International Business Management and Entrepreneurship Lecture Notes

International Business Management and
Entrepreneurship
Lecture Notes
Collin Starkweather1
Spring 2007
1
Copyright
c Collin Starkweather 2007. All rights reserved.
2
Contents
I International Business Management 7

1 Business Ethics and Social Responsibility 9
1.1 Culture and Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.2 Corporate Corruption . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.3 The United States . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.4 Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.4.1 Political and Business Scandals . . . . . . . . . . . . . . . . 13
1.4.2 Women in the Workplace . . . . . . . . . . . . . . . . . . . 13
1.4.3 Lobbying by Japan . . . . . . . . . . . . . . . . . . . . . . 15
1.5 Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.5.1 Bribes and Corruption . . . . . . . . . . . . . . . . . . . . . 15
1.5.2 Women in the Workplace in Europe . . . . . . . . . . . . . 15
1.6 Ethical Concerns in China . . . . . . . . . . . . . . . . . . . . . . . 16
1.7 Corporate Social Responsibility . . . . . . . . . . . . . . . . . . . . 18
1.7.1 Corruption and the FCPA Revisited . . . . . . . . . . . . . . 19
1.7.2 Response to Social Obligations . . . . . . . . . . . . . . . . 20
2 Operations and Productivity 23

2.1 Defining Operations Management . . . . . . . . . . . . . . . . . . 23
2.2 What Operations Managers Do . . . . . . . . . . . . . . . . . . . . 25
2.3 The Service Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.4 Trends in Operations Management . . . . . . . . . . . . . . . . . . 30
2.5 The Productivity Challenge . . . . . . . . . . . . . . . . . . . . . . 30
2.5.1 Productivity Variables . . . . . . . . . . . . . . . . . . . . . 32
2.5.2 Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.5.3 Management . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.5.4 Productivity and the Service Sector . . . . . . . . . . . . . 34
2.6 Social Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3 Operations Strategy in a Global Environment 37

3.1 Developing Missions and Strategies . . . . . . . . . . . . . . . . . . 38
3.1.1 Mission . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3.1.2 Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.2 Issues in Operations Strategy . . . . . . . . . . . . . . . . . . . . . 42
3
4 CONTENTS
3.2.1 Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.2.2 Preconditions . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.2.3 Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.3 Strategy Development and Implementation . . . . . . . . . . . . . . 44
3.3.1 Identify Critical Success Factors . . . . . . . . . . . . . . . 44
3.3.2 Build and Staff the Organization . . . . . . . . . . . . . . . 45
3.3.3 Integrate OM With Other Activities . . . . . . . . . . . . . 45
3.4 Global Operations Strategy Options . . . . . . . . . . . . . . . . . 45
4 Project Management 49
4.1 Project Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.1.1 The Project Manager . . . . . . . . . . . . . . . . . . . . . 50
4.1.2 The Work Breakdown Structure . . . . . . . . . . . . . . . 51
4.2 Project Scheduling . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.3 Project Controlling . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4.3.1 PERT and CPM . . . . . . . . . . . . . . . . . . . . . . . . 54
4.3.2 Network Diagrams . . . . . . . . . . . . . . . . . . . . . . . 55
4.4 Determining the Project Schedule . . . . . . . . . . . . . . . . . . 56
4.5 Slack Time and Identifying the Critical Path . . . . . . . . . . . . . 57
4.6 Variability in Activity Times . . . . . . . . . . . . . . . . . . . . . . 58
4.6.1 Probability of Project Completion . . . . . . . . . . . . . . 59
4.7 Cost-Time Trade-Offs and Project Crashing . . . . . . . . . . . . . 61
4.8 A Critique of PERT and CPM . . . . . . . . . . . . . . . . . . . . 62
4.9 Using Microsoft Project for Managing Projects . . . . . . . . . . . 63
5 Forecasting 65
5.1 What is Forecasting? . . . . . . . . . . . . . . . . . . . . . . . . . 65
5.1.1 Types of Forecasts . . . . . . . . . . . . . . . . . . . . . . . 66
5.1.2 The Strategic Importance of Forecasting . . . . . . . . . . . 67
5.2 A Seven Step Forecasting System . . . . . . . . . . . . . . . . . . . 67
5.3 Forecasting Approaches . . . . . . . . . . . . . . . . . . . . . . . . 68
5.3.1 Qualitative Forecasting Methods . . . . . . . . . . . . . . . 70
5.3.2 Quantitative Forecasting Methods . . . . . . . . . . . . . . 71
5.3.3 Measuring Forecast Error . . . . . . . . . . . . . . . . . . . 72
5.3.4 Adjusting for Trend . . . . . . . . . . . . . . . . . . . . . . 73
5.3.5 Seasonal Variations in Data . . . . . . . . . . . . . . . . . . 75
5.3.6 Associative Models . . . . . . . . . . . . . . . . . . . . . . 76
5.4 Monitoring and Controlling Forecasts . . . . . . . . . . . . . . . . . 79
5.4.1 Adaptive Smooting . . . . . . . . . . . . . . . . . . . . . . 80
5.4.2 Focus Forecasting . . . . . . . . . . . . . . . . . . . . . . . 80
6 Design of Goods and Services 81

6.1 Goods and Services Selection . . . . . . . . . . . . . . . . . . . . . 82
6.1.1 Product Life Cycles . . . . . . . . . . . . . . . . . . . . . . 82
6.1.2 Life Cycle and Strategy . . . . . . . . . . . . . . . . . . . . 82
6.1.3 Product-by-Value Analysis . . . . . . . . . . . . . . . . . . 83
CONTENTS 5
6.2 Generating New Products . . . . . . . . . . . . . . . . . . . . . . . 83

6.2.1 Importance of New Products . . . . . . . . . . . . . . . . . 83
6.3 Product Development . . . . . . . . . . . . . . . . . . . . . . . . . 84
6.3.1 Product Development System . . . . . . . . . . . . . . . . 84
6.3.2 Quality Function Deployment (QFD) . . . . . . . . . . . . . 84
6.3.3 Organizing for Product Development . . . . . . . . . . . . . 85
6.3.4 Manufacturability and Value Engineering . . . . . . . . . . . 86
II Entrepreneurship 89
7 Introduction to Entrepreneurship 91
7.1 Characteristics of the Successful Entrepreneur . . . . . . . . . . . . 92
7.2 Are You Ready? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
7.3 Setting Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
8 Finding an Idea 97
8.1 You’ve Got an Idea. Now What? . . . . . . . . . . . . . . . . . . . 99
9 Defining Your Market 101

9.1 Finding Your Niche . . . . . . . . . . . . . . . . . . . . . . . . . . 101
9.2 Redefining and Expanding Your Niche . . . . . . . . . . . . . . . . 104
9.3 The Mission Statement . . . . . . . . . . . . . . . . . . . . . . . . 104
10 Market Research 109

10.1 What Am I Researching, Exactly? . . . . . . . . . . . . . . . . . . 110
10.2 Research Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
10.2.1 Sources of Secondary Research . . . . . . . . . . . . . . . . 111
11 The Business Plan 115

11.1 Preparing to Put the Plan Together . . . . . . . . . . . . . . . . . 116
11.1.1 Your Audience . . . . . . . . . . . . . . . . . . . . . . . . . 116
11.1.2 Look and Feel . . . . . . . . . . . . . . . . . . . . . . . . . 117
11.1.3 Some Style Points . . . . . . . . . . . . . . . . . . . . . . . 118
11.2 The Plan Contents . . . . . . . . . . . . . . . . . . . . . . . . . . 119
12 Presenting the Plan 123

12.1 The Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
12.2 Some Suggestions . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
12.2.1 Do It Until You Get It Right . . . . . . . . . . . . . . . . . 123
12.2.2 Know Your Outline Thoroughly . . . . . . . . . . . . . . . . 124
12.2.3 Be Familiar With All Equipment to be Used . . . . . . . . . 124
12.2.4 The First Minute is the Most Important . . . . . . . . . . . 125
12.2.5 Take Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 125
12.2.6 So What? . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
12.3 After the Presentation . . . . . . . . . . . . . . . . . . . . . . . . . 125
6 CONTENTS
13 Inventory Control 127

13.1 Inventory and Cash Flow . . . . . . . . . . . . . . . . . . . . . . . 128
13.2 Tracking Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
13.3 Computerized Inventory Control . . . . . . . . . . . . . . . . . . . 129
13.3.1 Inventory Turnover . . . . . . . . . . . . . . . . . . . . . . 130
13.4 Inventory Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 131
13.4.1 Buying Inventory . . . . . . . . . . . . . . . . . . . . . . . 131
13.5 Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
13.5.1 Dealing with Suppliers . . . . . . . . . . . . . . . . . . . . 132
13.5.2 Payment Plans . . . . . . . . . . . . . . . . . . . . . . . . 133
14 Hiring Employees 135

14.1 How to Hire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
14.1.1 Job Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 136
14.1.2 Job Description . . . . . . . . . . . . . . . . . . . . . . . . 136
14.1.3 Advertising the Job . . . . . . . . . . . . . . . . . . . . . . 138
14.1.4 Finding People . . . . . . . . . . . . . . . . . . . . . . . . . 138
Part I
International Business
Management
7
Chapter 1
Business Ethics and Social

Responsibility
Business ethics and social responsibility are topics that every business person will
be confronted with at some point in their career, whether they are a small business
owner who runs a restaurant or a multinational corporation like Microsoft or Lenovo.
As multinational corporations become more prominent, they become increasingly
important not only as a business entity, but as leaders in the community. Likewise,
small business owners are leaders in their community whether they intend to be or
not.
For multinationals, business ethics becomes more problematic as multinationals
cross cultural boundaries. What may be perfectly acceptable to one culture may be
abhorrent to another.
1.1 Culture and Ethics
Side Note 1.1.1 (Conflicting Cultural Values) Ask the class whether they can
think of cultural values that are perfectly acceptable in one part of the world but
not in another.
• Married women are considered to be acting against the teachings of the Koran
if they work outside the home. Furthermore, in some Islamic nations, such
as Saudia Arabia, they are not allowed to drive or go out in public without
covering their hair or face.
• Homosexuality is acceptable in Scandinavia but offensive in many other parts

of the world.
9
10 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
• Child labor is considered abhorrent in the U.S.A. and Europe but a commonly
accepted practice throughout the developing world. Prison labor is also con-
sidered improper in the U.S.A. Note that during the industrialization of the
U.S.A., child labor was widely used.
Which brings us to the subject of this lecture: Ethics.
Definition 1.1.1 (Ethics) The study of morality and standards of conduct.
1.2 Corporate Corruption

Side Note 1.2.1 (The Importance of Cultural Differences to Business) Understanding
cultural differences is very important for doing international business:
1. Why is corruption an important business issue?

• See sidenote 1.2.2.
2. How do cultural perceptions influence international management when East-
erners do business with Westerners?
• Westerners do not understand guanxi. It is much harder for a Westerner
to know when to trust a Chinese person than for a Chinese person to
know when to trust another Chinese person.
• Because of this, Western business people may not initially trust their
Chinese counterparts. This is something Chinese business people should
be aware of.
• In general, it is much harder to understand the many subtle clues that
someone is trustworthy when they are from another culture.
• However, there is a perception in the West that Chinese are hard-working
and smart.
3. What aspects of Western culture make it difficult for Chinese people to do
business with Western people?
• Are Americans perceived as being too focused on money?
• Are Chinese people inclined to trust Westerners?
• Westerners and Easterners build trust in different ways. For example,
Easterners tend to trust people after observing a pattern of consistent
behavior. Westerners rely more on contracts, which are more strictly
enforced in the West.
• Because guanxi is less important in the West, business people put less
emphasis on socializing and are more comfortable doing business with
others they do not know well or do not personally like.
1.2. CORPORATE CORRUPTION 11
• Westerners from different countries can be quite different. For example,

Scandinavians are typically highly trustworthy1 but Italians are less so.
• Of course, these are all generalizations and individuals may differ signif-
icantly from their cultural affiliations.
Side Note 1.2.2 (Corruption) Corruption is of concern for business people be-
cause
• It increases risk.
– In the wake of Enron, WorldCom, and Tyco, investors in the United

States had to reevaluate the risk associated with owning stock.
– If business leaders cannot count on other business leaders and public
officials to act in a fair and consistent way, they must factor additional
uncertainty into their calculations.
• It increases the cost of doing business.
– A bribe is a business expense that goes to no productive purpose and

decreases profits.
– Executives who steal from their company do so at the expense of profits
which would be realized by shareholders.
– The impact of corporate corruption in the United States has been
∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act, which
requires strict monitoring and verification of financial information.
• On a macroeconomic level, it is simply inefficient.
– Resources are diverted from more productive uses (such as building build-
ings) to less productive uses (such as conspicuous consumption by cor-
rupt officials or business leaders).
Definition 1.2.1 (Bribe) A price, reward, gift, or favor bestowed or promised with
a view to prevent the judgment or corrupt the conduct of a judge, witness, voter,
or other person in a position of trust.2
Though things are improving, China continues a battle against corruption. In the
words of a Beijing correspondent for “The Economist” magazine, “. . . there are few
if any issues which affect and infuriate so many in China as corruption. Farmers and
urban entrepreneurs alike are subject to the rampant demands of petty officials.”[6]
1 The Scandinavian countries composed 4 of the top 6 and 5 of the top 8 countries perceived
as least corrupt in the 2005 Transparency International Corruptions Perception Index. Source:
texttthttp://www.transparency.org/policy research/surveys indices/cpi, September 20, 2006.
2 Source: http://www.dict.org, September 20, 2006.
1.3 The United States

The United States has recently been rocked by a number of scandals in the business
community.
• Enron – In December 2001, corporate malfeasance by the CFO and others at

Enron precipitated the largest bankruptcy in history in the U.S..
– WorldCom reportedly had over $63 billion in assets prior to bankruptcy.3
– Several Enron executives have since been sentenced to jail for fraud and
other charges.
• WorldCom – Following the Enron scandal, WorldCom declared bankruptcy in
July 2002, succeeding Enron as the largest bankruptcy in U.S. history.
– WorldCom reportedly had over $103 billion in assets prior to bankruptcy.4
– Bernard Ebbers, the former CEO of WorldCom, was convicted of fraud
and conspiracy and sentenced to 25 years in jail.
• Tyco – The CEO of Tyco, Dennis Kozlowski, was accused of looting the
company to fund a lavish lifestyle, including a $2 million birthday party for
his wife.
– He was convicted in 2005 of stealing up to $600 from the company and
was sentenced to between 8 and 25 years in prison.
While western developed economies often cite a high ethical standard, scandals such
as Enron, Parmalat, Worldcom, Qwest, and Tyco make it clear that even western
developed economies have significant ethical shortcomings.
Side Note 1.3.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron, the Sarbanes-
Oxley Act (SOX) was passed in the U.S. specifying rigorous reporting requirements
for corporate financial statements and requiring the CEO and CFO to approve and
declare accurate public financial statements. Criminal penalties if the CEO and CFO
sign statements later found to be false or misleading.
These regulations can impose significant costs (in the form of reporting burdens)
on multinational firms operating in the United States. There is currently debate as
to the effectiveness of the regulations relative to the costs.
Side Note 1.3.2 (Cultural Heritage in the U.S.) My cultural perspective is prob-
ably based as much on my family’s Scandinavian heritage as my upbringing in the
United States.
In Scandinavia, a high value is placed on honesty and personal integrity. See sidebar
1.2.1.
3 Source: http://www.bankruptcydata.com/Research/15 Largest.htm, March 17, 2007.
4 Source: http://www.bankruptcydata.com/Research/15 Largest.htm, March 17, 2007.
1.4. JAPAN 13
1.4 Japan
1.4.1 Political and Business Scandals
Japan has been beset by both political and business scandals. Several cabinet
members were forced to resign after accepting exhorbitant advisory fees or improper
political donations.
Moreover, the political scandals do not appear to have been fully acknowledged and
addressed. Hodgetts et al. cite the example of the chief prosecutor in Tokyo who
was transfered to a remote city after an investigation into exhorbitant entertainment
spending by private firms on public officials.
Better known is the case of Japanese banks, which was insufficiently regulated and
took on too much risky debt and did not write off bad loans in a timely manner.
This resulted in several banks being technically bankrupt [5, p. 58].
Side Note 1.4.1 (The U.S. Savings and Loan Scandal) The issue somewhat re-
sembles the Savings and Loan scandal in the U.S.. Savings and loan institutions,
also known as thrifts and which function like banks, were not as highly regulated as
banks, and as a result made high risk investments in the late 1980s and early 1990s.
This resulted in the failure of 1043 institutions between 1986-1995 with losses es-
timated between $100 billion and $500 billion. The government was compelled to
provide public money to bail out the institutions. 5
1.4.2 Women in the Workplace
Sexual harassment has also become an issue in Japan. This is exacerbated by the
fact that
• There is a discrepancy in perceptions of gender in Japan, with many men of

the opinion that women were just biding their time until they marry and have
children,
• Many men do not understand why sexual harassment constitutes a problem,
• Prosecuting these kinds of issues can be expensive and time consuming and
may not ultimately result in a significant financial penalty.
Likewise, women have a difficult time being taken seriously, with many women
finding their employment opportunities constrained.
Side Note 1.4.2 (Sexual Harassment in the United States) Behavior considered
socially acceptable elsewhere in the world may not be considered socially or legally
5 Source: http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2 2.pdf.
acceptable in the United States. Furthermore, sexual harassment lawsuits result in

significant penalties (e.g., in the millions of dollars) to those who are successfully
prosecuted.
It is considered a very serious issue, and for most public institutions and many large
corporations, considerable attention and training is given employees to inform them
what is acceptable and unacceptable in the workplace.
Hodgetts et al. cite two cases in which foreign firms operating in the U.S. have
paid substantial penalties as a result of sexual harassment or discrimination based
on race, gender, or other issues.
Definition 1.4.1 (Sexual Harassment) The definition of sexual harassment given

by the United States Equal Employment Opportunity Commission is as follows:6
Unwelcome sexual advances, requests for sexual favors, and other verbal or phys-
ical conduct of a sexual nature constitutes sexual harassment when submission to
or rejection of this conduct explicitly or implicitly affects an individual’s employ-
ment, unreasonably interferes with an individual’s work performance or creates an
intimidating, hostile or offensive work environment.
This definition has been further elaborated:
Sexual harassment can occur in a variety of circumstances, including but not limited
to the following:
• The victim as well as the harasser may be a woman or a man. The victim
does not have to be of the opposite sex.
• The harasser can be the victim’s supervisor, an agent of the employer, a

supervisor in another area, a co-worker, or a non-employee.
• The victim does not have to be the person harassed but could be anyone
affected by the offensive conduct.
• Unlawful sexual harassment may occur without economic injury to or discharge

of the victim.
• The harasser’s conduct must be unwelcome.
Side Note 1.4.3 (Sexual Harassment in China) Ask the students whether they
perceive there is any gender discrimination in the workplace. Are women with equal
qualifications as men given equal pay and position? Take a show of hands, yes or
no.
6 Source: http://www.de2.psu.edu/harassment/legal.
1.5. EUROPE 15
1.4.3 Lobbying by Japan
Japan spends more money lobbying in the U.S. than any other. Many people who
are paid significant sums to lobby for Japan and Japanese firms are former high-
ranking U.S. politicians.
Definition 1.4.2 (Lobbying) To address or solicit members of a legislative body

in the lobby or elsewhere, with the purpose to influence their votes; in an extended
sense, to try to influence decision-makers in any circumstance.7
Note that lobbyists do not have any formal power. They only have the power of
persuasion.
Side Note 1.4.4 (Is this Ethical?) Do you consider it ethical for a former politi-
cian to charge high fees to lobby their former colleagues?
1.5 Europe
1.5.1 Bribes and Corruption
Although most western European countries are not ranked highly on Transparency
International’s poll of corruption (Italy, at 40, is the notable exception), with most in
the top 20 among over 150 countries included in the survey, their attitudes towards
bribery when working in foreign markets differs from that of the U.S..
Hodgetts et al. cites a study in which Europeans managers who were polled were
much less likely to refuse to pay a bribe (or perceive it as unethical) than their
American counterparts.
Side Note 1.5.1 (Is Paying a Bribe Unethical?) Do you consider it unethical to
pay a bribe if it is necessary to do business? Take a show of hands, yes or no.
1.5.2 Women in the Workplace in Europe
France and Germany
While legislation exists to guarantee equal treatment and equal opportunity for
women in both France and Germany, men are disproportionately represented in
management positions, particularly in upper management. Although women have
entered the workforce in large numbers in recent decades, there seems to be a glass
ceiling due to social factors.
7 Source: http://www.dict.org.
Definition 1.5.1 (Glass Ceiling) An invisible barrier that determines the level to
which a woman or other member of a demographic minority can rise in an organi-
zation. 8
Side Note 1.5.2 (Is There a Glass Ceiling for Women in China?) Is there a glass
ceiling for women in China? Take a show of hands, yes or no.
For those students who think so, what are the factors that contribute to the glass
ceiling?
• The perception among men of women in the workplace?

• Educational opportunities for women?
• Potential for networking?
• Do you think that the status of women in the workplace is improving or will
improve?
Great Britian
Things are generally considered better for women in Great Britian due to
• Women have been more proactive in setting up organizations in Great Britian.

