7+lobali0ation and the Challen*e for Develo(in* Countries.8 ?orld 6ank Develo(ment
@esearch +rou(' #une 1002' available at
htt(:<<///2./orldbank.or*<economic(olic!<*lobali0ation<documents</(s12>5.(df.
ore references
6utler' Hirt. 7ultinational %inance.8 $outh-?estern Colle*e ,ub' 1003.
ultinational %inance (rovides a concise treatment of the investment and financial decisions facin* the
multinational cor(oration. The te"t (rovides a frame/ork for evaluatin* the o((ortunities' costs and risks
of multinational o(erations so readers can see be!ond the al*ebra and terminolo*! to *eneral (rinci(les.
It is distin*uished b! its lo*ical or*ani0ation' su(erior (eda*o*!' and clear' non-technical /ritin* st!le. It
includes the traditional international finance to(ics of forei*n e"chan*e' currenc! and derivatives
markets' currenc! risk Jtransaction' o(eratin* and translationK mana*ement' countr! risk' ta"ation'
ca(ital structure' cost of ca(ital' and international (ortfolio diversification. It also has uni&ue cha(ters on
multinational treasur! mana*ement' o(tions on real assets' cor(orate *overnance' asset (ricin*' and
international (ortfolio mana*ement.
o!er' Charles' c+uian' #ames' and Hretlo/' ?illiam. 7Contem(orar! %inancial
ana*ement.8 Thomsan $outh/estern:20th Edition' 100>.
%ocusin* on shareholder /ealth ma"imi0ation' international as(ects of financial mana*ement' ethics' and
the im(act of the Internet' this introductor! te"tbook covers: determinants of valueG ca(ital investment
decisionsG the cost of ca(ital' ca(ital structure' and dividend (olic!G and' /orkin* ca(ital mana*ement and
financial forecastin*. To(ics like lease financin*' financin* /ith derivatives' international financial
mana*ement' and cor(orate restructurin* are also discussed. An enclosed CD (rovides access to a
com(anion /eb site. The authors are scholars of mana*ement and investment consultants.
?orld 6ank. 7Doin* 6usiness: Econom! @ankin*s.8 1009. Available at
htt(:<<///.doin*business.or*<Econom!@ankin*s<
The Doin* 6usiness (ro-ect (rovides ob-ective measures of business re*ulations and their enforcement
across 252 economies and selected cities at the subnational and re*ional level.
31B
1:. Fro!th strateies for
start-ups
:ran$lated and reprinted with peri$$ion !ro DowlingLDru -rQndung$anageent
32
Editor$: ichael Do/lin*' Eans #uer*en Drumm JIniversit! of @e*ensber*K
Reviewer: Timoth! 6 %olta J,urdue Iniversit!K
Learnin* ob-ectives
define /hat constitutes a *ro/th firm
describe the (roblems of *ro/th and *ro/th strate*ies
describe *ro/th mistakes and solutions
:vervie/
In this cha(ter /e investi*ate (ossible strate*ies for the *ro/th of start-u( firms. %irst' /e describe *ro/th as a
(henomenon and basic (roblem for such firms. In (articular /e anal!0e the (roblem from the vie/(oint of ne/
start-u(s /hich (lan from the outset to *ro/ lar*er &uickl!. ?e then e"amine different *ro/th strate*ies /hich
firms can (ursue. In the second (art of the cha(ter /e (resent the most /ell-kno/n mistakes made b! start-u(s
durin* the *ro/th (hase' and su**est /a!s to correct orYeven betterYavoid them. To conclude' /e (rovide
recommendations for ho/ entre(reneurs can (rofit best from *ro/th. In this cha(ter /e refer most often to firms
/ith 7(roducts8 but the strate*ies and (itfalls revie/ed here also a((l! to service com(anies.
Definition and models
Definition and statistics
?e start b! definin* /hat /e mean b! *ro/th and *ro/th-oriented firms. Criteria such as *ro/th in the number
of em(lo!ees' or sales *ro/th are *enerall! used b! researchers. The Haufmann Center for Entre(reneurial
Leadershi(' a leadin* institute of entre(reneurial research in the I$A' for e"am(le' defines hi*h-*ro/th firms as
bein* those /ith over 30 (er cent *ro/th in sales or over 10 (er cent *ro/th in the number of em(lo!ees for each of
the three (recedin* !ears. :ther I$ researchers J$ie*el<acillan 2DD3K define stron* *ro/th as over 1= (er cent
*ro/th (er annum over a three-!ear (eriod.
The number of hi*h-*ro/th firms is no doubt limited. Even in the I$A' onl! = (er cent of firms each !ear are
estimated to take on e"tra staff Jcf. $e"ton<6o/man-I(ton 2DD2' (. 21K. Eo/ever' these fast-*ro/in* firms have a
dis(ro(ortionate si*nificance for the increase in the number of -obs. In the I$A' for e"am(le' it is estimated that
onl! 21-2= (er cent of all businesses are res(onsible for 200 (er cent of the em(lo!ment *ro/th in the I$ econom!
