International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007


Copyright c Collin Starkweather 2007. All rights reserved.


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

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. . . .6 Variability in Activity Times . . . . . .3. . . . . . . . . . . . . . . . .4 4 Project Management 4. . . .3. . .3 Dynamics . . . . . . . .3 Product-by-Value Analysis .2 The Strategic Importance of Forecasting 5. . . . . . . . . . . . . . . . . . . . .4 Determining the Project Schedule . . . . . . . . . . . .1 What is Forecasting? . . . . .3. . . . . . . . . . . . . . . . . . . . .1 Product Life Cycles . . . . .2. . .6. . . . . . . . . . .2 Network Diagrams . . . 4. . . . . . . . . . . . .3. 3. 4. . . . . . . . . . . . . . . . . . . . . .1 Identify Critical Success Factors . . . . . . . . . . . . . . . . . . . . . 4. . . . . . 6. . . CONTENTS . 4. . . . 5. . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . .1.2 The Work Breakdown Structure . . . . . . . . . 5. . 6. . . . . . . . 5. . . . . . 5. . . . . . . . .1 Probability of Project Completion . . . . 3. . . . . . . . . . . . . . . . . . .1 Types of Forecasts . . 6 Design of Goods and Services 6. .3. 3. . . . . . . . . . . . . . . . . . . . . . .4. . 4. . . . . . . . . 3. . . . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 The Project Manager . . . . . . .8 A Critique of PERT and CPM . . . . . . . . . . . . 4. . . . .1. . . . .1 PERT and CPM . . . . .6 Associative Models . . . . . .4. . . . . . . . . . 6. . . . . Strategy Development and Implementation . . . . . . . .5 Slack Time and Identifying the Critical Path . . . . . . . .2 Preconditions . . . . . 5. . . . 4. . . 4. . .2 A Seven Step Forecasting System . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . 5. . .1 Research . . . 5. 4. . . . . . . . . . .3 3. . . . .1. . . . 4. . . . . 5.3. . . . . . .3. . . . . . . .2 Focus Forecasting . . .4 3. . . .1 Qualitative Forecasting Methods . . . . . . 5. . . . . . . .3 Project Controlling . . . . . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . . . . . . . . .2 Build and Staff the Organization . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . . . .3. .4 Monitoring and Controlling Forecasts . . . . . . . . . . . . . . . .1 Project Planning . . . . . . . . . 5. . . . . . . . . . . . . . . . .3. . . . . . . . . .1. .2. . . . . .3 Measuring Forecast Error . . . . . . . . . . . . 4.1 Adaptive Smooting .3 Forecasting Approaches . . . . . . . . . . . .5 Seasonal Variations in Data . . . . . . . . . . . . . . . . . . .7 Cost-Time Trade-Offs and Project Crashing . . . . .2 Life Cycle and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . .1. . . . . . .2 Project Scheduling . . .3. . . . . . . . . . .1 Goods and Services Selection . . . . 3. . . . . . . . . . . . . . . . . .2 Quantitative Forecasting Methods . . . .4 Adjusting for Trend . . . . . . . . . . . .1. . . .3. . . . . . . . . . . . . 4.

. . . . . . . . . .2 Know Your Outline Thoroughly . . . 99 9 Defining Your Market 101 9.2. . . . . . . . . .3 After the Presentation . . . . . . . . . Exactly? . . . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . .4 The First Minute is the Most Important . . .2 Quality Function Deployment (QFD) . . . . . . . . . . . .2 Are You Ready? . . . . . . . . . . . . . . . . . . . . . . . . .2. . .1 Finding Your Niche . . . . . . . . . . 6. .1. .1 What Am I Researching. . . .2.3 The Mission Statement . . . . . 12. . . . . . . .2 Some Suggestions . . . . . . .3 Organizing for Product Development . . . .3 Setting Goals . . . . 111 10. .3. . . . . . . . . . 95 8 Finding an Idea 97 8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . .2 The Plan Contents .1 Your Audience . . . . . . . . . . . . . . . . . . 110 10. . . . . . 92 7. . . . . .2 6. .2. . .1 Importance of New Products . . . . . .2 Redefining and Expanding Your Niche . . . . . . . 101 9. . . . . . . . . . .3. . . . . . . . . . . . 12.3 Generating New Products . . . . . . . . .4 Manufacturability and Value Engineering . . . . . . . . . . . . . . .5 Take Notes . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . 11. .1 Product Development System . . . 12. . . . . . . . . . . . . . . . 11. . . . . . . . . . . . . . . . . . . . Now What? . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . 104 9. . . . . . . . . . . . . . 104 10 Market Research 109 10. .2. . . . . . . . . . . . . . . . . . . . .1 The Presentation . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . .2. . . . . . . . 6. . . . . . . . . . . 12 Presenting the Plan 12. . . . . . . .2 Look and Feel . 12. . . . . . . . . . . . . . . . . . .1 Do It Until You Get It Right . . . . . . . . . . . . . . . . 94 7. . . . . . . .1 Sources of Secondary Research . . . 111 11 The Business Plan 11. . .2 Research Methods . . . . . . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . 12.1 Preparing to Put the Plan 11. . . . . .6 So What? . . . .1 Characteristics of the Successful Entrepreneur . . . .2. . . . . 6. . . . . . . . . .3 Be Familiar With All Equipment to be Used 12. . . . . . . . . . . . . . . .3 Some Style Points 11. . . . . . 12. . . . . . . . . . . . . . . . . . . Product Development . . . . . . . . . .3. . 12. . . . . . . . . . . . . . . . . . . .1 You’ve Got an Idea. .1. . . . . . . . . . . . .3. . .CONTENTS 6. . . . . . .

. . .2 Job Description . . . . . . . . . . . . . . . . .2 Tracking Inventory . .3 Advertising the Job 14. . . . . . .1 How to Hire . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. . . . . . . . . . . . . . . . . . . 14 Hiring Employees 14. . . .6 13 Inventory Control 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Job Analysis . 13. . . 13. . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . . . . .1. . . . . .1 Dealing with Suppliers . . . . . . . 13. . . . . . . . . . . . . . . . . . . . . . .5. . . . . . . . . .4 Finding People . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5. . . . . . . . . . . . 13. . .2 Payment Plans . . . . . . . . . . . . . 14. . .4 Inventory Accounting . . . .4. . . . . . . .1. . . . . . . . . . . . . . . . . . .1 Buying Inventory . . . 13. . .1 Inventory Turnover . . . . . . . . . . . . . .1 Inventory and Cash Flow .5 Suppliers .3. . . . . . . . 14. 13. . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . 13. . . . . . . . . .3 Computerized Inventory Control 13. . . . . . . . . . . . .

Part I International Business Management 7 .


Furthermore. 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.1. • Married women are considered to be acting against the teachings of the Koran if they work outside the home. Likewise. in some Islamic nations.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. What may be perfectly acceptable to one culture may be abhorrent to another. business ethics becomes more problematic as multinationals cross cultural boundaries. such as Saudia Arabia. they are not allowed to drive or go out in public without covering their hair or face.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. For multinationals. 1. but as leaders in the community.1 Culture and Ethics Side Note 1. • Homosexuality is acceptable in Scandinavia but offensive in many other parts of the world. small business owners are leaders in their community whether they intend to be or not. 9 . they become increasingly important not only as a business entity.

Note that during the industrialization of the U. 1. Westerners rely more on contracts. For example. 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. • Because guanxi is less important in the West. • Because of this. • In general.2. Which brings us to the subject of this lecture: Ethics.10 CHAPTER 1. .A. This is something Chinese business people should be aware of.A.S. there is a perception in the West that Chinese are hard-working and smart.2. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. Definition 1. Prison labor is also considered improper in the U.S.1 (Ethics) The study of morality and standards of conduct.1. Easterners tend to trust people after observing a pattern of consistent behavior. Western business people may not initially trust their Chinese counterparts. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1.2. 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. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi.A.S. • However. which are more strictly enforced in the West.. child labor was widely used. 3. 2. Why is corruption an important business issue? • See sidenote 1.2 Corporate Corruption Side Note 1. and Europe but a commonly accepted practice throughout the developing world. 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.

voter. – In the wake of Enron. 2006. which requires strict monitoring and verification of financial information. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. gift. .2 Though things are improving. investors in the United States had to reevaluate the risk associated with owning stock. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. For example. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. it is simply inefficient. these are all generalizations and individuals may differ significantly from their cultural affiliations.1. reward. – Resources are diverted from more productive uses (such as building buildings) to less productive uses (such as conspicuous consumption by corrupt officials or business leaders). and Tyco. Definition 1. “.”[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. there are few if any issues which affect and infuriate so many in China as corruption. they must factor additional uncertainty into their calculations. September 20.2.2 (Corruption) Corruption is of concern for business people because • It increases risk. • It increases the cost of doing business. 2 Source: http://www. . – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way.transparency. Source: texttthttp://www. Scandinavians are typically highly trustworthy1 but Italians are less so. – A bribe is a business expense that goes to no productive purpose and decreases profits. • Of course. witness. September 20. 2006. or other person in a position of trust. China continues a battle against corruption.1 (Bribe) A price. In the words of a Beijing correspondent for “The Economist” magazine. .org/policy research/surveys indices/cpi. WorldCom. Side Note • On a macroeconomic level.2. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different.

http://www. WorldCom declared bankruptcy in July 2002. Side Note 1. • WorldCom – Following the Enron scandal. Parmalat.3. Worldcom. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. While western developed economies often cite a high ethical standard.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States. Qwest.2 (Cultural Heritage in the U.2. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. 3 Source: 4 Source: http://www. Dennis Largest.3 – Several Enron executives have since been sentenced to jail for fraud and other charges.S.4 – Bernard Ebbers. Side Note 1. history. succeeding Enron as the largest bankruptcy in U. • Enron – In December 2001. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States..S.htm. March 17. See sidebar 1. .S. was convicted of fraud and conspiracy and sentenced to 25 years in jail.S. was accused of looting the company to fund a lavish lifestyle.3 The United States The United States has recently been rocked by a number of scandals in the business community.htm. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U.3. the former CEO of WorldCom. scandals such as Enron. the SarbanesOxley Act (SOX) was passed in the U. a high value is placed on honesty and personal integrity. including a $2 million birthday party for his wife. March 17. 2007. 2007. In Scandinavia.1. and Tyco make it clear that even western developed economies have significant ethical shortcomings. There is currently debate as to the effectiveness of the regulations relative to the Largest.bankruptcydata. • Tyco – The CEO of Tyco.bankruptcydata.12 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.

• Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty. p. 58].4. This resulted in several banks being technically bankrupt [5.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals.4. and as a result made high risk investments in the late 1980s and early 1990s.1. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. the political scandals do not appear to have been fully acknowledged and addressed.2 (Sexual Harassment in the United States) Behavior considered socially acceptable elsewhere in the world may not be considered socially or legally 5 Source: 2.S. Better known is the case of Japanese banks. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan.2 Women in the Workplace Sexual harassment has also become an issue in Japan. also known as thrifts and which function like banks. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. Moreover.4. were not as highly regulated as banks. Likewise.. women have a difficult time being taken seriously. Side Note 1. The government was compelled to provide public money to bail out the institutions.fdic. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. Savings and loan institutions. Hodgetts et al. with many women finding their employment opportunities constrained. with many men of the opinion that women were just biding their time until they marry and have children. . Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations.pdf. 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.4.1 (The U. JAPAN 13 1.4 1.S. Side Note 1. • Many men do not understand why sexual harassment constitutes a problem.4. 5 1.

3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace. sexual harassment lawsuits result in significant penalties (e. yes or no. in the millions of dollars) to those who are successfully prosecuted. . gender. have paid substantial penalties as a result of sexual harassment or discrimination based on race. requests for sexual favors. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances.psu. cite two cases in which foreign firms operating in the U. Side Note 1. • The harasser’s conduct must be including but not limited to the following: • The victim as well as the harasser may be a woman or a man. • The harasser can be the victim’s supervisor. Hodgetts et al. or other issues. a supervisor in another area. 6 Source: http://www.de2. considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States. unreasonably interferes with an individual’s work performance or creates an intimidating.4.14 CHAPTER 1. or a non-employee. This definition has been further elaborated: Sexual harassment can occur in a variety of circumstances. The victim does not have to be of the opposite sex. It is considered a very serious issue.S. and for most public institutions and many large corporations.g. Definition 1. • The victim does not have to be the person harassed but could be anyone affected by the offensive conduct. an agent of the employer. and other verbal or physical conduct of a sexual nature constitutes sexual harassment when submission to or rejection of this conduct explicitly or implicitly affects an individual’s employment. Furthermore. a co-worker.4. Are women with equal qualifications as men given equal pay and position? Take a show of hands. hostile or offensive work environment.

is the notable exception).dict. yes or no. particularly in upper management.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. Although women have entered the workforce in large numbers in recent decades. their attitudes towards bribery when working in foreign markets differs from that of the U.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.S. 1. there seems to be a glass ceiling due to social factors. than any other.5 1. EUROPE 15 1.4.7 Note that lobbyists do not have any formal power.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere.4. men are disproportionately represented in management positions. with most in the top 20 among over 150 countries included in the survey.5.5. .1. Definition 1.S. to try to influence decision-makers in any circumstance. Hodgetts et al. They only have the power of persuasion.3 Lobbying by Japan Japan spends more money lobbying in the U. with the purpose to influence their votes.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy. at 40.5. politicians.4.S. 7 Source: Side Note 1.5. in an extended sense. Side Note 1.2 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. 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.. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.

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.S.16 CHAPTER (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents.about.htm.5. . 8 Side Note 1.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. 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. • Discrimination lawsuits are more commonplace in Great Britian. 1. but there is a perception that there are risks and ethical considerations. • More British companies have actively sought to recruit and promote women into management. 8 Source: http://careerplanning. though compensation is limited relative to lawsuits filed in the U. Side Note 1.5.. 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. yes or no.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity.

Side Note 1. 7.S. An increase in crime and illegal business activities.6. ETHICAL CONCERNS IN CHINA 17 Side Note 1.1.5 billion in sales annually. Ethical considerations include 1. [5.S. 2. p. Often. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. 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. 4. 64]. An opaque legal system. International corporate spying problems. Bribery and other forms of corruption. 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. .3 (Corporate Spying) Hodgetts et al. executives. Side Note 1. • Note that for every corporate spy that is caught. and • A recent history of rapid economic development.6.6. there are undoubtedly many others that get away with it. 3. Piracy and counterfeiting (see sidenote below). 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. • A relatively stable government.2 (Piracy and Counterfeiting) Present sidenote at [5. Prison labor.6. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. 5. company in Boulder was stolen and sold to a Chinese company. • Yet another case in which software from a U. pp. Child labor.