• More British companies have actively sought to recruit and promote women
into management.
• Discrimination lawsuits are more commonplace in Great Britian, though com-
pensation is limited relative to lawsuits filed in the U.S..
Side Note 1.5.3 (Why Would a Company Actively Recruit and Promote Women?)
Ask the class why a company would actively recruit and promote women even if not
required to do so by legislation.
One possibility is that highly qualified and talented women are being underpaid and
placed in positions that underutilize their talents. Companies may be able to recruit
more qualified women than men at a given wage level if they promote the company
as taking a proactive stance on gender.
1.6 Ethical Concerns in China

MNCs see China as a place of tremendous opportunity, but there is a perception
that there are risks and ethical considerations.
8 Source: http://careerplanning.about.com/library/glossary/bldef-glassceiling.htm.
1.6. ETHICAL CONCERNS IN CHINA 17
Side Note 1.6.1 (Opportunity in China) Why do others consider Chinese to present
greater opportunity than other places?
• A very large population administered by a central government which can grant

access to a wide variety of markets,
• A relatively stable government, and
• A recent history of rapid economic development.
Ethical considerations include
1. Child labor,
2. Prison labor,
3. An increase in crime and illegal business activities,
4. Piracy and counterfeiting (see sidenote below),
5. International corporate spying problems,
6. An opaque legal system,
7. Bribery and other forms of corruption.
Side Note 1.6.2 (Piracy and Counterfeiting) Present sidenote at [5, p. 64].
Lack of action from Beijing may result in “tit-for-tat” retribution from the United
States and others.
Side Note 1.6.3 (Corporate Spying) Hodgetts et al. [5, pp. 63–64] take note of
• A case in which an industrial spy from China was caught trying stealing
cultures from Amgen for a drug with $1.5 billion in sales annually.
• Another case in which a Chinese spy in Hong Kong was caught evesdropping
on U.S. executives.
• Yet another case in which software from a U.S. company in Boulder was stolen
and sold to a Chinese company.
• Note that for every corporate spy that is caught, there are undoubtedly many
others that get away with it.
An activity related to corporate spying is the breaking of agreements by Chinese

companies who go on to appropriate patents or capital from foreign firms. Often,
it is difficult for foreign firms to navigate the Chinese legal system in the case of a
dispute.
Side Note 1.6.4 (Corruption) Though things are improving, China continues a
battle against corruption. In the words of a Beijing correspondent for “The Economist”
magazine, “. . . there are few if any issues which affect and infuriate so many in China
as corruption. Farmers and urban entrepreneurs alike are subject to the rampant
demands of petty officials.”[6]
See also sidenote 1.2.2.
1.7 Corporate Social Responsibility

Definition 1.7.1 (Corporate Social Responsibility (CSR)) The actions of a firm
to benefit society beyond the requirments of the law and the direct interests of the
firm.
Side Note 1.7.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement.
Ben & Jerry’s ice cream company is considered a model of a socially responsible
company in the U.S..
Other companies, such as Whole Foods, a grocery chain, give customers the op-
portunity to donate to charity every time they go to buy groceries (and many do)
or donate a fixed percentage of their profits to charity depending on which charities
are most supported by their customers.
See http://www.benjerry.com/our company/our mission/index.cfm for more
detail.
Definition 1.7.2 (Nongovernmental Organizations (NGOs)) Private, not-for-profit

organizations that seek to serve society’s interest by focusing on social, political,
and economic issues such as poverty, social justice, education, health, and the en-
vironment.
Definition 1.7.3 (Nongovernmental Organizations (NGOs)) Private, not-for-profit

organizations that seek to serve society’s interest by focusing on social, political,
and economic issues such as poverty, social justice, education, health, and the en-
vironment. Prominent NGOs include
• Save the Children (provides support for the children afflicted by poverty and
malnutrition),
• Oxfam (a confederation of charitable organizations that support the alleviation
of poverty, provide relief in the event of humanitarian disasters, and promotion
of social equity),
• CARE (promotes community development, such as education and health care,
and emergency relief in the event of humanitarian disasters),
1.7. CORPORATE SOCIAL RESPONSIBILITY 19
• World Wildlife Fund (WWF) (promotes environmental conservation and pro-

tection for endangered species),
• Conservation International (promotes environmental conservation), and
• Rainforest Action Network (RAN).
Both political groups and businesses are influenced by NGOs. For example, Hodgetts
cites a case in which Citigroup (recall that Citigroup is one of the 10 largest MNCs
in the world as of 2003) divested from certain financial projects identified by RAN
as harmful to the environment.
Side Note 1.7.2 (Why Would a Company Listen to an NGO?) Why would a
company take actions that could impact its profits to satisfy an NGO?
• Good press and free advertising,
• To prevent a boycott or other consumer defections,
• And, last but note least, executives may actually feel that it is the right thing
to do. Executives are people, too.
– Even socially responsible executives would consider the “bottom line”

when making decisions, as executives of publicly traded companies are
ultimately responsible to their shareholders.
1.7.1 Corruption and the FCPA Revisited
Hodgetts et al. note that while U.S. firms are constrained by the FCPA with regards
to bribery and other corrupt practices,9 U.S. MNCs do not appear to have been
significantly impacted.
In fact, many feel that it has had a net benefit, as it gives the U.S. firms a reason
to refuse to pay bribes.
A treaty was recently signed by 29 OECD (Organization of Economic Cooperation
and Development) nations also outlaws bribery, but does not outlaw payments to
political party leaders.
Side Note 1.7.3 (Perceptions of Corruption) Transparency International ranks

perceptions of corruption in 159 countries. In 2005, China ranked 78 out of 158,
with a score of 3.2. A 10 indicates “squeaky clean” while a 0 represents highly
9 Hodgetts et al. note two executives for Lockheed Martin were actually fined a substantial
amount of money ($20,000 and $125,000 respectively) and one was sent to jail for bribing a
member of the Egyptian parliament.
corrupt. 5.0 is considered to be the borderline at which countries are considered to

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

eties, and the environment. Commitments that many MNCs have signed on to, such
as the U.N. Global Compact, specify standards and codes of conduct in domestic
and global operations.
Side Note 1.7.5 (Table 3-1: Principles of the Global Compact) The U.N. Global
Compact specifies 10 principles which MNCs should abide by:
1. Support and respect the protection of international human rights,

10 http://www.infoplease.com/ipa/A0781359.html, July 1, 2006. Scandinavian countries
are at the top of the list.
1.7. CORPORATE SOCIAL RESPONSIBILITY 21
2. Ensure that MNCs are not complicit in human rights abuses,
3. Freedom of association and recognition of the right of collective bargaining

(i.e., the right for unions to exist),
4. Elimination of all forms of forced and compulsory labor,
5. Elimination of child labor,
6. Elimination of discrimination with respect to employment and occupation,
7. A precautionary approach to environmental challenges,
8. Undertake initiatives to promote greater environmental responsibility,
9. Encourage development and dissemination of environmentally friendly tech-

nologies, and
10. Business should work against all forms of corruption, including extortion and
bribery.
Chapter 2
Operations and
Productivity
This course is called International Enterprise Management. While some aspects

will focus on the “international” component of the name, much of it will focus on
the “enterprise management” component. In business parlance, another name for
enterprise management is “operations management.”
2.1 Defining Operations Management
Definition 2.1.1 (Operations Management) Operations management, often ab-

breviated OM, is the set of activities that creates value in the form of goods and
services by transforming inputs into outputs.
Note that the definition refers to both goods and services. As China develops, the
efficient production of services will become more important.
Side Note 2.1.1 (Heizer Company Profile: Hard Rock Café) Review Heizer’s
company profile of the Hard Rock Café [1, pp. 2–3].
• Hard Rock Cafés are in most major cities in the U.S. and Beijing. In total,
they have restaurants in 38 countries.
• They typically combine heavy merchandizing with the restaurant operation.
• They have also expanded into compelementary operations, such as hotels,

casinos, etc..
23
24 CHAPTER 2. OPERATIONS AND PRODUCTIVITY
• Based on my limited and personal observations, in the U.S., the food is

considered by many to be mediocre and overpriced. People generally go for
the atmosphere.
– Most Americans are familiar with the Hard Rock Café and among the
younger generation, a significant percentage have eaten in a Hard Rock
Café at least once.
∗ I have eaten there, and I was disappointed in the experience. The
prices were high, but I did not consider the menu to be much more
than standard “sports bar” fare.
– The Hard Rock Café was once considered “edgy” in the United States
and built a reputation on unique atmosphere and attitude.
– However, it is now so widespread that it is no longer considered edgy
and so corporate that any attitude it may have no longer derives from
the “rock and roll” world that was its origins.
– So management must not focus more on product quality and continu-
ing to draw customers despite a different image and differing customer
perceptions than it originally had.
• In the profile, Heizer states that “we look not only at how Hard Rock’s man-
agers create value, but also how a variety of managers in other industries do
so.”
The Hard Rock Café will be discussed further throughout the course.
Functions within organizations are typically divided between three categories:
1. Marketing – Generates the demand, or at least takes the order for a product
or service.
2. Production/operations – Creates the product.
3. Finance/accounting – Tracks how well the organization is doing, pays the

bills, and collects the money.
Our study of operations management will have four focus areas.
1. OM is one of the three major functions of an organization and is related

to all other functions. So we focus on how people organize themselves for
productive activity.
2. We will study how goods and services are produced.
3. We will try to understand what operations managers do so that we can po-

tentially become better operations managers ourselves.
2.2. WHAT OPERATIONS MANAGERS DO 25
4. OM is one of the most costly aspects of an organization. We will focus on

improving OM functions as a key to increasing profitability and enhancing
service to society.
Side Note 2.1.2 (Organization Charts) Review Heizer’s 3 sample organization

charts [1, p. 5], known commonly in the U.S. business community as “org charts.”
• Every organization with more than a few employees has an organization chart.
• They are often sources of conflict among management, particularly when job
titles are not clear, as the org chart determines executives’ authority and,
more generally, place in the heirarchy.
2.2 What Operations Managers Do

Operations managers focus on the four functions of the management process:
1. Planning,
2. Organizing,
3. Staffing, and
4. Controlling.
To accomplish these functions, operations managers make decisions. OM decisions

have been divided into ten categories by Heizer [1, pp. 6–7]. Everything we study
in this course will relate to improving our ability to make one of the ten types of
management decisions.
Definition 2.2.1 (Operations Decisions) The strategic decisions of OM (Opera-

tions Management) are product design, quality, process design, location selection,
layout design, human resources and job design, supply-chain management, inven-
tory, scheduling, and maintenance.
Side Note 2.2.1 (Ten Decision Categories) Review Heizer’s 10 decision cate-
gories [1, p. 7].
1. Service and product design – What good or service should we offer? How
should we design these products?
• Design typically determines the lower limit of cost and the upper limit
of quality.
2. Quality management – Who is responsible for quality? How do we define the

quality?
• The customer’s quality expectations must be determined and a quality

assurance process must be put in place.
3. Process and capacity design – What process and what capacity will these
products require?
• Process decisions commit management to specific technologies, quality,

personnel use, and maintenance and determine much of the cost of a
product or service.
4. Location – Where should we put the facility?
• Location decisions are crucial. Poor location decisions may overwhelm

other efficiencies.
• Discuss Active.com’s location decisions and Matt McAdams a posteriori
assessment of the choices.
5. Layout design – How should we arrange the facility? How large must the
facility be to meet our plan?
• Involves materials flows, capacity needs, personnel levels, technology

decisions, and inventory requirements.
6. Human resources and job design – How do we provide a reasonable work

environment? How much can we expect our employees to produce?
• Human resources decisions are critical to all aspects of success.

• Personnel costs are a significant part of most production or service pro-
cesses.
7. Supply-chain management – Should we make or buy this component? Who

are our suppliers and who can integrate into our e-commerce program?
• Managers must consider quality, delivery, innovation, and price.

• Mutual trust between buyers and suppliers is crucial.
8. Inventory, material requirements planning, and JIT (just-in-time) – How much

inventory of each item should we have? When do we reorder?
• Inventory decisions must follow from customer and supplier considera-

tions, production scheduling, and human resource planning.
9. Intermediate and short-term scheduling – Are we better off keeping people on

the payroll during slowdowns? Which job do we perform next?
• Feasible and efficient production schedules must be determined.

2.2. WHAT OPERATIONS MANAGERS DO 27
10. Maintenance – Who is responsible for maintenance? When do we do main-

tenance?
• Maintenance is one aspect of decision-making that is often overlooked
and can contribute significantly to costs.
• Reliability and stability of systems depends on well-planned maintenance
schedules.
We will attempt to cover in detail topics relating to as many of these as possible as

time permits during the semester.
Definition 2.2.2 (Just in Time) Just In Time (JIT) is an inventory strategy im-
plemented to improve the return on investment of a business by reducing in-process
inventory and its associated costs. The process is driven by a series of signals, or
Kanban, that tell production processes to make the next part. Kanban are usually
simple visual signals, such as the presence or absence of a part on a shelf. When
implemented correctly, JIT can lead to dramatic improvements in a manufacturing
organization’s return on investment, quality, and efficiency.
New stock is ordered when stock reaches the re-order level. This saves warehouse
space and costs. However, one drawback of the JIT system is that the re-order level
is determined by historical demand. If demand rises above the historical average
planning duration demand, the firm could deplete inventory and cause customer
service issues. To meet a 95% service rate a firm must carry about 2 standard
deviations of demand in safety stock. Forecasted shifts in demand should be planned
for around the Kanban until trends can be established to reset the appropriate
Kanban level. In recent years manufacturers have touted a trailing 13 week average
is a better predictor than most forecastors could provide.
A related term is Kaizen which is an approach to productivity improvement literally
meaning ”continuous improvement” of process.1
Side Note 2.2.2 (A Little History) Review Heizer figure 1.3 “Significant Events
in Operations Management” [1, p. 8].
• Eli Whitney (1800) is credited for popularizing interchangeable parts, which

relied upon standardization and quality control.
• Frederick W. Taylor (1881) introduced science to management and is known
as the “father of scientific management” [1, p. 9]. He also believed that
management is responsible for
– Matching employees to the right job,
– Providing the proper training,
– Providing proper work methods and tools, and
1 Source: http://en.wikipedia.org/wiki/Just In Time %28business%29, February 14, 2007.
– Establishing legitimate incentives for work to be accomplished.

• Walter Shewhart (1924) provided the foundations for the use of statisics and
sampling in quality control.
• Recently, major contributions have come from the field of information sci-
ences.
Definition 2.2.3 (Information Sciences) The systematic processing of data to

yield information.
2.3 The Service Sector

As economies modernize and production is sufficient to guarantee a basic level
of food, shelter, and other essentials for its citizens, services become increasingly
important. In the U.S., the economy transitioned from agriculture to manufacturing
around 1900. Manufacturing was dominant until about 1950 or so. Today, services
account for over 70% of U.S. economic output.
Side Note 2.3.1 (Development of the Service Economy) Present Heizer figure
1.5 [1, p. 11].
• In most western economies, the services sector is by far the largest employer.
• In some service industries, such as retail, average wages are below average2
in the U.S.. However, for others professional occupations, such as the le-
gal profession or computer services in the financial industry, the wages are
considerably above average.
Definition 2.3.1 (Services) Those economic activities that typically produce an

intangible product.
The U.S. Bureau of Labor Statistics defines services to include [1, p. 9]
• Repair and maintenance,

• Government,
• Food and lodging,
• Transportation,
• Insurance,
• Trade,
2 The average national private industry wage.
2.3. THE SERVICE SECTOR 29
• Financial,
• Real estate,
• Education,
• Legal,
• Medical,
• Entertainment,
• Other professional occupations.
Side Note 2.3.2 (Differences Between Goods and Services) There are a vari-
ety of important differences between goods and services which result in differences
in the way they are managed.
• Services are typically intangible.
• Services are often produced and consumed simultaneously. This is important

insofar as there is no inventory.
• Services are more often unique. Legal advice is rarely identical for two clients.
• Services have a high consumer interaction. Consumers interact with those

providing the service.
• Services have inconsistent product definition.
• Services are often knowledge-based. Therefore it is difficult to automate.
• Services are often dispersed. Customers seek services through local interme-
diaries.
Note that many goods include services and many services include goods.3 That is,
when going to a restaurant, you enjoy both the food that you purchase and the
service provided by the waiter or waitress who takes care of you. When buying a
computer, the purchase price may include installation services, a support contract
in case you have problems or training to familiarize you with the features of the
computer. Hospital care includes both health services and goods, such as pharma-
ceuticals or medical supplies, used in your treatment.
Definition 2.3.2 (Pure Service) A service that does not include a tangible prod-
uct.
3 Services that do not include a good as a component are called pure services. See definition
2.3.2.
2.4 Trends in Operations Management

We talked a little about the history of operations management in sidenote 2.2.2.
Globalization has been having a dramatic impact on operations management and
in the future, it will continue to strongly impact the field.
Trends that Heizer and Render identify [1, p. 13] for the future of operations man-
agement include
• Global focus – Due to decreases in transportation and communications costs,

operations managers are increasingly responsible for innovations that move
ideas, parts, and finished goods rapidly, wherever and whenever needed.
• Just-in-time performance – Inventory is costly and operations management
practices are using just-in-time methods to reduce inventory costs.
• Supply-chain partnering – Shorter product life cycles as well as rapid changes
in materials require more participation by suppliers and long-term relationship
building by operations managers.
• Rapid product development – The life span of products is decreasing and the
need to rapidly develop and bring to market new products is consequently
increasing.
• Mass customization – With increases in technical capabilities and customer-
level information management, brought about in part by the internet, the next
step in product development involves customizing products according to the
customer’s preferences.
• Empowered employees – With the rise of services and knowledge products,
operations managers are responding by moving decision making to the indi-
vidual employee.
• Environmentally sensitive production – Companies and their customers are
becoming increasingly concerned with creating environmentally friendly prod-
ucts. Operations managers are being challenged to produce biodegradable,
reusable, or recyclable products or to minimize packaging and other wasteful
production steps.
2.5 The Productivity Challenge

One of the operation manager’s primary challenges is improving productivity. This
can be done by producing more output with a given level of inputs or reducing the
level of inputs used to produce a given level of output.
Definition 2.5.1 (Productivity) The ratio of outputs (goods and services) divided
by one or more inputs (such as labor, capital, or management).
2.5. THE PRODUCTIVITY CHALLENGE 31
Definition 2.5.2 (Single-Factor Productivity) Indicates the ratio of one resource

(input) to the goods and services produced (outputs).
Definition 2.5.3 (Mulitfactor Productivity) Indicates the ratio of many or all

resources (inputs) to the goods and services produced (outputs).
Also known as total factor productivity.
Definition 2.5.4 (Total Factor Productivity) See definition 2.5.3.
In order to improve productivity, an operations manager should be able to mea-

sure productivity to accurately evaluate the success or failure of measures taken to
improve productivity.
Side Note 2.5.1 (Measuring Productivity and Personal Incentives) While mea-
suring enhanced productivity is important for the company, the operations manager
should also realize that increases in productivity are an important metric used to
determine his or her advancement within the company.
Managers who can document increases in productivity and their role in creating
those increases also improve their own prospects for advancement within their or-
ganization.
Side Note 2.5.2 (Example: Calculating Productivity) Present Heizer’s exam-

ple 2 [1, p. 15].
Collins Title Company has a staff of 4 working 8 hours per day at

$640/day and overhead of $400/day.
The company closes on 8 titles a day but purchased a system that will
allow processing of 14 titles a day, but overhead is no $800/day.
8 titles per day
Labor productivity with the old system: = 0.25 titles per labor-hour
32 labor-hours
14 titles per day
Labor productivity with the new system: = 0.4375 titles per labor-hour
32 labor-hours
8 titles per day
Multifactor productivity with the old system: $600+$400 = 0.0077 titles per labor-hour
14 titles per day
Multifactor productivity with the old system: $600+$800 = 0.97 titles per labor-hour
Measuring productivity is not always a straightforward activity. Potential problems

include
• Quality – Quality may change while the quantity of inputs and outputs is
constant. Consider today’s computers versus those from the 1970s.
– The first computer ever used had no internal memory. (It used audio
tapes for memory storage.) The screen had only one color, green, and
was about the size of my hand. There were, of course, no word proces-
sors, spreadsheets, or other commercial software available. If you wanted
the computer to do something, you had to write a program from scratch.
• Exogeneous factors – External elements may cause changes in productivity

which the operations manager or other factors in the system under study is
not responsible for.
– For example, in Cambodia, the public provision of electricity is highly

variable. The electricity often goes out in the middle of the day and the
current may vary in strength. If the public electricity provision increases
in quality, it may improve productivity.
• Units of measure – There may not be appropriate units of measure.
– Not all cars are the same. A Toyota Corolla is a much different car than
a Porsche 911 Turbo.
– This can be a particular problem in the service industry, where quality
and other factors vary widely or the level of service provision includes
items difficult to measure, such as convenience or safety.
2.5.1 Productivity Variables
Operations managers typically divide productivity variables into three categories:
1. Labor,
2. Capital,
3. Management.
Definition 2.5.5 (Productivity Variables) In operations management, the three

factors critical to productivity improvement – labor, capital, and the arts and science
of management.
Labor
In the U.S., about 10% of the annual improvement in productivity is due to increases
in labor productivity.
Labor productivity has increased due to
• Better-educated,
2.5. THE PRODUCTIVITY CHALLENGE 33
• Better-nourished, and
• Healthier workers as well as
• A shorter work week.
The primary variables for improving labor productivity include
1. Basic education appropraite for an effective labor force,

2. Diet of the labor force, and
3. Social overhead that makes labor available, such as transportation and sani-
tation, and
4. In developed nations, maintaining and enhancing the skills of labor.
Education of the labor force is a primary concern of developed nations given the
speed with which technology and knowledge improve.
Side Note 2.5.3 (The State of Education in the U.S.) Present Heizer figure 1.8
[1, p. 16], “About Half of 17-Year-Olds in the U.S. Cannot Correctly Answer Ques-
tions of This Type.”
In the U.S., there is considerable concern over teaching of basic skills such as
mathematics to grade school children. Heizer notes that 38% of American job
applicants tests for basic skills were deficient in reading, writing, and math. About
half of 17-year-olds cannot answer the following multiple-choice questions:
1. What is the area of a 4 × 6 meter rectangle.4

• 4 square meters
• 6 square meters
• 10 square meters
2. If 9y + 3 = 6y + 15 then y =
• 1
• 2
• 4
• 6
3. Which of the following is true about 84% of 100?
4 When presenting this question, draw the rectangle on the blackboard.
• It is greater than 100

• It is less than 100
• It is equal to 100
At the university level, however, U.S. graduate programs and the students they
produce remain the best in the world.
2.5.2 Capital
Capital investment in the U.S. has increased at about an average of 1.5% after
allowances for depreciation.
Note that there is a trade-off between capital and labor in most industries, and the
cost of capital depends on interest rates.
2.5.3 Management
Management is used to ensure that labor and capital are used effectively and effi-
ciently.
According to Heizer [1, p. 17], management accounts for over half the annual
increase in productivity through the application of technology and utilization of
knowledge.
Side Note 2.5.4 (Management as an Input) Because this is a course in busi-

ness management, and because the author of the textbook is writing about opera-
tions management, management is considered as a separate input.
Note that in classic economic analysis and other areas of business, management is
not always identified separately from labor as an input.
Developed economies (also known as post-industrial economies) require trained,

educated, and knowledgeable employees and operations managers are responsible
for ensuring that technology, education, and knowledge, as well as capital, are
utilized effectively.
Definition 2.5.6 (Knowledge Society) A society in which much of the labor force
has migrated from manual work to work based on knowledge.
2.5.4 Productivity and the Service Sector
Historically, in the U.S., productivity in the service sector has not increased as rapidly
as with the production of goods. Difficulties arise because service-sector work is
2.6. SOCIAL RESPONSIBILITY 35
1. Typically labor-intensive (e.g., teaching),
2. Frequently individually processed (e.g., investment advice),
3. Often an intellectual task performed by professionals (e.g., medical diagnosis),
4. Often difficult to automate (e.g., a haircut), and
5. Difficult to evaluate for quality (e.g., the performance of a law firm).
Low-productivity activities, such as cleaning, food preparation, laundry service, and

child care, have also been growing in the service sector as more families are composed
of two working parents and may bias productivity measures downward.
Side Note 2.5.5 (Service Productivity in the U.S.) Productivity is highest in

the U.S. in both overall and service productivity. Heizer notes [1, p. 18]
• Retailing in the U.S. is twice as productive as in Japan,5
• The U.S. telephone industry is twice as productive as Germany’s, and
• The U.S. banking system is about 33% more productive than Germany’s.
2.6 Social Responsibility

As discussed in chapter 1, operations managers are also challenged to incorporate
socially responsibility into their decision-making while at the same time considering
profits and efficiency. These challenges include such issues as
• Maintaining a clean environment,
• Keeping the workplace safe,
• General ethical behavior concerning issues such as child labor and corruption.
These demands come not only from the manager’s personal ethic, but from cus-
tomers, government agencies, watchdog groups such as NGOs, and other stake-
holders. We will discuss this challenge in more detail throughout the course.
5 In Japan, legislation protects shopkeepers from discount retailers.