32 Translated and re(rinted /ith (ermission from Do/lin*<Drumm +rkndun*smana*ement JEntre(reneurshi(K
$(rin*er Merla*' 1003.
15. 7rowth strategies for start-ups
Jcf. $e"ton<6o/man-I(ton 2DD2' (. 20K. @esearch studies in +erman! have also sho/n that businesses /ith =0 to
1=0 em(lo!ees recorded the *reatest increase in em(lo!ment Jcf. Hkhlhorn<?issdorf 1002K. International
com(arative data can be found in the +lobal Entre(reneurshi( onitor J+EK. 6ased on a surve! of all start-u(s
from 2DDD' the +E (resented the share of hi*h-*ro/th start-u(s Jsee E"hibit >3K. Jcf. $ternber* 1000K.
E"hibit >3: Countries in com(arison: $hare of hi*h-*ro/th start-u(s com(ared to total start-u(s.
J+oure: $ternber* 1000K
+ro/th models
In the field of entre(reneurshi( research' life c!cle models are often used to describe the entre(reneurial
(rocess. These models are also used in research into *ro/th (roblems. Ha0an-ian and Dra0in J2D50K' for e"am(le'
develo(ed a four-(hase *ro/th model' and identified the t!(ical *ro/th (roblems of fast-*ro/in* firms in each
(hase.
,hase 2' Conce(t and develo(ment: %ocus on the invention and develo(ment of a service or (roduct. ain
(roblems:
develo(in* the idea
testin* a (rotot!(e
findin* investment su((ort for the idea
,hase 1' Commerciali0ation: Develo(in* the (roduct for introduction to the market. ain (roblems:
settin* u( the or*ani0ation and (roduction
solvin* technical (roblems
market entr!
,hase 3' +ro/th: The fast-*ro/th (hase is characteri0ed b! its focus on the market.
31>
ain (roblems:
,roducin* lar*er &uantities
+uaranteein* &ualit!
E"(andin* market share
,ersonnel (roblems
,hase B' $tabilit!: In this (hase the focus lies on consolidatin* the market (osition /ith the initial (roduct' and
develo(in* further (roducts.
ain (roblem:
$imultaneousl! mana*in* the market entr! of ne/ (roducts /ithout losin* the com(etitive advanta*es of
older (roducts.
Althou*h life (hase models like these can hel( the decision-makin* (rocess in research and (ractice' the! also
have their (itfalls. In a revie/ of such models' $e"ton and 6o/man<I(ton J2DD2K /arned that economic
(henomena cannot al/a!s be com(ared to biolo*ical (henomena Jlife c!clesK. %irm *ro/th does not al/a!s develo(
throu*h the (hases of such models in a strai*htfor/ard' linear /a!' for e"am(le. ,articularl! in fast-*ro/in*
industries involvin* technolo*ical chan*e' *ro/th is more chaotic than ordered. oreover' /ell-kno/n *ro/th
models /ith a bell-sha(ed' concave' or (lateau structure are onl! useful as ideal reference (atterns for actual
*ro/th (rocesses.
6uildin* on this criticism' Covin and $levin J2DD9K su**est another *ro/th model from the com(le"it!
mana*ement (ers(ective. This model em(hasi0es that *ro/th occurs throu*h certain market factors in combination
/ith internal com(etences and resources. The main (roblem for entre(reneurs is overcomin* the increasin*
or*ani0ational and e"ternal com(le"it!. In the follo/in* sections of this cha(ter /e /ill define (ossible strate*ies
for start-u( *ro/th. $ee E"hibit >B belo/.
E"hibit >B: The 7com(le"it! mana*ement8 *ro/th model
Industrial chan*e is often tri**ered b! technolo*ical chan*es' for /hich there are man! e"am(les: the
substitution of di*ital technolo*ies in a /hole ran*e of analo* (roducts' from office e&ui(ment to tele(hones' and
the Internet as a communication medium. Technolo*ical chan*es like this enable start-u( firms develo(in* ne/
technolo*ies and introducin* them to the market to take over the (ositions of their established com(etitors.
A second catal!st for industrial transformations is chan*e in consumer behavior. The increasin* technolo*ical
com(etence of customers' for e"am(le' has enabled the *ro/th of direct com(uter sellers like Dell. Customers are
(re(ared to *et information about even hi*h-technolo*! (roducts from the Internet and order them online instead
of askin* for advice in a sho(.
Dere*ulation or liberali0ation can also be a reason for industrial transformation and chan*e. In recent !ears
industr! dere*ulation has created o((ortunities for start-u( firms and *ro/th o((ortunities in *eneral in various
industries' such as the air traffic' telecommunications' or financial service sectors.