1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement.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.benjerry. provide relief in the event of humanitarian disasters.2.3 (Nongovernmental Organizations (NGOs)) Private. See http://www. In the words of a Beijing correspondent for “The Economist” magazine. Definition 1. Definition 1. China continues a battle against corruption.7. political. and promotion of social equity). BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. social justice. and economic issues such as company/our mission/index. education.7.7.7 Corporate Social Responsibility Definition 1.cfm for more detail. political. there are few if any issues which affect and infuriate so many in China as corruption.6. such as education and health care.4 (Corruption) Though things are improving. and emergency relief in the event of humanitarian disasters). “. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition).2 (Nongovernmental Organizations (NGOs)) Private. and the environment. a grocery chain. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. . 1. Other companies. and the environment.2.S. health. Side Note 1. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. and economic issues such as poverty. health.. social justice. such as Whole Foods. give customers the opportunity 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. • CARE (promotes community development. education.18 CHAPTER 1. . not-for-profit organizations that seek to serve society’s interest by focusing on social. . not-for-profit organizations that seek to serve society’s interest by focusing on social.”[6] See also sidenote 1.

S.S. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). many feel that it has had a net benefit. In 2005. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. firms a reason to refuse to pay bribes. Side Note 1. 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.7. but does not outlaw payments to political party leaders. .2. as executives of publicly traded companies are ultimately responsible to their shareholders.7. 1. Executives are people.000 and $125.7. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. firms are constrained by the FCPA with regards to bribery and other corrupt practices. • Conservation International (promotes environmental conservation). • And. Both political groups and businesses are influenced by NGOs. too. as it gives the U. China ranked 78 out of 158.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament.1. executives may actually feel that it is the right thing to do. For example. last but note least. with a score of 3. In fact.9 U. note that while U.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.1 Corruption and the FCPA Revisited Hodgetts et al.7. Side Note 1. and • Rainforest Action Network (RAN).S. – Even socially responsible executives would consider the “bottom line” when making decisions.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. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. • To prevent a boycott or other consumer defections. MNCs do not appear to have been significantly impacted.

3. 1.2 respectively.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. WorldCom.6 and 8.N. It is a difficult problem to solve.html. but most important first step is to recognize that there is a problem. . malfeasance and diversion of corporate funds becomes increasingly difficult.7.S.infoplease. Moreover. Commitments that many MNCs have signed on to. with scandals such as Enron. better than the U. the United States and Europe have recently been rocked by corporate corruption. Hong Kong is number 15. and Parmalat resulting in investors losing billions of dollars.7.4.20 CHAPTER 1. societies.0 is considered to be the borderline at which countries are considered to have a problem. Side Note 1.5 (Table 3-1: Principles of the Global Compact) The U. more Chinese will own stock in companies.3. specify standards and codes of conduct in domestic and global operations.N. and the environment. Global Compact specifies 10 principles which MNCs should abide by: Support and respect the protection of international human rights. July 1. With more disciplined corporate governance. The government is actively addressing the issue of corruption. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. such as the U. and not based on hard data. It cannot be considered to be based on a scientific survey. Tyco.7. Important: Although it is widely cited. Side Note 1. Singapore is number 5 with a score of 9. 2. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. 2006. with a score of 8. As more state-owned businesses become privatized and the size of the middle class increases.4 (Some Opinions) Personally. 5. Scandinavian countries are at the top of the list. Global Compact. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. The government recognizes that it is an issue and is taking action. 10 http://www. With greater financial transparency.10 Corruption is certainly not endemic to Asia. I think corruption will diminish as China economically develops for several reasons: 1. 4. and Germany at 7. slightly better than Sweden.

and 10. 6. 4. 9. Ensure that MNCs are not complicit in human rights abuses. Freedom of association and recognition of the right of collective bargaining (i.7. 7.1. including extortion and bribery. Business should work against all forms of corruption. 21 3.. Undertake initiatives to promote greater environmental responsibility. 8. Elimination of discrimination with respect to employment and occupation. Elimination of all forms of forced and compulsory labor.e. the right for unions to exist). CORPORATE SOCIAL RESPONSIBILITY 2. A precautionary approach to environmental challenges. Encourage development and dissemination of environmentally friendly technologies. . 5. Elimination of child labor.


1.1. another name for enterprise management is “operations management. e • Hard Rock Caf´s are in most major cities in the U.1 (Operations Management) Operations management.” 2. and Beijing. • They typically combine heavy merchandizing with the restaurant operation.Chapter 2 Operations and Productivity This course is called International Enterprise Management. often abbreviated OM. the efficient production of services will become more important. Side Note 2.1 (Heizer Company Profile: Hard Rock Caf´) Review Heizer’s e company profile of the Hard Rock Caf´ [1. e they have restaurants in 38 countries. casinos.1 Defining Operations Management Definition 2. 23 .S. While some aspects will focus on the “international” component of the name. much of it will focus on the “enterprise management” component. • They have also expanded into compelementary operations. such as hotels. In total. Note that the definition refers to both goods and services. 2–3]. pp. is the set of activities that creates value in the form of goods and services by transforming inputs into outputs. As China develops. etc. In business parlance..

We will try to understand what operations managers do so that we can potentially become better operations managers ourselves. 3. Marketing – Generates the demand. or at least takes the order for a product or service. a significant percentage have eaten in a Hard Rock Caf´ at least once. but I did not consider the menu to be much more than standard “sports bar” fare.. We will study how goods and services are produced. 1. and collects the money. – Most Americans are familiar with the Hard Rock Caf´ and among the e younger generation. Heizer states that “we look not only at how Hard Rock’s managers create value. in the U. 2. 2. but also how a variety of managers in other industries do so. – So management must not focus more on product quality and continuing to draw customers despite a different image and differing customer perceptions than it originally had. e ∗ I have eaten there. Finance/accounting – Tracks how well the organization is doing. OPERATIONS AND PRODUCTIVITY • Based on my limited and personal observations. The prices were high. 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.24 CHAPTER 2. • In the profile. and I was disappointed in the experience. – However. the food is considered by many to be mediocre and overpriced. People generally go for the atmosphere. OM is one of the three major functions of an organization and is related to all other functions. Production/operations – Creates the product. 3. – The Hard Rock Caf´ was once considered “edgy” in the United States e and built a reputation on unique atmosphere and attitude.” The Hard Rock Caf´ will be discussed further throughout the course. pays the bills. So we focus on how people organize themselves for productive activity. Our study of operations management will have four focus areas. e Functions within organizations are typically divided between three categories: 1. .S.

Definition 2. 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. and maintenance. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions. location selection. 1.” • Every organization with more than a few employees has an organization chart. business community as “org charts. supply-chain management. WHAT OPERATIONS MANAGERS DO 25 4. Staffing. inventory.2. .2. 7].2.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. known commonly in the U. as the org chart determines executives’ authority and. pp. 6–7]. Side Note 2.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. Planning. quality. Organizing. OM decisions have been divided into ten categories by Heizer [1.1. human resources and job design. operations managers make decisions. • They are often sources of conflict among management. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society.S. Controlling. more generally. To accomplish these functions. 2. 3. particularly when job titles are not clear.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1. 5]. 2. and 4. p. scheduling.2. Side Note 2. p. place in the heirarchy.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. layout design. process design. OM is one of the most costly aspects of an organization.

8. and maintenance and determine much of the cost of a product or service. • Discuss Active. 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. 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. OPERATIONS AND PRODUCTIVITY 2. Location – Where should we put the facility? • Location decisions are crucial. production scheduling. technology decisions. 7. Process and capacity design – What process and what capacity will these products require? • Process decisions commit management to specific technologies. and human resource planning. personnel levels. innovation. 6. delivery. material requirements planning. 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. 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. and price. 9. Inventory. personnel use. Layout design – How should we arrange the facility? How large must the facility be to meet our plan? • Involves materials flows. .’s location decisions and Matt McAdams a posteriori assessment of the choices. capacity needs. 4. Poor location decisions may overwhelm other efficiencies.26 CHAPTER 2. and JIT (just-in-time) – How much inventory of each item should we have? When do we reorder? • Inventory decisions must follow from customer and supplier considerations. • Personnel costs are a significant part of most production or service processes. • Mutual trust between buyers and suppliers is crucial. quality. and inventory requirements. 5.

such as the presence or absence of a part on a shelf. However. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the In Time %28business%29.1 Side Note 2. February 14. New stock is ordered when stock reaches the re-order level.wikipedia. 8]. 2007. p. the firm could deplete inventory and cause customer service issues. He also believed that management is responsible for – Matching employees to the right job. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. which relied upon standardization and quality control. Maintenance – Who is responsible for maintenance? When do we do maintenance? • Maintenance is one aspect of decision-making that is often overlooked and can contribute significantly to costs.2.2. one drawback of the JIT system is that the re-order level is determined by historical demand.2. The process is driven by a series of signals. quality. and 1 Source: http://en. This saves warehouse space and costs. 9]. • Reliability and stability of systems depends on well-planned maintenance schedules. • Eli Whitney (1800) is credited for popularizing interchangeable parts. – Providing the proper training. WHAT OPERATIONS MANAGERS DO 27 10. Kanban are usually simple visual signals.2 (Just in Time) Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process.2 (A Little History) Review Heizer figure 1. If demand rises above the historical average planning duration demand.3 “Significant Events in Operations Management” [1. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. and efficiency. p. • Frederick W. or Kanban. Definition 2. – Providing proper work methods and tools. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. When implemented correctly. . that tell production processes to make the next part.2. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1.

p. .3. The U. for others professional occupations. • Recently. • Government. Manufacturing was dominant until about 1950 or so. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. services account for over 70% of U. • Trade. • Insurance. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished.. Bureau of Labor Statistics defines services to include [1.3 (Information Sciences) The systematic processing of data to yield information. Definition 2. p.5 [1. economic output. such as the legal profession or computer services in the financial industry. 11].1 (Services) Those economic activities that typically produce an intangible product. shelter. In the U. 2. major contributions have come from the field of information sciences. Side Note 2.S. Definition 2. Today.1 (Development of the Service Economy) Present Heizer figure 1.2..S.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food.S. the wages are considerably above average. the services sector is by far the largest employer. 9] • Repair and maintenance. such as retail. 2 The average national private industry wage.S. • Food and lodging. However. the economy transitioned from agriculture to manufacturing around 1900. • In most western economies. average wages are below average2 in the U.28 CHAPTER 2.3. • In some service industries. and other essentials for its citizens. services become increasingly important. • Transportation.

3.2.3 That is. 29 Side Note 2.3. Note that many goods include services and many services include goods. • Medical. . • Services are typically intangible.2 (Differences Between Goods and Services) There are a variety of important differences between goods and services which result in differences in the way they are managed. • Services have a high consumer interaction. used in your treatment. Legal advice is rarely identical for two clients.3. When buying a computer. Therefore it is difficult to automate. • Other professional occupations. THE SERVICE SECTOR • Financial. • Real estate. such as pharmaceuticals or medical supplies. 3 Services that do not include a good as a component are called pure services.3. Customers seek services through local intermediaries. This is important insofar as there is no inventory. • Legal. a support contract in case you have problems or training to familiarize you with the features of the computer. you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you.2 (Pure Service) A service that does not include a tangible product.2. • Services are often produced and consumed simultaneously. See definition 2. the purchase price may include installation services. • Services are more often unique. Consumers interact with those providing the service. • Services are often knowledge-based. • Services have inconsistent product definition. when going to a restaurant. Definition 2. • Services are often dispersed. • Entertainment. Hospital care includes both health services and goods. • Education.

capital. 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 2.30 CHAPTER 2. the next step in product development involves customizing products according to the customer’s preferences. wherever and whenever needed.5. • Empowered employees – With the rise of services and knowledge products. • 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.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. brought about in part by the internet.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. or management). Operations managers are being challenged to produce biodegradable. reusable. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. Globalization has been having a dramatic impact on operations management and in the future. operations managers are responding by moving decision making to the individual employee. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. • Mass customization – With increases in technical capabilities and customerlevel information management. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. it will continue to strongly impact the field.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity.2. 2. p. operations managers are increasingly responsible for innovations that move ideas. . and finished goods rapidly. • 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. Trends that Heizer and Render identify [1. OPERATIONS AND PRODUCTIVITY 2. or recyclable products or to minimize packaging and other wasteful production steps. parts.2.

5.25 titles per labor-hour = 0.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). THE PRODUCTIVITY CHALLENGE 31 Definition 2. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. Side Note 2.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.4 (Total Factor Productivity) See definition 2. .1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.5. Definition 2. Consider today’s computers versus those from the 1970s. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company. p. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.97 titles per labor-hour 14 titles per day 32 labor-hours 8 $600+$400 14 Multifactor productivity with the old system: Multifactor productivity with the old system: titles per day $600+$800 titles per day Measuring productivity is not always a straightforward activity.4375 titles per labor-hour = 0.5. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.5.5. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. 15].5. Side Note 2.2.5. Definition 2. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.0077 titles per labor-hour = 0.3. but overhead is no $800/day. In order to improve productivity.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. Also known as total factor productivity.

5 (Productivity Variables) In operations management. such as convenience or safety. green. – Not all cars are the same. The electricity often goes out in the middle of the day and the current may vary in strength. in Cambodia. ..32 CHAPTER 2. about 10% of the annual improvement in productivity is due to increases in labor productivity. spreadsheets.5. Labor. capital.S. If the public electricity provision increases in quality. – This can be a particular problem in the service industry. no word processors. it may improve productivity. or other commercial software available. 3. and the arts and science of management. where quality and other factors vary widely or the level of service provision includes items difficult to measure. Definition 2. • 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. and was about the size of my hand. A Toyota Corolla is a much different car than a Porsche 911 Turbo. • Units of measure – There may not be appropriate units of measure.) The screen had only one color. 2. 2. Management. you had to write a program from scratch. (It used audio tapes for memory storage. – For example.5. If you wanted the computer to do something. the three factors critical to productivity improvement – labor.1 Productivity Variables Operations managers typically divide productivity variables into three categories: 1. of course. Labor productivity has increased due to • Better-educated. OPERATIONS AND PRODUCTIVITY – The first computer ever used had no internal memory. the public provision of electricity is highly variable. Labor In the U. There were. Capital.

Side Note 2.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. such as transportation and sanitation.S. draw the rectangle on the blackboard. p. What is the area of a 4 × 6 meter rectangle.) Present Heizer figure 1. Which of the following is true about 84% of 100? 4 When presenting this question. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading.3 (The State of Education in the U. In developed nations. and 33 3.8 [1. . Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. 2. THE PRODUCTIVITY CHALLENGE • Better-nourished.S. Diet of the labor force. and math.2. “About Half of 17-Year-Olds in the U. maintaining and enhancing the skills of labor.” In the U. and • Healthier workers as well as • A shorter work week. Social overhead that makes labor available. and 4. there is considerable concern over teaching of basic skills such as mathematics to grade school children.5. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3.S. writing. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. Basic education appropraite for an effective labor force. Cannot Correctly Answer Questions of This Type.5.. The primary variables for improving labor productivity include 1. 16].