Chapter 3
Operations Strategy in a
Global Environment
We will now discuss globalization within the context of enterprise management.

There are a variety of reasons to expand domestic operations into the international
arena. The following reasons proceed from the most tangible to less tangible reasons.
1. Reduction of Costs – Many multinationals take advantage of lower labor

costs overseas as well as take advantage of tax and tariff benefits for foreign
operations.
• The World Trade Organization (WTO) has reduced average tariffs from
40% in 1940 to 3% in 1995.
• In the U.S., Canada, and Mexico, NAFTA (the North American Free
Trade Agreement) seeks to phase out all trade barriers.
– In Mexico, maquiladoras allow manufacturers to only be taxed on
value-added operations.
• Other prominent free trade agreements include
– APEC (between Pacific rim countries),
– SEATO (Australia, New Zealand, Japan, Hong Kong, South Korea,
New Guinea, and Chile),
– MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay)
• The EU (European Union) is also a major trading bloc.
2. Improve the Supply Chain – Unique resources, such as expertise or raw mate-
rial, can be used to improve the supply chain by locating in areas where these
resources are prevalent. For example,
• Cutting-edge auto designers are keen to locate in Southern California.
37
38CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT
• Most shoe production takes place in South Korea and Guangzhou.

• Perfumers tend to concentrate in Grasse, France.
3. Provide Better Goods and Services – For companies doing business in an
international setting, an understanding of cultural differences in preferences
is needed to best meet customer needs.
4. Attract New Markets – Expansion into foreign markets can
• Expand the life cycle of an existing product,
• Provide additional insights and opportunities, and
• Increase sales.
5. Learn to Improve Operations – Firms can learn from efficient business prac-
tices in foreign markets.
6. Attract and Retain Global Talent – By offering more employment opportuni-
ties, global organizations can attract and retain better employees.
3.1 Developing Missions and Strategies

A mission allows managers to tell employees where the company is going whereas
a strategy tells them how to get there.
3.1.1 Mission
Whether large or small, I recommend that all companies draft a mission statement.
Missions state the rationale for an organization’s existence.
Definition 3.1.1 (Mission) The purpose or rationale for an organization’s exis-

tence.
Side Note 3.1.1 (Mission Statements for Three Organizations) Review Heizer
figure 2.2 [1, p. 28] which includes mission statements for three multinational com-
panies:
1. FedEx,
FedEx is committed to our People-Service-Profit philosophy. We
will produce outstanding financial returns by providing totally re-
liable, competitively superior, global air-ground transportation of
high-priority goods and documents that require rapid, time-certain
delivery. Equally important, positive control of each package will
be maintained utilizing real time electronic tracking and tracing
3.1. DEVELOPING MISSIONS AND STRATEGIES 39
systems. A complete record of each shipment and delivery will

be presented with our request for payment. We will be helpful,
courteous, and professional to each other and the public. We will
strive to have a completely satisfied customer at the end of each
transaction.
2. Merck, and
The mission of Merck is to provide society with superior products
and services – invations and solutions that improve the quality of life
and satisfy customer needs – to provide employees with meaningful
work and advancement opportunities and investors with a superior
rate of return.
3. The Hard Rock Café.
Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an
exceptional entertainment and dining experience. We are commit-
ted to being an important, contributing member of our community
and offering the Hard Rock family a fun, healthy, and nurturing
work environment while ensuring our long-term success.
Side Note 3.1.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mis-
sion statement.
Ben & Jerrys is founded on and dedicated to a sustainable corporate

concept of linked prosperity. Our mission consists of 3 interrelated parts:
• Product Mission – To make, distribute & sell the finest quality
all natural ice cream & euphoric concoctions with a continued
commitment to incorporating wholesome, natural ingredients and
promoting business practices that respect the Earth and the Envi-
ronment.
• Economic Mission – To operate the Company on a sustainable
financial basis of profitable growth, increasing value for our stake-
holders & expanding opportunities for development and career
growth for our employees.
• Social Mission – To operate the company in a way that actively
recognizes the central role that business plays in society by initiat-
ing innovative ways to improve the quality of life locally, nationally
& internationally.

detail.
3.1.2 Strategy
Strategy involves concrete steps by which a company can achieve its mission. Com-
panies compete by trying to achieve a competitive advantage in one or more of at
least three important dimensions:
1. Differentiation – They make their product better.

2. Cost leadership – Providing cheaper products.
3. Responsiveness – By providing timelier, more responsive products or services.
Definition 3.1.2 (Strategy) How an organization expects to achieve its missions

and goals.
Definition 3.1.3 (Competitive Advantage) In operations management, the cre-

ation of a unique advantage over competitors.
Side Note 3.1.3 (Sample Mission Statements) Present Heizer’s figure 2.3: “Sam-
ple Missions for a Company, the Operations Function, and Major Departments in
an Operations Function.”
Note that mission statements are used not only at the company-wide level, but can
be used at the department level and even at the project level.
Differentiation
Producers can try to compete based on providing a product or service that is unique
in some way. Differentiation can arise from anything that the customer may value
about a product or a services, be it
• Product features,
• The “look and feel” of the product,
• Availability of complementary products,
• Interoperability with other products,
• Training,
3.1. DEVELOPING MISSIONS AND STRATEGIES 41
• Product delivery or installation,
• Repair and maintenance or warranty services.
Definition 3.1.4 (Differentiation) In operations management, distinguishing the

offerings of an organization in any way that the customer perceives as adding value.
Many service providers focus on experience differentiation, such as Disney with its
theme parks and the Hard Rock Café and other theme restaurants. In China, KTV
tries to differentiate itself from competitors by providing a more exciting karaoke
experience with more advanced equipment and flashier karaoke rooms.
Definition 3.1.5 (Experience Differentiation) In operations management, engag-

ing the customer with the product through imaginative use of the five senses, so
the customer “experiences” the product.
See also definition 3.1.4.
Competing on Cost
For producers of “commoditized” products or services, price is perhaps the most

important competitive dimension.
Definition 3.1.6 (Low-Cost Leadership) In operations management, achieving

maximum value (expressed in terms of quality and price) as perceived by the cus-
tomer.
Low-cost leadership does not imply low value or low quality.
Often providers of low-cost products achieve their competitive advantage by taking

advantage of facilities, management techniques, or technologies to reduce costs.
Wal-Mart has been very successful in competing by driving down overhead and
distribution costs.
Competing on Response
Competitive advantage in responsiveness relates to ability to be
• Flexible – Being able to match changes in a marketplace
– For example, Hewlett-Packard has achieved an advantage by being able

to provide a product with a life cycle of months and dramatically change
design and volume in a short time frame.
• Reliable – Being able to provide consistent products or services with minimal

risk to the customer.
– FedEx’s motto is an example of a company who is trying to compete on

the basis of reliability: “Absolutely, positively on time.”
• Quickness – Quickness can refer to speed in design, production, or delivery.
– In the U.S., Domino’s Pizza specializes in pizza delivery and at one

time guaranteed that your pizza would be delivered to your home in 30
minutes or less.
– Pizza Hut also provided a guarantee that if you came to the restaurant
for lunch and ordered a “Personal Pan Pizza,” you would get your pizza
in 5 minutes or less.
Definition 3.1.7 (Response) In operations management, the set of values related

to rapid, flexible, and reliable performance.
Side Note 3.1.4 (Operation Management’s Contribution to Strategy) Present

Heizer figure 2.4 [1, p. 32]. This figure provides examples of strategic decisions and
how they relate to the ten operations decisions discussed in sidenote 2.2.1.
Side Note 3.1.5 (Example: Starting a Restaurant) Present Heizer example 1

[1, p. 34].
• The example relates to the process design decision based on the mission state-
ment, “To provide outstanding French fine dining for the people of Chicago.”
• Several alternative options are presented.
3.2 Issues in Operations Strategy

In forming a strategy to achieve a stated mission, a manager should consider
• Research – What researchers have identified as successful characteristics of

operations management strategies.
• Preconditions – Things that must be understood before a strategy is formu-

lated.
• Dynamics – How to deal with change as the strategy is confronted with

changes in the operating environment.
Each of these topics will be discussed in turn.

3.2. ISSUES IN OPERATIONS STRATEGY 43
3.2.1 Research
The PIMS (Profit Impact of Market Strategy) project by GE (General Electric)

collected data from 3,000 cooperating organizations to identify characteristics of
high ROI (Return on Investment) firms. They determined that high-impact OM
decisions have the following characteristics:
1. High product quality1

2. High capacity utilization
3. High operating efficiency2
4. Low investment intensity3
5. Low direct cost per unit4
3.2.2 Preconditions
At a minimum, when considering factors that influence strategy development, an

understanding is needed of
1. Strengths and weakness of competitors

• Including possible new entrants and
• Commitment of suppliers and distributors
2. Current environmental, technological, legal, and economic issues.
3. The product life cycle
4. Resources available to the manager
5. Integration of the OM strategy with the company’s overall strategy
3.2.3 Dynamics
Strategy may need to be changed due to changes in an organization, including

personnel, finance, technology, and product life cycle changes, and changes in the
environment, such as the competitive environment, advances in technology, etc..
Side Note 3.2.1 (Strategy and Issues During a Product’s Life) Present Heizer
figure 2.5 [1, p. 36]. Four phases of the typical product life cycle are given as well
as where some current products lie on the life cycle.
1 Relative to the competition.
2 The ratio of actual to expected employee productivity.
3 The amount of capital required to produce a dollar of sales.
4 Relative to the competition.
3.3 Strategy Development and Implementation

Operations managers commonly use a SWOT (Strength, Weakness, Opportunities,
and Threats) analysis to develop strategies.
Definition 3.3.1 (SWOT Analysis) In operations management, determining in-

ternal strengths and weaknesses and external opportunities and threats.
The operations manager’s job is a three-step process:
1. Identify a strategy and critical success factors,

2. Group the necessary activities into an organizational structure, and
3. Staff the organization with personnel that will get the job done.
The purpose of this process is to
1. Implement an OM strategy,
2. Provide competitive advantage, and
3. Increase productivity.
Side Note 3.3.1 (Strategy Development Process) Present Heizer figure 2.6 [1,
p. 37], “Strategy Development Process.”
The process of developing a strategy involves the following steps:
• Environmental Analysis,
• Determine Corporate Mission, then
• Form a Strategy.
3.3.1 Identify Critical Success Factors
A successful strategy must determine what factors are critical to success, then
determine whether the organization does these things well (and, in particular, if the
firm has a competitive advantage in these things) and where failures are most likely.
Definition 3.3.2 (Critical Success Factors) In operations management, those ac-

tivities or factors that are key to achieving competitive advantage.
These critical success factors are used to develop a competitive advantage.

3.4. GLOBAL OPERATIONS STRATEGY OPTIONS 45
Side Note 3.3.2 (Identifying Critical Success Factors) It is a good idea to use
the 10 decision categories in sidenote 2.2.1 as a checklist to determine critical
success factors.
Once CSFs are determined, an activity map can be used to link an organization’s
competitive advantage to the CSFs.
Definition 3.3.3 (Activity Map) In operations management, a graphical link of

competitive advantage, CSFs, and supporting activities.
Side Note 3.3.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage)

Present Heizer figure [1, p. 39].
Southwest Airlines has a competitive advantage in providing low-cost airfares. The
figure provides an activity mapping of the activities that relate to SWA’s critical
success factors.
• Red arrows – critical success factors
• Blue arrows – support activities
3.3.2 Build and Staff the Organization
Building a competent staff is one of the most important functions of an operations

manager and is critically important to the success of his or her strategy.
Recall the “org charts” in sidenote 2.1.2 as examples of how firms organize their
activities.
3.3.3 Integrate OM With Other Activities
In order to achieve its strategy, OM activities are most productive when they are
integrated with other activities such as marketing, finance, MIS,5 and HR.6
3.4 Global Operations Strategy Options
Scholars of operations management have identified four strategies for operations

management in an international setting.
5 Management Information Systems
6 Human Resources.
1. International strategy – Often the easiest strategy, as exports require little

change in operations and licenses often leave risk with the licensee. Also one
of the least profitable due to transport costs and little local responsiveness.
See definition 3.4.3.
2. Multidomestic strategy – Exporting management talent and processes but not

necessarily the product. Typically characterized by subsidiaries, franchises, or
joint ventures with substantial independence. Usually does not confer a cost
advantage. See definition 3.4.4.
• McDonald’s is an example of a country with a multidomestic strategy.

Its menu reflects the country in which it operates, with beer on the menu
in Germany, wine in France, and hamburgers without beef in India.
3. Global strategy – Not characterized by local responsiveness, but a good strat-

egy for cost reduction when products do not need to be adapted locally. See
definition 3.4.5.
• Texas Instruments is an example of a country with a global strategy. In

the semiconductor industry, products do not need to be localized.
4. Transnational strategy – Exploits economies of scale and learning and respon-

siveness by recognizing that core competence does not reside in a “home”
country but can exist anywhere in the organization. See definition 3.4.6.
• Nestlé is an example of a country with a transnational strategy. Although

it is legally Swiss, 95% of its assets and 98% of its sales are made outside
Switzerland. Only 10% of its work force is Swiss. [1, p. 42]
Definition 3.4.1 (International Business) A firm that engages in cross-border

transactions.
Definition 3.4.2 (Multinational Corporation (MNC)) A firm that has extensive

involvement in international business, owning or controlling facilities in more than
one country.
Definition 3.4.3 (International Strategy) In operations management, a strategy

that uses exports and licenses to penetrate the global arena.
Definition 3.4.4 (Multidomestic Strategy) In operations management, a strat-

egy in which operating decisions are decentralized to each country to enhance local
responsiveness.
Definition 3.4.5 (Global Strategy) In operations management, a strategy in which

operating decisions are centralized and headquarters coordinates the standardization
and learning between facilities.
3.4. GLOBAL OPERATIONS STRATEGY OPTIONS 47
Definition 3.4.6 (Transnational Strategy) In operations management, a strat-

egy that combines the benefits of global scale efficiencies with the benefits of local
responsiveness.
Side Note 3.4.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5, p. 6].
Note that many companies that are well-known American brands are now making
more money overseas than they do in the U.S., including
• Avon
• Chevron
• Citicorp
• Coca-cola
• Colgate Palmolive
• Du Pont
• Exxon-Mobil
• Eastman Kodak
• Gillette
• Hewlett-Packard
• McDonald’s
• Motorola
• Ralston-Purina
• Texaco
• 3M Company
• Xerox
Chapter 4
Project Management
Side Note 4.0.2 (Company Profile: Bechtel) Discuss Heizer’s company profile
of Bechtel [1, pp. 46–47].
The profile highlights the importance of project management in achieving compet-
itive advantage.
Project management is becoming more important as technology and globalization

are making projects more complex and collapsing product life cycles.
Project management involves three phases:
1. Planning – Goal setting, defining the project, and team organization.

2. Scheduling – People, money, and supplies are tasked to specific activities and
activities are related to each other.
3. Controlling – Monitoring of resources, costs, quality, and budgets. Plans are
also revised to meet changes in time and cost demands.
Side Note 4.0.3 (Project Planning, Scheduling, and Controlling) Present Heizer
figure 3.1 [1, p. 49].
Side Note 4.0.4 (Personal Reflections on Software Project Management) My

experience in project management is primarily in the field of software project man-
agement.
Software engineering is one of the most challenging areas in project management
because of the complexity of software development and the significant amount of
uncertainty associated with creating new algorithms or technical features.
Even Microsoft, the largest software company in the world, regularly goes over
schedule with flagship development projects such as updates to Microsoft Windows.
49
50 CHAPTER 4. PROJECT MANAGEMENT
However, it is also an area in which there will continue to be high demand for
qualified people.
See also Heizer sidenote “Project Management and Software Development,” [1,
p. 69].
Side Note 4.0.5 (Personal Advice on Project Management) Project manage-

ment is a tricky profession. If you become a project manager on projects of signifi-
cant complexity, you will be confronted with a daunting task.
You may be managing resources far in excess of your individual salary. Your job is
to make things go smoothly and according to plan. In a sense, you are doing your
job well if noone notices the project management. However, if things go wrong, it
is very obvious and can be very costly.
Moreover, you should always expect the unexpected. People will not come through
with what they promised, things you thought were certain turn out not to be, and
you will be forced to improvise.
4.1 Project Planning

While many projects are run within an existing organization, often times, a tempo-
rary project organization is formed to address a specific project.
Definition 4.1.1 (Project Organization) An organization formed to ensure that

programs (projects) receive the proper management and attention.
Project organizations work best when [1, p. 48]
1. Work can be defined with a specific goal and deadline,
2. The job is unique or somewhat unfamiliar to the existing organization,
3. The work contains complex interrelated tasks requiring specialized skills,
4. The project is temporary but critical to the organization, and/or
5. The project cuts across organizational lines.
4.1.1 The Project Manager
As alluded to in sidenote 4.0.5, project managers are highly visible in a firm and
have significant responsibilities.
The responsibilities of project managers are to make sure that
4.1. PROJECT PLANNING 51
1. All projects come in on time,

2. The project is on or under budget,
3. The project meets its quality goals, and
4. People receive motivation and information necessary to do their jobs.
4.1.2 The Work Breakdown Structure
One of the first tasks involved in project management is to figure out how to divide
the project into parts with a work breakdown structure (WBS).
Definition 4.1.2 (Work Breakdown Structure (WBS)) In operations manage-

ment, dividing a project into more and more detailed components.
Side Note 4.1.1 (Avoid Creating a WBS That is Too Detailed) A common er-
ror that inexperienced project managers make is to divide the project into too many
tasks.
When dividing a project into tasks, ask yourself
• Do I really need to spend the time to monitor each task I have identified?
• Does the failure of this task cause significant problems completing the project
on time or under budget or impact other tasks that cause problems?
If the answer to these questions is no, you have divided the tasks too finely.
For example, in a software engineering project, a web page takes about a day to
build for an experienced team. In a project that includes allowing a user to enter
personal information on a web page, a task that should only take a day or so,
• Build the user account input web page
is a much better task division than
1. Complete graphic design for user account input web page

2. Review graphic design for user account input web page
3. Approve graphic design for user account input web page
4. Complete software architecture for user account input web page functionality
5. Review software architecture for user account input web page functionality
6. Approve software architecture for user account input web page functionality
7. Write software for user account input web page functionality
8. Write software for user account input confirmation page functionality
9. Test software for user account input and confirmation web page functionality
A work breakdown structure contains tasks that decrease in size from top to bottom
and is generally divided into the following levels:
1. Project
2. Major tasks in the project
3. Subtasks in major tasks
4. Activities (also known as “work packages”) to be completed
Side Note 4.1.2 (Work Breakdown Structure) Present Heizer figure 3.3 [1, p. 50]
concerning an example based on a simple work breakdown structure (WBS) for Win-
dows XP.
The actual WBS for Windows XP would, of course, fill hundreds if not thousands
of pages.
Side Note 4.1.3 (Reality Check: WBS) In reality, the work breakdown structure
is not something you go to your office to do in isolation.
It arises from meeting and discussing the activities with engineering and technical
staff as well as senior management.
At the time you are creating the work breakdown structure, you should also take
note of time and cost estimates given by your technical staff. They will be useful
for project scheduling, which we will discuss next in section 4.2.
4.2 Project Scheduling

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

4.2. PROJECT SCHEDULING 53
4. Make better use of people, moeny, and material resources by identifying crit-
ical bottlenecks in the project
Side Note 4.2.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s
figure 3.4 [1, p. 51], “Gantt Chart of Service Activities for a Delta Jet during a 60-
Minute Layover.”
This will give the class an idea of the look and feel of a typical Gantt chart.
Definition 4.2.1 (Gantt Charts) Planning charts used to schedule resources and
allocate time.
Definition 4.2.2 (Bottleneck) A location or situation in which otherwise rapid

progress is impeded. Derives from the typical shape of a bottle, which becomes
narrower as one approaches the neck of the bottle; – said of roads; as, right by the
bridge, the road bottlenecks.
Gantt charts are perhaps the most widely used tool for ensuring that
1. All activities are planned for,
2. The order of performance is accounted for,
3. Activity time estimates are recorded, and
4. Overall project time is developed.
Side Note 4.2.2 (Using Gantt, PERT, and CPM) Inexperienced project man-
agers often feel the need to use Gantt, PERT, and CPM tools for every project
management activity. Perhaps they imagine that they are not doing their jobs
professionally if they are not.
However, these should be considered merely tools to be used when they are useful
by saving time or energy. MS Project’s Gantt chart functions demand you assign
employees, cost estimates, and other values to each activity. It can actually be
quite time consuming to create and maintain Gantt charts, PERT and other formal
documents.
For smaller projects, I have found that simple spreadsheets or even just writing
things down on a notepad (I typically use a separate notepad for each project to
keep organized) is more productive than using Gantt .
PERT and CPM help answer questions such as
• When will the entire project be completed?