Chan*es in technolo*ies' customer (references' or re*ulations offer o((ortunities for transformation and
chan*e' but it is u( to entre(reneurs to make use of them. At the be*innin* of a transformation (eriod' firms must
e"(eriment /ith different strate*ies to ta( the *ro/th (otential of the industr! situation. ?e have seen man!
different such e"(eriments /ith Internet technolo*ies in the last fe/ !ears. an! of them came to nothin*' but
several successful business models have survived. ?e have alread! *iven the e"am(le of Dell as a successful direct
(rovider of ,Cs via the Internet. %urther e"am(les are I$ com(an! Auto-6!-TelAs sale of cars to traditional car
dealers via the Internet' or E-6a!' the Internet auctioneers.
A (eriod of e"(erimentation is follo/ed b! a stabili0ation (hase. In the literature' innovation mana*ement
researchers talk about 7dominant desi*ns8. A dominant desi*n stabili0es a (articular industr! structure' and the
(ositions of com(etitors. There is *enerall! a consolidation (hase in the industr!' and failed e"(eriments lead to
315
certain firms disa((earin* from the industr!. Eo/ever' successful business models can mean even faster *ro/th for
the survivors' as the! can take over shares of the market from other com(etitors.
+ro/th throu*h bu!in* out other com(anies
The entre(reneurshi( mana*ement literature *enerall! refers to internal *ro/th. Eo/ever' small' fast-*ro/in*
com(anies also have the (ossibilit! of *ro/in* b! ac&uisition. These o((ortunities have become even more fre&uent
in recent !ears due to the increasin* availabilit! of venture ca(ital' and of ca(ital resources from initial (ublic
offerin*s JI,:sK. An ac&uisition strate*! for a fast-*ro/in* start-u( can brin* man! advanta*es. %irst of all' -ust like
lar*e firms' small firms can tr! to obtain s!ner*ies b! means of com(lementar! resources from bou*ht-out firms.
$ales *ro/th as a result of bu!in* out firms in the same industr! could be rendered more efficient b! combined
resources and the ac&uisition of com(etent em(lo!ees. An ac&uisition strate*! can also be (ursued to enable
*ro/th in ne/ *eo*ra(hic markets. oreover' the o((ortunit! for e"(ansion via ac&uisition is (articularl!
attractive in other countries' /here it can be difficult to establish ne/ businesses.
$uch a strate*! can also offer the o((ortunit! to *o into related diversification' i.e. a start-u( firm can ac&uire
other (roducts or services /hich are related to its ori*inal ones. $!ner*! effects and reduced or shared overheads
can also be *ained here. %irms can also inte*rate verticall! throu*h ac&uisition' i.e. b! bu!in* out su((liers or
customers to (rocess more ste(s in the value chain in-house. Mertical inte*ration can sometimes brin* advanta*es
of cost or differentiation. Cost advanta*es can arise either throu*h bu!in* or buildin* u( chea(er distribution
channels Jfor/ard inte*rationK' or chea( in(uts Jback/ard inte*rationK. Advanta*es of differentiation can be
obtained b! distribution channels or in(uts /hich stand out from those of com(etitors Jcf. ,orter 2DD1K.
If the firm to be taken over is alread! successful' the take-over can (rovide additional financial resources. A
further *ain from an ac&uisition ma! be additional &ualified (ersonnel /ho mi*ht also be able to stren*then the
ori*inal firm. ore customers can be /on' or ac&uired more chea(l! than if the! have to be found usin*
conventional marketin* methods. The ac&uisition of other firms can also be a chance to *ain technolo*ical kno/-
ho/' or even ne/ technolo*ies in the form of (atents.
+ro/th throu*h coo(eration
A coo(eration strate*! strikes a balance bet/een internal *ro/th and *ro/th from the ac&uisition of other
com(anies. $everal studies in the I$A have (roved that fast-*ro/in* start-u(s sometimes use coo(eration /ith
other small firms' and sometimes /ith lar*e' established firms.
This coo(eration is of various t!(es. Licensin* is a t!(ical strate*! in the biotech industr!' for e"am(le. $mall
biotech start-u(s *enerall! do not have the necessar! com(lementar! resources Jcf. Teece 2D5>K to carr! ne/ dru*s
throu*h all the test (hases and then to market them. $uch firms often sell licenses to established (harmaceutical
firms Jthe dan*er of this strate*! /ill be dealt /ith 7Inade&uate or incorrect marketin*8K :ther coo(eration
strate*ies' such as @esearch and Develo(ment coo(eration' or outsourcin* (roduction' are (ossible. Coo(eration
strate*ies are (ursued more fre&uentl! /here there are net/orks of start-u(s Jcf. Lechner 1002K.