2.5. are utilized effectively. educated. Difficulties arise because service-sector work is .3 Management Management is used to ensure that labor and capital are used effectively and efficiently.. p. Developed economies (also known as post-industrial economies) require trained. Definition 2.5.5% after allowances for depreciation. graduate programs and the students they produce remain the best in the world. According to Heizer [1. has increased at about an average of 1. and because the author of the textbook is writing about operations management. and the cost of capital depends on interest rates.5. and knowledgeable employees and operations managers are responsible for ensuring that technology.2 Capital Capital investment in the U.4 (Management as an Input) Because this is a course in business management.S. 2.S. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. U. Note that there is a trade-off between capital and labor in most industries.5. education. management is not always identified separately from labor as an input. 17].34 CHAPTER 2. and knowledge. as well as capital.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. Note that in classic economic analysis and other areas of business. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. however.5. management is considered as a separate input. in the U. productivity in the service sector has not increased as rapidly as with the production of goods. Side Note 2. 2.4 Productivity and the Service Sector Historically.S.

• Keeping the workplace safe. These challenges include such issues as • Maintaining a clean environment. Side Note 2. 35 3. Low-productivity activities. Often difficult to automate (e. food preparation.6. 18] • Retailing in the U. Difficult to evaluate for quality (e. . investment advice). government agencies. teaching). Often an intellectual task performed by professionals (e. 2. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward. and 5. 2. but from customers. SOCIAL RESPONSIBILITY 1..5 (Service Productivity in the U.g..5. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency.g. legislation protects shopkeepers from discount retailers. 4. a haircut). banking system is about 33% more productive than Germany’s. Frequently individually processed (e.. such as cleaning.S.S. laundry service.g.. p.g.5 • The U.S. These demands come not only from the manager’s personal ethic.S..2.S. Heizer notes [1. medical diagnosis).g.) Productivity is highest in the U. the performance of a law firm). and • The U.6 Social Responsibility As discussed in chapter 1. Typically labor-intensive (e. • General ethical behavior concerning issues such as child labor and corruption. and child care. watchdog groups such as NGOs. in both overall and service productivity. 5 In Japan. and other stakeholders. is twice as productive as in Japan. We will discuss this challenge in more detail throughout the course. telephone industry is twice as productive as Germany’s.


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

an understanding of cultural differences in preferences is needed to best meet customer needs. competitively superior.1 Mission Whether large or small. global organizations can attract and retain better employees. • Perfumers tend to concentrate in Grasse. Side Note 3. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. 5. I recommend that all companies draft a mission statement. FedEx is committed to our People-Service-Profit philosophy. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. Equally important.1. and • Increase sales. 3. 3.38CHAPTER 3. 3.1. time-certain delivery. positive control of each package will be maintained utilizing real time electronic tracking and tracing .1 (Mission) The purpose or rationale for an organization’s existence. 28] which includes mission statements for three multinational companies: 1. Definition 3. 6. • Provide additional insights and opportunities.2 [1. France. Provide Better Goods and Services – For companies doing business in an international setting. global air-ground transportation of high-priority goods and documents that require rapid. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product.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. We will produce outstanding financial returns by providing totally reliable. Missions state the rationale for an organization’s existence. FedEx.1.1 (Mission Statements for Three Organizations) Review Heizer figure 2. Attract and Retain Global Talent – By offering more employment opportunities. p. 4.

natural ingredients and promoting business practices that respect the Earth and the Environment. We will be helpful. 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.1. contributing member of our community and offering the Hard Rock family a fun. 3. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. A complete record of each shipment and delivery will be presented with our request for payment. a grocery chain. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. nationally & internationally. Our mission consists of 3 interrelated parts: • Product Mission – To make. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) . DEVELOPING MISSIONS AND STRATEGIES systems. 2. such as Whole Foods. The Hard Rock Caf´.. Other companies. • Social Mission – To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally.1. and nurturing work environment while ensuring our long-term success. e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience.3. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. 39 Side Note 3.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. We are committed to being an important. Merck. We will strive to have a completely satisfied customer at the end of each transaction. healthy. courteous. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. and professional to each other and the public.S.

the creation of a unique advantage over competitors.” Note that mission statements are used not only at the company-wide level. • The “look and feel” of the product. • Training. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. be it • Product features. Cost leadership – Providing cheaper products.40CHAPTER 3. Differentiation can arise from anything that the customer may value about a product or a services. more responsive products or services.cfm for more detail. • Interoperability with other products. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. • Availability of complementary products.1. but can be used at the department level and even at the project level. Definition 3. 3. the Operations Function. .2 (Strategy) How an organization expects to achieve its missions and goals. Differentiation – They make their product better. Side Note 3. Responsiveness – By providing company/our mission/index. 3.3 (Sample Mission Statements) Present Heizer’s figure 2. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.1.3 (Competitive Advantage) In operations management.1.3: “Sample Missions for a Company. See http://www.1. 2. and Major Departments in an Operations Function. Definition 3.2 Strategy Strategy involves concrete steps by which a company can achieve its mission.benjerry.

3.1. DEVELOPING MISSIONS AND STRATEGIES • 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 Caf´ and other theme restaurants. In China, KTV e 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, engaging 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 customer. Low-cost leadership does not imply low value or low quality. Often providers of low-cost products achieve their competitive advantage by taking advantage of facilities, management techniques, or technologies to reduce costs. Wal-Mart has been very successful in competing by driving down overhead and distribution costs.

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

42CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Reliable – Being able to provide consistent products or services with minimal risk to the customer. – 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 statement, “To provide outstanding French fine dining for the people of Chicago.” • Several alternative options are presented.


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 formulated. • Dynamics – How to deal with change as the strategy is confronted with changes in the operating environment. Each of these topics will be discussed in turn.





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



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



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 2 The

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

Weakness. The operations manager’s job is a three-step process: 1. “Strategy Development Process. 37].3.6 [1. Definition 3.3.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success.1 (SWOT Analysis) In operations management. Group the necessary activities into an organizational structure. and 3. . Definition 3. determining internal strengths and weaknesses and external opportunities and threats. The purpose of this process is to 1.” The process of developing a strategy involves the following steps: • Environmental Analysis. Staff the organization with personnel that will get the job done.3. Opportunities. if the firm has a competitive advantage in these things) and where failures are most likely. p. Side Note 3. and 3. These critical success factors are used to develop a competitive advantage.1 (Strategy Development Process) Present Heizer figure 2. then determine whether the organization does these things well (and. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. 2. • Determine Corporate Mission. Increase productivity.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength.2 (Critical Success Factors) In operations management. then • Form a Strategy.3. 2.44CHAPTER 3. and Threats) analysis to develop strategies. Identify a strategy and critical success factors. those activities or factors that are key to achieving competitive advantage. Implement an OM strategy. 3. Provide competitive advantage. in particular.

39]. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. . Recall the “org charts” in sidenote 2.6 3. MIS. Side Note 3. and supporting activities. 5 Management 6 Human Information Systems Resources. 3.1 as a checklist to determine critical success factors.3 (Activity Map) In operations management.3.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2. OM activities are most productive when they are integrated with other activities such as marketing.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.2 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.2 as examples of how firms organize their activities.5 and HR.3 Integrate OM With Other Activities In order to achieve its strategy. a graphical link of competitive advantage. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. Definition 3.3. • Red arrows – critical success factors • Blue arrows – support activities 3. finance. CSFs. p. Once CSFs are determined.3.3. Southwest Airlines has a competitive advantage in providing low-cost airfares. an activity map can be used to link an organization’s competitive advantage to the CSFs.

4.4. 95% of its assets and 98% of its sales are made outside Switzerland. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. as exports require little change in operations and licenses often leave risk with the licensee. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization. franchises. . See definition 3. wine in France.4. Definition 3. • Nestl´ is an example of a country with a transnational strategy. In the semiconductor industry.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. but a good strategy for cost reduction when products do not need to be adapted locally. 42] Definition 3.4.4. 3.5 (Global Strategy) In operations management. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. International strategy – Often the easiest strategy. Definition 3. • Texas Instruments is an example of a country with a global strategy. p.4.4. [1. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. owning or controlling facilities in more than one country. Only 10% of its work force is Swiss.4.4. • McDonald’s is an example of a country with a multidomestic strategy. Usually does not confer a cost advantage. with beer on the menu in Germany. 4.46CHAPTER 3. Definition 3. Global strategy – Not characterized by local responsiveness.6.3. 2.1 (International Business) A firm that engages in cross-border transactions. See definition 3. Typically characterized by subsidiaries. a strategy that uses exports and licenses to penetrate the global arena. and hamburgers without beef in India. See definition 3. products do not need to be localized.4.3 (International Strategy) In operations management. Although e it is legally Swiss. Its menu reflects the country in which it operates. Definition 3. See definition 3. Also one of the least profitable due to transport costs and little local responsiveness.4 (Multidomestic Strategy) In operations management.5. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. or joint ventures with substantial independence.

Note that many companies that are well-known American brands are now making more money overseas than they do in the U.4.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.S.4. 6]. Side Note 3.4. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. 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 .3. p.6 (Transnational Strategy) In operations management.


quality. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows.0. Plans are also revised to meet changes in time and cost demands. Scheduling – People.0.0. the largest software company in the world. Side Note 4. p. Controlling – Monitoring of resources. 46–47]. Even Microsoft. costs.1 [1. 49]. The profile highlights the importance of project management in achieving competitive advantage. Planning – Goal setting. Side Note 4. money. defining the project. and Controlling) Present Heizer figure 3. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. and budgets.Chapter 4 Project Management Side Note 4.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. 3. 2. pp. and team organization. and supplies are tasked to specific activities and activities are related to each other. Scheduling. 49 . Project management involves three phases: 1.3 (Project Planning. 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.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1.

PROJECT MANAGEMENT However.0. 69]. Your job is to make things go smoothly and according to plan. However.5 (Personal Advice on Project Management) Project management is a tricky profession.0. and you will be forced to improvise. Moreover. 4. 4. things you thought were certain turn out not to be. and/or 5. Side Note 4. The work contains complex interrelated tasks requiring specialized skills.1 The Project Manager As alluded to in sidenote 4. The project is temporary but critical to the organization. In a sense. if things go wrong.1 Project Planning While many projects are run within an existing organization. a temporary project organization is formed to address a specific project. you will be confronted with a daunting task. 3. often times. If you become a project manager on projects of significant complexity.1. The job is unique or somewhat unfamiliar to the existing organization.5. See also Heizer sidenote “Project Management and Software Development. Definition 4. p. project managers are highly visible in a firm and have significant responsibilities. p.1. People will not come through with what they promised. The responsibilities of project managers are to make sure that . 48] 1.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. 2. you should always expect the unexpected. you are doing your job well if noone notices the project management. 4. The project cuts across organizational lines. You may be managing resources far in excess of your individual salary.50 CHAPTER 4. Project organizations work best when [1. Work can be defined with a specific goal and deadline. it is very obvious and can be very costly.” [1. it is also an area in which there will continue to be high demand for qualified people.

People receive motivation and information necessary to do their jobs. Side Note 4. Approve software architecture for user account input web page functionality . • Build the user account input web page is a much better task division than 1.1. 51 4. a web page takes about a day to build for an experienced team. in a software engineering project. 3.2 (Work Breakdown Structure (WBS)) In operations management. 2. 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.1.4. a task that should only take a day or so. The project meets its quality goals. Complete software architecture for user account input web page functionality 5. Complete graphic design for user account input web page 2. For example.1 (Avoid Creating a WBS That is Too Detailed) A common error that inexperienced project managers make is to divide the project into too many tasks.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). and 4. Definition 4. Review software architecture for user account input web page functionality 6. PROJECT PLANNING 1. All projects come in on time. In a project that includes allowing a user to enter personal information on a web page.1. you have divided the tasks too finely. Review graphic design for user account input web page 3. When dividing a project into tasks. The project is on or under budget. dividing a project into more and more detailed components. Approve graphic design for user account input web page 4.1.

the work breakdown structure is not something you go to your office to do in isolation. p. Major tasks in the project 3.1. Write software for user account input web page functionality 8. At the time you are creating the work breakdown structure.3 [1.52 CHAPTER 4. fill hundreds if not thousands of pages.3 (Reality Check: WBS) In reality. of course.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. 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: 1.1. Side Note 4. Show the relationship between each activity to others and to the whole project 2. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. you should also take note of time and cost estimates given by your technical staff.2 (Work Breakdown Structure) Present Heizer figure 3. Write software for user account input confirmation page functionality 9. Scheduling serves to 1. Identify precedence relationships among activities 3. They will be useful for project scheduling. Encourage realistic time and cost estimates for each activity .2. which we will discuss next in section 4. The actual WBS for Windows XP would. 4. Subtasks in major tasks 4. Activities (also known as “work packages”) to be completed Side Note 4. Project 2. PROJECT MANAGEMENT 7.

“Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover.2. Perhaps they imagine that they are not doing their jobs professionally if they are not. and CPM tools for every project management activity.2.4. Overall project time is developed. Make better use of people. the road bottlenecks.2. p. Definition 4. 3. Definition 4. The order of performance is accounted for. PERT. cost estimates. 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 . Gantt charts are perhaps the most widely used tool for ensuring that 1.2. – said of roads. right by the bridge. PERT and CPM help answer questions such as • When will the entire project be completed? . Activity time estimates are recorded. PERT and other formal documents. and material resources by identifying critical bottlenecks in the project Side Note 4. It can actually be quite time consuming to create and maintain Gantt charts. For smaller projects. and other values to each activity. 51]. PERT.” This will give the class an idea of the look and feel of a typical Gantt chart.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. Side Note 4.2. 2. as.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. and CPM) Inexperienced project managers often feel the need to use Gantt.2 (Using Gantt.4 [1. and 4. which becomes narrower as one approaches the neck of the bottle. MS Project’s Gantt chart functions demand you assign employees. moeny. All activities are planned for. Derives from the typical shape of a bottle.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. However. PROJECT SCHEDULING 53 4. these should be considered merely tools to be used when they are useful by saving time or energy.

Control programs typically produce reports detailing 1. and 8. 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.54 CHAPTER 4. or ahead of schedule? • On any given date. behind schedule.3 Project Controlling Project control involves monitoring resources. Cost breakdowns for each task. . 5. costs.3. Cost distribution tables. is the project on schedule. Time analysis reports. is the money spent equal to. 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. less than. Functional cost and hour summaries. were developed in the 1950s for project control. 3. Raw material and expenditure forecasts. 6. quality. 4. 4. Definition 4. and budgets of projects. 2. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. PERT and CPM.1 PERT and CPM Two methods.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. Variance reports. what is the best way to accomplish this goal at the least cost? 4. Total program labor curves. 7.3. Work status reports.