• What are the critical activities or tasks in the project – that is, which activities
will delay the entire project if they are late?
• Which are the noncritical activities – the ones that can run late without
delaying the whole project’s completion?
• What is the probability that the project will be completed by a specific date?
• At any particular date, is the project on schedule, behind schedule, or ahead

of schedule?
• On any given date, is the money spent equal to, less than, or grater than the
budgeted amount?
• Are there enough resources available to finish the project on time?
• If the project is to be finished in a shorter amount of time, what is the best

way to accomplish this goal at the least cost?
4.3 Project Controlling

Project control involves monitoring resources, costs, quality, and budgets of projects.
Control programs typically produce reports detailing
1. Cost breakdowns for each task,
2. Total program labor curves,
3. Cost distribution tables,
4. Functional cost and hour summaries,
5. Raw material and expenditure forecasts,
6. Variance reports,
7. Time analysis reports, and
8. Work status reports.
4.3.1 PERT and CPM
Two methods, PERT and CPM, were developed in the 1950s for project control.
Definition 4.3.1 (Program Evaluation and Review Technique (PERT)) A project

management technique that employs three time estimates for each activity.
4.3. PROJECT CONTROLLING 55
Definition 4.3.2 (Critical Path Method (CPM)) A project management tech-

nique that uses only one time factor per activity.
Definition 4.3.3 (Critical Path) The computed longest time path through a net-
work.
They both follow six steps:
1. Define the project and prepare the WBS.

2. Develop the relationships among activities.
3. Draw the network connecting all of the activities.
4. Assign time and/or cost estimates to each activity.
5. Compute the longest time path, or the critical path, through the network.
6. Use the network to help plan, schedule, monitor, and ontrol the project.
Side Note 4.3.1 (Reality Check: PERT and CPM) MS Project allows you to
track relationships among activities and can produce either a Gantt or PERT chart
from a single project data set. Moreover, it will do for you automatically much of
what we will go through manually in this class.
So there is no practical need if you are using modern software to take the time to
separately create and update Gantt and PERT charts.
Also, in my experience, Gantt charts are the “go to” visualization method for even
very complex projects. Personally, I have never needed to use PERT charts and
have only produced them when I wanted something to show to upper management.
4.3.2 Network Diagrams
There are two approaches to visualizing activity networks:
1. Activity on Node (AON) and

2. Activity on Arrow (AOA).
As the names describe, AON associates the activity with the node whereas AOA
associates the activity with the arrow.
Side Note 4.3.2 (Example: AON and AOA) Present Heizer’s figure 3.5 [1, p. 53].
Side Note 4.3.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams)

Present Heizer’s examples 1–2 with figures 3.6–3.8 [1, pp. 54–55].
• Table 3.1 gives sufficient information to describe the network.
Follow with example 3 and figure 3.9 [1, p. 56].
4.4 Determining the Project Schedule

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

to determine the project schedule.
4.5. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57
Definition 4.4.2 (Forward Pass) In project management scheduling, the step that
identifies all the earliest times that activities can be completed.
Side Note 4.4.1 (Example of Determining the Project Schedule) Present an

example of determining a project schedule based on those described in sidenote
4.3.3 and Heizer figure 3.10 [1, p. 57], “Notation Used in Nodes for Forward and
Backward Pass.”
Then complete Heizer example 7 figure 3.13 [1, p. 61] based on table 3.3 [1, p. 60].
Note that activities A, C, E, G, and H have no slack time and cannot be delayed
without delaying the entire project. These are called critical activities. Also notable
is that if the total time of the project needs to be reduced, the time devoted to one
of these activities must also be reduced.
4.5 Slack Time and Identifying the Critical Path

After we have calculated start and finish times we know the slack time for each
activity. Slack time is just Slack = LS − ES or Slack = LF − EF .
Definition 4.5.1 (Slack Time) In project scheduling, the free time for an activity,
or the amount of time an activity can be delayed without delaying the entire project.
The critical path is one that
• Begins at the first activity in the project,

• Terminates at the last, and
• Includes only critical activities (see sidenote 4.4.1).
Note also that if we delay each activity by the amount of slack that activity has,
we may delay the project as a whole.1 When several noncritical activities appear
successively in a path, they share total slack. If an activity2 does not impact the
slack time of any other activity, it is said to have free slack.
Definition 4.5.2 (Total Slack) In project scheduling, the time shared among more
than one activity.
Definition 4.5.3 (Free Slack) In project scheduling, the time associated with a
single activity.
1 For example, in the example in sidenote 4.4.1, if we delay activities B and D by one week
each, we cannot complete the project in 15 weeks.

2 For example, activity F in sidenote 4.4.1.
4.6 Variability in Activity Times
We have so far assumed that the activities will take a fixed length of time. However,
the time required to complete an activity is often uncertain due to supply problems,
unexpected complexities, technical considerations that were unknown at the time
the project schedule was drawn up, etc..
In PERT, three time estimates are used:
1. Optimistic time – The shortest amount of time an activity will take 1% of

the time
2. Pessimistic time – The longest amount of time an activity will take 1% of the
time
3. Most likely time – The most realistic estimate of the time required to complete
an activity.
Side Note 4.6.1 (Reality Check: Time Estimates) We define the optimistic and
pessimistic times as if we know for certain what the probability distribution of pos-
sible completion times will be.
In reality, we do not. Effectively, in most cases, the project manager pulls the
number “out of the air” based on their experience managing related activities.
Definition 4.6.1 (Optimistic Time) In project scheduling, the “best” activity com-
pletion time that could be obtained in a PERT network.
See also definitions 4.6.2 and 4.6.3.
Definition 4.6.2 (Pessimistic Time) In project scheduling, the “worst” activity

completion time that could be obtained in a PERT network.
Definition 4.6.3 (Most Likely Time) In project scheduling, the most probable
activity completion time that could be obtained in a PERT network.
Definition 4.6.4 (Beta Distribution) A general type of statistical distribution which

is related to the gamma distribution. Beta distributions have two free parameters,
which are labeled according to one of two notational conventions. The usual def-
inition calls these alpha and beta, and the other uses β 0 = β − 1 and α0 = α − 1
. The beta distribution is used as a prior distribution for binomial proportions in
4.6. VARIABILITY IN ACTIVITY TIMES 59
Bayesian analysis. The above plots are for various values of (α,β) with α = 1 and
β ranging from 0.25 to 3.00.3
The domain is [0,1], and the probability function P (x) and distribution function
D(x) are given by
(1 − x)β−1 xα−1 Γ(α + β)

P (x) = = (1 − x)β−1 xα−1 (4.1)
B(α, β) Γ(α)Γ(β)
where B(p, q) and Γ(p) are given by
Γ(p)Γ(q) (p − 1)!(q − 1)!

B(p, q) = = (4.2)
Γ(p + q) (p + q − 1)!
The beta distribution is commonly used in project scheduling to estimate activity

time distributions in a PERT network [1, p. 62].
Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6.

The variance of the activity time is Variance = [(b − a)/6]2 .
Side Note 4.6.2 (Calculating Expected Activity Time and Variance) Present
Heizer example 8 [1, p. 63] for activity F based on optimistic, most likely, and pes-
simistic times of 1, 2, and 9 weeks. The expected activity time for activity F is 3
weeks5 and the variance is 1.78 weeks.6
Have someone in the class compute the expected activity time7 and variance8 for
activity E based on optimistic, most likely, and pessimistic times of 1, 4, and 7.
4.6.1 Probability of Project Completion
If we assume that
1. Total project completion times follow a normal probability distribution and
2. Activity times are statistically independent

3 Source: http://mathworld.wolfram.com/BetaDistribution.html and
http://mathworld.wolfram.com/BetaFunction.html, February 21, 2007.
4 See definition 4.6.4.
5 t = a+4m+b = 1+4(2)+9 = 18 = 3 weeks
6 i62 h 6 i
(9−1) 2
h
6 Variance = (b−a) = = 64 = 1.78
6 6 36
7 4 weeks.
8 1.00 week.
then the total project completion time will simply the the sum of variances on the
critical path
X
σp2 = Project variance = (variances of activities on critical path) (4.3)
Definition 4.6.5 (Variance) For a single variate X having a distribution P (x)

with known population mean µ, the population variance var(X), commonly also
PN
written σ 2 , is defined as σ 2 ≡ i=1
R P (xi )(xi − µ)
2
for a discrete distribution with
2 2
N possible values of xi and σ ≡ P (x)(x − µ) dx for a continuous distribution.
See also 4.6.6.
Definition 4.6.6 (Standard Deviation) The standard deviation is the square root
of the variance.9
An observation will fall within 1 standard deviation of the mean approximately 68%
of the time, two standard deviations approximately 95% of the time, and within 3
standard deviations approximately 99.7% of the time.
Side Note 4.6.3 (Example: Project Variance) Review Heizer example 9 [1, p. 64].
Note that the standard deviation of 1.76 weeks implies that the project will exceed
the expected completion time by more than 1.76 weeks approximately 16% of the
time.10
Determining Project Completion Time for a Given Confidence Inter-

val
A common question is, “What is the probability that a project will take more than
X time to complete?”
This can be answered by consulting the normal tables and using Z-values to estimate
the answer based on the variance we showed how to calculate in section 4.6.1.
Side Note 4.6.4 (Using the Normal Table) Pass out Heizer Appendix I [1, pp. A2–
A3] “Normal Curve Areas.”
Review Heizer example 10 [1, p. 65] and figure 3.16.
9 For more information, see http://mathworld.wolfram.com/StandardDeviation.html.

4.7. COST-TIME TRADE-OFFS AND PROJECT CRASHING 61
Variability Off the Critical Path
Note that while we have focused on the critical path, if certain activities off the
critical path take the pessimistic time estimate or more to complete, it may result
in the project being delayed.
4.7 Cost-Time Trade-Offs and Project Crashing

What happens when either the project is behind schedule or the deadlines have
been moved up? Both scenarios are not uncommon, and if you become a project
manager, you will doubtless experience one or both of these eventualities many
times in your career.
Project crashing is the name given to the process of rushing a project to completion.
When crashing a project, we need to ensure
• The amount by which an activity is crashed is, in fact, permissible and realistic,
• The shortened durations will actually enable us to finish the project on time,
and
• The total cost of crashing is as small as possible.11
Definition 4.7.1 (Crashing) In project management, shortening activity time in a

network to reduce time on the critical path so total completion time is reduced.
Definition 4.7.2 (Crash Time) In project management, crash time is the shortest
duration of an activity.
Definition 4.7.3 (Crash Cost) In project management, crash cost is the cost re-
quired to complete an activity in the shortest time possible.
Since activity completion times are typically shortened by adding resources, the
crash cost is typically higher than the normal cost.
Crashing a project involves a four step process:
1. Step 1 – Compute the crash cost per week. Assuming linear costs,
(Crash cost − Normal cost)
Crash cost per period = (4.4)
(Normal time − Crash time)
11 Since crashing a project often involves adding additional resources to activities, we want
to do so in the least cost mannger possible.

2. Step 2 – Find the critical path(s) in the project network.

3. Step 3 – If there is only one critical path, select the activity on this critical
path that
• Can still be crashed and
• Has the smallest crash cost per period.
Crash this activity by one period. If there is more than one critical path, select
one activity from each such that
• Each selected activity can still be crashed and
• The total crash cost per period of all selected activities is smallest.
Then crash each activity by one period. Note that one activity may be on
several critical paths.
4. Step 4 – Update all activity times. If the due date has been reached, stop. If
not, go to step 2.
Side Note 4.7.1 (Reality Check: Project Crashing) As common as projects falling
behind schedule or deadlines being moved up is upper management’s insistence that
a project be completed in less time than a project manager estimates.
As a project manager, you should be very wary of such pressure. If you accept
the challenge and try to rush the project to please upper management, they will
probably blame you if the project is not completed on time despite the fact that
they pressured you to change your estimates.
My personal advice is to try to resist pressure to compress your time estimates and
let upper management know when their expectations are unrealistic, as the negative
impact on your career of tactfully pushing back against management is usually much
less than the negative impact of a significant project delay or cost overrun.
At times this may be politically infeasible. If you find yourself needing to rush a
project, the advice given in this section should be helpful.
Side Note 4.7.2 (Example: Crashing a Project) Present Heizer example 12 [1,
pp. 67–69] including table 3.5 and figures 3.18–3.19.
4.8 A Critique of PERT and CPM

There are both advantages and disadvantes to PERT.
• Advantages
– Especially useful for large projects
4.9. USING MICROSOFT PROJECT FOR MANAGING PROJECTS 63
– Straightforward and not mathematically complex

– Graphical tools help perceive relationships quickly and easily
– Critical path and slack time analysis very helpful
– Project documentation and graphs identify who is responsible for various
activities
– Applicable to a wide variety of projects
– Useful in monitoring both schedules and costs
• Disadvantages
– Project activities must be clearly defined, independent, and the relation-

ships stable
– Precedence relationships must be specified
– Time estimates tend to be subjective and are subject to “fudging” by
managers12
– The danger of too much emphasis on critical paths. Noncritical paths
should be closely monitored as well.
4.9 Using Microsoft Project for Managing Projects

Present programs 3.1–3.7 [1, pp. 70–74] with figures demonstrating MS Project
functionality.
Note that most project management textbooks refer to MS Project as the software of
choice for project management. It is perhaps the most widely known and featureful
project management software available. However, it is relatively expensive and the
features are so numerous and complex, they are often overkill for small- to medium-
sized projects.
There are a variety of alternatives, including open source software that is free.
Information on Achievo can be found at http://www.achievo.org. Information
on dotProject can be found at http://www.dotproject.net. Information on
Planner can be found at http://live.gnome.org/Planner.
You may also refer to http://en.wikipedia.org/wiki/List of project management software
for a list of project management software or ask Dr. Starkweather about his im-
pression of various alternatives.
12 Recall sidenote 4.7.1.

Chapter 5
Forecasting
5.1 What is Forecasting?

Business is inherently unpredictable. Part of the job for business leaders is to make
good decisions with limited information.
Definition 5.1.1 (Forecasting) The art and science of predicting future events.
Part of good decision-making comes from years of experience. However, even the
best and most experienced managers need to use mathematical forecasts to supple-
ment their intuition.
Side Note 5.1.1 (Heizer Company Profile: Tupperware) Review Heizer’s com-
pany profile of the Tupperware [1, pp. 82–83].
Forecasts are classified by the future time horizon it concerns:
• Short-range forecasts – Generally less than 3 months. Tend to be more accu-

rate than medium- or long-range forecasts. Also uses different methodology,
primarily mathematical techniques. Useful for
– Purchasing,
– Job scheduling,
– Workforce levels,
– Job assignments, and
– Production levels.
• Medium-range forecasts – Generally between 3 months and 3 years. Useful
for
65
66 CHAPTER 5. FORECASTING
– Sales forecasting,
– Production planning and budgeting,
– Cash budgeting, and
– Analyzing various operating plans.
• Long-range forecasts – Generally more than 3 years. Generally deals with
more comprehensive issues than short-range forecasts. Useful for
– Planning for new products,
– Capital expenditures,
– Facility locations or expansion, and
– Research and development.
Product life cycles tend to follow four stages:
1. Introduction,
2. Growth,
3. Maturity, and
4. Decline.
In the first two stages, longer forecasts are needed.
5.1.1 Types of Forecasts
Organizations typically use
• Economic forecasts,
• Technological forecasts, and
• Demand forecasts.
Definition 5.1.2 (Economic Forecasts) In operations management, planning in-

dicators valuable in helping organizations prepare medium- to long-range forecasts.
These may include inflation rates, money supply, housing starts, and other economic
indicators.
Definition 5.1.3 (Technological Forecasts) In operations management, long-term

forecasts concerned with the rates of technological progress. These concern rates
of technological progress, which impacts purchases of new plant and equipment as
well as development of new products.
5.2. A SEVEN STEP FORECASTING SYSTEM 67
Definition 5.1.4 (Demand Forecasts) In operations management, projections of

a company’s sales for each time period in the planning horizon. Also called sales
forecasts, these drive a company’s production, capacity, and scheduling decisions
and serve as inputs to financial, marketing, and personnel planning.
5.1.2 The Strategic Importance of Forecasting
We will examine the impact of product forecasting in
1. Human resources – Anticipated demand is needed to estimate the need for
• Hiring,
• Training, and
• Layoffs.
2. Capacity – Underestimating demand can result in
• Undependable delivery,
• Loss of customers, and
• Loss of market share.
3. Supply-chain management – Accurate forecasts are essential for
• Good supplier relations and

• Ensuring price advantages for materials and parts.
5.2 A Seven Step Forecasting System

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

Side Note 5.2.1 (The Most Common Errors in Forecasting Methodology) In

my experience, the most common errors I have seen with forecasting involve:
• Trying to use regression analysis with too few observations.

– In one case, budgets for a department in which I worked were forecast
based on a regression analysis with 3 observations.
• Using models that are more sophisticated than the user’s understanding.
– If you do not truly understand the mathematics, use something simpler.
– Many people try to apply ordinary least squares (OLS) regression tech-
niques, based on a linear model, to inherently nonlinear systems.
• Lack of follow-up.
– After making a forecast, track the actual outcomes and compare them
to the forecasts.
– If they do not match, figure out whether an improvement to the fore-
casting methodology can be made.
• Lack of sanity checking.
– Before you show your numbers to others, ask yourself if they make sense.
– On a number of occasions, I have seen otherwise competent people
(including Ph.D. statisticians) embarrassed in front of a room full of
people when presenting numerical results that don’t actually make sense
based on some simple logic checks.
• Lack of support for the forecasts.
– You should be able to explain how and why you arrived at each and
every number that you forecast.
– If someone challenges your forecast and you do not have supporting logic
or documentation, you will be unable to defend your numbers.
5.3 Forecasting Approaches

Forecasting can use a qualitative or quantitative approach. In practice, it is a bit of
an art that mixes both. Any quantitative approach should be complemented with
a qualitative “reality check.”
• Qualitative Methods – Popular qualitative methods include

– Jury of executive opinion
∗ Often this method is used in combination with qualitative models.
5.3. FORECASTING APPROACHES 69
– Delphi method
∗ Participants in the Delphi method include
· Decision makers,
· Staff personnel, and
· Respondents.
∗ The more independent your decision makers are from economic,
political, or other incentives to over or understate demand, the more
likely it is your results will be accurate.
– Sales force composite
∗ You would be surprised how accurate your sales force can be.
∗ However, be sure that the sales force is clear that their incentive
is to be as accurate as possible. Sales people typically respond to
incentives, and if they perceive there is an incentive to exaggerate,
they will do so.
– Consumer market survey
∗ You will often find that your customers will have incentives to inflate
their estimates of demand; for example, they may want you to think
that they will be doing more business with you in the future to obtain
price concessions today.
• Quantitative Methods – Popular quantitative methods include
– Time-series models
∗ Naive approach
· Simply assumes demand this period equals demand last period.
· The simplest and easiest way to estimate demand.
· Useful as a starting point or sanity check for more sophisticated
methods.
· See definition 5.3.8.
∗ Moving averages
· Simple, useful method if we can assume that market demands
will stay fairly steady over time.
· There are three problems with moving averages
1. Increasing the size of n smoothes out fluctuations better but
makes the method less sensitive to real changes in data.
2. Moving averages cannot pick out trends very well.
3. Moving averages require more past data to work with than,
say, the naive approach.
∗ Exponential smoothing
· More sophisticated than the naive approach or moving averages.
· Requires less past data than moving averages.
· Referred to as exponential because errors in past prediction ex-

ponentially reduce in importance.
∗ Trend projection
– Associative models
∗ Linear regressions
Definition 5.3.1 (Quantitative Forecasts) Forecasts that employ one or more

mathematical models that rely on historical data and/or causal variables to forecast
demand.
Definition 5.3.2 (Qualititative Forecasts) Forecasts that incorporate such fac-

tors as the decision maker’s intuition, emotions, personal experiences, and value
system.
5.3.1 Qualitative Forecasting Methods
Definition 5.3.3 (Jury of Executive Opinion) In operations management, a fore-

casting technique that takes the opinion of a small group of high-level managers
and results in a group estimate of demand.
See also definitions 5.3.4, 5.3.5, and 5.3.6.
Definition 5.3.4 (Delphi Method) In operations management, a forecasting tech-

nique using a group process that allows experts to make forecasts.
Definition 5.3.5 (Sales Force Composite) In operations management, a fore-

casting technique based on salespersons estimates of expected sales.
Definition 5.3.6 (Consumer Market Survey) In operations management, a fore-

casting technique that solicits input from customers or potential customers regarding
future purchase plans.
5.3.2 Quantitative Forecasting Methods
Definition 5.3.7 (Time Series) A forecasting technique that uses a series of past
data points to make a forecast.
See also definitions 5.3.8, 5.3.9, 5.3.10, and 5.3.11.
Definition 5.3.8 (Naive Approach) A forecasting technique that assumes demand

in the next period is equal to demand in the most recent period. That is, Ft = At−1
where Ft is the forecast demand for the current time period and At−1 is the actual
demand last period.
Definition 5.3.9 (Moving Averages) A forecasting method that uses an average

of the n most recent periods of data to forecast the next period.
Moving averages can be either simple or weighted.
• Simple Moving Average – Mathematically, a simple moving average is given

by P
demand in previous n periods
Moving average = (5.1)
n
• Weighted Moving Average – Mathematically, a weighted moving average is
given by
P
(weight for period n)(demand in period n)
Weighted moving average = P
weights
(5.2)
Definition 5.3.10 (Exponential Smoothing) A weighted moving-average forecast-

ing technique in which data points are weighted by an exponential function.
Mathematically, exponential smoothing is given by
Ft = Ft−1 + α(At−1 − Ft−1 ) (5.3)
where Ft = new forecast

Ft−1 = previous forecast
α = smoothing (or weighting) constant (0 ≤ α ≤ 1)
At−1 = previous period’s actual demand
The smoothing constant, α, generally ranges from 0.05 to 0.5. Higher values give
more weight to recent data, and are appropriate to use when the underlying average
is likely to change, while lower values give more weight to past data, and are
appropriate to use when the underlying average is relatively stable. When α = 1.0,
exponential smoothing is equivalent to naive forecasting.1
Forecasters often choose the smoothing constant that minimizes forecast error (see
definition 5.3.12), such as the mean absolute deviation (see definition 5.3.13).
Definition 5.3.11 (Trend Projections) A time-series forecasting method that fits

a trend line to a series of historical data points and then projects the line into the
future for forecasts.
5.3.3 Measuring Forecast Error
Once a forecast is made, it is good practice to compare the estimated value with
the actual value as actual values become available.
Definition 5.3.12 (Forecast Error) The forecast error (also known as forecast de-
viation) is defined as
Forecast error = Actual demand − Forecast value

= At − F t
See definitions 5.3.13, 5.3.14, and 5.3.15.
Three popular measures are
1. Mean absolute deviation (MAD),

2. Mean squared error (MSE),
3. Mean absolute percent error (MAPE).
Definition 5.3.13 (Mean Absolute Deviation (MAD)) A measure of the over-

all forecast error for a model.
The value is computed taking the sum of the absolute values of the forecast errors
and dividing by the number of periods:
P
|actual − forecast|
MAD = (5.4)
n

Definition 5.3.14 (Mean Squared Error (MSE)) The average of the squared dif-
ferences between the forecasted and observed values.
Mathematically, MSE is given by
(forecast errors)2
P
MSE = (5.5)
n
Definition 5.3.15 (Mean Absolute Percent Error (MAPE)) THe average of the
absolute differences between the forecast and actual values, expressed as a percent
of actual values.
Mathematically, MAPE is given by
Pn
100 i=1 |actuali − forecasti |/actuali
MAPE = (5.6)
n
5.3.4 Adjusting for Trend
There are a variety of ways to adjust forecasts for trends. Since we have already
discussed exponential smoothing we may as well discuss how to make adjustments
to the exponential smoothing technique for trend.
Exponential Smoothing with Trend Adjustment
The forecasting technique of exponential smoothing (see definition 5.3.10) can be

modified to include a trend by using the formula
Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend
(5.7)
or
F ITt = Ft + Tt (5.8)
With smoothing constants α for the average and β for the trend,
Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period)
(5.9)
or
Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.10)
The trend Tt is given by
Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period)
(5.11)
or
Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 (5.12)
where
Ft = exponentially smoothed forecast of the data series in period t

Tt = exponentially smoothed trend in period t
At = actual demand in period t
α = smoothing constant for the average(0 ≤ α ≤ 0)
β = smoothing constant for the trend(0 ≤ α ≤ 0)
To compute a trend-adjusted exponentially smoothed forecast,
1. Compute Ft , the emponentially smoothed forecast for period t using equation

5.10.
2. Compute the smoothed trend, Tt with equation 5.12.
3. Calculate the forecast including trend, F ITt , by the formula F ITt = Ft + Tt .
Ordinary Least Squares
Regression analysis is also useful for predicting trends. The most commonly used
regression technique is called ordinary least squares (OLS) regression analysis and
assumes a linear relationship between dependent and independent variables. It is
also commonly called linear regression analysis.
ŷ = a + bx (5.13)
where ŷ is pronounced “y hat” and
ŷ = the dependent variable

a = y-axis intercept
b = the slope of the regression line
x = the independent variable (in this case, time)
The values of a and b can be calculated with the formula
P
xy − nx̄ȳ
b= P 2 (5.14)
x − nx̄2
where
x = known values of the independent variable
y = known values of the dependent variable
x̄ = the average value of x
ȳ = the average value of y
n = the number of observations
Then a is given by a = ȳ − bx̄.