Althou*h ne/ firms can *ain the com(lementar! resources the! lack throu*h coo(eration' the! still need basic
com(etences in root technolo*ies and ke! functions. In a stud! of hi*h-tech start-u(s in the I$A' c+ee et al.
J2DD=K sho/ed that the start-u(s /hich *re/ fastest /ere those /hich (ursued coo(eration strate*ies to build on
stren*ths' and not to com(ensate for /eaknesses.
$to((in* *ro/th b! sellin* the firm
An ac&uisition can be re*arded as a *ro/th strate*!' but the sale of a com(an! leads to a halt in *ro/th. $uch a
sale does not necessaril! have to be described as a loss' ho/ever. :n the contrar!' a trade saleY/hen a start-u(
sells itself to another firmYcan be seen as the successful end of the entre(reneurial (rocess. A firm has the
(ossibilit! of continuin* to *ro/ as (art of another firm' or the founders can use the sales revenue to (ursue other
activities. There are man! e"am(les of so-called 7serial entre(reneurs8. These entre(reneurs have founded several
ne/ com(anies' hel(ed them to *ro/' and then sold them in order to (ursue other activities. The best e"am(le of
this is #im Clark from $ilicon Malle!. Ee is currentl! /orkin* on startin* his fourth and fifth com(anies' both in the
Internet field. ,rior to this he *enerated several billion I$D for himself and his collea*ues /ith three ver!
successful hi*h-tech start-u(s: $ilicon +ra(hics' ;etsca(e' and Eealthion. Clark reco*ni0ed a lon* time a*o that he
is best at controllin* the *ro/th (hase of a start-u(' but is too im(atient to mana*e a mature or*ani0ation
(rofessionall!. Ee tries to choose the ri*ht time to sell ne/ firms to com(etitors /hich are better at dealin* /ith the
maturit! (hase Jcf. Chon* et al. 1000K.
+ro/th throu*h innovation
Times of technolo*ical chan*e are an o((ortunit! for start-u(s to *ro/. ;e/ firms that use technolo*ical
chan*es to introduce ne/ (roducts or services as market leaders can *ain com(etitive advanta*es &uickl!. Eo/ever'
technolo*ical innovations like these must be able to be (rotected' or the! /ill not last. The ne/ firms must also
(ossess or ac&uire the necessar! com(lementar! resources for the (roducts and the marketin* of them Jcf. Teece
2D5>K.
Certain t!(es of innovation are es(eciall! advanta*eous for start-u(s. In his book' 1he 2nno,ator<s #ilemma'
Christensen J2DD9K differentiates bet/een 7sustainin* technolo*ies8 and 7disru(tive technolo*ies8. $ustainin*
technolo*ies im(rove e"istin* (roduct-market structures and are *enerall! introduced most effectivel! b!
established firms. Disru(tive technolo*ies' on the other hand' /hich enable ne/ a((lications for ne/ customer
se*ments' tend to be develo(ed and marketed b! start-u(s. Christensen takes the e"am(le of the com(uter hard
drive industr! to sho/ ho/ start-u(s have ver! often seen successful *ro/th over a t/ent!-!ear (eriod as s(in-offs
of established firms. $imilar develo(ments can be seen in other sectors.
In the ne"t (art of this cha(ter' /e anal!0e the most fre&uent *ro/th mistakes in start-u(s.
Fro!th problems
ana*ement mistakes
:f course' start-u(s often make mana*ement mistakes in (ursuin* *ro/th.
A classic first mistake is in the choice of a (roduct or serviceYand<or even /orse' a marketY/ith no (otential
for *ro/th. The onl! safe*uard a*ainst this mistake is to conduct careful market and com(etitor anal!sis J$ee
Cha(ter 23K to estimate the total market (otential. This anal!sis must be com(lemented b! the choice of a strate*!
for ca(turin* the market /ith /hich an assumed market (otential can be develo(ed' takin* into account the *iven
financial restrictions. A second mistake is the failure to choose one of the aforementioned *ro/th strate*ies earl!
on. A third mistake is to not recruit com(etent and (rofessional staff to im(lement the (lanned strate*ies. A fourth
mistake is not to ali*n (roduct-market *ro/th strate*ies /ith the firmAs other strate*ies' es(eciall! finance' E@' and
or*ani0ational strate*ies. A fifth mistake is to choose the /ron* finance model. Eere' an almost classic mistake is
330
for firms to refinance lon*-term fi"ed ca(ital /ith short-term returns' or /ith short-term revolvin* loans. A si"th
mistake is to force *ro/th. If *ro/th occurs too ra(idl!' the firm is in dan*er of losin* si*ht of the risks involved in
the individual activities of the value chain' even /hen this *ro/th can be financed. Eere' continuous develo(ment is
better than erratic *ro/th Jcf. Eut0schenreuter 1002K' because it enables mana*ement to fill the *a(s in their
kno/led*e. ?e /ill *o into several of these mana*ement mistakes in more detail in the follo/in*.