2. it will do for you automatically much of what we will go through manually in this class. Develop the relationships among activities. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. They both follow six steps: 1. Side Note Use the network to help plan. See also definition 4.3. monitor. Also. in my experience.3.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. Moreover.3.2. . Compute the longest time path.3 (Critical Path) The computed longest time path through a network. Assign time and/or cost estimates to each activity.2 (Example: AON and AOA) Present Heizer’s figure 3. Activity on Node (AON) and 2. and ontrol the project. schedule. 5. 4. Draw the network connecting all of the activities. 4. Personally. 3. As the names describe.5 [1. Activity on Arrow (AOA).2 Network Diagrams There are two approaches to visualizing activity networks: 1. PROJECT CONTROLLING 55 Definition 4. AON associates the activity with the node whereas AOA associates the activity with the arrow. p.3. Define the project and prepare the WBS. See also definition 4. through the network. 6. 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.3. or the critical path. Gantt charts are the “go to” visualization method for even very complex projects.3.3. Side Note 4. Definition 4.1 (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. 53].

1. 54–55].1 gives sufficient information to describe the network. pp.3. that is. that is. PROJECT MANAGEMENT Side Note 4. 56]. its ES is the maximum of all EF values of its predecessors.1 (Critical Path Analysis) In project management. ES = max{EF of all immediate predecessors}. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. See also definition 4. – If an activity is an immediate predecessor to more than one activity. . we must use time estimates of each activity to determine the overall schedule for the project. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time.3. EF = ES + Activity time. LF = min{LS of all immediate following activities}. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed.6–3. We do this with a critical path analysis with involves a 2-step procedure. 4.8 [1. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. p. 2. Follow with example 3 and figure 3. Definition 4. that is. LS = LF − Activity time. 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. In other words.3. their dependencies. analysis used to determine the project schedule.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3.4 Determining the Project Schedule Once we have identified all of our activities.9 [1. – If an activity has multiple immediate predecessors. its LF is the minimum of all LS values of all activities that immediately follow it.56 CHAPTER 4.4. • Table 3.

the step that identifies all the earliest times that activities can be completed. the free time for an activity. the time associated with a single activity. the time shared among more than one activity. Definition 4. Side Note 4.2 (Total Slack) In project scheduling.5. Slack time is just Slack = LS − ES or Slack = LF − EF . C. and • Includes only critical activities (see sidenote 4. we cannot complete the project in 15 weeks.” Then complete Heizer example 7 figure 3. Also notable is that if the total time of the project needs to be reduced. Note that activities A.5. 61] based on table 3. Note also that if we delay each activity by the amount of slack that activity has.4.5. • Terminates at the last.4.2 (Forward Pass) In project management scheduling.4.5. E. 57].10 [1. “Notation Used in Nodes for Forward and Backward Pass.3. 1 For example.1.4.4. it is said to have free slack. activity F in sidenote 4. 4.1 When several noncritical activities appear successively in a path.3 [1.13 [1. Definition 4. the time devoted to one of these activities must also be reduced. if we delay activities B and D by one week each. in the example in sidenote 4.1 (Slack Time) In project scheduling. 2 For example. they share total slack.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity.1). SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. or the amount of time an activity can be delayed without delaying the entire project. p. 60].1.3 and Heizer figure 3. p. These are called critical activities. G. p. The critical path is one that • Begins at the first activity in the project. Definition 4.3 (Free Slack) In project scheduling.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. we may delay the project as a whole. If an activity2 does not impact the slack time of any other activity.4. and H have no slack time and cannot be delayed without delaying the entire project. .

The beta distribution is used as a prior distribution for binomial proportions in .1 (Optimistic Time) In project scheduling.3. Beta distributions have two free parameters. Side Note 4.6.1 and 4.2.3 (Most Likely Time) In project scheduling.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.2 and 4. the time required to complete an activity is often uncertain due to supply problems.6. In PERT. in most cases. Definition 4. we do not.6. etc. PROJECT MANAGEMENT 4.6.2 (Pessimistic Time) In project scheduling. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. Effectively. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. See also definitions CHAPTER 4. the project manager pulls the number “out of the air” based on their experience managing related activities. In reality.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. Definition 4. and the other uses β = β − 1 and α = α − 1 . Most likely time – The most realistic estimate of the time required to complete an activity..6. three time estimates are used: 1. Definition 4.6. technical considerations that were unknown at the time the project schedule was drawn up.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution.6. See also definitions 4. Definition 4. the “best” activity completion time that could be obtained in a PERT network. The usual definition calls these alpha and beta. the most probable activity completion time that could be obtained in a PERT network. See also definitions 4. unexpected complexities.1 and 4.6. However. which are labeled according to one of two notational conventions. the “worst” activity completion time that could be obtained in a PERT network.6.3.

com/BetaFunction.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. Total project completion times follow a normal probability distribution and 2.6.6. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. p.html http://mathworld.6.25 to 3. The variance of the activity time is Variance = [(b − a)/6]2 . 5 t = a+4m+b = 1+4(2)+9 = 18 = 3 weeks 6 6 i h i6 h 2 (9−1) 2 6 Variance = (b−a) = = 64 = 1. and 9 Side Note 4. q) = (4.wolfram.1]. 63] for activity F based on optimistic. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.1) where B(p. Activity times are statistically independent 3 Source: http://mathworld. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p.4. most likely. 4.00 week. most likely. and .β) with α = 1 and β ranging from 0. p. The expected activity time for activity F is 3 weeks5 and the variance is 1. 8 1.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic.4.78 6 6 36 7 4 weeks.78 weeks. and pessimistic times of 1.wolfram.00. February 21. 4. 4 See definition 4. and 7.html.1 Probability of Project Completion If we assume that 1.3 The domain is [0. The above plots are for various values of (α. β) Γ(α)Γ(β) P (x) = (4. 2007.6. 62].2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1. and the probability function P (x) and distribution function D(x) are given by (1 − x)β−1 xα−1 Γ(α + β) = (1 − x)β−1 xα−1 B(α. 2. and pessimistic times of 1.

“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. the population variance var(X). pp.3) Definition 4.6.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. see http://mathworld.” Review Heizer example 10 [1. p. Note that the standard deviation of 1.60 CHAPTER 4. Definition 4. p.6. and within 3 standard deviations approximately Determining Project Completion Time for a Given Confidence Interval A common question is.wolfram.76 weeks implies that the project will exceed the expected completion time by more than 1. is defined as σ 2 ≡ i=1 P (xi )(xi − µ)2 for a discrete distribution with 2 N possible values of xi and σ ≡ P (x)(x − µ)2 dx for a continuous distribution. A2– A3] “Normal Curve Areas. See definition (Example: Project Variance) Review Heizer example 9 [1.4 (Using the Normal Table) Pass out Heizer Appendix I [1. PROJECT MANAGEMENT then the total project completion time will simply the the sum of variances on the critical path 2 σp = Project variance = (variances of activities on critical path) (4. 9 For 10 See more information.6.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.6. See also 4.6. .5. 65] and figure 3.6 (Standard Deviation) The standard deviation is the square root of the variance. definition 4.76 weeks approximately 16% of the time. Side Note 4.html.1. two standard deviations approximately 95% of the time. of the time. 64]. Side Note 4.6. commonly also N written σ 2 .

7.7. Assuming linear costs. • The shortened durations will actually enable us to finish the project on time. Since activity completion times are typically shortened by adding resources. Project crashing is the name given to the process of rushing a project to completion.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. the crash cost is typically higher than the normal cost. Crashing a project involves a four step process: 1. you will doubtless experience one or both of these eventualities many times in your career. we want to do so in the least cost mannger possible. in fact.7. it may result in the project being delayed. crash time is the shortest duration of an activity.4. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. When crashing a project. shortening activity time in a network to reduce time on the critical path so total completion time is reduced.1. and if you become a project manager. and • The total cost of crashing is as small as possible.4) 11 Since crashing a project often involves adding additional resources to activities. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4.1 (Crashing) In project management.1.2 (Crash Time) In project management. Definition 4.7. .7. crash cost is the cost required to complete an activity in the shortest time possible. we need to ensure • The amount by which an activity is crashed is. See definition 4. 4. See definition 4.3 (Crash Cost) In project management. permissible and realistic.11 Definition 4.7. if certain activities off the critical path take the pessimistic time estimate or more to complete. Step 1 – Compute the crash cost per week. Definition 4.

Then crash each activity by one period. As a project manager. PROJECT MANAGEMENT 2. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period.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. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. Side Note 4. If you find yourself needing to rush a project. go to step 2. If you accept the challenge and try to rush the project to please upper management. you should be very wary of such pressure.62 CHAPTER 4. 4.7.5 and figures 3. Side Note 4.19. 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. 4. pp. If the due date has been reached. Crash this activity by one period. If not. • Advantages – Especially useful for large projects . Step 4 – Update all activity times.7. 3.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. If there is more than one critical path. At times this may be politically infeasible.18–3. Step 2 – Find the critical path(s) in the project network. Step 3 – If there is only one critical path. the advice given in this section should be helpful. stop. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. 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. Note that one activity may be on several critical paths. 67–69] including table 3.2 (Example: Crashing a Project) Present Heizer example 12 [1.

You may also refer to http://en. Information on dotProject can be found at http://www. 70–74] with figures demonstrating MS Project 4. Information on Achievo can be found at http://www. There are a variety of alternatives. pp. it is relatively expensive and the features are so numerous and mediumsized projects. including open source software that is free. It is perhaps the most widely known and featureful project management software available.achievo.gnome. Noncritical paths should be closely monitored as well.9 Using Microsoft Project for Managing Projects Present programs 3.9. 12 Recall sidenote 4. and the relationships 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. Information on Planner can be found at http://live. independent. of project management software for a list of project management software or ask Dr. Starkweather about his impression of various alternatives.1.7 [1. However. Note that most project management textbooks refer to MS Project as the software of choice for project management.dotproject. USING MICROSOFT PROJECT FOR MANAGING PROJECTS – Straightforward and not mathematically complex – Graphical tools help perceive relationships quickly and easily – Critical path and slack time analysis very helpful 63 – Project documentation and graphs identify who is responsible for various activities – Applicable to a wide variety of projects – Useful in monitoring both schedules and costs • Disadvantages – Project activities must be clearly defined.wikipedia.4. they are often overkill for small.1–3.


Tend to be more accurate than medium. Useful for – Purchasing. Also uses different methodology. Part of the job for business leaders is to make good decisions with limited information. Definition 5. pp.Chapter 5 Forecasting 5.1 (Heizer Company Profile: Tupperware) Review Heizer’s company profile of the Tupperware [1. Side Note 5. However. even the best and most experienced managers need to use mathematical forecasts to supplement their intuition. – Workforce levels. – Job scheduling.or long-range forecasts. Forecasts are classified by the future time horizon it concerns: • Short-range forecasts – Generally less than 3 months.1. primarily mathematical techniques. and – Production levels. – Job assignments. Useful for 65 . Part of good decision-making comes from years of experience. • Medium-range forecasts – Generally between 3 months and 3 years.1.1 What is Forecasting? Business is inherently unpredictable.1 (Forecasting) The art and science of predicting future events. 82–83].

1.1 Types of Forecasts Organizations typically use • Economic forecasts.1. Capital expenditures. Definition 5. Product life cycles tend to follow four stages: 1. 2.1.1. housing starts. Growth. FORECASTING • Long-range forecasts – Generally more than 3 years. Generally deals with more comprehensive issues than short-range forecasts. and Analyzing various operating plans. 5. Decline. money supply.1. Cash budgeting.4. and 4. and Research and development. Maturity. • Technological forecasts.3 and 5.4.3 (Technological Forecasts) In operations management. long-term forecasts concerned with the rates of technological progress. These may include inflation rates. See also definitions long-range forecasts. These concern rates of technological progress. Useful for – – – – Planning for new products. .2 and 5. See also definitions 5. 3.1. Introduction.1. planning indicators valuable in helping organizations prepare medium. Facility locations or expansion. which impacts purchases of new plant and equipment as well as development of new products. Definition 5. In the first two stages.2 (Economic Forecasts) In operations management.66 – – – – Sales forecasting. Production planning and budgeting. and • Demand forecasts. and other economic indicators. CHAPTER 5. longer forecasts are needed.

2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. 6. 5.2 and 5. Select the items to be forecasted. and • Layoffs. . capacity.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1.1. and personnel planning.4 (Demand Forecasts) In operations management. these drive a company’s production. Human resources – Anticipated demand is needed to estimate the need for • Hiring. Validate and implement the results. 5. projections of a company’s sales for each time period in the planning horizon. Capacity – Underestimating demand can result in • Undependable delivery. 2. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. • Loss of customers. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. 7. Select the forecasting models. Determine the time horizon of the forecast. See also definitions 5.1. Make the forecast. • Training.1. 3. 5. marketing. and scheduling decisions and serve as inputs to financial. 3. 4.2. Also called sales forecasts.3.5. Determine the use of the forecast. and • Loss of market share. Gather the data needed to make the forecast.1. 2.

– Many people try to apply ordinary least squares (OLS) regression techniques. • Lack of follow-up. – Before you show your numbers to others. the most common errors I have seen with forecasting involve: • Trying to use regression analysis with too few observations. you will be unable to defend your numbers. • Using models that are more sophisticated than the user’s understanding. • Lack of support for the forecasts.1 (The Most Common Errors in Forecasting Methodology) In my experience. FORECASTING Side Note 5. • Lack of sanity checking.68 CHAPTER 5. – If someone challenges your forecast and you do not have supporting logic or documentation. use something simpler. it is a bit of an art that mixes both. 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. In practice. 5. to inherently nonlinear systems.3 Forecasting Approaches Forecasting can use a qualitative or quantitative approach. I have seen otherwise competent people (including Ph. – In one case.” • Qualitative Methods – Popular qualitative methods include – Jury of executive opinion ∗ Often this method is used in combination with qualitative models. – If they do not match. – After making a forecast. Any quantitative approach should be complemented with a qualitative “reality check. – If you do not truly understand the mathematics. . ask yourself if they make sense.D. based on a linear model. budgets for a department in which I worked were forecast based on a regression analysis with 3 observations. – You should be able to explain how and why you arrived at each and every number that you forecast. track the actual outcomes and compare them to the forecasts. – On a number of occasions. figure out whether an improvement to the forecasting methodology can be made.2.

· Useful as a starting point or sanity check for more sophisticated methods. . and · Respondents. the more likely it is your results will be accurate. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. ∗ The more independent your decision makers are from economic. they will do so. or other incentives to over or understate demand. Sales people typically respond to incentives. 3. · Requires less past data than moving averages. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. 2.8. useful method if we can assume that market demands will stay fairly steady over time.3. Moving averages require more past data to work with than. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. the naive approach. political. – Sales force composite ∗ You would be surprised how accurate your sales force can be. · Staff personnel. ∗ Moving averages · Simple.9. Moving averages cannot pick out trends very well. · The simplest and easiest way to estimate demand. ∗ However. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages.3. 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. and if they perceive there is an incentive to exaggerate.5. · There are three problems with moving averages 1. be sure that the sales force is clear that their incentive is to be as accurate as possible. · See definition 5.3. say. for example. · See definition 5.