The least squares method has several drawbacks.
1. Recall that the equation 5.13 assumes a linear relationship.

2. It cannot be used to predict too many periods into the future as the further
into the future the prediction is made, the more uncertain it is.
3. Deviations around the least squares line are assumed to be random.
5.3.5 Seasonal Variations in Data
In most businesses, demand is seasonal. In the U.S., consumers often make fewer
purchases of durable goods, such as cars and washing machines, during the summer
months when it is common to take a vacation. Most businesses experience a surge
in sales around Christmas.
Definition 5.3.16 (Seasonal Variations) Regular upward or downward movements

in a time series that tie to recurring events.
Although there are many methods to accomodate seasonal demand, we will examine
one model, the multiplicative seasonal model, to account for seasonal changes in
demand in our forecasting. The first step is to calculate the seasonal forecast. We
do that with a 5-step process.
1. Find the average historical demand for each season.

2. Compute the average demand over all months.
3. Compute a seasonal index for each season by dividing the historical demand
by average demand.
4. Estimate next year’s total annual demand.
5. Divide this estimate of total annual demand by the number of seasons, then
multiply it by the seasonal index for that month. This provides the seasonal
forecast.
5.3.6 Associative Models
OLS With a Single Independent Variable
We briefly discussed ordinary least squares (OLS) regression analysis in section 5.3.4.
We will use the same technique, but x will be something other than time.
ŷ = a + bx (5.15)
ŷ = the dependent variable (e.g., sales)
x = the independent variable (e.g., average local salary)
Side Note 5.3.1 (Example: Using OLS) Present Heizer example 12 [1, pp. 106–
107].
Note that making predictions of future demand involves also making predictions
about the independent variable x. If there are published estimates you can cite
(e.g., the local Chamber of Commerce or a state government agency may publish
estimates of future salary levels) they will often be helpful. However, if you are
uncertain about predictions of x, whatever uncertainties you may have transfer to
your predicition of y.
Standard Error of the Estimate
The standard error of the estimate is a measure of the degree of accuracy of the
estimate of y in a regression model. It is also called the standard deviation of the
regression and, mathematically, is given by
rP
(y − yc )2
Sy,x = (5.16)
n−2
where y = y-value of each data point

yc = computed value of the dependent variable
n = the number of data points
An equivalent formulation to equation 5.16 is

rP P P
y 2 − a y − b xy
Sy,x = (5.17)
n−2
Side Note 5.3.2 (Distribution About the Point Estimate) Present Heizer fig-
ure 4.9 [1, p. 107], “Distribution about the Point Estimate of $600 Million Payroll.”
Note that the regression assumes a standard normal distribution about the estimate.
Correlation Coefficients for Regression Lines
Definition 5.3.17 (Correlation Coefficient) A measure of the strength of the re-

lationship between two variables.
The measure expresses the degree of strength of the linear relationship and is usually
denoted with the letter r where 0 ≤ r ≤ 1.
The correlation coefficient of variables x and y is given by
P P P
n xy − x y
r= p P P P P (5.18)
[n x2 − ( x)2 ] [n y 2 − ( y)2 ]
Side Note 5.3.3 (Examples of Correlation Coefficients) Present Heizer figure

4.10 [1, p. 108], “Four Values of the Correlation Coefficient.”
Side Note 5.3.4 (Causation vs. Correlation) Correlation merely means that the
values of two variables are historically related. It does not imply causation one way
or the other, nor does it imply that they will continue to be related.
Historically, the average length of a woman’s skirt and stock market prices in the
U.S. have been correlated,2 with stock prices generally rising as skirts rise, but the
relationship is coincidental. Certainly, changes in skirt lengths don’t cause stock
market prices to rise and vice versa.
Other interesting correlations that have been identified over the years include banana
prices and U.S. stock market prices as well as the winner of the Super Bowl, a
football game played between two football conferences in the U.S.3 and the U.S.
stock market. Even the Year of the Pig correlates strongly with the U.S. stock
markets. Since 1935, in all but one Year of the Pig, the U.S. Dow Jones Industrial
Average and Standard and Poor 500, leading stock indexes, has risen.4 .
Definition 5.3.18 (Coefficient of Determination) A measure of the amount of

variation in the dependent variable about its mean that is explained by the regression
equation.
2 Seethe note in the margin accompanying Heizer example 14 [1, pp. 109].
3 Professionalfootball in the U.S. is monopolized by the NFL, or National Football League,
which is divided into two “conferences,” the AFL (American Football Conference) and the
NFC (National Football Conference).
4 Source: http://www.time.com/time/business/article/0,8599,1594488,00.html?xid=site-
cnn-partner, February 28, 2007.
The coefficient of determination is simply r2 where r is the correlation coefficient.

(See definition 5.3.17.) It measures the percent of variation in the dependent
variable (y) explained by the regression equation.
It is commonly simply called “R squared.” For example, “What was the R squared
of your regression?”
Multiple Regression Analysis
In section 5.3.6, we discussed a means by which we can attempt to predict the value
of one variable using the value of another. The same technique can be applied to
use several independent variables to predict the value of a dependent variable.
Adding additional independent variables as predictors, if they are indeed related to
the dependent variable, results in additional predictive accuracy as measured by r2 .5
Definition 5.3.19 (Multiple Regression) A causal forecasting method with more

than one independent variable.
The multiple regression equivalent of equation 5.15 is given by
ŷ = a + b1 x1 + b2 x2 + . . . (5.19)
ŷ = the dependent variable (e.g., sales)

x1 , x2 , . . . = values of the independent variables
b1 , b 2 , . . . = coefficients of the independent variables
Determining the values of a, b1 , b2 , etc. in a multiple regression analysis involves

a complex formula which is beyond the scope of this class. In practice, you would
use statistics software to calculate these values.
Side Note 5.3.5 (Example: Multiple Regression at TransAlta Utilities) Present

Heizer sidebar [1, p. 110], “Forecasting Manpower with Multiple Regression at
TransAlta Utilities.”
As the sidebar points out, often the most difficult part of building a multiple regres-
sion model is to pick the independent variables.
5 See definition 5.3.18 and Heizer example 15 [1, p. 110].
5.4. MONITORING AND CONTROLLING FORECASTS 79
5.4 Monitoring and Controlling Forecasts

As mentioned in sidenote 5.2.1, one of the most common problems with forecasting
is a lack of follow-up. Do forecasts actually manage to predict future behavior?
Errors can be very costly and if models are not accurate in their predictions, the
forecasting methodology needs to be modified.
Tracking signals are typically used monitor forecasts.
Definition 5.4.1 (Tracking Signal) A measurement of how well the forecast is

predicting actual values.
A tracking signal is computed as a running sum of the forecast errors (RSFE) divided
by the mean absolute deviation (MAD). In other words,
RSF E
(Tracking signal) =
M AD
P
(actual demand in period i − forecast demand in period i)
=
M AD
where P
|actual - forecast|
M AD = (5.20)
n
A good tracking signal has about as much positive as negative error, though large
errors may be a problem as well even if the positive and negative errors balance.
Definition 5.4.2 (Bias) A forecast that is consistently higher or consistently lower

than actual values of a time series.
The tracking signals should also be compared as they are generated against limits. If
the tracking signals violate upper or lower limits, then forecasts need to be adjusted
or the underlying operations need to be evaluated to determine why there was a
deviation from the forecasts. These limits are typically based on M ADs, which
correspond roughly to standard deviations.6
One M AD is equivalent to 0.8 standard deviations, two M ADs to 1.6 standard
deviations, three M ADs to 2.4 standard deviations, and 4 M ADs to 3.2 standard
deviations. This means that the observed value should be within 2 M ADs abut
89% of the time, three M ADs about 98% of the time, and within 4 M ADs about
99.9% of the time.
Side Note 5.4.1 (A Plot of Tracking Signals) Review Heizer figure 4.11 [1, p. 111].
6 Recall definition 4.6.6.
5.4.1 Adaptive Smooting
Adaptive smoothing uses computer monitoring to control exponential smoothing by

adjusting smoothing constants. Note that even with computer monitoring, changes
need to be check with human eyeballs to ensure that the adjustments make sense.
Definition 5.4.3 (Adaptive Smoothing) An approach to exponential smoothing

forecasting in which the smoothing constant (e.g., α in definition 5.3.10) is auto-
matically changed to keep errors to a minimum.
Typically adjustments are made to minimize error forecasts and adjusted whenever
the computer notes a tracking signal outside of an established control limit.
5.4.2 Focus Forecasting
Focus forecasting, which selects a model based on goodness-of-fit to a data set, is

based on two principles:
1. Sophisticated forecasting models are not always better than simple ones.
2. There is no single technique that should be used for all products or services.
Definition 5.4.4 (Focus Forecasting) Forecasting that tries a variety of com-

puter models and selects the best one for a particular application.
Side Note 5.4.2 (Reality Check: Focus Forecasting) Although focus forecast-
ing is often used in business settings, there has been much criticism of the approach
to using models based on thier fit to the data.
Many feel that a model should be selected based on the logical relationship of the
variables and that focus forecasting is a fundamentally flawed in its approach.
In your career, you must make your own decision as to how you select the forecasting
models that you use. However, you should be aware of the criticism of focus
forecasting.
Side Note 5.4.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4.2
[1, p. 114], “Summary of Forecasting Formulas.”
Chapter 6
Design of Goods and

Services
Many companies derive a competitive advantage by using product strategies to

efficiently produce a variety of products and/or services to meet changing customer
demand or target specific consumer niches.1
Side Note 6.0.4 (Heizer Company Profile: Regal Marine) Review Heizer’s com-
pany profile of Regal Marine [1, pp. 122–123].
Regal Marine competes in part by quickly designing and building new models to ap-
peal to a variety of market niches. They also use just-in-time production techniques,
which will be discussed in detail later in the semester, time permitting.
Product strategy2 defines the breadth of the product line and links product decisions
to [1, pp. 124,128]
• Investment and cash flow,

• Market share and dynamics,
• Product life cycle, and
• The organization’s capabilities.
Definition 6.0.5 (Product Decision) The selection, definition, and design of prod-
ucts.
1 In this chapter, the word “product” will refer to both goods and services. Referring to
services as products is common in the service industry. For example, insurance companies
often refer to their policies, which, as an intangible, is a service, as products.
2 Recall sidenote 2.2.1 .
81
82 CHAPTER 6. DESIGN OF GOODS AND SERVICES
6.1 Goods and Services Selection

Product decisions focus on creating a competitive advantage via
• Differentiation – Offering distinctly unique or high-quality products

• Low cost – Providing quality goods and services at a lower cost than com-
petitors
• Rapid response – Executing rapid design and product development to respond
to changing consumer demand
6.1.1 Product Life Cycles
Product life cycles can be divided into four phases:
1. Introduction,
2. Growth,
3. Maturity, and
4. Decline.
Life cycles can be in the days or weeks (e.g., YouTube videos), months (e.g., clothing
fashions), years (e.g., restaurants or nightclubs), or even decades.
6.1.2 Life Cycle and Strategy
Strategies change as products move through their life cycle. Product strategy in-
volves determining the best strategy for each product based on its position in the
life cycle.
• Introductory phase – In the introductory phase, products expenses are often

high for
– Research and development,
– Process modification and enhancement, and
– Supplier development.
• Growth phase – Effective capacity forecasting is necessary.
• Maturity phase – Competitors have entered or are entering the market, so
high volume, low-cost, and innovative production is appropriate.
• Decline phase – Investment needs to be minimized and resources need to be
redeployed, often ruthlessly.
6.2. GENERATING NEW PRODUCTS 83
6.1.3 Product-by-Value Analysis
For firms with many products, a product-by-value analysis can identify the critical
few products in which additional resources should be invested and the trivial many
from which resources should be diverted.
Definition 6.1.1 (Product-by-Value Analysis) A listing of products in descend-

ing order of their individual dollar contribution to the firm, as well as the total
annual dollar contribution of the product.
6.2 Generating New Products

Most products have a limited life cycle, and if a company is to survive, it must
regularly redesign existing products or bring new products to market.
Definition 6.2.1 (Brainstorming) A team technique to generate creative ideas on

a particular subject. Ideas are not reviewed until after the brainstorming session.
Brainstorming should be done understanding the following factors
• Understanding the customer is the primary issue in new-product development.

Operations managers must pay attention to the market and needs and pref-
erences of “leading edge” consumers.
• Economic factors, such as consumer incomes, are tied to product demand.
• Sociological and demographic change is also tied to product demand.
• Technological change often drives product innovation.3
• Political and legal change can also bring about business opportunities.4
Side Note 6.2.1 (Example: Brainstorming) Lead the class in a brainstorming

session. Brainstorm on possible new products that students believe could be prof-
itable and developed and brought to market for less than $12,500 or 100,000 yuan.
6.2.1 Importance of New Products
The need for companies to cultivate the ability to introduce new products cannot
be overstated.
3 For example, the development of cellular telephone technology or the internet.
4 For example, deregulation of the telecommunications industry with the breakup of AT&T
in the late 1970s.
For example, DuPont estimates that it takes 250 ideas to yield one marketable
product [1, p. 128]. A friend and coworker who was an engineer5 at a major
engineering company has worked with engineers who through a 30-year or longer
engineering career never worked on a product that was successfully brought to
market.
Side Note 6.2.2 (Percent of Sales from Products Recently Introduced) Present
Heizer figure 5.2 [1, p. 128].
Many successful companies rely on sales from products introduced within the past
five years.
6.3 Product Development
6.3.1 Product Development System
Recall that product strategies link product decisions to cash flow, market dynamics,
the product life cycle, and the organization’s capabilities.
Side Note 6.3.1 (Product Development Stages) Present Heizer figure 5.3 [1,
p. 129].
Each stage should have an accompanying review to determine whether to progress
or not.
6.3.2 Quality Function Deployment (QFD)
Quality function deployment (QFD) describes either of two processes:
1. Determines what will satisfy the customer and

2. Translates customer desires into a product design.
Definition 6.3.1 (Quality Function Deployment (QFD)) A process for deter-

mining customer requirements (customer “wants”) and translating them into the
attributes (the “hows”) that each functional area can understand and act on.
The house of quality is a graphic technique for defining the relationship between
customer desires and a product.
Definition 6.3.2 (House of Quality) A part of the quality function that utilizes
a planning matrix to relate customer “wants” to “how” the firm is going to meet
those “wants.”
5 His name is Gary Brosz and he was an engineer at Ball Aerospace.
6.3. PRODUCT DEVELOPMENT 85
Side Note 6.3.2 (Example: House of Quality) Present Heizer example 1 [1, p. 130].
Building the house of quality involves six steps:
1. Identify customer wants.

2. Identify how the good or service satisfies customer wants.6
3. Relate customer wants to product hows.7
4. Identify relationships between the firm’s hows.8
5. Develop importance ratings.9
6. Evaluate competing products.10
Side Note 6.3.3 (QFD Software) A commercial software product called QFD
Capture Software can be used to perform QFD functions. Note that it is not free or
open source, as was the software described in section 4.9. See http://www.qfdcapture.com
for more information.
6.3.3 Organizing for Product Development
In the West, there are three popular methods by which organizations undertake
product development.
1. An organization is divided into departments; e.g., a research & development,

design engineering, manufacturing engineering, and production departments.
• Fixed duties exist, which can be an advantage.
• Effective communication and coordination between separate departments
can be problematic.
• More common in large, bureaucratic companies and organizations.
2. An operations manager is assigned as the product “champion” who takes the
product through the organization from concept through production.
3. Product development is done by teams.
• Perhaps the most popular approach in the U.S..
• “Product development teams” are also sometimes called “design for
manufacturability teams” or “value engineering teams.”
6 For example, with product features. In other words, identify the rows of the house in
sidenote 6.3.2.
7 In other words, create the columns of the house in sidenote 6.3.2.
8 These are given on the roof of the house in sidenote 6.3.2.
9 Weighted customer ratings are given on the bottom of the house in sidenote 6.3.2.
10 The right-hand columns of the house in sidenote 6.3.2.
• Use of these teams is often called concurrent engineering.11
In Japan, organizations are less structured and typically not divided into research
and development, engineering, production, etc..
Definition 6.3.3 (Product Development Teams) Teams charged with moving

from market requirements for a product to achieving product success.
These teams often include representatives from marketing, engineering, manufac-
turing, purchasing, quality assurance, and field service personnel. Some teams even
include representatives from vendors.
Definition 6.3.4 (Concurrent Engineering) In project development, use of par-

ticipating teams in design and engineering activities.
Side Note 6.3.4 (Personal Observations Regarding QFD) Quality function de-
ployment (see definition 6.3.1) was implicitly included in the product specification
phase of operations management at the companies I have worked for. I have never
heard of or actually worked at a company where QFD or the house of quality tool
has been used.
My experience may not be indicative of management practices in general in the
U.S., but my personal impression is that formal QFD practices are not widespread
in practice.
Side Note 6.3.5 (Personal Observations Regarding Product Development Teams)

The use of product development teams is common in the U.S., and I believe it is an
incentive-compatible means to maximize the probability of successful development
of a product because the success of the team is tied to that of the product.
However, it can also be problematic because teams, because their fate is tied to a
product, will often advocate for continuation of their project past the point that it
is profitable for the company.
6.3.4 Manufacturability and Value Engineering
Manufaturability and value engineering activities concern improvement of design

and specifications at the research, development, design, and production stages of
product development.
Definition 6.3.5 (Manufacturability and Value Engineering) Activities that help

improve a product’s design, production, maintainability, and use.
The goals of manufacturability and value engineering are
6.3. PRODUCT DEVELOPMENT 87
1. Cost reduction,
2. Reduced complexity of the product,
3. Standardization of components,
4. Improvement of functional aspects of the product,
5. Improved job design and job safety,
6. Improved maintainability (serviceability) of the product, and
7. Robust design.
Part II
Entrepreneurship
89
Chapter 7
Introduction to
Entrepreneurship
Although starting a business is usually a complex, difficult undertaking, doing it is

simple. As a Chinese philosopher once said, “Every journey . . . must begin with a
single step.” At its core, starting a business simply involves taking the first step,
then taking another step, then another.
However, taking that first step can be extremely daunting. In fact, fear of failure
and other insecurities dissuade most people from ever starting a business.
Side Note 7.0.6 (Business Failures) A friend and former colleague, Matt McAdams,
who has started two businesses and been CEO of three startups once told me, “None
of the other CEOs respect you until you’ve driven a couple of businesses into the
ground.” He was joking, but the humor in the statement lay in the fact that there
is some truth to it.
If you start a small business, you should be confident, but also realistic. Most
businesses fail within the first 18 months. See also sidenote 7.0.7.
The best way to overcome that fear is to address any concerns or uncertainties by
preparing as much as possible before “taking the plunge.” However, ultimately, you
will have to decide that you have done as much as you can do and simply take
action.
Side Note 7.0.7 (Confidence vs. Realism) Most people perceive those who start
businesses as risk-takers; that is, people who can tolerate a high degree of risk.
While it is important to be realistic about risks when starting a business, studies
have found that most successful entrepreneurs are actually unrealistically confident
91
92 CHAPTER 7. INTRODUCTION TO ENTREPRENEURSHIP
about their prospects. They may not have a realistic assessment of the risks they
are undertaking when they start their businesses.1
In our discussion of entrepreneurship, we will discuss how to prepare to start a small

business as well as manage a business early in its life. Hopefully, you will finish
the course with the confidence that if you decide to start a small business, you will
maximize your chance of success.
7.1 Characteristics of the Successful Entrepreneur
What are the qualities that lead people to start businesses?
• Most entrepreneurs feel a sense of urgency that made starting a business seem
like a necessity [4, pp. 12–13].
– Entrepreneur Magazine cites an entrepreneur who states that the time

will be right when “you can honestly say ‘I’ll put my house, jewelry, and
other personal collateral on the line to attain the start-up capital I need
for the long-term rewards I deserve.”’
• According to experts who have studied entrepreneurs, it’s not usually a single
incident (such as getting fired) that leads to entrepreneurship, but a series of
frustrations.
• Entrepreneurs typically do not feel fulfilled working for others and feel the
need to control their own destiny.
• Surveys and research indicates that the most common personality trait is
self-confidence.
• Finally, successful entrepreneurs know how to raise money.
– You not only have to believe in yourself, you have to convince others to
believe in you. And by believe in you, I mean believe in you enough to
give you money.
– We will discuss techniques for raising money in detail later in the course.
• The desire to make alot of money quickly is not one of the characteristics of
the successful entrepreneur. If asked, everyone would say that they want to
be thier own boss, make lots of money quickly and with little effort.
1 There are a variety of studies that support this. See,
for example, http://wistechnology.com/article.php?id=2018 and
http://www.ccer.edu.cn/en/ReadNews.asp?NewsID=5324, March 6, 2007.
7.1. CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93
Side Note 7.1.1 (A Selfish Act) Bear in mind that starting a business can be a
very selfish act. Often, starting a business will require the kind of effort that means
you cannot spend sufficient time to maintain your personal relationships the way
you are accustomed to. Putting in long hours is not something that is done once in
a while, but something you may need to do day after day, week after week, month
after month, possibly even years at a time.
If after many long hours at work your family will be asking you, “When are you
coming home for dinner?” or criticizing you for ignoring them, it may be difficult
to keep the necessary focus on the business.
You may lose friends because you do not have the time to maintain the friendship.
For many people, friends and family are the most important concerns in their life.
If you are not prepared to redefine relationships relative to your business life, you
may not be prepared to start a company.
Discuss the impact of the demands of a startup on the marriages of Active.com
management and Jerry’s difficulty balancing work and family life.
The discussion of entrepreneurship and starting and managing a business will contain
some information that may not be relevant to you as a student at this point.
• Some of the information is intended for those who have an established career
and real-world experience to draw upon.
– For now, take note of this information. It may be useful later in your
career.
• Among the means by which you can to raise money, we will discuss venture
capital. Venture capital financing is common in the United States but is not
yet a common means of financing in China.
– However, the use of venture capital will probably increase over time in
China.
– Additionally, the techniques used to acquire financing from venture cap-
italists can be put to good use obtaining debt financing or convincing
family, friends, or angel investors.
Side Note 7.1.2 (Personal Experience with the Impact of Startups on Relationship)
My personal experiences with the work schedule demanded by startup companies
as experienced at Active.com and Absolute Performance included
• Regular 70 hour weeks
• Incidents that demand devotion to the company over and above the call of
duty; for example, at Active.com, we suffered a database corruption that
resulted in my practically living at work for three weeks
• Many all-nighters; for example,
– The CEO of Absolute Performance once told a customer that the com-
pany’s product could parse XML files. We didn’t, so I volunteered to
work a 24-hour day to complete the parser so that he would not have to
admit that he stretched the truth to the customer. This kind of event
was not uncommon at Absolute Performance.
– At Active.com, we had to update the web site late at night when our
customers were not using it in case something went wrong. The “code
push” would often start at midnight and, depending on the complexity
of the push, might last four to six hours.
• During one “crunch time,” there were so many engineers sleeping at the office
at Active.com that at one point the landlord threatened to evict us since the
lease specified that we were being leased a business rather than residential
space
The demands of a startup also had a dramatic impact on the marriages of Active.com
management and the family life of the CEO of Absolute Performance. There were
far more divorces that occured among management at Active.com than average in
the population at large.
7.2 Are You Ready?