Incom(atibilit! of *ro/th strate*ies and or*ani0ational structure
The *ro/th of start-u(s must be (lanned' and su((orted b! one or more of the above mentioned strate*ies. It is
a si*nificant *ro/th mistake to do /ithout (lannin* and strate*ic develo(ment. Eo/ever' even /hen these
mistakes are avoided' and *ro/th strate*ies e"ist' mana*ers tend to overlook the fact that there is a connection
bet/een the chosen strate*! and the (articular or*ani0ational structure of the start-u(. This oversi*ht is a serious
im(ediment to *ro/th.
%irms /hich are still small and strivin* to *ro/ should choose team structures' or' if necessar!' ti*ht
centrali0ation as a structure for their or*ani0ation so that the! can handle kno/led*e mana*ement' and decision
coordination and im(lementation better. The lack of team mana*ement and net/orkin* in the start-u( and
consolidation (hases hinders *ro/th' as the e"(erience of start-u(s from $ilicon Malle! has sho/n.
If *ro/th is achieved b! increasin* sales volume' start-u(s can defer the ad-ustment of the ori*inal
or*ani0ational structure until decision deficits' such as dela!s in decision-makin*' be*in to surface. In *ro/in*
com(anies' maintainin* the same team structures and mana*ement *enerall! leads to a loss of coordination. It also
(ost(ones the creation of a clear cor(orate structure. If the distribution of res(onsibilit! in the start-u( is unclear'
or if the same team mana*ement has been continued des(ite *ro/th' (roblems /ill arise due to a lack of
coordination. Therefore' the distribution of com(etences and res(onsibilit! must be achieved' de(endin* on the
strate*ies the start-u( (ursues. If team structures im(ede this because the! are too slo/' the! must be re(laced b!
hierarchical structures.
Different strate*ies ma! be necessar! if the com(an! (ursues diversification strate*ies b! e"(andin* into ne/
markets' or brin*in* out ne/ (roducts b! e"(andin* the value chain' or into ne/ net/orks. Eo/ever' this re&uires
a *ood kno/led*e of the industr! or industries in /hich the start-u( /ishes to diversif!. In this case' a more
decentrali0ed or*ani0ational structure /ith different' relativel! autonomous de(artments is advisable. Eo/ever'
de(artment decentrali0ation makes coordination essential. $ome of the classic mistakes made b! !oun* firms are
either to /ait too lon* before decentrali0in*' decentrali0in* too soon' and<or failin* to coordinate the ne/
de(artments. Each of these mistakes' or a combination' can have a restrictin* effect on the *ro/th of a firm' and in
the /orst case can even increase the risk of a !oun* firmAs *oin* bankru(t.
Inade&uate or incorrect marketin*' coo(eration' finance' or E@ strate*ies
+ro/th is also at risk if start-u(s fail to develo( strate*ic (lannin*' marketin*' financin*' risk mana*ement' E@
mana*ement' or*ani0ation' or (olicies for internationali0ation. +ro/th mistakes made in re*ard to marketin*'
financin*' and E@ mana*ement are (articularl! serious. an! of the follo/in* issues have been introduced in
(revious cha(ters.
The first *rou( of fla/ed *ro/th strate*ies is marketin* strate*ies. $tart-u(s are (articularl! susce(tible to
concentratin* on develo(in* a technical or scientific (roduct further and develo(in* ne/ (roducts' but not (a!in*
enou*h attention to marketin*. arketin* (lans and their e"tra(olation are a (rere&uisite for avoidin* *ro/th
mistakes. If a firm does not conduct market research' identif! customer (references' *enerate ne/ customer /ishes'
or se*ment or ca(ture the market' it /ill not *ro/. $tart-u(s can onl! find out /hether or not the! can achieve or
have alread! achieved a dominant (osition in the market b! conductin* s!stematic market research. If the! alread!
have a dominant (osition' the! could tr! to (ush com(etitors out of the market or (revent them from enterin* it in
the first (lace. De(endin* on the financial resources available' e.*. after a successful I,:' it could even make sense
to bu! out com(etitors and *ro/ in this fashion.
A second *rou( that can hinder *ro/th is coo(eration strate*ies' such as /hen a start-u( becomes overl!
de(endent on a more established com(an! as a senior (artner' for e"am(le' /hen a small biotech firm de(ends on
a lar*e (harmaceutical com(an! to market its (roducts. If lar*er established com(anies reall! commit themselves
to their -unior (artners and are successful' then coo(eration often ends u( /ith the senior (artner takin* over the
start-u(. This onl! ensures the *ro/th of the senior (artner. Transferrin* licenses to lar*er firms before a (roduct is
full! develo(ed is also dan*erousYthis is a (articular (roblem for biotech start-u(s if the *overnment has not !et
a((roved a ne/ dru*. Eo/ever' /hat is much more common is o((ortunistic behavior b! the senior (artner' /here
it is (aid /ell b! the -unior (artner for its marketin* activities' but then it does not in fact a**ressivel! market the
-unior (artnerAs (roducts. $uch a fla/ed marketin* strate*! is also a hu*e hindrance to *ro/th.