3. 5. See also definitions 5. See also definitions (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.3. Definition 5.70 CHAPTER 5. and value system. and 5.3. See also definitions 5.4.3. Definition (Sales Force Composite) In operations management. 5.3.3. 5.3. See also definition 5. See also definition 5. 5.5. a forecasting technique using a group process that allows experts to make forecasts.4 (Delphi Method) In operations management. emotions. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand. personal experiences.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.6.3. . (Consumer Market Survey) In operations management.3.3. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.2. Definition 5.1 Qualitative Forecasting Methods Definition 5.3. and 5.3.3. and 5.3. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.3. and 5. Definition 5. a forecasting technique based on salespersons estimates of expected sales. See also definitions 5. · See definition (Jury of Executive Opinion) In operations management.3.3.

3. FORECASTING APPROACHES 71 5. exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5.2 Quantitative Forecasting Methods Definition 5. a simple moving average is given by demand in previous n periods Moving average = (5. Definition 5.05 to 0. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period. See also definition 5.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.1) n • Weighted Moving Average – Mathematically. • Simple Moving Average – Mathematically. Higher values give more weight to recent data.3. generally ranges from 0.3) The smoothing constant.5. Definition 5.3.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.10.7. 5. Mathematically.3.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. 5. That is. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. Moving averages can be either simple or weighted. and 5.7. See also definition α.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.3. and are appropriate to use when the underlying average .8. See also definitions 5.3. Definition

3. Mean absolute percent error (MAPE).3.3.3. 1 See |actual − forecast| n (5.4) definition 5. and are appropriate to use when the underlying average is relatively stable.3.14. See also definition 5.3. Measuring Forecast Error Once a forecast is made. and 5.72 CHAPTER 5.8.7. . Mean absolute deviation (MAD). Definition 5. exponential smoothing is equivalent to naive forecasting.13).12).7. such as the mean absolute deviation (see definition 5.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5. 3.3.0. See also definition 5. 5. Definition 5. When α = 1.15.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.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.13. while lower values give more weight to past data. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5. it is good practice to compare the estimated value with the actual value as actual values become available. Mean squared error (MSE).3.3. Three popular measures are 1. 2. FORECASTING is likely to change. Definition 5.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5.3.3.

FORECASTING APPROACHES 73 Definition 5. expressed as a percent of actual values. 5.12. MAPE is given by MAPE = See also definition 5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.3. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.7) or F ITt = Ft + Tt (5.12.5) |actuali − forecasti |/actuali n (5. 100 n i=1 (forecast errors)2 n (5. MSE is given by MSE = See also definition 5.11) . Mathematically.8) With smoothing constants α for the average and β for the trend.3.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.3.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values. Mathematically. 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.

12) = exponentially smoothed forecast of the data series in period t = exponentially smoothed trend in period t = actual demand in period t = smoothing constant for the average(0 ≤ α ≤ 0) = smoothing constant for the trend(0 ≤ α ≤ 0) To compute a trend-adjusted exponentially smoothed forecast.10. Tt with equation 5. the emponentially smoothed forecast for period t using equation 5. 3. Compute Ft . Compute the smoothed trend. 1. by the formula F ITt = Ft + Tt . FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. Calculate the forecast including trend. 2. time) (5. F ITt . It is also commonly called linear regression analysis.14) . y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. Ordinary Least Squares Regression analysis is also useful for predicting trends.12.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5.74 or CHAPTER 5.

Divide this estimate of total annual demand by the number of seasons. Most businesses experience a surge in sales around Christmas. 1. 2. Although there are many methods to accomodate seasonal demand. Compute a seasonal index for each season by dividing the historical demand by average demand. ¯ x The least squares method has several drawbacks. the multiplicative seasonal model. . Recall that the equation 5.. 3.5 Seasonal Variations in Data In most businesses. during the summer months when it is common to take a vacation. FORECASTING APPROACHES where b x y x ¯ y ¯ n = the slope of the regression line = known values of the independent variable = known values of the dependent variable = the average value of x = the average value of y = the number of observations 75 Then a is given by a = y − b¯. It cannot be used to predict too many periods into the future as the further into the future the prediction is made.3. demand is seasonal. then multiply it by the seasonal index for that month. In the U. We do that with a 5-step process. the more uncertain it is.3. 5. Find the average historical demand for each season. The first step is to calculate the seasonal forecast. consumers often make fewer purchases of durable goods. 4. Compute the average demand over all months. 1.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. such as cars and washing machines. Definition 5.S. 5.3. we will examine one model.5. Deviations around the least squares line are assumed to be random. 2. Estimate next year’s total annual demand. to account for seasonal changes in demand in our forecasting.13 assumes a linear relationship. 3. This provides the seasonal forecast.

mathematically. pp. if you are uncertain about predictions of x. It is also called the standard deviation of the regression and. We will use the same technique.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. However. is given by (y − yc )2 n−2 Sy.17) .76 CHAPTER 5.1 (Example: Using OLS) Present Heizer example 12 [1. 106– 107].x = (5. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful. If there are published estimates you can cite (e. FORECASTING 5. 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.3. whatever uncertainties you may have transfer to your predicition of y.. Note that making predictions of future demand involves also making predictions about the independent variable x.3. average local salary) (5. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.x = (5.4.3..16) where y yc n = y-value of each data point = computed value of the dependent variable = the number of data points An equivalent formulation to equation 5. but x will be something other than time.g.g.15) Side Note 5..16 is y2 − a y − b n−2 xy Sy. sales) = y-axis intercept = the slope of the regression line = the independent variable (e.g.

3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. stock market. Dow Jones Industrial Average and Standard and Poor 500. FORECASTING APPROACHES 77 Side Note 5. p.html?xid=sitecnn-partner.3.S.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables.4 (Causation vs.3. the average length of a woman’s skirt and stock market prices in the U. is monopolized by the NFL. in all but one Year of the Pig. Historically.2 with stock prices generally rising as skirts rise.5. 2007. have been correlated. stock markets. Side Note 5. changes in skirt lengths don’t cause stock market prices to rise and vice versa. Even the Year of the Pig correlates strongly with the U. 109]. 107].time. the U.3 and the U. February 28. Other interesting correlations that have been identified over the years include banana prices and U. It does not imply causation one way or the other.1594488.S.S.8599.18.18) .” Side Note 5. 4 Source: http://www. or National Football League.S.S.S. which is divided into two “ (Distribution About the Point Estimate) Present Heizer figure 4.4 .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. 108]. “Four Values of the Correlation Coefficient.9 [1. Certainly.” the AFL (American Football Conference) and the NFC (National Football Conference).S. the note in the margin accompanying Heizer example 14 [1.3. stock market prices as well as the winner of the Super Bowl. a football game played between two football conferences in the U. pp.3. Correlation Coefficients for Regression Lines Definition 5. Definition 5. but the relationship is coincidental. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. “Distribution about the Point Estimate of $600 Million Payroll. leading stock indexes.3 (Examples of Correlation Coefficients) Present Heizer figure 4.” Note that the regression assumes a standard normal distribution about the estimate. p.3. The correlation coefficient of variables x and y is given by r= See also definition 5.10 [1.00.3. Since 1935. Correlation) Correlation merely means that the values of two variables are historically related. nor does it imply that they will continue to be related.3. football in the U. has risen.

. It is commonly simply called “R squared. if they are indeed related to the dependent variable. . x2 .3. results in additional predictive accuracy as measured by r2 . .3. often the most difficult part of building a multiple regression model is to pick the independent variables.5 Definition 5.78 CHAPTER 5. etc. Adding additional independent variables as predictors. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . In practice. (See definition 5. p.3. 110]. b1 .3.) It measures the percent of variation in the dependent variable (y) explained by the regression equation. . b1 . sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.3.” For example. .19 (Multiple Regression) A causal forecasting method with more than one independent variable. The multiple regression equivalent of equation 5. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. we discussed a means by which we can attempt to predict the value of one variable using the value of another. . “What was the R squared of your regression?” Multiple Regression Analysis In section 5. b 2 . Side Note 5. you would use statistics software to calculate these values.19) Determining the values of a.17. p. The same technique can be applied to use several independent variables to predict the value of a dependent variable.15 is given by y = a + b1 x1 + b2 x2 + .18 and Heizer example 15 [1.g. in a multiple regression analysis involves a complex formula which is beyond the scope of this class.” As the sidebar points out. . 110]. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. . 5 See definition 5. = the dependent variable (e.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. b2 . .6. .

three M ADs to 2. two M ADs to 1. and within 4 M ADs about 99.4. though large errors may be a problem as well even if the positive and negative errors balance. The tracking signals should also be compared as they are generated against limits.8 standard deviations.11 [1. three M ADs about 98% of the time. This means that the observed value should be within 2 M ADs abut 89% of the time.forecast| n where M AD = (5.1 (A Plot of Tracking Signals) Review Heizer figure 4. MONITORING AND CONTROLLING FORECASTS 79 5. 6 Recall definition 4. . one of the most common problems with forecasting is a lack of follow-up. In other words.2. p. the forecasting methodology needs to be modified. Side Note standard deviations.20) A good tracking signal has about as much positive as negative error.4 standard deviations. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts. which correspond roughly to standard deviations.4. and 4 M ADs to 3. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).6 One M AD is equivalent to 0. Definition 5. These limits are typically based on M ADs. Definition 5.9% of the time. Tracking signals are typically used monitor forecasts.2 standard deviations.1.4.6. If the tracking signals violate upper or lower limits.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. 111]. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.4.

5. there has been much criticism of the approach to using models based on thier fit to the data. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. Note that even with computer monitoring. changes need to be check with human eyeballs to ensure that the adjustments make sense. Side Note 5..2 [1.4. 2.4. Definition 5. you must make your own decision as to how you select the forecasting models that you use. Definition 5.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. Side Note 5.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. “Summary of Forecasting Formulas.80 CHAPTER 5.4. p.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants.2 Focus Forecasting Focus forecasting. However. There is no single technique that should be used for all products or services. In your career. FORECASTING 5.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.g.4. Sophisticated forecasting models are not always better than simple ones.3. you should be aware of the criticism of focus forecasting.10) is automatically changed to keep errors to a minimum.4. 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. α in definition 5. which selects a model based on goodness-of-fit to a data set.” .4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. 114].4. is based on two principles: 1.

2 Recall sidenote 2. For example. which will be discussed in detail later in the semester. as an intangible.5 (Product Decision) The selection. They also use just-in-time production techniques. pp. • Market share and dynamics. as products.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1.1 Side Note 6.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. 122–123]. Definition 6. Referring to services as products is common in the service industry. time permitting. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. the word “product” will refer to both goods and services. definition. 124.128] • Investment and cash flow.0. and • The organization’s capabilities.1 . 1 In this chapter. insurance companies often refer to their policies.2.0. • Product life cycle. is a service. pp. which. Product strategy2 defines the breadth of the product line and links product decisions to [1. 81 . and design of products.

g.1. years (e. restaurants or nightclubs). . Life cycles can be in the days or weeks (e.2 Life Cycle and Strategy Strategies change as products move through their life cycle. 6. • Decline phase – Investment needs to be minimized and resources need to be redeployed. so high volume. • Introductory phase – In the introductory phase.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 competitors • Rapid response – Executing rapid design and product development to respond to changing consumer demand 6.g. • Maturity phase – Competitors have entered or are entering the market. often ruthlessly. – Process modification and enhancement. months (e. Decline. • Growth phase – Effective capacity forecasting is necessary. and – Supplier development.g.1 Product Life Cycles Product life cycles can be divided into four phases: 1.. Maturity. and innovative production is appropriate. 3. Growth. and 4. Product strategy involves determining the best strategy for each product based on its position in the life cycle.. low-cost. or even decades. 2..82 CHAPTER 6. products expenses are often high for – Research and development. YouTube videos).1. clothing fashions). DESIGN OF GOODS AND SERVICES 6. Introduction.

1.1 (Example: Brainstorming) Lead the class in a brainstorming session.2. 6. • Technological change often drives product innovation. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12.1.2 Generating New Products Most products have a limited life cycle. • Sociological and demographic change is also tied to product demand. are tied to product demand. 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. • Economic factors.2.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.6. as well as the total annual dollar contribution of the product. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. such as consumer incomes.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. it must regularly redesign existing products or bring new products to market.000 yuan.3 • Political and legal change can also bring about business opportunities. example. the development of cellular telephone technology or the internet.2. and if a company is to survive. 4 For 3 For . 6.2. GENERATING NEW PRODUCTS 83 6.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. example. Definition 6. Ideas are not reviewed until after the brainstorming session. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. Definition 6.4 Side Note 6.500 or 100.3 Product-by-Value Analysis For firms with many products.

1 (Product Development Stages) Present Heizer figure 5.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. Definition 6. 129]. Each stage should have an accompanying review to determine whether to progress or not.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. 128].84 CHAPTER 6. p. DuPont estimates that it takes 250 ideas to yield one marketable product [1.2.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. the product life cycle. p. 6. 128].3. DESIGN OF GOODS AND SERVICES For example. Translates customer desires into a product design. Determines what will satisfy the customer and 2.3. Side Note 6. Side Note 6.1 (Quality Function Deployment (QFD)) A process for determining customer requirements (customer “wants”) and translating them into the attributes (the “hows”) that each functional area can understand and act on. . market dynamics.3 [1.3.3. Definition 6.2 (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. and the organization’s capabilities.3.3 6. p. 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. 6.2 [1. Many successful companies rely on sales from products introduced within the past five years.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. The house of quality is a graphic technique for defining the relationship between customer desires and a product.

7 4.3. In other words. p.2. PRODUCT DEVELOPMENT 85 Side Note 6. a research & development. design engineering.. An organization is divided into for more information. Product development is done by teams. • More common in large.6. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. 10 The right-hand columns of the house in sidenote 6. 7 In other words. • Perhaps the most popular approach in the U.S.3.10 Side Note 6. • Effective communication and coordination between separate departments can be problematic.2.” 6 For example. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.3. Note that it is not free or open source. • Fixed duties exist.2. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. . Relate customer wants to product hows. identify the rows of the house in sidenote 6. and production departments.2 (Example: House of Quality) Present Heizer example 1 [1. 1.9. Develop importance ratings.3.qfdcapture. Evaluate competing products. Identify relationships between the firm’s hows. e. 3. 6. create the columns of the house in sidenote 6. as was the software described in section 4. Identify customer wants. bureaucratic companies and organizations.8 5. which can be an advantage. 130]. manufacturing engineering.3. Building the house of quality involves six steps: 1.3. 2. 2.g.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions.2.3.2. with product features. See http://www. there are three popular methods by which organizations undertake product development. Identify how the good or service satisfies customer wants.6 3..3 Organizing for Product Development In the West. 8 These are given on the roof of the house in sidenote 6.

production.S. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. use of participating teams in design and engineering activities. because their fate is tied to a product.S.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.3.. Side Note 6. manufacturing. purchasing.3. design. quality assurance. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering.4 (Concurrent Engineering) In project development. development.4.11 In Japan. organizations are less structured and typically not divided into research and development. engineering.. My experience may not be indicative of management practices in general in the U.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. Definition 6.3. but my personal impression is that formal QFD practices are not widespread in practice. Some teams even include representatives from vendors.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. .. and use. and field service personnel. These teams often include representatives from marketing.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. The goals of manufacturability and value engineering are 11 See definition 6. Side Note 6. Definition 6. and production stages of product development.3. engineering. (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. production. etc.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design.3.86 CHAPTER 6. it can also be problematic because teams. 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. Definition 6. However. maintainability. will often advocate for continuation of their project past the point that it is profitable for the company.3.