If you are thinking about starting your own business, the first thing you should do is
look in the mirror. Try to realistically evaluate your own strengths and weaknesses.
• Create a Personal Résumé – List your personal and professional experiences.

Include
– Skills,
– Educational background,
– Hobbies, and
– Accomplishments that require expertise or special knowledge.
Do your skills, interests, and experience match the kind of talents your busi-
ness would require?
• Analyze Your Personal Attributes – As yourself about yourself.
– Are you friendly and self-motivated?

– Are you a hard worker?
– Do you have common sense?
7.3. SETTING GOALS 95
If you are not a “people person,” you may not want to start a business that
focuses on customer relationships.
• Analyze Your Professional Attributes – Be aware of where you need help, such
as sales, marketing, advertising, and administration.
7.3 Setting Goals

With any major endeavor, it helps to set goals. When setting goals,
• Be specific. “Raise 100,000 yuan by July 1” is a much better goal than “raise
money.”
• Be optimistic. “Achieve financial independence” is much better than “pay

the bills.”
• Be realistic. If your goal is to raise 1,000,000 yuan and you’ve never had a
job before, your goal may not be realistic.
– Start with small goals. Move on to larger goals once the small goals
have been met.
• Set both short-term goals and long-term goals.
– Short-term goals are those that can be accomplished within a year.

– Long-term goals are those that may take 5, 10, or 20 years to accomplish.
Side Note 7.3.1 (What’s It Really Like?) If you wonder what running a busi-
ness is really like, ask other entrepreneurs.
Like parents, even the successful ones will probably focus on the negative. When I
talk to those who I know who have started businesses, it is common to exchange
“war stories” about the difficult times and sacrifices, although the successful ones
generally view their experiences as positive on the whole. Listening to war stories
can help you arrive at an accurate mental picture of what it is really like to start
and manage a business.
If you talk to an entrepreneur who has not been successful, try to figure out why they
were not successful. Learning from failure is as important, if not more important,
than learning from success.
When setting goals, ask yourself the following questions:
• Income – How much do you want to earn. Consider at least a five-year time
horizon.
• Lifestyle – Would you be happy traveling frequently? What about your family?
Are you willing to invest your personal assets? What do you want in terms of
– Travel,
– Hours of work,
– Geographic location, and
– Investment of personal assets.
• Type of work – Do you want to work indoors or outdoors? Would you rather
work with people or remotely, such as over the phone or internet? How much
do you want to work with computers?
• Ego gratification – Be realistic. Many people want to start their own business
for ego gratification. Acknowledge this fact and factor it into your decision-
making. How much is your ego worth?
Side Note 7.3.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ”
quiz [4, pp. 18–20]. Have the class write down their answers and evaluate their own
EQ. The reasons given for adding or subtracting points are as interesting as the
ultimate score.
Eliminate question 1 and substract one point from the scoring given on p. 20.
Side Note 7.3.3 (Personal Goals and Objectives Worksheet) Hand out Leson-
sky’s “Personal Goals and Objectives” worksheet [4, pp. 21].
Chapter 8
Finding an Idea
The good ideas are the simple ideas. They do not involve engineering the next great
wonder of the world, but scratching an itch. They answer the question, “How can
I do something better?” or “How can I do it differently than the next guy?”
Lesonsky discusses an idea started by two friends in Irvine, California. Good restau-
rants did not deliver and the amount of time the average American worker had for
lunch was getting shorter and shorter, so they started a restaurant delivery busi-
ness. It was neither original or complicated, but has been very successful because
it addressed a local need.
Netflix, an online DVD rental business, began1 when someone got annoyed by late
charges from local video rental stores.
Side Note 8.0.4 (Ideas for Businesses Friends Have Started) Discuss some of
the ideas that friends have used to start businesses.
• Active.com’s league business began with Matt, a Ph.D. physicist, who enjoyed
handicapping sports and felt that putting tools online for sports enthusiasts to
use would build a profitable online community. Online registration for sporting
events was only a part of his original game plan, but over time became the
primary thrust of the business.
• Absolute Performance’s business began because Jerry felt the monitoring soft-
ware available for Oracle database systems was not well developed and thought
that by combining consulting services with monitoring software, he would be
able to provide a better product than competitors who provided only software.
1 Explain the business concept behind Netflix. I used Netflix when I lived in Chicago. I
also used a grocery delivery service. Personal time was in short supply so the convenience
they provided was well worth the price.
97
98 CHAPTER 8. FINDING AN IDEA
• Trackvia arose because Matt felt that small businesses had the need to man-
age data but did not have the resources to develop expertise in database
management. So he decided to build a simple system that would allow small
businesses and individuals to securely manage data online.
Side Note 8.0.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things
About Me Work Sheet” [4, pp. 28–29].
Side Note 8.0.6 (Some Personal Observations About Generating Ideas) I have
found among those that are of an entrepreneurial bent, business ideas come at a
rapid rate, often one or more a day.
I continue to generate business ideas as a matter of habit. My recent ideas include:
• A rock climbing belt for women which doesn’t have to be removed for the
woman to relieve herself. It sounds silly, but it is a major complaint for female
rock climbers.
• A nose piercing that consists of a small, hollow tube. Often times, people
have to remove nose piercings for work or social occasions; however, nose
piercings take a long time to heal and removing a piercing often results in
the skin closing and needing a repiercing. Studs and other decorative pieces
could be designed that would be interchangeable by inserting them in the
tube. The tube could be made unobtrusive enough that it would not need to
be removed for work. Those with nose piercings would not need to remove
the piercing and risk it closing.
• An escrow service that arbitrages the differences in contract enforcement prac-

tices and business ethics between Scandinavia and other nations such as those
which are not as highly placed on Transparency International’s Corruption
Perceptions Index.
However, most ideas are not feasible because
• They would not be profitable enough,
• They require more financing than the entrepreneur has access to,
• They require expertise that the entrepreneur does not have,

• They require business relationships that the entrepreneur does not have,
• The ideas are easily copied and would be quickly appropriated by more able
competitors,
• The business would involve too much risk,
• Etc., etc..
8.1. YOU’VE GOT AN IDEA. NOW WHAT? 99
The idea itself is only a small part of the ultimate success of a business. You have
to think long and hard about why your idea might not work and satisfy yourself
that you will be able to address all the weaknesses in your idea. After all, you will
be spending years of your life trying to make the idea work. You do not want all of
that time to go to waste and potentially lose your personal investment and that of
friends and relatives because you overlooked something.
8.1 You’ve Got an Idea. Now What?

The number one trait needed by successful entrepreneurs is perseverance. En-
trepreneurs are often told their idea is flawed, it is too risky, that they will never
make it, or are otherwise discouraged. However, to be truly self-motivated and
persistent in the way you need to succeed, you should have “thick skin.” That is,
while you should listen to criticism that others give, you should not let it dissuade
you. A well-known phrase in English, used as the title of at least 12 movies and
television shows,2 is, “Never say die.”
Side Note 8.1.1 (Security Cameras) Recount the story of Miles’ friend who started
a business selling coordinated, computer-controlled security cameras. He ran the
business as a one-man operation for years, making just enough to get by but not
much more. People thought he was going nowhere and generally dimissed his busi-
ness, thinking that if he did not succeed after a couple of years, he would never
succeed.
Finally, in the wake of 9/11, the business took off. His sales are now in the millions
of dollars per year and the business is very profitable.
Warnings about risk are perhaps the criticism you should consider most carefully.
You should be realistic about risks. And you should not risk anything you can’t
afford to lose, such as your family, home, or health.
Side Note 8.1.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist
for Evaluating Ideas” [4, p. 33].
Have students come up with examples of products that meet various criteria on the
checklist.
Side Note 8.1.3 (Business Comparison Work Sheet) Present Lesonsky’s “Busi-
ness Comparison Work Sheet” [4, p. 35].
Have students fill out the form on their own time.
2 http://www.imdb.com/find?s=all&q=never+say+die, February 17, 2007.

100 CHAPTER 8. FINDING AN IDEA
Chapter 9
Defining Your Market
After coming up with your idea, your next step is to do some market research. There
are two broad categories of markets:
1. Consumers and
2. Businesses.
Definition 9.0.1 (B2B) Businesses whose customers are primarily other businesses
are called “B2B,” or business-to-business ventures.
See also 9.0.2.
Definition 9.0.2 (B2C) Businesses whose customers are primarily consumers are
called “B2C,” or business-to-consumer ventures.
See also 9.0.1.
Not only do you need to decide whether you are marketing to businesses or con-
sumers, but you should try to target your market as specifically as possible.
9.1 Finding Your Niche

Finding a niche can be a more daunting task than you might think. When trying
to identify your niche market, go through the following 7 steps:
1. Make a wish list – Who do you want to do business with? Identify
• Geographic area you want to serve,
101
102 CHAPTER 9. DEFINING YOUR MARKET
• The types of businesses and consumers you want to target in terms of

age, earnings, and other important demographics.
It is much better to target “pregnant women between 25 and 35 in households
that earn more than 50,000 per year.”
2. Focus – Be specific. “Selling maternity clothes to executive women” is much
better than “selling clothes.” To focus your search for a niche,
• Make a list of things you do
• List your achievements
• Identify the most important lessons you’ve learned in life
• Look for patterns that arise from your style
3. Describe the customer’s worldview – Talk to prospective customers and iden-
tify their main concerns.
• The rule “do unto others as you would have them do unto you” is often
called the Golden Rule. Lynda C. Falkenstein, author of Nichecraft: Using Your Specialness to Focu
coined what she calls the Platinum Rule: “Do unto others as they would
do unto themselves.” [4, p. 75]
4. Synthesize – Coalesce your ideas. A good niche has five qualities
(a) It takes you where you want to go. It should confirm to your long-term
vision.
(b) Somebody else wants it. By someone else, I mean customers.
(c) It’s carefully planned.
(d) It’s one-of-a-kind. That is, there is not already alot of competition.
(e) It evolves. That is, it allows you to branch off into other niches as the
business grows.
5. Evaluation – Evaluate your niche against the criteria in step 4. If it does not
sufficiently meet the criteria, discard the idea and move on to the next one.
6. Test – Offer samples, give a seminar, etc..
• Don’t spend alot of money. After all, the longer you wait to go into
business in earnest, the longer it will be until you make your first profit.
But do test your product before you go ahead full speed.
• If your initial test does not go well, you need to stop and seriously
reevaluate your plan.
• A friend in Chicago, Donna, decided to start a business selling unique
winter clothes for dogs. She started by making a few samples and giving
them to friends with dogs. Then she approached a few local pet stores
and arranged for them to offer her products for sale at a low price, then
asked them about customer reactions.
9.1. FINDING YOUR NICHE 103
7. Go for it! – Implement your idea. If you did your homework, you should be
able to enter your niche market with confidence.
Side Note 9.1.1 (Smaller is Bigger) When starting a business, many entrepreneurs
make the mistake of being “all over the map.” That is, they try to satisfy all possi-
ble customers and end up trying to do too many things well. It is better to do just
one thing well than to do many things poorly.
Side Note 9.1.2 (Caveat: Marketing to Demographic Groups) When market-

ing to demographic groups, you should practice extra caution to avoid stereotypes
or other insensitive approaches.
Many Western companies make the mistake of lumping together Japanese, Korean,
Chinese, and other Asian customers together. Likewise, many Eastern companies
make the mistake of lumping together American and European customers. This can
be offensive and serve to alienate rather than appeal to your customer.
Marketing to demographic groups has become much more refined in the last few
decades. New marketing techniques include generational, life stage, and cohort
marketing. (See definitions 9.1.1, 9.1.2, and 9.1.3.) Using these new marketing
techniques can allow you to narrow your market, and the narrower your focus on
your target, the more likely you are to score a hit.
Definition 9.1.1 (Generational Marketing) Marketing to consumers based on age

as well as social, economic, demographic, and psychological factors.
This marketing technique has been widely used since the early 1980s in the U.S..
Definition 9.1.2 (Life Stage Marketing) Marketing to consumers based on what

they are doing at a given period in life, such as having children, buying a home, or
retiring.
As older people are more active than before, many are choosing to start families
later in life or even have children ten years or more apart. Someone who is starting
a family at age 20 has much in common with someone starting a family at age 35
even though their ages may be quite different.
Definition 9.1.3 (Cohort Marketing) Marketing to people based on the groups

or “cohorts” they were part of during their formative years; for example, the World
War II cohort, the Depression-era cohort, etc..
For example, in the U.S., young adults in the Depression, when many people were
suffering from extreme poverty, are similar in age to those who came of age in World
War II, when the country was immersed in a war effort, but their behavior differs
significantly due to the different influences in their youth.
9.2 Redefining and Expanding Your Niche

Lynda C. Falkenstein1 advises that you regularly reevaluate your niche. Every six
months or so, ask yourself
• Who are your target clients?

• Who aren’t your target clients?
• Do you refuse business if it falls outside your niche? Generally, you should.
• How do clients perceive your business niche? What do they think your business
stands for?
• Is your niche evolving?
• Does your niche offer customers what they want?
• Do you have a plan that effectively conveys the need for your niche product
to the right market?
• Can you confidently predict the life cycle of your niche?
• How can your niche be expanded into a variety of products or services?
• Do you have a sense of passion with respect to your niche?
• Does your niche feel comfortable and natural?
• How will pursuing your niche contribute to achieving the goals you have set
for your business.
Falkenstein states, “Creating a niche is the difference between being in business and
not being in business.” [4, p. 79]
9.3 The Mission Statement

Once you have a niche, create a mission statement. The mission statement should
• Be succinct, a few sentences at most.

• Convey the essence of your business’s goals and philosophies.
Side Note 9.3.1 (Mission Statements for Three Organizations) Review Heizer
figure 2.2 [1, p. 28] which includes mission statements for three multinational com-
panies:
1 See section 9.1.
9.3. THE MISSION STATEMENT 105
1. FedEx
FedEx is committed to our People-Service-Profit philosophy. We

will produce outstanding financial returns by providing totally re-
liable, competitively superior, global air-ground transportation of
high-priority goods and documents that require rapid, time-certain
delivery. Equally important, positive control of each package will
be maintained utilizing real time electronic tracking and tracing
systems. A complete record of each shipment and delivery will
be presented with our request for payment. We will be helpful,
courteous, and professional to each other and the public. We will
strive to have a completely satisfied customer at the end of each
transaction.
2. Merck
The mission of Merck is to provide society with superior products

and services – invations and solutions that improve the quality of life
and satisfy customer needs – to provide employees with meaningful
work and advancement opportunities and investors with a superior
rate of return.
3. The Hard Rock Café
Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an

exceptional entertainment and dining experience. We are commit-
ted to being an important, contributing member of our community
and offering the Hard Rock family a fun, healthy, and nurturing
work environment while ensuring our long-term success.
Side Note 9.3.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mis-
sion statement.
Ben & Jerrys is founded on and dedicated to a sustainable corporate

concept of linked prosperity. Our mission consists of 3 interrelated parts:
• Product Mission – To make, distribute & sell the finest quality

all natural ice cream & euphoric concoctions with a continued
commitment to incorporating wholesome, natural ingredients and
promoting business practices that respect the Earth and the Envi-
ronment.
• Economic Mission – To operate the Company on a sustainable
financial basis of profitable growth, increasing value for our stake-
holders & expanding opportunities for development and career
growth for our employees.
• Social Mission – To operate the company in a way that actively

recognizes the central role that business plays in society by initiat-
ing innovative ways to improve the quality of life locally, nationally
& internationally.
detail.
Answering the following questions can provide you with a clear picture of what your
mission statement should include:
• Who are your customers?2
• What image of your business do you want to convey?
• What is the nature of your products and services?
– What determines pricing and quantity?

– What is your competitive edge? Price? Features?
– Will this change over time?
• What level of service do you provide?
• What roles do you and your employees play?
– You should develop a leadership that organizes, challenges, and recog-

nizes outstanding employees.
• What kind of relationship will you maintain with suppliers?
– Remember that when you succeed, so do your partners.
• How do you differ from competitors?
– Why would your customers prefer your product to a competitor’s?
• How will you use technology, capital, processes, products and services to reach
your goals?
• What philosophies or values guided the responses to the previous questions?

2 Recall section 9.1.
9.3. THE MISSION STATEMENT 107
When crafting your mission statement,
• Involve others. Other people can help you with creative ideas and identify
weaknesses you might miss.
• Set aside a full day to work on your statement.
• Plan a date to meet with people. Write down your thoughts so you can lead
people logically through your ideas.
• Be prepared. Bring paper and pens and some refreshments for your guests.
• Brainstorm. Do not discard any ideas, no matter how silly.
• Use “radiant” words. Colorful, spicy language conveys your excitement and
conviction in your idea.
Chapter 10
Market Research
While the excitement of a great idea is often enough to propel an entrepreneur into
business, you need to take a step back for a sanity check. Donna Barson, president
of Barson Marketing, Inc., says “A lot of companies skim over the important back-
ground information because they’re so interested in getting their product to market.
But the companies that do the best are the ones that do their homework.”
Definition 10.0.1 (Market Research) Research into the characteristics, spending

habits, location and needs of your business’s target market, the industry as a whole,
and the particular competitors you face.
Market research should answer the following questions:
• Who will by my product or service?
• Why will they buy it?
• Where will they buy it? In a store? On the internet?
• What do I need to charge to make a sufficient profit?
• What products or services will mine be competing with?
• Am I positioning my product or service correctly? How do I compete success-

fully with existing suppliers?
• What government regulations do I need to be aware of with respect to my

products or services?
109
110 CHAPTER 10. MARKET RESEARCH
10.1 What Am I Researching, Exactly?

Market research should focus on three areas:
1. Your industry.
• What are the trends, such as growth and technology, in your industry?
• For example, if you are opening a bookstore to sell textbooks by a uni-
versity, are other bookstores in the area switching to computerized in-
ventory systems? Does the university provide a database of classes and
textbooks you can acquire? Does the university have growth projections
for the student population in the next ten years?
2. Your customers.
• Your customer research should tell you how much you can make in sales.
• You should know the following things about your customers:
– What is your market reach? If you are a restaurant, are your cus-
tomers primarly people living within 5 kilometers of your establish-
ment?
– What is the per-capita or median income of your customers?
– What is the unemployment rate in your area?
– What is the population of potential customers?
– Are there other important demographic factors, such as gender or
cultural background that you need to know about?
• Based on your expected customers, estimate the total sales for your type
of product or service in your area. Now try to determine how much of
this you can reasonably expect to get.
• Again, if you are opening a bookstore to sell textbooks by a university,
the total number of potential customers would be the number of stu-
dents at the university. How much would each be expected to spend
on textbooks? Does the university collect information regarding the
spending habits of students?
3. Your competition.
• Most entrepreneurs do not sufficiently research the competition.