A third *rou( of fla/ed *ro/th strate*ies concerns the financin* of *ro/th. In the initial (hases of the life c!cle
of start-u(s' *ro/th can scarcel! be financed out of their (rofits' nor can it *enerall! be financed alone b! the
foundersA e&uit!. $tart-u(s in (articular are often underca(itali0ed. The onl! alternative that remains is seekin*
outside ca(ital.
To finance *ro/th strate*ies start-u(s sometimes borro/ lon*-term debt /hich is to be (aid back /ith interest
from the revenues from im(lementin* the strate*!. Like/ise' some start-u(s redeem loans and interest (a!ments
ste(-b!-ste( over a lon* (eriod b! takin* out revolvin*' short-term loans. 6oth financial strate*ies -eo(ardi0e
*ro/th considerabl!' or even hinder it com(letel! if the firm does not *enerate the (lanned revenues' or if no ne/
short-term loans are available to (a! off (art of the lon*-term loan at the ri*ht time. In addition' start-u(s /ith hi*h
*ro/th (otential in certain industries' can trade (artial o/nershi( in their firms for 7venture ca(ital8.
$tart-u(s can also make another *ro/th mistake in financin* b! launchin* their I,:s on the stock market too
soon and sim(l! usin* this revenue to re(a! debt or venture ca(ital and re(lace it /ith e&uit! from the ca(ital
market. ?hat is even more serious after an I,: is /hen firms make the *ro/th mistake of merel! increasin* their
cash mana*ement or randoml! bu!in* out other firms' rather than usin* their I,: funds to finance /ise *ro/th
strate*ies.
The fourth *rou( of related business strate*ies /here serious mistakes can be made is Euman @esource
strate*ies. In man! cases the founders and em(lo!ees of start-u(s are in their thirties' and sometimes onl! in their
t/enties' and are fre&uentl! hi*hl! &ualified universit! or colle*e *raduates Jcf. %rank<:(it0 1002' (. B=BK. The
homo*eneit! of the a*e distribution of mana*ers and em(lo!ees often leads to start-u(s ac&uirin* ne/ (ersonnel
from the same a*e *rou(. Eo/ever' a homo*eneous a*e distribution ma! lead to a decline in motivation as
em(lo!ees a*e at the same time. $tart-u(s must therefore be (articularl! careful to achieve a hetero*eneous a*e
distribution in their (ersonnel. The! must also attem(t to ac&uire older em(lo!ees /ith e"(erience in the industr!
331
and /ith mana*ement com(etences from other successful com(anies. It can be of *reat value to ac&uire more
senior mana*ers /ho en-o! the ne/ challen*e of /orkin* for a start-u( before the! retire. Lack of lo!alt! in their
(ersonnel should lead start-u(s to think about ho/ to retain their (articularl! talented em(lo!ees. If start-u(s fail
to consider these (oints' obstacles to *ro/th are a matter of course.
uch more im(ortant' ho/ever' is develo(in* the kno/led*e and com(etences of the entire staff de(endin* on
the start-u(As chosen *ro/th strate*!. The kno/led*e and com(etences necessar! for formulatin* and
im(lementin* the *ro/th strate*ies must be forecast as (art of &ualitative Euman @esource (lannin*' and then
(rovided b! Euman @esource develo(ment or b! ac&uirin* e"ternal (ersonnel Jcf. Drumm 1000K. If this does not
ha((en' start-u(s face a *ro/th barrier /hich is hard to overcome. The failure to im(lement strate*!-oriented E@
develo(ment and build u( and maintain internali0ed motivation of the em(lo!ees throu*h attractive /ork and
/orkin* conditions is a barrier to *ro/th /hich is often overlooked.
Inade&uate or incorrect internal accountin*
All firms' /hether !oun* or mature' need cost accountin* s!stems /hich can re(ort costs andYas far as the! are
s(ecificall! attributableYrevenues (er cost unit' cost center' and de(artment. It is im(ortant that start-u(s
establish s!stems for unit cost accountin*' cost center accountin*' and breakeven anal!sis Jcf. $cherrer 2DDDK in
order to be able to assess economic inefficiencies and sources of loss b! means of tar*et<actual com(arisons and
(rofit mar*ins. If the com(etition is fierce' firms should also establish tar*et costin* to be able to undermine
com(etitors b! ad-ustin* (rice (olic!.