2.6. Improved job design and job safety. Cost reduction. 5. 4. Robust design. 3. Improved maintainability (serviceability) of the product. 6. 87 . Standardization of components.3. Reduced complexity of the product. PRODUCT DEVELOPMENT 1. Improvement of functional aspects of the product. and 7.


Part II Entrepreneurship 89 .


who has started two businesses and been CEO of three startups once told me. fear of failure and other insecurities dissuade most people from ever starting a business. However.0.” He was joking. but the humor in the statement lay in the fact that there is some truth to it. doing it is simple. “None of the other CEOs respect you until you’ve driven a couple of businesses into the ground.7 (Confidence vs. Most businesses fail within the first 18 months. Realism) Most people perceive those who start businesses as risk-takers. you should be confident. ultimately. taking that first step can be extremely daunting. must begin with a single step.Chapter 7 Introduction to Entrepreneurship Although starting a business is usually a complex. .0.7. that is. you will have to decide that you have done as much as you can do and simply take action. Side Note 7. studies have found that most successful entrepreneurs are actually unrealistically confident 91 . 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. Side Note 7. Matt McAdams. As a Chinese philosopher once said. but also realistic. See also sidenote 7. then another.” At its core. then taking another step. While it is important to be realistic about risks when starting a business. difficult undertaking. people who can tolerate a high degree of risk. .6 (Business Failures) A friend and former colleague. In fact. If you start a small business. starting a business simply involves taking the first step.0. “Every journey .

March 6. we will discuss how to prepare to start a small business as well as manage a business early in its life. but a series of frustrations. 1 There are a variety of studies that support this. 12–13].edu. you will finish the course with the confidence that if you decide to start a small business. • Surveys and research indicates that the most common personality trait is self-confidence. you have to convince others to believe in you. If asked.asp?NewsID=5324. 7. • The desire to make alot of money quickly is not one of the characteristics of the successful entrepreneur. See. you will maximize your chance of success. everyone would say that they want to be thier own boss.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.php?id=2018 http://www.ccer. successful entrepreneurs know how to raise money. for example.92 CHAPTER 7. it’s not usually a single incident (such as getting fired) that leads to entrepreneurship. Hopefully.1 In our discussion of entrepreneurship. – Entrepreneur Magazine cites an entrepreneur who states that the time will be right when “you can honestly say ‘I’ll put my house. make lots of money quickly and with little effort. And by believe in you. and . and other personal collateral on the line to attain the start-up capital I need for the long-term rewards I deserve. INTRODUCTION TO ENTREPRENEURSHIP about their prospects. 2007.”’ • According to experts who have studied jewelry. I mean believe in you enough to give you money. – We will discuss techniques for raising money in detail later in the course. They may not have a realistic assessment of the risks they are undertaking when they start their businesses. http://wistechnology. – You not only have to believe in yourself. • Finally. • Entrepreneurs typically do not feel fulfilled working for others and feel the need to control their own destiny.

Often.7. Discuss the impact of the demands of a startup on the marriages of Active. For many people. • Some of the information is intended for those who have an established career and real-world experience to draw upon. “When are you coming home for dinner?” or criticizing you for ignoring them. Side Note 7. If after many long hours at work your family will be asking you. take note of this information.1. – Additionally. You may lose friends because you do not have the time to maintain the friendship. or angel and Absolute Performance included • Regular 70 hour weeks • Incidents that demand devotion to the company over and above the call of duty. possibly even years at a time. month after month. the techniques used to acquire financing from venture capitalists can be put to good use obtaining debt financing or convincing family. CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93 Side Note 7.1 (A Selfish Act) Bear in mind that starting a business can be a very selfish act. – However. Putting in long hours is not something that is done once in a while. 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. If you are not prepared to redefine relationships relative to your business life. Venture capital financing is common in the United States but is not yet a common means of financing in China. week after week. It may be useful later in your career. you may not be prepared to start a company.1. the use of venture capital will probably increase over time in China. at Active. • Among the means by which you can to raise money. friends.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. we will discuss venture management and Jerry’s difficulty balancing work and family life. friends and family are the most important concerns in their life. – For now.1. for example. we suffered a database corruption that resulted in my practically living at work for three weeks .com. 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. but something you may need to do day after day. it may be difficult to keep the necessary focus on the business.

We didn’ – Hobbies.94 CHAPTER 7. might last four to six hours. Do your skills. There were far more divorces that occured among management at Active. • Create a Personal R´sum´ – List your personal and professional experiences. Try to realistically evaluate your own strengths and weaknesses. and – Accomplishments that require expertise or special knowledge. for example. – The CEO of Absolute Performance once told a customer that the company’s product could parse XML files. This kind of event was not uncommon at Absolute Performance.” there were so many engineers sleeping at the office at Active. interests. depending on the complexity of the push. we had to update the web site late at night when our customers were not using it in case something went wrong. INTRODUCTION TO ENTREPRENEURSHIP • Many all-nighters. • During one “crunch time. and experience match the kind of talents your business would require? • Analyze Your Personal Attributes – As yourself about yourself. – At Active.2 Are You Ready? If you are thinking about starting your own business. e e Include – Skills. 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 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. The “code push” would often start at midnight management and the family life of the CEO of Absolute Performance. 7. the first thing you should do is look in the mirror. – Educational than average in the population at large. – Are you friendly and self-motivated? – Are you a hard worker? – Do you have common sense? .

When I talk to those who I know who have started businesses. Move on to larger goals once the small goals have been met. “Achieve financial independence” is much better than “pay the bills. – Start with small goals. “Raise 100.3. ask yourself the following questions: • Income – How much do you want to earn. – Short-term goals are those that can be accomplished within a year. advertising.3 Setting Goals With any major endeavor.000 yuan by July 1” is a much better goal than “raise money.” • Be realistic. If your goal is to raise 1. it helps to set goals. such as sales. When setting goals.000 yuan and you’ve never had a job before. If you talk to an entrepreneur who has not been successful. try to figure out why they were not successful. When setting goals. ask other entrepreneurs.7.” • Be optimistic. it is common to exchange “war stories” about the difficult times and sacrifices. 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. Learning from failure is as important. if not more important. 7. • Be specific. marketing. • Analyze Your Professional Attributes – Be aware of where you need help. and administration. SETTING GOALS 95 If you are not a “people person. your goal may not be realistic.000. Side Note 7. even the successful ones will probably focus on the negative. Consider at least a five-year time horizon. – Long-term goals are those that may take 5. although the successful ones generally view their experiences as positive on the whole. or 20 years to accomplish.” you may not want to start a business that focuses on customer relationships.1 (What’s It Really Like?) If you wonder what running a business is really like. . Like parents. 10. • Set both short-term goals and long-term goals.3. than learning from success.

2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4.3. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. Have the class write down their answers and evaluate their own EQ.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. 18–20]. INTRODUCTION TO ENTREPRENEURSHIP • Lifestyle – Would you be happy traveling frequently? What about your family? Are you willing to invest your personal assets? What do you want in terms of – Travel.3. . 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. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. 20. Acknowledge this fact and factor it into your decisionmaking. How much is your ego worth? Side Note 7. 21]. pp. – Geographic location. Side Note 7. – Hours of work. pp.96 CHAPTER 7. Many people want to start their own business for ego gratification. and – Investment of personal assets.

97 . Side Note 8. • Absolute Performance’s business began because Jerry felt the monitoring software available for Oracle database systems was not well developed and thought that by combining consulting services with monitoring software. They do not involve engineering the next great wonder of the world. They answer the question.4 (Ideas for Businesses Friends Have Started) Discuss some of the ideas that friends have used to start’s league business began with Matt. began1 when someone got annoyed by late charges from local video rental stores.0. California. Good restaurants did not deliver and the amount of time the average American worker had for lunch was getting shorter and shorter. but has been very successful because it addressed a local need. Netflix.D. so they started a restaurant delivery business. a Ph. I also used a grocery delivery service. physicist.Chapter 8 Finding an Idea The good ideas are the simple ideas. an online DVD rental business. but over time became the primary thrust of the business. I used Netflix when I lived in Chicago. he would be able to provide a better product than competitors who provided only software. Personal time was in short supply so the convenience they provided was well worth the price. but scratching an itch. It was neither original or complicated. • Active. who enjoyed handicapping sports and felt that putting tools online for sports enthusiasts to use would build a profitable online community. “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. 1 Explain the business concept behind Netflix. Online registration for sporting events was only a part of his original game plan.

Side Note 8.0. • An escrow service that arbitrages the differences in contract enforcement practices and business ethics between Scandinavia and other nations such as those which are not as highly placed on Transparency International’s Corruption Perceptions Index. Side Note 8. FINDING AN IDEA • Trackvia arose because Matt felt that small businesses had the need to manage data but did not have the resources to develop expertise in database management. business ideas come at a rapid rate. • They require business relationships that the entrepreneur does not have. but it is a major complaint for female rock climbers.0. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. • Etc. • They require more financing than the entrepreneur has access to. • They require expertise that the entrepreneur does not have. . hollow tube. most ideas are not feasible because • They would not be profitable enough.98 CHAPTER 8. However. however. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. The tube could be made unobtrusive enough that it would not need to be removed for work.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. people have to remove nose piercings for work or social occasions.. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4. • The business would involve too much risk. etc. often one or more a day. pp. • A nose piercing that consists of a small. I continue to generate business ideas as a matter of habit. • The ideas are easily copied and would be quickly appropriated by more able competitors.. 28–29]. Often times. It sounds silly. Those with nose piercings would not need to remove the piercing and risk it closing. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online.

imdb. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a” Side Note 8. making just enough to get by but not much more. you should not let it dissuade you. while you should listen to criticism that others give. A well-known phrase in English. He ran the business as a one-man operation for years. Have students come up with examples of products that meet various criteria on the checklist. he would never succeed. 33]. or are otherwise discouraged. 2007. Finally. you will be spending years of your life trying to make the idea work. 35]. to be truly self-motivated and persistent in the way you need to succeed. 8.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4.2 is. 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. p. Side Note 8. used as the title of at least 12 movies and television shows.1 You’ve Got an Idea. Warnings about risk are perhaps the criticism you should consider most carefully. People thought he was going nowhere and generally dimissed his business.1.1. computer-controlled security cameras. home. However. After all. And you should not risk anything you can’t afford to lose. Entrepreneurs are often told their idea is flawed. 2 http://www. it is too risky. Side Note 8. Now What? The number one trait needed by successful entrepreneurs is perseverance. You should be realistic about risks. “Never say die. in the wake of 9/11. YOU’VE GOT AN IDEA. February 17. the business took off.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. His sales are now in the millions of dollars per year and the business is very profitable. 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. or health. that they will never make it. Have students fill out the form on their own time. thinking that if he did not succeed after a couple of years.1. p. you should have “thick skin.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. such as your family. .” That is.


Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. Businesses.0. your next step is to do some market research.1.Chapter 9 Defining Your Market After coming up with your idea.0. See also 9. Definition 9. There are two broad categories of markets: 1. 101 .0. See also 9. When trying to identify your niche market.” or business-to-business ventures.2.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. but you should try to target your market as specifically as possible.1 Finding Your Niche Finding a niche can be a more daunting task than you might think.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. 9.0. Consumers and 2. Not only do you need to decide whether you are marketing to businesses or consumers.” or business-to-consumer ventures. go through the following 7 steps: 1. Definition 9.

Test – Offer samples. After all. Then she approached a few local pet stores and arranged for them to offer her products for sale at a low price. It should confirm to your long-term vision. p. • Don’t spend alot of money. But do test your product before you go ahead full speed. the longer you wait to go into business in earnest. etc. Focus – Be specific.” [4.000 per year. That is. Describe the customer’s worldview – Talk to prospective customers and identify their main concerns. (d) It’s one-of-a-kind. • The rule “do unto others as you would have them do unto you” is often called the Golden Rule. give a seminar. there is not already alot of competition. If it does not sufficiently meet the criteria. author of Nichecraft: Using Your Specialness to Focu coined what she calls the Platinum Rule: “Do unto others as they would do unto themselves. discard the idea and move on to the next one.” 2. • 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 3.102 CHAPTER 9. I mean customers. Synthesize – Coalesce your ideas. .. • If your initial test does not go well. you need to stop and seriously reevaluate your plan. Lynda C. DEFINING YOUR MARKET • The types of businesses and consumers you want to target in terms of age. (b) Somebody else wants it. Falkenstein. 6. and other important demographics. it allows you to branch off into other niches as the business grows. then asked them about customer reactions. decided to start a business selling unique winter clothes for dogs. It is much better to target “pregnant women between 25 and 35 in households that earn more than 50.” To focus your search for a niche. (c) It’s carefully planned. By someone else. (e) It evolves. the longer it will be until you make your first profit. 5. 75] 4. • A friend in Chicago. A good niche has five qualities (a) It takes you where you want to go. Evaluation – Evaluate your niche against the criteria in step 4. “Selling maternity clothes to executive women” is much better than “selling clothes. She started by making a few samples and giving them to friends with dogs. That is. Donna. earnings.

such as having children. many entrepreneurs make the mistake of being “all over the map. FINDING YOUR NICHE 103 7. and the narrower your focus on your target. life stage.3. etc.1. Many Western companies make the mistake of lumping together Japanese. when the country was immersed in a war effort.1. the World War II cohort. If you did your homework. Definition 9.1.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. economic. when many people were suffering from extreme poverty. or retiring. young adults in the Depression. demographic. you should be able to enter your niche market with confidence.1 (Smaller is Bigger) When starting a business. 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. many are choosing to start families later in life or even have children ten years or more apart. Definition 9. you should practice extra caution to avoid stereotypes or other insensitive approaches.S. This can be offensive and serve to alienate rather than appeal to your customer.1..1. This marketing technique has been widely used since the early 1980s in the U. they try to satisfy all possible customers and end up trying to do too many things well.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups. Chinese. many Eastern companies make the mistake of lumping together American and European customers. the more likely you are to score a hit. Side Note 9. are similar in age to those who came of age in World War II. . (See definitions 9.S. Marketing to demographic groups has become much more refined in the last few decades. Korean. Side Note 9.. For example.” That is.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years.1.1. Definition 9.1.) Using these new marketing techniques can allow you to narrow your market.1. As older people are more active than before.9. It is better to do just one thing well than to do many things poorly.1 (Generational Marketing) Marketing to consumers based on age as well as social.. 9.1. but their behavior differs significantly due to the different influences in their youth. and psychological factors.2. and 9. New marketing techniques include generational. and cohort marketing. and other Asian customers together. for example. Likewise. Go for it! – Implement your idea. buying a home. the Depression-era cohort. in the U.

p.3. Falkenstein1 advises that you regularly reevaluate your niche.3 The Mission Statement Once you have a niche. create a mission statement. you should.2 [1. • Convey the essence of your business’s goals and philosophies. “Creating a niche is the difference between being in business and not being in business. p. Every six months or so. Side Note 9. The mission statement should • Be succinct.1 (Mission Statements for Three Organizations) Review Heizer figure 2. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally.104 CHAPTER 9. .2 Redefining and Expanding Your Niche Lynda C. DEFINING YOUR MARKET 9. 79] 9. 28] which includes mission statements for three multinational companies: 1 See section 9. • 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. a few sentences at most.1. Falkenstein states.” [4.