• Be careful not to underestimate the number of customers.
• Use the internet, library, local business organizations, and personal con-
nections to research the competition. If you are competing against a
publicly traded company, get copies of their financial statements and
annual reports. Go out and visit local competitors. Buy their products
if you can.
10.2. RESEARCH METHODS 111
10.2 Research Methods

Research can be either primary or secondary.
Definition 10.2.1 (Primary Research) In market research, primary research is in-

formation that comes directly from the source; that is, customers. This can come
from a variety of sources:
1. Surveys,
2. Focus groups,
3. Other sources.
See also 10.2.3.
Definition 10.2.2 (Focus Group) A type of primary market research1 where a

group of potential customers (typically 5 to 12) come together in an informal envi-
ronment, under the guidance of a moderator, to discuss a product or a service.
Side Note 10.2.1 (Grease the Squeeky Wheel) When you conduct primary mar-
ket research, the customers you should pay the most attention to are the ones who
complain the most or give the most negative feedback.
Definition 10.2.3 (Secondary Research) In market research, secondary research

is information that comes from organizations, government agencies, trade associa-
tions, or other groups that gater statistics, reports, and studies.
See also 10.2.1.
10.2.1 Sources of Secondary Research
There are a variety of sources for secondary research.
• Local business associations are often good sources of information. In the

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

• Trade associations often compile information about the industry the associa-
tion represents.
– Most trade associations provide their information for free.
• The government is a valuable source of information.
– Most of the information is provided for free.
– In the U.S., a census is conducted every ten years which provides infor-
mation about income and demographics in specific areas.
– In the U.S., most government information is now freely available over
the internet.
• Buy a map.
– Highlight the geographic area where you think your customers will come
from.
– Walk around. What are your impressions of the area?
• Local universities can often be a valuable source of information.
– Business students who want to gain some “real world” experience can
be an excellent and low-cost source of labor for research.
– Business professors are often excellent sources of information.
Side Note 10.2.2 (Sample Market Research Competition Questionnaire) Pass

out Lesonsky’s “Sample Market Research Competition Questionnaire.” [4, pp. 92–
93] The questionnaire supposes that someone is going to open a bar and wants to
research other bars in the area.
The class should put together a sample research questionnaire for a visit to a com-
petitor’s location.
Side Note 10.2.3 (Web Site Survey) The web site http://www.surveysite.com
conducts market research for other e-commerce sites. Even if you do not want to
spend money on such a service, you can get ideas about what kind of questions you
need to ask if you are starting an online business.
Side Note 10.2.4 (Export Oriented Businesses) If you are thinking of starting
a business that would involve exporting to the United States, the U.S. Department of
Commerce’s International Trade Administration (ITA) publishes a variety of reports,
surveys, and books about imports and exports to the United States.
You can find the U.S. ITA at http://www.usatrade.com.
Side Note 10.2.5 (Sample Focus Group Questionnaire) Pass out Lesonsky’s “Sam-
ple Focus Group Questionnaire.” [4, p. 101] The questionnaire supposes that some-
one is going to become a chocolatier.
10.2. RESEARCH METHODS 113
Side Note 10.2.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample
Direct Mail Questionnaire.” [4, pp. 102–103] The questionnaire supposes that
someone is going to open an interior decoration business.
Chapter 11
The Business Plan
The business plan is an essential document not only to seek funding but to provide
a sanity check and to give you a framework for developing your business.
In terms of sanity checking, the business plan should help you avoid five pitfalls that
would limit your opportunity to succeed. Those who provide financing are aware of
these pitfalls, and so should you be.
1. No realistic goals – Your business plan should help you ascertain whether your
goals are realistic. Set up a timetable with specific steps to be accomplished
in a specific period.
2. Failure to anticipate roadblocks – You should know what the possible “show
stoppers” are in your business. Your business plan should list obstacles that
may arise and what will be done to address them.
3. No commitment or dedication – Entrepreneurs must be ready and willing

to demonstrate a personal and financial commitment to the success of the
venture.
4. Lack of demonstrated experience – Entrepreneurs must give evidence of per-

sonal experience or experience on their team in both the business and technical
skills that are necessary for a successful venture.
5. No market niche – Many entrepreneurs propose an idea without knowing who

the potential customers will be.
Definition 11.0.4 (Business Plan) A business plan is a written document that

details a proposed venture. It must describe current status, expected needs, and
projected results of the new business. Every aspect of the venture should be covered,
including
115
116 CHAPTER 11. THE BUSINESS PLAN
• The project,
• Marketing,
• Research and development,
• Manufacturing,
• Management,
• Critical risks,
• Financing, and
• Milestones or a timetable.
A business plan is also known as a venture plan, loan proposals, or investment

prospectus.
Failing in business is very costly, and while a business plan will not guarantee success,
it will help you maximize your venture’s chances for success. It provides a variety
of other benefits.
• The effort and discipline needed to put together the business plan will force
the entrepreneur to view the proposed venture critically and objectively.
• The analyses included in the plan force the entrepreneur to closely scrutinize
the assumptions about the venture’s success or failure.
• The business plan allows outside evaluators (such as investors) to critically

evaluate the proposed venture.
• The business plan quantifies objectives, allowing the entrepreneur to track

results by measurable benchmarks.
• It is a tool to communicate with outside financial sources and internal man-

agement for guiding the venture to success.
11.1 Preparing to Put the Plan Together
11.1.1 Your Audience
The first question you should ask yourself is, “Who is going to be reading the plan?”
If you present your plan to venture capitalists or financiers, you will likely be giving
your plan to read many business plans per day. They may spend no more than five
11.1. PREPARING TO PUT THE PLAN TOGETHER 117
minutes with your business plan before deciding to give you an audience or place
you in the “circular file.”1
Many venture capitalists use the following six step process to evaluate a business
plan [3, p. 300]. Note that less than a minute on average is devoted to each step.
1. Determine the characteristics of the venture and its industry.
2. Determine the financial structure of the plan, including debt or equity financ-
ing required.
3. Read the latest balance sheet.
4. Determine the quality of the entrepreneurs.2
5. Establish the unique details of this venture.
6. Read the plan over casually.
If you cannot impress the financier with these three steps, you will not even get
your foot in the door and be invited to present your plan to investors.
While the initial read-through might be only a five-minute perusal, bear in mind
that once the plan is advanced to the next stage of financing, other financing
professionals may spend more time analyzing the details of the plan.
11.1.2 Look and Feel
The way your plan looks and feels will give investors their first impression of you as
a person. They will want to see something that reflects that you are neat, thorough
and careful, not ostentatious, pretentious, or spendthrift.
Kuratko suggests the following [3, p. 301]:
• Appearance
– It should look good, but not too good.

– Binding and printing should not be sloppy, but should not be too lavish.
– Staples are too cheap while professional bookbinding might give the
impression that you spend too lavishly.
– Kuratko suggests a plastic spiral binding holding together a pair of cover
sheets of a single color.
• Length
1 The “circular file” refers to the circular paper filing system that sits under every desk;
i.e., the trash can.

2 Do not underestimate the importance of this step.
– It should be no more than 50 pages.

– 40 pages is ideal.3
• The Cover and Title Page
– The cover should have the name of the company, the date of the plan,
and full contact information4 for the company.
– Inside the front cover should be a title page repeating the cover infor-
mation.
– On the title page, a number should be in a corner5 indicating the copy
number. You should use this to keep track of who has which copy. It
should also serve as a reminder not to make too many copies or your
investors may think that others have turned down your plan.
• The Executive Summary
– Two or three pages immediately following the title page.

– It should explain
1. The company’s current status,
2. Its products or services,
3. The benefits to customers,
4. The financial forecasts,
5. The venture’s objectives in 3 to 5 years,
6. The amount of financing needed, and
7. How investors will benefit.
– It is worth repeating: Keep it down to at most two or three pages.
• Table of Contents
– The Table of Contents should list each of the business plan’s sections
and mark pages for each section.
11.1.3 Some Style Points
Kuratko also recommends that you [3, p. 302]:
• Keep the Plan Short – People who read the plan are generally pressed for
time. If you write to much, they will not read it.
3 Note that for this class, the business plan is expected to be less than Kuratko’s recom-
mended length – no more than 20 pages.

4 Phone number, address, e-mail address, and/or web site.
5 I suggest the lower-right corner, though you should not put it in the same corner as page
numbers appear.
11.2. THE PLAN CONTENTS 119
• Organize and Package the Plan Appropriately – Organize things logically and
present a neat package with proper grammar. Use the spell checker on your
word processor to check for spelling mistakes.
• Orient the Plant Toward the Future – Create an air of excitement.
• Avoid Exaggeration – Your sales and revenue estimates should be well re-
searched. Your credibility is established in part by the credibility of your plan.
• Highlight Critical Tasks – This part of the plan demonstrates your ability to
analyze and address potential problems.
• Give Evidence of an Effective Team – Be sure that your audience knows that
your people have the skills to succeed.
• Do Not Overdiversify – Don’t try to be all things to all people. Present a

focused plan.
• Identify the Target Market – Market research should support a focused cus-
tomer niche.
• Keep the Plan Written in the Third Person – Do not use “I,” “we,” or “us.”
Instead, use “he,” “they,” or “them.”
• Capture the Reader’s Interest – Be sure your title page and executive summary
capture the reader’s interest quickly.
11.2 The Plan Contents
Side Note 11.2.1 (10 Sections of a Business Plan) Present Kuratko Table 10.2
[3, p. 305], which describes the 10 sections of a typical business plan.
Some details on each section of the business plan:
1. Executive Summary – This should be the last thing you write, but it is the
first thing that your audience will read. The executive summary gives readers
their first impression, so be sure the writing is finely crafted.
2. Business Description – Name the business, and tell why it is named what it
is.6 Note any industry developments and describe the business thoroughly.
Include any pictures or designs that would be helpful.
• If there are patents, copyrights, trademarks, or other special market

advantages you have, be sure to include them in the business description.
6 E.g., is it based on a family name? Does it include technical terms you need to identify?
3. Marketing Segment – You must convince investors that a market exists, that
your sales estimates are reasonable, and that you can beat the competition.
(a) Market Niche – Define your market niche.

(b) Competitive Analysis – Assess the strengths and weaknesses of the com-
petition. This should be an honest assessment.
(c) Marketing Strategy – Your marketing strategy should be described based
on research, including
• The kinds of customer groups to be initially targeted,
• The Kinds of customer groups to be targeted as the business ma-
tures,
• Methods of identifying and contacting customers,
• Features of the product to be emphasized in your sales efforts,
• Any innovative sales or marketing concepts that will enhance cus-
tomer acceptance.7
(d) Pricing Policy – Compare your pricing policy with competitors. Gross
profit margin should be discussed. Justify any price increases over com-
petitors based on newness, quality, warranty, service, etc..
(e) Advertising Plan – Discuss any promotional campaign, including the type
of media8 and, if the promotional campaign will be a significant portion
of expenses, how and when expenses will be incurred.
4. Research, Design, and Development – If R&D9 is to be performed, cost,

time, testing, and project status should be discussed. Any risks should also
be detailed.
5. Operations Segment – First, describe the location of the new segment. Im-
portant aspects of location include
• Labor, supplier, and customer availability and proximity,

• Local taxes and zoning requirements, and
• Possible support of local banks.
In addition, facilities requirements, such as equipment, storage, offices, etc.

should be described. Costs should be detailed for all major expenses.
6. Management Segment – Key personnel, their job descriptions and responsi-

bilities, and résumés should be given. In addition, pay and ownership (such
as stock agreements) should be described.
7. Financial Segment – The financial segment should include

7 For example, if you are going to market leases on equipment where previously only sales
were allowed.
8 Such as magazines, television, radio, or internet.
9 Research and Development
11.2. THE PLAN CONTENTS 121
(a) A pro forma balance sheet, which investors will use to estimate debt/equity
ratios, working capital, current ratios, inventory turnover, etc.,
(b) An income statement, detailing projected profits and losses,
(c) A cash-flow statement, detailing projected inflows and outflows.
8. Critical-Risks Segment – Discuss business risks and the ways you might ad-
dress them. Risks might include
• Negative industry trends,
• Costs exceeding estimates,
• Difficulty purchasing parts or materials,
• Design or research difficulties,
• Unexpected competitions.
Try to be honest and realistic. Your investors are probably as aware, or more
aware, of the risks than you are. Discounting them as trivial or claiming that
you can overcome any risk will not endear you to investors.
9. Harvest Strategy Segment – Detail how your company will adapt as the com-
pany grows and develops. What happens if the management team changes?
What will happen to the company assets if ownership changes?
10. Milestone Schedule Segment – Detail milestones with a timetable for various
activities to be accomplished. These might include
• Incorporation of the new venture,
• Completion of design and development,
• Completion of prototypes,
• Hiring of sales representatives,
• Product display at trade shows,
• Signing up distributors and dealers,
• Ordering production quantities of materials,
• Receipt of first orders,
• First sales and first deliveries, and
• Payment of first accounts receivable.
11. Appendix – If there are documents, such as blueprints or résumés you would
like to include which are not core to the business plan, include an appendix.
Definition 11.2.1 (Pro Forma) A latin term that means projected, as opposed to
actual. For example, a balance sheet containing projected balances is called a pro
forma balance sheet.
Side Note 11.2.2 (The Growth of Active.com) Discuss the growth of Active.com,
including the important milestones and when (and in what order) they were reached
and changes in management and governance as the company grew.
Chapter 12
Presenting the Plan
12.1 The Presentation

Side Note 12.1.1 (What Goes Into the Presentation) Present Kawasaki’s In-
vestor Pitch, Sales Prospect Pitch, and Potential Partner Pitch [2, pp. 51–56].
12.2 Some Suggestions

These suggestions come from those who have experience both giving and listening
to business pitches.
12.2.1 Do It Until You Get It Right
This is perhaps the most important piece of advice.

The presentation of your plan is an ongoing process, not a one-time event. Your
presentation should evolve over time as you listen to your audience and receive
feedback.
The first time you present your plan, you will probably not do a good job. Do not
be dismayed. You will probably have to present it at least ten times before it is
ready for the medium-sized fish.1 You will have to pitch to many medium-size fish
before you are ready for the big fish.
This means that you should not count on presenting your plan to your most critical
investor for the first time. Present it to your friends, your family, your dog, your
business class, local business associations, anyone who will listen. Present it many
1 Guy Kawasaki, author of The Art of the Start, recommends twenty-five times [2, p. 62].
123
124 CHAPTER 12. PRESENTING THE PLAN
times. Only when you are consistently getting a good response from your audience
and are comfortable with the presentation is it time to take it to investors.
Guy Kawasaki likes to tell a different version of an old joke, “How can you tell if an
entrepreneur is pitching?” The answer: “His lips are moving.”2 [2, p. 44]
Side Note 12.2.1 (The Job Talk) Every Ph.D. graduate in economics puts to-
gether a “job talk” in which they present their dissertation to prospective employers.
Most Ph.D. candidates give their “job talk” half a dozen times to other students
before giving it in an interview situation.
Most graduates get between 5 and 15 interviews when they graduate. By the time
I gave my job talk to my eventual employer, Lexecon, I had given it over a dozen
times. In retrospect, I don’t think it was quite right until somewhere between the
8th and 10th time.
12.2.2 Know Your Outline Thoroughly
It often helps to include key words in the outline that will help you recall examples
and other details during the presentation.
12.2.3 Be Familiar With All Equipment to be Used
Never count on technology working the way you want it to. There will always be
glitches, and you don’t want something as silly as a burned-out light bulb to cost
you an investor.
• Bring your own laptop. You don’t want to try to figure out other people’s
equipment, and even if you can figure it out, they may have another version
of PowerPoint, Adobe Reader, or other software you use that unexpectedly
ruins the careful formatting you have in your electronic documents.
• Bring a backup thumb drive with your presentation on it. Post a copy of your
presentation in a secure location on your homepage just in case.
• Test the equipment the day before.
• Be sure that someone knows where to get an extra light bulb if the bulb in
the projector burns out.
• Bring paper copies3 of your presentation in case all else fails. Bring at least
twice as many as you expect there to be people in the room.
2 This originally comes from an American classic, the lawyer joke. The original joke goes,
“How can you tell when a lawyer is lying?” The answer, of course, is, “His lips are moving.”
3 Color copies!
12.3. AFTER THE PRESENTATION 125
Side Note 12.2.2 (A Presentation in Copenhagen) I flew all the way to Copen-
hagen once to hold a 3-day workshop on mathematical modeling in economics.
Much of the material required use of the internet. I was shocked to find out the
day I arrived that the conference room reserved for the class did not have internet
access even though I had sent them e-mails ahead of time specifically indicating
that the conference room would need to have internet access.
12.2.4 The First Minute is the Most Important
Your audience should know what you do within the first minute of your presentation.
Guy Kawasaki recommends you set a timer [2, p. 45]. Give your presentation to
friends or family. Stop when it goes off. Ask them what your company will do. If
they cannot explain it clearly, you are not presenting it well.
12.2.5 Take Notes
Have a pen and paper ready and take notes during the pitch.
• Your audience may ask you several questions at once. They may ask you
something you want to respond to in an e-mail later. They may ask you
something that makes you want to change your presentation. It is easy for
things to get lost in the heat of the moment, so write things down to make
sure you don’t forget.
• Taking notes also makes you look conscientious.
In general, I always bring a pen and paper to meetings. Many people feel as if
taking notes makes them look stupid, but in reality, it is quite the opposite. At
my company in Chicago, where some of the smartest people in the world worked,
everyone brought a pen and paper. Everyone.
12.2.6 So What?
When you are planning your presentation, ask yourself after every statement you
make, “So what?” If you cannot answer this question simply and easily, you need
to change or eliminate the statement.
12.3 After the Presentation

Each presentation will be different, and each investor will respond differently. You
should be prepared for the unexpected, and although you go into each presentation
126 CHAPTER 12. PRESENTING THE PLAN
with only success on your mind, you should also realize that most most comments
will be negative and most presentations are rejected.
Be prepared for rejection and do not consider it the end of the road. Remember
that persistence is the most important character trait of entrepreneurs. Each time
your are rejected improves your future opportunities. Each negative comment gives
you an opportunity to change an investor’s opinion.
Side Note 12.3.1 (What to Do When You’re Turned Down) Present Kuratko
table 10.5 [3, p. 321]: “What to do when a venture capitalist turns you down: Ten
questions.”
Chapter 13
Inventory Control
Most entrepreneurs do not know how to set up effective inventory control systems.
Even more problematic, startup businesses don’t have a past sales figures or expe-
rience with which to project demand and inventory requirements.
Side Note 13.0.2 (Insufficient Inventory) Insufficient inventory can mean
• Lost sales,
• Costly back-orders,
• High prices for emergency inventory.
Side Note 13.0.3 (Excess Inventory) However, excess inventory costs money for
• Extra overhead,
• Debt service on loans that you purchased the inventory with,
• Additional personal property tax on unsold inventory, and
• Additional insurance costs.
You may also find yourself wanting to lower your prices to get rid of excess inventory.
By some estimates [4, p. 287] excess inventory costs 20% to 30% of the original
purchase price of the merchandise to store and maintain.
127
128 CHAPTER 13. INVENTORY CONTROL
13.1 Inventory and Cash Flow

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

Inventory tracking tells you
• What inventory is in stock,

• What is on order,
• When it will arrive, and
• What you’ve sold.
Methods for inventory control should include one or more of the following inventory
control systems:
• Manual Tag Systems

– In a “manual tag system,” you remove price tags from the product at
the point of purchase (e.g., at the cash register). The removed tags are
then cross-checked against physical inventory to figure out what you’ve
sold.
Reports from a manual tag system may show sales according to prod-
uct line, brand name, and styles and would include any other relevant
information such as whether the items were on sale or discounted.
13.3. COMPUTERIZED INVENTORY CONTROL 129
• Dollar-control Systems
– “Dollar control systems” show the cost and gross profit margin on indi-
vidual inventory items.
Most computerized inventory tracking systems1 provide this type of in-
formation.
• Unit-control Systems
– “Unit-control systems” use methods ranging from “eyeballing” shelves
to bin tickets.
Definition 13.2.1 (Bin Tickets) In unit-control inventory systems, bin tickets are
tiny cards kept with each type of product that list a stock number, a description,
maximum and minimum quantities stocked, cost (in code), selling price and any
other information you want to include. [4, p. 291]
Bin tickets will have corresponding office file cards that list a stock number, selling
price, cost, number of items to a case, supply source and alternative source, order
dates, quantities, and delivery time.
Whatever inventory control system is used, retailers should make inventory checks
as often as is practical: Daily, weekly, or at a minimum, yearly.
13.3 Computerized Inventory Control

Most businesses in the U.S. use some sort of computerized inventory control these
days. They provide more information with much less effort than manual systems
and should let you
• Track usage,
• Monitor changes in unit costs,
• Calculate when you need to reorder, and
• Analyze inventory levels on an item-by-item basis.
Side Note 13.3.1 (POS (Point-of-Sale) Systems) Computerized inventory con-

trol systems called “POS,” or point-of-sale, systems, involves the exchange of in-
formation collected at the cash register with the business’ computerized inventory
control system to help you
• Analyze sales data in great detail,

1 See section 13.3 below.
• Maintain a sales history, and
• Improve pricing accuracy.
When considering the purchase of a POS, consider the following features:
• Ease of use – Does it have a friendly and easy-to-use interface?
• Entry of sales information – Is it easy to enter sales information?
• Pricing – You should be able to set up multiple prices for each item, such as
for volume discounts for preferred customers.
• Updating product information – At the time a sale is entered, these systems

should automatically update inventory and accounting records.
• Security – To prevent theft, be sure it’s not easy to “hack” the system.
• Taxes – Be sure you can support the local tax system or multiple tax rates if
you deal in more than one state or on the internet.
Note that there are both off-the-shelf POS systems available in the market and
industry-specific systems useful for all sorts of businesses ranging from book stores
to auto repair shops to dry cleaners to beauty salons.
13.3.1 Inventory Turnover
Typically, a high inventory turnover is a mark of a well-managed inventory system.
Definition 13.3.1 (Turnover) When you have replaced 100% of your original in-
ventory, you have “turned over” your inventory.
To improve efficiency of inventory control, work with suppliers to improve delivery

times and count inventory more often.
Definition 13.3.2 (Order Cycle) In inventory management, the order cycle is the
amount of time it takes to process paperwork and place orders.
Definition 13.3.3 (Count Cycle) In inventory management, the count cycle is

the amount of time between counting inventory. For example, if you perform an
inventory count four times a year, your count cycle is 12 weeks.
Definition 13.3.4 (Delivery Cycle) In inventory management, the delivery cycle

is the amount of time between placing an order and receiving it.
13.4. INVENTORY ACCOUNTING 131
Definition 13.3.5 (Needs Period) In inventory management, the needs period is

the sum of the count cycle, order cycle, and delivery cycle.
In other words, Needs Period = Count Cycle + Delivery Cycle + Order Cycle.
See definitions 13.3.3, 13.3.4, and 13.3.2.
Many businesses also measure turnover by measuring sales per square foot (or square
meter). You should know how many sales per square meter per year you need to
survive. Calculate your sales per square meter once per month.
13.4 Inventory Accounting
Your accountant will typically handle inventory accounting, but you should at least
know about LIFO and FIFO. In the U.S., you must estimate your inventory value
when you file your taxes. LIFO and FIFO are two accounting methods used to do
this. In deciding which to use, follow the recommendation of your accountant.
Definition 13.4.1 (LIFO (Last In, First Out)) LIFO (last in, first out) assumes
that you sell the most recently purchased inventory first.
If there is inflation, it values your remaining inventory based on the prices of the
least recently purchased items, which allows you to pay less taxes on your inventory.2
See also 13.4.2.
Definition 13.4.2 (FIFO (First In, First Out)) FIFO (first in, first out) assumes
that you sell the least recently purchased inventory first.
If there is inflation, it values your remaining inventory based on the prices of the
most recently purchased items, which may result in higher taxes.3
See also 13.4.1.
13.4.1 Buying Inventory
In the process of putting together your business plan, you should arrive at a basic
assessment of the stock levels you’ll need for monthly or seasonal sales volume.
After you have been in business your inventory control system should give you a
better idea of stocking levels.
2 At least this is true in the U.S. The author is unfamiliar with Chinese tax codes.
3 At least this is true in the U.S. The author is unfamiliar with Chinese tax codes.
Definition 13.4.3 (Open-to-Buy) The open-to-buy is the amount budgeted for

inventory purchases for a given period, usually one, three or four months.
Open-to-buy can be calculated with the following formula:
Planned inventory + planned sales - actual inventory - stock on order = open-to-buy
Note that formulas and computerized inventory control systems and other means
to manage inventory don’t make up for a business owner’s intuition. Leave room
for unanticipated items in your budget and feel free to exceed or fall short of your
budget according to your business sense.
13.5 Suppliers
Suppliers can be divided into four categories:
1. Manufacturers – Note that some manufacturers refuse to fill small orders.
2. Distributors – Also known as wholesalers, brokers or jobbers. Their prices are

higher than a manufacturers.
3. Independent craftspeople
4. Import sources – They operate like domestic wholesalers.
13.5.1 Dealing with Suppliers
The most important thing about a supplier is reliability. Good suppliers will help
you by providing products and even creative solutions to help meet your customers’
demands. Note that it is not uncommon that
• Some suppliers require a minimum order for merchandise.
– The minimum may be higher for first orders to cover the cost of setting
up a new account.
• Some suppliers demand a minimum number of items per order.
Rieva Lesonsky, author of Start Your Own Business, says, “Be open, courteous and
firm with your suppliers, and they will respond in kind.”
13.5. SUPPLIERS 133
13.5.2 Payment Plans
Suppliers of expensive equipment or merchandise may require credit references.