Doin* /ithout an! kind of cost accountin* leads not onl! to the fact that sources of loss remain undiscovered'
but also that (rofit (otentials sta! hidden as /ell. 6oth of these (oints re(resent (ossible *ro/th risks. $tart-u(s
must therefore avoid this risk b! establishin* cost and (rofit accountin*' and a breakeven anal!sis as &uickl! as
(ossible.
De(endence on third (arties
an! start-u(' survival' and *ro/th strate*ies lead almost inevitabl! to the de(endence of ne/ firms on third
(arties. This causes no (roblem as lon* as the interests of all (eo(le and firms involved are relativel! e&ual and<or
com(atible. De(endence on third (arties functionin* as investors' licensors' (artners' (rinci(al customers in the
sales market' or sin*le su((liers does not necessaril! lead to *ro/th barriers. Eo/ever' de(endence is a
disadvanta*e if there are diver*in* interests' or if the (artners behave o((ortunisticall!. In this case' the *ro/th of
the start-u( is inhibited and the firm is forced to fi*ht the o((ortunistic behavior of the (artners. %or the start-u(
these defense activities incur transaction costs /hich arise in the (re(aration (hase of a (artnershi( and in the
conclusion of coo(eration contracts' and are added to later b! transaction costs arisin* from controllin*' and
correctin* errors.
Eo/ever' the older the firm becomes' de(endence on third (arties should be reduced. The de(endence on
licensors should be com(ensated for b! the firmAs o/n research and develo(ment. The de(endence on outside
investors' on the other hand' is *enerall! unavoidable' but it can be (ut to (ositive use b! raisin* risk ca(ital b!
(rofit sharin* /ith investors to create homo*eneit! of interests.
As sho/n above' de(endence on third (arties can arise /hen a firm markets its (roducts. It can' ho/ever' also
arise in the ac&uisition of (reliminar! (roducts' or in financin*. It is at its hi*hest in firm net/orks. $tart-u(s must
therefore ask themselves re(eatedl! /hether these de(endencies secure their e"istence and survival' or /hether
the! are endan*erin* their *ro/th. As lon* as the firmAs survival is secured b! su((liers or customers throu*h
strate*ic de(endencies' for instance /ithin a net/ork of coo(eratin* firms' the start-u( can (rofit. If such
de(endencies ho/ever' endan*er the success and *ro/th of the firm' the start-u( must tr! to e"tricate itself b!
buildin* u( its o/n sales or su((l! channels. Eomo*eneit! of interests must also be taken into account /hen
buildin* an e"ternal net/ork in order to minimi0e transaction costs /hich stunt *ro/th.
Acculturation (roblems /hen bu!in* com(anies
+ro/th as a result of ac&uirin* com(anies in the su((l! chain' or diversif!in* into other sectors not onl! creates
the (otential for mistakes due to inade&uate kno/led*e of the industr!' but b! insufficient acculturation of the
com(anies ac&uired. Ever! com(an! develo(s its o/n culture from the moment it is founded. This is manifested in
the foundersA value s!stem in re*ard to their em(lo!ees' customers' su((liers' s(onsors' and other (artners.
%ounders /ill al/a!s tr! to transfer their value s!stem onto their em(lo!ees and thus form their behavior
com(letel! or at least (artl!. Com(an! culture is also manifested in desired forms of behavior' rituals' and acce(ted
(rocesses of anal!0in* and solvin* (rocesses (racticed b! the founders /hich the! in turn /ould like their
em(lo!ees to im(lement. Communicatin* these values and forms of behavior is (art of the mana*ement (rocess.
If other com(anies are ac&uired in the course of (lanned *ro/th (rocesses' the com(an! also takes on their
7forei*n8 firm cultures. The confrontation bet/een t/o or more incom(atible firm cultures makes acculturation
essential. The different cultures must be ada(ted to each other' or the *ro/th of the entire com(an! and its
individual de(artments due to s!ner*! effects is at stake.
There are three different acculturation strate*ies to choose from. In the case of usur(ation' the mana*ement
from the bou*ht out firm is re(laced b! the mana*ement team of the firm that bou*ht it out. This model is *enerall!
e"(ensive' but can be im(lemented relativel! &uickl!. In the case of ada(tation' the bu!in* and bou*ht out firmJsK
*et to kno/ and understand each otherAs cultures in order to chan*e and ada(t them ste( b! ste(. This model is
much slo/er than usur(ation' but also chea(er. The s!nthesis model consists of consciousl! *ivin* u( the old firm
culture and creatin* a ne/ one. This model makes sense if the ac&uisition means that the markets and thus market-
oriented strate*ies chan*e' or the national orientation of the start-u( can be e"(anded to an international one.
Doin* /ithout acculturation strate*ies not onl! stunts *ro/th' but also increases the risk of bankru(tc!.
Cha(ter summar!