The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. natural ingredients and promoting business practices that respect the Earth and the Environment. Equally important. FedEx FedEx is committed to our People-Service-Profit philosophy. 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. We are committed to being an important. We will be helpful.9. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. and professional to each other and the public. 2. . competitively superior. We will produce outstanding financial returns by providing totally reliable. time-certain delivery. A complete record of each shipment and delivery will be presented with our request for payment. 105 Side Note 9. and nurturing work environment while ensuring our long-term success. courteous. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. We will strive to have a completely satisfied customer at the end of each transaction.3.3. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. THE MISSION STATEMENT 1. 3.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. global air-ground transportation of high-priority goods and documents that require rapid. healthy. contributing member of our community and offering the Hard Rock family a fun. Our mission consists of 3 interrelated parts: • Product Mission – To make.

cfm for more detail. • How do you differ from competitors? – Why would your customers prefer your product to a competitor’s? • How will you use technology. See http://www.1. DEFINING YOUR MARKET • Social Mission – To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally. give customers the opportunity 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. and recognizes outstanding employees. a grocery chain. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. so do your partners. • What kind of relationship will you maintain with suppliers? – Remember that when you succeed. capital. Other companies. processes. such as Whole Foods.. 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. .com/our company/our mission/index.106 CHAPTER 9. products and services to reach your goals? • What philosophies or values guided the responses to the previous questions? 2 Recall section 9.S. nationally & internationally.benjerry. challenges.

Write down your thoughts so you can lead people logically through your ideas. • Use “radiant” words. 107 • Involve others. Colorful. • Set aside a full day to work on your statement. spicy language conveys your excitement and conviction in your idea.9. Do not discard any ideas. THE MISSION STATEMENT When crafting your mission statement. • Be prepared.3. Bring paper and pens and some refreshments for your guests. . • Plan a date to meet with people. • Brainstorm. no matter how silly. Other people can help you with creative ideas and identify weaknesses you might miss.


you need to take a step back for a sanity check. says “A lot of companies skim over the important background information because they’re so interested in getting their product to market. Inc. the industry as a whole.” Definition 10.1 (Market Research) Research into the characteristics. and the particular competitors you face. But the companies that do the best are the ones that do their homework. Donna Barson.0.Chapter 10 Market Research While the excitement of a great idea is often enough to propel an entrepreneur into business. president of Barson Marketing. location and needs of your business’s target market. spending habits. 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 successfully with existing suppliers? • What government regulations do I need to be aware of with respect to my products or services? 109 ..




What Am I Researching, Exactly?

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




Research Methods

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


Sources of Secondary Research

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

definition 10.2.1.


CHAPTER 10. MARKET RESEARCH • Trade associations often compile information about the industry the association represents. – Most trade associations provide their information for free. • The government is a valuable source of information. – Most of the information is provided for free. – In the U.S., a census is conducted every ten years which provides information about income and demographics in 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 competitor’s location. Side Note 10.2.3 (Web Site Survey) The web site 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 Side Note 10.2.5 (Sample Focus Group Questionnaire) Pass out Lesonsky’s “Sample Focus Group Questionnaire.” [4, p. 101] The questionnaire supposes that someone is going to become a chocolatier.

2. pp. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.” [4.10. RESEARCH METHODS 113 Side Note 10.2. .6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.


and so should you be. expected needs.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. Your business plan should list obstacles that may arise and what will be done to address them. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture. 5.0. No realistic goals – Your business plan should help you ascertain whether your goals are realistic. It must describe current status. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed. and projected results of the new business. including 115 . In terms of sanity checking. 2.4 (Business Plan) A business plan is a written document that details a proposed venture. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. 4. 3. Those who provide financing are aware of these pitfalls. Set up a timetable with specific steps to be accomplished in a specific period. Definition 11. Lack of demonstrated experience – Entrepreneurs must give evidence of personal experience or experience on their team in both the business and technical skills that are necessary for a successful venture. Every aspect of the venture should be covered. 1.

• Manufacturing. 11. • The business plan allows outside evaluators (such as investors) to critically evaluate the proposed venture. CHAPTER 11. • The business plan quantifies objectives. and while a business plan will not guarantee success. and • Milestones or a timetable. • Financing. They may spend no more than five . or investment prospectus. • It is a tool to communicate with outside financial sources and internal management for guiding the venture to success. • Research and development. it will help you maximize your venture’s chances for success.1 Preparing to Put the Plan Together Your Audience The first question you should ask yourself is. • 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. It provides a variety of other benefits. you will likely be giving your plan to read many business plans per day. allowing the entrepreneur to track results by measurable benchmarks. • Management. • Marketing. “Who is going to be reading the plan?” If you present your plan to venture capitalists or financiers. • Critical risks.1 11.1. THE BUSINESS PLAN A business plan is also known as a venture plan. Failing in business is very costly. loan proposals.116 • The project.

p.1.1. 4.. bear in mind that once the plan is advanced to the next stage of financing. p. but not too good. including debt or equity financing required. 300]. 6. . other financing professionals may spend more time analyzing the details of the plan. Determine the financial structure of the plan. 3. Determine the characteristics of the venture and its industry. thorough and careful. i. 1. They will want to see something that reflects that you are neat. Read the latest balance sheet. 301]: • Appearance – It should look good. you will not even get your foot in the door and be invited to present your plan to investors. pretentious. – Binding and printing should not be sloppy.11. or spendthrift.”1 Many venture capitalists use the following six step process to evaluate a business plan [3.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person. Kuratko suggests the following [3. If you cannot impress the financier with these three steps. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. not ostentatious. the trash can. 2. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. 2 Do not underestimate the importance of this step. While the initial read-through might be only a five-minute perusal. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. 11. Read the plan over casually. Determine the quality of the entrepreneurs. 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. Note that less than a minute on average is devoted to each step. but should not be too lavish.e.2 5. Establish the unique details of this venture.

If you write to much.3 Some Style Points Kuratko also recommends that you [3. The company’s current status. though you should not put it in the same corner as page numbers appear. and/or web site. The benefits to customers.118 CHAPTER 11. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. a number should be in a corner5 indicating the copy number. 4. – On the title page. 3 Note that for this class. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages.3 • The Cover and Title Page – The cover should have the name of the company. and How investors will benefit. 5 I suggest the lower-right corner. e-mail address. and full contact information4 for the company. – Inside the front cover should be a title page repeating the cover information. 11. . The venture’s objectives in 3 to 5 years. – It should explain 1. 5. – It is worth repeating: Keep it down to at most two or three pages. 4 Phone number. The amount of financing needed. address. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section.1. 2. 3. 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 date of the plan. The financial forecasts. they will not read it. Its products or services. You should use this to keep track of who has which copy. 7. 6. THE BUSINESS PLAN – It should be no more than 50 pages. p. – 40 pages is ideal. • The Executive Summary – Two or three pages immediately following the title page.

Executive Summary – This should be the last thing you write.2. • Keep the Plan Written in the Third Person – Do not use “I. but it is the first thing that your audience will read. Present a focused plan.2. • Identify the Target Market – Market research should support a focused customer niche. trademarks.. copyrights. The executive summary gives readers their first impression.6 Note any industry developments and describe the business thoroughly.” or “them. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems. Some details on each section of the business plan: 1.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly. • Orient the Plant Toward the Future – Create an air of excitement. so be sure the writing is finely crafted. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar.” “we. Your credibility is established in part by the credibility of your plan.g.” Instead.2 [3.2 The Plan Contents Side Note 11. use “he. Business Description – Name the business. Use the spell checker on your word processor to check for spelling mistakes. 11.11. and tell why it is named what it is. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed. 305]. which describes the 10 sections of a typical business plan. • Do Not Overdiversify – Don’t try to be all things to all people. is it based on a family name? Does it include technical terms you need to identify? .” “they.” or “us. or other special market advantages you have. p. • If there are patents. Include any pictures or designs that would be helpful. be sure to include them in the business description. • Avoid Exaggeration – Your sales and revenue estimates should be well researched.1 (10 Sections of a Business Plan) Present Kuratko Table 10. 6 E. 2.

Research. and that you can beat the competition. or internet. • Any innovative sales or marketing concepts that will enhance customer acceptance. Financial Segment – The financial segment should include 7 For example. and Development – If R&D9 is to be performed. Justify any price increases over competitors based on newness. Operations Segment – First. and customer availability and proximity. This should be an honest assessment. • The Kinds of customer groups to be targeted as the business matures. Gross profit margin should be discussed. supplier. (c) Marketing Strategy – Your marketing strategy should be described based on research.7 (d) Pricing Policy – Compare your pricing policy with competitors. should be described. including the type of media8 and. In addition. if you are going to market leases on equipment where previously only sales were allowed. and r´sum´s should be given. (b) Competitive Analysis – Assess the strengths and weaknesses of the competition. if the promotional campaign will be a significant portion of expenses. their job descriptions and responsibilities.120 CHAPTER 11. such as equipment. describe the location of the new segment. warranty. Important aspects of location include • Labor. Costs should be detailed for all major expenses. how and when expenses will be incurred. radio. offices. Design. Any risks should also be detailed. service. 8 Such as magazines. Marketing Segment – You must convince investors that a market exists.. • Methods of identifying and contacting customers. 5. time. storage. quality. and project status should be discussed. • Local taxes and zoning requirements. 9 Research and Development . etc. Management Segment – Key personnel. that your sales estimates are reasonable. pay and ownership (such e e as stock agreements) should be described. In addition. 6. cost. including • The kinds of customer groups to be initially targeted. (e) Advertising Plan – Discuss any promotional campaign. facilities requirements. 4. television. • Features of the product to be emphasized in your sales efforts. etc. and • Possible support of local banks. THE BUSINESS PLAN 3. 7. testing. (a) Market Niche – Define your market niche.

com) Discuss the growth of Active. (c) A cash-flow statement.1 (Pro Forma) A latin term that means projected. Your investors are probably as aware. working capital. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. include an appendix.2. 11. as opposed to actual. Side Note 11. First sales and first deliveries. For example.. (b) An income statement. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. of the risks than you are. These might include • • • • • • • • • • Incorporation of the new venture. Product display at trade shows. . Ordering production quantities of materials. 9. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. Difficulty purchasing parts or materials.2. which investors will use to estimate debt/equity ratios. Hiring of sales representatives.11. Receipt of first orders. and Payment of first accounts receivable. Risks might include • • • • • Negative industry 8. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. detailing projected profits and losses. inventory turnover. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. Costs exceeding estimates. Critical-Risks Segment – Discuss business risks and the ways you might address them. Completion of design and development. What happens if the management team changes? What will happen to the company assets if ownership changes? 10. detailing projected inflows and outflows. Appendix – If there are documents.2 (The Growth of Active.2. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. a balance sheet containing projected balances is called a pro forma balance sheet. Design or research difficulties. Try to be honest and realistic. Signing up distributors and dealers. Completion of prototypes. etc. current ratios. or more aware. Definition 11. Unexpected competitions.


The presentation of your plan is an ongoing process. and Potential Partner Pitch [2. Sales Prospect Pitch. pp. Do not be dismayed. your dog. 62]. you will probably not do a good job. Your presentation should evolve over time as you listen to your audience and receive feedback. Present it many 1 Guy Kawasaki.1. anyone who will listen. Present it to your friends.1 You will have to pitch to many medium-size fish before you are ready for the big fish. not a one-time event.1 (What Goes Into the Presentation) Present Kawasaki’s Investor Pitch. The first time you present your plan.1 The Presentation Side Note 12. This means that you should not count on presenting your plan to your most critical investor for the first time. your family. author of The Art of the Start.1 Do It Until You Get It Right This is perhaps the most important piece of advice. p. 51–56]. 123 . your business class.Chapter 12 Presenting the Plan 12. recommends twenty-five times [2. 12.2. local business associations. 12. You will probably have to present it at least ten times before it is ready for the medium-sized fish.2 Some Suggestions These suggestions come from those who have experience both giving and listening to business pitches.

I don’t think it was quite right until somewhere between the 8th and 10th time. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving. By the time I gave my job talk to my eventual employer.” 3 Color copies! . of course. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers.2.”2 [2.2. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. Adobe Reader. The original joke goes. Lexecon. • Bring a backup thumb drive with your presentation on it. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. Post a copy of your presentation in a secure location on your homepage just in case. 2 This originally comes from an American classic.2. Most Ph. and you don’t want something as silly as a burned-out light bulb to cost you an investor. 12. the lawyer joke. “His lips are moving. • Bring paper copies3 of your presentation in case all else fails. • Test the equipment the day before. 12.D. is. “How can you tell when a lawyer is lying?” The answer.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. In retrospect.D. p. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. • Bring your own laptop. Most graduates get between 5 and 15 interviews when they graduate. Bring at least twice as many as you expect there to be people in the room.124 CHAPTER 12. 44] Side Note 12.2 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. and even if you can figure it out. PRESENTING THE PLAN times.1 (The Job Talk) Every Ph. Guy Kawasaki likes to tell a different version of an old joke. There will always be glitches. I had given it over a dozen 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. You don’t want to try to figure out other people’s equipment. they may have another version of PowerPoint.