If you don’t have trade references or a credit rating (as is the case with many
starting businesses) you may find smaller suppliers more accomodating than large
suppliers. If you are dealing with a reticent large supplier, personal interaction can
work wonders. You can also present your financial statements and prospects for
success.
If a supplier is uncertain about you, they will put you on a c.o.d. basis until you
have proven yourself reliable.
Definition 13.5.1 (COD (or c.o.d.)) Cash on delivery. If a supplier does not
extend credit, customers may be required to pay upon receipt of goods.
Whatever you do, do not falsify or misrepresent your financial statements. At least
in the U.S., it is considered a felony.
Side Note 13.5.1 (Tip: Sending it Back) While managing at a housing com-
pany while getting my undergraduate degree, I regularly had to deal with food
vendors.
Discuss
• Their negotiating technique when discussing pricing, and

• The need to be firm but fair, such as the occasions on which we had to send
back bad food or refuse an entire shipment (and make do with what was on
hand) in order to make a point about late deliveries.
Tips for dealing with suppliers:
1. Be sure to add up
• Costs,
• Discounts, and
• Allowances
before you make a decision. Suppliers sometimes try to complicate pricing to
their advantage.
2. Ask about the freight policy before ordering.
• Sometimes if an order is large enough, the supplier will pay for freight.
• For items being shipped, you should know who is liable for damage to
goods in transit.
• Depending on whether the supplier pays frieght, it may be worthwhile

to cancel backorders and bundle them with a subsequent orders.
3. Be aware of your supplier’s priorities. Do they fill orders in the order that they
come in or do they give preferential treatment to larger orders?
4. Specify a cancellation date on your order forms.
5. Inform all your employees who might receive shipments to carefully inspect
all items that are delivered before you sign the delivery receipt.
Definition 13.5.2 (FOB (or f.o.b.)) Free on board. International Term of Sale
that means the seller fulfills his or her obligation to deliver when the goods have
passed over the ship’s rail at the named port of shipment. This means that the
buyer has to bear all costs and risks to loss of or damage to the goods from that
point. The FOB term requires the seller to clear the goods for export.4
Colloquially, people often say something like “f.o.b. Seattle” to indicate that an
item being shipped from Seattle is free on board.
Definition 13.5.3 (FOB Destination (or f.o.b. Destination)) Free on board des-
tination. As opposed to FOB, FOB destination indicates that the seller of merchan-
dise bears the shipping costs and maintains ownership until the merchandise is
delivered to the buyer. 5
FOB Destination changes the location where title and risk pass. Under this arrange-
ment, title and risk remain with the seller until they have delivered the freight to
the delivery location specified in the contract.6
Definition 13.5.4 (Back Order) This is a Distribution (business) term and refers
to the status of items on a purchase order in the event that some or all of the
inventory required to fulfil the order is out of stock. This differs from a forward
order where stock is available but delivery is postponed for other reasons.7
4 Source: http://www.epoi.com/jargon.html, May 19, 2007.

5 Source: http://www.abcsmallbiz.com/reference/glossary/glossary efg.html, May 19,
2007.
6 Source: http://www.roadway.com/shippers/glossary.html, May 19, 2007.
7 Source: http://en.wikipedia.org/wiki/Backorder, May 19, 2007.
Chapter 14
Hiring Employees
Hiring is perhaps the most important task for any entrepreneur. The benefits of
finding the right person for a job cannot be overstated. On the other hand, a
bad hire, besides being bad for business, can take a tremendous personal toll on
the entrepreneur as he or she is faced with the prospect of stressful personnel
management duties such firing the employee.
Side Note 14.0.2 (Tip: A Personal Note Concerning Personnel Management)

By far the most stressful decisions I have made in my management career have con-
cerned firing or laying off employees.
While reprimanding or terminating ineffective employees and downsizing are neces-
sary business decisions, they are often emotionally draining for the manager as well
as the employee involved.
This chapter will cover the ins and outs of hiring
• Full-time employees (FTEs),
• Part-time employees,
• Temporary employees (temps), and
• Independent contractors.
Side Note 14.0.3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form
[4, p. 337].
135
136 CHAPTER 14. HIRING EMPLOYEES
14.1 How to Hire

Hiring involves analyzing the job requirements, creating a job description, and re-
cruiting.
Side Note 14.1.1 (Formalities) While it may seem when you hire your first em-
ployee an unnecessary burden to write a job description and create all the other
formalities, by the time you hire your 40th employee, you’ll be grateful to have
spent the time to go through a more formal process.
14.1.1 Job Analysis
Before creating a job description, you need to consider
• The physical or mental tasks involved. Cleaning, lifting, programming, writing

reports, selling, etc..
• How the job will be done. Will the person use a computer? What software
do they need to do? Will they be welding? What kind of welding equipment
will they need to be familiar with?
• The reason the job exists. What are the goals for the employee and how does
the job relate to other jobs in the company?
• The qualifications needed. Not only education and skills, but personality
traits.
14.1.2 Job Description
Side Note 14.1.2 (Tip: Job Title Inflation) Inexperienced employers are often
tempted to inflate the job title of the position they are trying to hire in an attempt
to lure candidates. However, this can create several problems:
• Even if the employee is grateful to have an inflated job title at first, they
will soon expect compensation commensurate with their job title. If you call
someone a Vice President but don’t compensate them as such, you will likely
find that they will come to you at some point to demand a vice president’s
salary.
• If you have do terminate the employee, an employee with an inflated job title
may expect an inflated severance package.
• You may not leave enough buffer above the employee. If you give someone
a job as Vice President, then want to hire someone else later at a position
above them in the company, you have nothing to offer.
14.1. HOW TO HIRE 137
• There is little room for advancement. Part of retaining quality employees is

the prospect of advancement. If you hire someone at the highest level of their
competency, you may find it difficult to give them a promotion later.
• If you give someone an inflated job title but do not offer a salary commensurate
with the title, you may find they are tempted to leverage that job title to seek
employment elsewhere.
You may actually be doing your employee a disservice by inflating their job title. If,
for example, you hire someone as Director who is not qualified to be a director, then
they go on to a Director position at another company, their lack of qualifications
may be obvious to their new employer and result in their termination or other harm
to their career.
Side Note 14.1.3 (Job Description) Present Lesonsky’s sample “Job Descrip-
tion” form [4, p. 339].
Definition 14.1.1 (Job Description) Job descriptions should include
• A job title,
• The position of that employee in the corporate heirarchy, and
• Job summary with major and minor duties.
Definition 14.1.2 (Job Specification) Job specifications are similar to job de-
scriptions (see definition 14.1.1) and should include the personal requirements ex-
pected of an employee [4, p. 338]. Like a job description, it includes
• The job title,

• Who the person reports to, and
• A summary description of the position.
It also includes
• Any educational requirements,

• Desired experience,
• Specialized skills or knowledge,
• A salary range,
• Benefits,
• Physical or other special requirements associated with the job, and
• Any occupational hazards.
14.1.3 Advertising the Job
When you write an advertisement,
• List the top 4 or 5 skills that are most essential to the job.
– Keep in mind that many qualified applicants may not answer an ad

if you list skills that are not particularly necessary for the job. For
example, if you are looking for an accountant, don’t list “familiarity
with Quickbooks”1 if you really just want someone who is familiar with
accounting.
• Do not list requirements other than educational or experience-related ones.
• Do not ask for specific personality traits, such as “outgoing” or “detail-

oriented,” or people who may not have them will just try to fake those per-
sonality traits in the interview.
• Be sure to list appropriate contact information.
– For professional positions, applicants should be given at least an e-mail

address and mailing address to send resumes and other documents and
possibly a phone number.
– For other positions, you may have applicants schedule an appointment
by e-mail or over the phone and come in to fill out an application.2
Side Note 14.1.4 (Using an E-mail Address) For professional positions, e-mail
addresses have become perhaps the most popular way to get applicant information
at U.S. companies. With e-mail, you don’t get calls from aggressive applicants who
are trying to circumvent the hiring process. It also makes it easy to receive and
process a large number of applications with a minimum of effort.
Many American companies are no longer providing phone numbers, particularly
those that advertise on web sites, due to the number of applicants for competitive
positions.
14.1.4 Finding People
There are many possible sources of applicants.
• Your Personal and Professional Network
• University and College Placement Offices

1 Quickbooks is the most popular accounting software package for small businesses in the
U.S..
2 See sidenote 14.1.5.
• Senior Citizen Centers – Senior citizens who need extra income or retirees who
want to make productive use of their time often make excellent employees
• An Unemployment Agency – Contact government and private agencies who

assist unemployed persons
• Job Banks – Professional associations often have “job banks” where profes-
sionals who are looking for employment can supply their resumes. In the U.S.,
most professional associations’ job banks are now online.
• Industry Publications – Most trade publications take ads for job openings.
• Online – In the U.S., particularly in the high-tech industry, many positions

are being filled online. Try to perform a search on a job sites such as
http://www.monster.com or http://www.dice.com with the keyword “java”
will demonstrate just how widely used online tools are.3
Generally, for professional positions, the hiring process proceeds as follows:
1. You narrow the number of resumes down to about 10.
2. You interview the candidates.
3. You narrow down the 10 candidates to 3.
4. You conduct a second round of interviews with the remaining 3 candidates.
5. You check references.
6. You hire the preferred candidate.
Screening People
Reviewing resumes and applications is an art, not a science.

If you are lucky, you will get several candidates for any job you are offering. For any
job, you need to narrow down the number of applicants to those you can interview
in a reasonable time frame, about 10 or so.
To “weed out” candidates,
• Focus on the skills that a person can bring to your company. You can evaluate
their personality during the interview, but when looking at a resume, be sure
that a candidate can provide what you are looking for.
3 Java is a programming language. Searching on Monster.com with the keyword Java on
May 19, 2007 turned up more than 5,000 hits searching just the “Information Technology”
search category. There were 4,314 listings in the “Computers, Software” category. 159 in
“Financial Services.” 665 in “Internet/E-Commerce.” And 921 in “Engineering.”
• Look for patterns in their career.
– Do they change jobs too quickly?
• Throw out applications if someone cannot provide enough references. That

typically indicates that someone cannot supply enough positive references.
• Don’t necessarily discard resumes with some gaps.
• On the other hand, if a person survives downsizing or other major changes at

their former employers, that is a very good sign that they are a survivor.
• Rely on your intuition.
Side Note 14.1.5 (Job Application) Present Lesonsky’s sample job application
[4, pp. 344–345].
Applications should ask for things such as
• Name, address, phone number, and e-mail address,
• Educational background,
• Work experience
– As for salary information when asking about work experience
• Availability, including when an applicant can work and the hours they can
work,
• Special skills, and
• References.
Side Note 14.1.6 (Hiring at Active.com) In the hiring process at Active.com,

so many resumes came in that an administrative assistant was asked to perform the
first screening. She simply passed along resumes that contained certain keywords
that we were looking for.
Of those we looked at, we tossed those that had spelling or grammatical mistakes,
did not match our requirements closely enough, listed expertise in too many subject
areas,4 were not experienced enough, or were too experienced.
From the hiring process at Active.com, I learned that people lie on their resumes all
the time. Due to this, I have some personal recommendations:
• Always check references.

4 It takes time to become an expert with any sufficiently compex technology. If an applicant
indicated they were an expert with too many technologies, this indicated to us that the
applicant was not being truthful.
• Ask the person questions they would only know if they are competent in their
field.
• Ask people questions about their resume during the interview. Get clarification
on anything that you think may be suspect.
• Do not hire people who are discovered to be lying on their resume. Ever.
Not also that many of the best people we hired were not the best on paper. Several
of the engineers I hired did not finish their undergraduate degree. However, their
love of and devotion to learning technology far exceeded most university graduates
who were computer science majors simply because they thought it would make them
money. They were the type of people who would write software all day, then go
home and play on computers in their spare time.5
Side Note 14.1.7 (No-nos) In the U.S., there are certain things you may not dis-
cuss with a job applicant in order to avoid discrimination and other issues. Though
laws undoubtedly differ in China, in the U.S., employers may not ask about anything
not related to the job, including [4, p. 347]
• Age or date of birth,
• Sex, race, creed, color, religion, or national origin,
• Disabilities of any kind,
• Marital status,
• Maiden name (for female applicants), or
• If a person is a citizen.6
Questions that are not explicitly prohibited, but which can get employers in legal
trouble, include
• Whether the applicant has children,
• Whether the applicant has every been treated by a psychologist or psychiatrist,
• Whether the applicant has every been treated for drug or alcohol addiction,
• Whether the applicant has every been arrested,
• How many days the applicant was sick in the previous year, and
5 I don’t mean play in the sense that they were playing video games – they were networking
their house or setting up interesting web sites or doing other productive activities.
6 Employers can, however, ask prospective employees whether they can submit proof that
they have the legal right to work in the United States, such as through a “Green Card.”
• If a worker was ever injured on the job or filed for worker’s compensation.
Side Note 14.1.8 (Your Résumé) Discuss with students how to put together an
effective resume when they graduate.
The Interview
Remember that the candidate will be interviewing you as much as you will be
interviewing them. Good candidates will do their best to put their best foot forward.
You should do the same.
First impressions are the most important. Hopefully they will be neat and clean,
friendly, and demonstrate good communication skills.
Begin with some small talk. Discuss the job and the company. It is as important
to get the candidate excited about your company as you want to be about them.
Then ask them about their skills and background. Be sure to ask open-ended
questions, such as “Tell me about your last position,” or “Tell me about a problem
that you solved at your last job and the way you solved it.” Don’t ask yes-or-no
questions. You want the candidate to talk enough to give you a detailed impression.
Here are some suggestions for questions to ask the candidate:7
• If you could design the perfect job for yourself, what would you do? Why?8
• What kind of supervisor gets the best work out of you?
• How would you describe your current supervisor?
• How do you structure your time?
• What are three things you like about your current job?
• What were your three biggest accomplishments in your last job? In your
career?
• What can you do for our company that noone else can?
• What are your strengths and weaknesses?
• How far do you think you can go in the company? Why?
• What do you expect to be doing in five years?9
7 Taken from [4, p. 349].
8 In a recent debate, the Democratic party’s candidates for President of the United States
in the 2008 election were asked what their perfect job would be. Curiously, only one of them
answered, “President of the United States.”
9 This is a very typical job interview question in the United States, so much so that it is
almost a cliché. A friend from Texas was asked this question when he interviewed with Mo-
torola to be a supervisor in a manufacturing plant in Austin, Texas. He answered, “bowling.”
The interviewer laughed out loud. He got the job.
• What interest you most about this company? This position?
• Describe three situations where your work was criticized.
• Have you hired people before? If so, what did you look for?
Things to watch out for include
• A bad attitude regarding the candidate’s previous employer,
• Things the candidate seems reluctant to talk about,
• Whether the candidate can think on their feet,
• The candidate’s general demeanor, such as their posture, attentiveness, and

general tidiness in their appearance.
After your questions, give them time to ask you questions. If the candidate is really
interested in the position, they will have questions about the company and the
position.
Finally, after you finish the interview, take a few minutes to write down your im-
pressions.
Side Note 14.1.9 (The I.Q. Test) At Active.com, the CTO liked to ask ques-
tions like you would find on an I.Q. test to see how employees solved problems.
This has become popular recently in the U.S., with many companies like Google
incorporating these kinds of questions into their standard interview process.
Examples of these kinds of questions include
• Name as many ways you can think of to find a needle in a haystack within 30
seconds.
• What letter comes next in the sequence MTWTFS?
• If you have N people in a room and every person shakes every other person’s
hand, how many handshakes are there?
Checking References
One thing that far too few employers do is check references. I have interviewed
people who looked great on paper, gave a strong interview, but there references
were poor. They were not hired.
Most supervisors, at least in the U.S., do not give bad references to avoid potential
lawsuits. Be wary of answers that subtly indicate that there may have been a
problem with the candidate. Lesonsky tells of one supervisor who was asked about
a candidate who simply replied, “I only give good references.” When asked, “What
can you tell me about this person,” they again said, “I only give good references.”
Many larger companies will refer you to the human resources department. You
should try to speak directly to the candidate’s previous employer, who knows the
candidate well, rather than a human resources employee who may not.
Also, check their educational background. Contact their university to confirm that
they graduated and that their grades were what they said they were.
Although I don’t know how things work in China, in the U.S., you can hire companies
to check educational references and perform criminal background checks for about
$100 per check. Considering the cost of hiring someone whose resume has been
fabricated or who has a criminal background, it is usually a good investment.
Bibliography
[1] Jay Heizer and Barry Render. Operations Management. Pearson Education,
Inc., Upper Saddle River, New Jersey, 7th edition, 2005.
[2] Guy Kawasaki. The Art of the Start. Penguin Books, Ltd., New York, New
York, 2004.
[3] Donald F. Kuratko and Richard M. Hodgetts. Entrepreneurship: Theory, Pro-

cess, and Practice. Thompson South-Western, Mason, Ohio, 6th edition, 2004.
[4] Rieva Lesonsky. Start Your Own Business. Entrepreneur Press, Canada, 3rd
edition, 2004.
[5] Fred Luthans Richard M. Hodgetts and Jonathan Doh. International Manage-
ment: Culture, Strategy, and Behavior. McGraw-Hill Companies, Inc., New
York, New York, 6th edition, 2006.
[6] Shooting the messenger. The Economist, pages 70–83, September 2 2004.
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International Business Management and

I International Business Management 7

2 Operations and Productivity 23

3 Operations Strategy in a Global Environment 37

6 Design of Goods and Services 81

6.2 Generating New Products . . . . . . . . . . . . . . . . . . . . . . . 83

9 Defining Your Market 101

10 Market Research 109

11 The Business Plan 115

12 Presenting the Plan 123

13 Inventory Control 127

14 Hiring Employees 135

Business Ethics and Social

1.1 Culture and Ethics

• Homosexuality is acceptable in Scandinavia but offensive in many other parts

Which brings us to the subject of this lecture: Ethics.

Definition 1.1.1 (Ethics) The study of morality and standards of conduct.

1.2 Corporate Corruption

1. Why is corruption an important business issue?

• Westerners from different countries can be quite different. For example,

– In the wake of Enron, WorldCom, and Tyco, investors in the United

• It increases the cost of doing business.

– A bribe is a business expense that goes to no productive purpose and

• On a macroeconomic level, it is simply inefficient.

1.3 The United States

• Enron – In December 2001, corporate malfeasance by the CFO and others at

1.4.1 Political and Business Scandals

1.4.2 Women in the Workplace

• There is a discrepancy in perceptions of gender in Japan, with many men of

acceptable in the United States. Furthermore, sexual harassment lawsuits result in

Definition 1.4.1 (Sexual Harassment) The definition of sexual harassment given

• The harasser can be the victim’s supervisor, an agent of the employer, a

• Unlawful sexual harassment may occur without economic injury to or discharge

• The harasser’s conduct must be unwelcome.

1.4.3 Lobbying by Japan

Definition 1.4.2 (Lobbying) To address or solicit members of a legislative body

1.5.1 Bribes and Corruption

1.5.2 Women in the Workplace in Europe

France and Germany

• The perception among men of women in the workplace?

• Women have been more proactive in setting up organizations in Great Britian.

1.6 Ethical Concerns in China

• A very large population administered by a central government which can grant

Ethical considerations include

An activity related to corporate spying is the breaking of agreements by Chinese

1.7 Corporate Social Responsibility

Definition 1.7.2 (Nongovernmental Organizations (NGOs)) Private, not-for-profit

Definition 1.7.3 (Nongovernmental Organizations (NGOs)) Private, not-for-profit

• World Wildlife Fund (WWF) (promotes environmental conservation and pro-

• Conservation International (promotes environmental conservation), and

• Rainforest Action Network (RAN).

• Good press and free advertising,

• To prevent a boycott or other consumer defections,

– Even socially responsible executives would consider the “bottom line”

1.7.1 Corruption and the FCPA Revisited

Side Note 1.7.3 (Perceptions of Corruption) Transparency International ranks

corrupt. 5.0 is considered to be the borderline at which countries are considered to

1.7.2 Response to Social Obligations

MNCs are under increasing pressure to contribute positively to communities, soci-

1. Support and respect the protection of international human rights,

2. Ensure that MNCs are not complicit in human rights abuses,

3. Freedom of association and recognition of the right of collective bargaining

4. Elimination of all forms of forced and compulsory labor,