Com(an! *ro/th must be (lanned b! both old and !oun* firms. It re&uires the choice of one or more of the
above mentioned strate*ies to (romote *ro/th. ,roduct and (rocess innovations' the differentiation of (roducts
and markets' the use of market niches' and net/orkin* /ith other com(anies are im(ortant strate*ies for start-u(s.
+ro/th alon* the su((l! chain is a s(ecial case in vertical net/orkin* strate*ies. 6u!in* out entire com(anies is
also suitable as a *ro/th strate*!' but it (resu((oses the availabilit! of sufficient ca(ital' and the solution of
acculturation (roblems. +ro/th can be seriousl! threatened b! the mana*ement mistakes discussed above' but also
(romoted b! *ro/th strate*ies that are /ell im(lemented.
@eferences' and further literature
Chon*' .L. et al. J1000K: The $ilicon Malle! Ed*e' $tanford' CA. ((. 210-212.
33B
Covin' #.+. and $levin' D.,. J2DD9K: Ei*h +ro/th Transitions. Theoretical ,ers(ectives and $u**ested
Directions. In: $e"ton' D.L' and $milor' @.?.' 2DD9. ((. DD-21=.
Christensen' C.. J2DD9K: The InnovatorAs Dilemma. 6oston.
Drumm' Eans #kr*en J1000K: ,ersonal/irtschaft. B. Aufl. 6erlin us/.
%rank' E. and :(it0' C. J1002K: Internet-$tart-I(sYEin neuer ?ettbe/erber unter den i%ilteranla*en7 fkr
Eumanka(ital. .eitschrift fkr 6etriebs/irtschaft 92. #*.: B=3-B>D.
Eut0schenreuter' T. J1002K: ?achstumsstrate*ien. Einsat0 von ana*ement-ka(a0itmten 0ur
?ertstei*erun*. ?iesbaden.
Ha0an-ian' @.H. and Dra0in' @. J2DD0K: A sta*e-contin*ent model of desi*n and *ro/th for technolo*!-based
ne/ ventures. #ournal of 6usiness Menturin* J=K: 239-2=0.
Hkhlhorn' +. and ?issdorf' %. J1002K: #obmotor ittelstand. Im(ulse mr0 1002-0=-15: 10-19.
Lechner' C. J1000K: The Com(etitiveness of %irm ;et/orks. %rankfurt us/.
c+ee' #.E.' Do/lin*' .#. and e**inson' ?.L. J2DD=K: Coo(erative strate*! and ne/ venture (erformance.
The role of business strate*! and mana*ement e"(erience. In: $trate*ic ana*ement #ournal 2>J9K: =>=-
=50.
,orter' . J2DD1K: ?ettbe/erbsvorteile. 3. Aufl. %rankfurt<ain.
,orter' .E. and @ivkin' #.?. J1000K: Industr! Transformation. Earvard 6usiness $chool. ,ublishin* ;D-
902-005' #ul! 20.
$cherrer' +. J2DDDK: Hostenrechnun*. 3. Aufl. $tutt*art.
$e"ton' D.L. and 6o/man-I(ton' ;.6. J2DD2K: Entre(reneurshi(: Creativit! and +ro/th. ;e/ 3ork.
$e"ton' D.L. and $milor' @.?. J2DD9K: Entre(reneurshi( 1000. Dover.
$ie*el' @.' $ie*el' E. and acillan' I. J2DD3K: Characteristics distin*uishin* hi*h *ro/th ventures. #ournal
of 6usiness Menturin* 5J1K: 2>D-250.
$ternber*' @. J1000K: Entre(reneurshi( in DeutschlandYDas +rkndun*s*eschehen im internationalen
Mer*leich: Lmnderbericht Deutschland 0um +lobal Entre(reneurshi( onitor. 6erlin.
Teece' D.#. J2D5>K: ,rofitin* from technolo*ical innovation: Im(lications for inte*ration' collaboration'
licensin*' and (ublic (olic!. @esearch ,olic! 2=: 15=-30=. Elsevier $cience ,ublishers 6.M. J;orth-
EollandK.
About the cha(ter author
,rofessor ichael Do/lin* is ,rofessor for Innovation and Technolo*! ana*ement at the Iniversit! of
@e*ensbur*. Ee received his ,hD in 6usiness Administration from the Iniversit! of Te"as at Austin in 2D55. Eis
research interests include the strate*ic mana*ement of technolo*!' es(eciall! in the telecommunications industr!'
hi*h technolo*! entre(reneurshi(' and the relationshi(s bet/een technolo*!' (ublic (olic! and economic
develo(ment.
About the cha(ter editor
,rofessor Eans #kr*en Drumm is a retired ,rofessor of 6usiness Administration /ith a focus on Euman
@esource ana*ement and :r*ani0ation Theor!. Ee received his doctorate at the %ree Iniversit! of 6erlin and his
Eabilitation at the Iniversit! of the $aarland.
33>

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