I always bring a pen and paper to meetings. Ask them what your company will do. ask yourself after every statement you make. They may ask you something you want to respond to in an e-mail later. and each investor will respond differently. Give your presentation to friends or family.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. you are not presenting it well. Much of the material required use of the internet. Everyone. 12. it is quite the opposite. AFTER THE PRESENTATION 125 Side Note 12. and although you go into each presentation . They may ask you something that makes you want to change your presentation. • Your audience may ask you several questions at once. you need to change or eliminate the statement.2.5 Take Notes Have a pen and paper ready and take notes during the pitch. 45]. “So what?” If you cannot answer this question simply and easily.6 So What? When you are planning your presentation.3. but in reality. everyone brought a pen and paper. p. In general.2. If they cannot explain it clearly. 12.12.2. 12.2. Many people feel as if taking notes makes them look stupid. so write things down to make sure you don’t forget. • Taking notes also makes you look conscientious. 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. Stop when it goes off. 12. where some of the smartest people in the world worked. It is easy for things to get lost in the heat of the moment. Guy Kawasaki recommends you set a timer [2.3 After the Presentation Each presentation will be different.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. You should be prepared for the unexpected. At my company in Chicago.

PRESENTING THE PLAN with only success on your mind.5 [3.126 CHAPTER 12. Each negative comment gives you an opportunity to change an investor’s opinion. 321]: “What to do when a venture capitalist turns you down: Ten questions. Each time your are rejected improves your future opportunities.1 (What to Do When You’re Turned Down) Present Kuratko table 10. Side Note 12. Be prepared for rejection and do not consider it the end of the road.3. you should also realize that most most comments will be negative and most presentations are rejected.” . p. Remember that persistence is the most important character trait of entrepreneurs.

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 experience 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




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.


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 product line, brand name, and styles and would include any other relevant information such as whether the items were on sale or discounted.

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems


– “Dollar control systems” show the cost and gross profit margin on individual inventory items. Most computerized inventory tracking systems1 provide this type of information. • Unit-control Systems – “Unit-control systems” use methods ranging from “eyeballing” shelves to bin tickets. 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.


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

section 13.3 below.

13.4 (Delivery Cycle) In inventory management. To improve efficiency of inventory control. Definition 13. Definition 13.1 Inventory Turnover Typically. these systems should automatically update inventory and accounting records. work with suppliers to improve delivery times and count inventory more often. be sure it’s not easy to “hack” the system. For example.3.3 (Count Cycle) In inventory management. Definition 13. the order cycle is the amount of time it takes to process paperwork and place orders. • Updating product information – At the time a sale is entered. . 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.3. INVENTORY CONTROL When considering the purchase of a POS. • Security – To prevent theft.3. you have “turned over” your inventory. if you perform an inventory count four times a year. and • Improve pricing accuracy.2 (Order Cycle) In inventory management. your count cycle is 12 weeks. such as for volume discounts for preferred customers. the delivery cycle is the amount of time between placing an order and receiving it. 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. CHAPTER 13.130 • Maintain a sales history.3. • 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.1 (Turnover) When you have replaced 100% of your original inventory. the count cycle is the amount of time between counting inventory. Definition 13. a high inventory turnover is a mark of a well-managed inventory system.3.

.1 Buying Inventory In the process of putting together your business plan. INVENTORY ACCOUNTING 131 Definition 13.2. which allows you to pay less taxes on your inventory. which may result in higher taxes. Definition 13. First Out)) LIFO (last in.13. In deciding which to use.S. it values your remaining inventory based on the prices of the most recently purchased items. In the U.4. the needs period is the sum of the count cycle. and 13.5 (Needs Period) In inventory management. 13. and delivery cycle.3.3. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.4. 13.4. first out) assumes that you sell the least recently purchased inventory first. First Out)) FIFO (first in.3. See definitions 13.1 (LIFO (Last In. If there is inflation. it values your remaining inventory based on the prices of the least recently purchased items. but you should at least know about LIFO and FIFO. Definition 13.3 See also 13.1..3. you must estimate your inventory value when you file your taxes.2 See also 13. Many businesses also measure turnover by measuring sales per square foot (or square meter).2. If there is inflation. least this is true in the U. The author is unfamiliar with Chinese tax codes. Needs Period = Count Cycle + Delivery Cycle + Order Cycle.2 (FIFO (First In. 13.4.4. The author is unfamiliar with Chinese tax codes.S. follow the recommendation of your accountant. You should know how many sales per square meter per year you need to survive.4.3. LIFO and FIFO are two accounting methods used to do this.S.4. order cycle. In other words. Calculate your sales per square meter once per month. first out) assumes that you sell the most recently purchased inventory first. After you have been in business your inventory control system should give you a better idea of stocking levels.4 Inventory Accounting Your accountant will typically handle inventory accounting. 2 At 3 At least this is true in the U.

132 CHAPTER 13. and they will respond in kind. Distributors – Also known as wholesalers. Their prices are higher than a manufacturers.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. 3. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales .1 Dealing with Suppliers The most important thing about a supplier is reliability.4. Import sources – They operate like domestic wholesalers. says.” . INVENTORY CONTROL Definition 13. • Some suppliers demand a minimum number of items per order. courteous and firm with your suppliers. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. Independent craftspeople 4.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period.5 Suppliers Suppliers can be divided into four categories: 1. 2. usually one. 13. Manufacturers – Note that some manufacturers refuse to fill small orders. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. author of Start Your Own Business. “Be open.5. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. – The minimum may be higher for first orders to cover the cost of setting up a new account. Rieva Lesonsky. 13. brokers or jobbers. three or four months.

d. If a supplier does not extend credit.o. personal interaction can work wonders. you should know who is liable for damage to goods in transit. Be sure to add up • Costs. • For items being shipped.5. Suppliers sometimes try to complicate pricing to their advantage.. 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. 2. Side Note 13. customers may be required to pay upon receipt of goods. basis until you have proven yourself reliable. SUPPLIERS 133 13.5. • Discounts.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. the supplier will pay for freight.1 (COD (or c. .)) Cash on delivery. If a supplier is uncertain about you. At least in the U. 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. do not falsify or misrepresent your financial statements. You can also present your financial statements and prospects for success.13. • Sometimes if an order is large enough. and • The need to be firm but fair. Definition 13.o.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree.d. Whatever you do.5. If you are dealing with a reticent large supplier. it is considered a felony. they will put you on a c. Ask about the freight policy before ordering. Discuss • Their negotiating technique when discussing pricing.5. Tips for dealing with suppliers: 1. and • Allowances before you make a decision. I regularly had to deal with food vendors.S.

it may be worthwhile to cancel backorders and bundle them with a subsequent orders. Destination)) Free on board destination. May 19. http://www. Under this arrangement. 2007.134 CHAPTER 13. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt.5.3 (FOB Destination (or f.b.abcsmallbiz. 3.6 See also definition 13.html. Definition 13. Definition 13. 5 FOB Destination changes the location where title and risk pass.7 4 Source: 5 Source: http://www. 2007.o.2. .html. 7 Source: http://en. See also definition 13. May 19.html. Be aware of your supplier’s priorities.)) Free on board.5. INVENTORY CONTROL • Depending on whether the supplier pays frieght. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that The FOB term requires the seller to clear the goods for export. 6 Source: http://www. As opposed to FOB.4 Colloquially. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. This differs from a forward order where stock is available but delivery is postponed for other reasons.5. 5.b. May 19.4 (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. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. Seattle” to indicate that an item being shipped from Seattle is free on efg. people often say something like “f. Definition 13.5.5. 2007. May 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. Specify a cancellation date on your order forms.o.2 (FOB (or f.b.3.

• Part-time employees. On the other hand.2 (Tip: A Personal Note Concerning Personnel Management) By far the most stressful decisions I have made in my management career have concerned firing or laying off employees. besides being bad for business. 337]. 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. Side Note 14. they are often emotionally draining for the manager as well as the employee involved. and • Independent contractors.0. p. • Temporary employees (temps).3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. a bad hire. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. 135 . This chapter will cover the ins and outs of hiring • Full-time employees (FTEs).0. The benefits of finding the right person for a job cannot be overstated.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur.

an employee with an inflated job title may expect an inflated severance package.1. creating a job description. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed. then want to hire someone else later at a position above them in the company.1 How to Hire Hiring involves analyzing the job requirements.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. If you give someone a job as Vice President. you will likely find that they will come to you at some point to demand a vice president’s salary. 14. etc.1 Job Analysis Before creating a job description. and recruiting. this can create several problems: • Even if the employee is grateful to have an inflated job title at first.1. 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.136 CHAPTER 14.2 Job Description Side Note 14. Not only education and skills. you’ll be grateful to have spent the time to go through a more formal process.. 14. you need to consider • The physical or mental tasks involved. by the time you hire your 40th employee. they will soon expect compensation commensurate with their job title. Cleaning.1. selling. lifting. programming. However. • You may not leave enough buffer above the employee. writing reports. but personality traits. Side Note 14.1.1 (Formalities) While it may seem when you hire your first employee an unnecessary burden to write a job description and create all the other formalities. • If you have do terminate the employee. . HIRING EMPLOYEES 14. If you call someone a Vice President but don’t compensate them as such. you have nothing to offer. • How the job will be done.

3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. you hire someone as Director who is not qualified to be a director. • Physical or other special requirements associated with the job.1 (Job Description) Job descriptions should include • A job title. p. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. and • Job summary with major and minor duties.1. • If you give someone an inflated job title but do not offer a salary commensurate with the title. Definition 14. . • Desired experience. • A salary range. 338].1) and should include the personal requirements expected of an employee [4. and • Any occupational hazards. 339]. you may find it difficult to give them a promotion later. then they go on to a Director position at another company. you may find they are tempted to leverage that job title to seek employment elsewhere. p.2 (Job Specification) Job specifications are similar to job descriptions (see definition It also includes • Any educational requirements.1. it includes • The job title. You may actually be doing your employee a disservice by inflating their job title. and • A summary description of the position. • Benefits. • Specialized skills or knowledge. HOW TO HIRE 137 • There is little room for advancement. Definition 14. If. If you hire someone at the highest level of their competency. • The position of that employee in the corporate heirarchy. • Who the person reports to.1. for example. Side Note 14. Like a job description. Part of retaining quality employees is the prospect of advancement.

• Do not ask for specific personality traits.3 Advertising the Job When you write an advertisement.1.1. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number.S.5.S.” or people who may not have them will just try to fake those personality traits in the interview. • 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. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job. It also makes it easy to receive and process a large number of applications with a minimum of effort. particularly those that advertise on web sites.138 CHAPTER 14. – For other positions. 14. HIRING EMPLOYEES 14. Many American companies are no longer providing phone numbers.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. if you are looking for an accountant. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process.2 Side Note 14. With e-mail. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. companies.. . 2 See sidenote 14. such as “outgoing” or “detailoriented. – For professional positions. • Do not list requirements other than educational or experience-related ones. • List the top 4 or 5 skills that are most essential to the job.1. For example.1. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. • Be sure to list appropriate contact information. due to the number of applicants for competitive positions.4 Finding People There are many possible sources of applicants.

3 Java is a programming language.000 hits searching just the “Information Technology” search category.1. You narrow down the 10 candidates to 3. particularly in the high-tech industry.dice. 4. 159 in “Financial Services. 3. but when looking at a You interview the candidates.” 665 in “Internet/E-Commerce. the hiring process proceeds as follows: 1. You narrow the number of resumes down to about or http://www. • Online – In the U. most professional associations’ job banks are now online. To “weed out” candidates. You can evaluate their personality during the interview. • Focus on the skills that a person can bring to your company. Try to perform a search on a job sites such as http://www.. not a science.” And 921 in “Engineering. Software” category. about 10 or so.S.” with the keyword “java” will demonstrate just how widely used online tools with the keyword Java on May 19. There were 4. 6. HOW TO HIRE 139 • Senior Citizen Centers – Senior citizens who need extra income or retirees who want to make productive use of their time often make excellent employees • An Unemployment Agency – Contact government and private agencies who assist unemployed persons • Job Banks – Professional associations often have “job banks” where professionals who are looking for employment can supply their resumes. 2. Searching on Monster. If you are lucky. be sure that a candidate can provide what you are looking for. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. You hire the preferred candidate.3 Generally. In the U. for professional positions. You conduct a second round of interviews with the remaining 3 candidates. • Industry Publications – Most trade publications take ads for job openings.14. many positions are being filled online. 5. You check references. 2007 turned up more than 5..314 listings in the “Computers. Screening People Reviewing resumes and applications is an art. you will get several candidates for any job you are offering. For any job.

Of those we looked at. • Rely on your intuition. 344–345]. She simply passed along resumes that contained certain keywords that we were looking for. phone number. I have some personal recommendations: • Always check references. and e-mail address. If an applicant indicated they were an expert with too many technologies. HIRING EMPLOYEES – Do they change jobs too quickly? • Throw out applications if someone cannot provide enough references.140 • Look for patterns in their career. . we tossed those that had spelling or grammatical mistakes. if a person survives downsizing or other major changes at their former employers. listed expertise in too many subject areas.1.5 (Job Application) Present Lesonsky’s sample job application [4. 4 It takes time to become an expert with any sufficiently compex technology. CHAPTER 14.1. • On the other hand. • Special skills. That typically indicates that someone cannot supply enough positive references. or were too experienced. I learned that people lie on their resumes all the time. were not experienced enough. and • References. Applications should ask for things such as • From the hiring process at Active. • Don’t necessarily discard resumes with some gaps. did not match our requirements closely enough. address. Side Note 14. that is a very good sign that they are a survivor. Side Note 14. so many resumes came in that an administrative assistant was asked to perform the first screening. this indicated to us that the applicant was not being truthful. • Work experience – As for salary information when asking about work experience • Availability. including when an applicant can work and the hours they can work. Due to this. • Educational background.6 (Hiring at In the hiring process at Active.

14.1. 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. HOW TO HIRE 141 • Ask the person questions they would only know if they are competent in their field. They were the type of people who would write software all day. or • If a person is a citizen.” .1.6 Questions that are not explicitly prohibited. or national origin.S. Get clarification on anything that you think may be suspect. p. but which can get employers in legal trouble. • Do not hire people who are discovered to be lying on their resume. • Whether the applicant has every been arrested. • Sex. • How many days the applicant was sick in the previous year. ask prospective employees whether they can submit proof that they have the legal right to work in the United States. Not also that many of the best people we hired were not the best on paper. 347] • Age or date of birth. however. in the U. then go home and play on computers in their spare time. race. Several of the engineers I hired did not finish their undergraduate degree.. 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.7 (No-nos) In the U..5 Side Note 14. • Whether the applicant has every been treated for drug or alcohol addiction. religion. including [4. • Marital status. there are certain things you may not discuss with a job applicant in order to avoid discrimination and other issues. color. However. Though laws undoubtedly differ in China. creed. • Maiden name (for female applicants). employers may not ask about anything not related to the job. include • Whether the applicant has children. 6 Employers can. Ever. such as through a “Green Card.S. • Ask people questions about their resume during the interview. • Disabilities of any kind. • Whether the applicant has every been treated by a psychologist or psychiatrist.

A friend from Texas was asked this question when he interviewed with Moe torola to be a supervisor in a manufacturing plant in Austin. Texas. a recent debate.” The interviewer laughed out loud. 8 In 7 Taken . Discuss the job and the company. such as “Tell me about your last position. Begin with some small talk. p. 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 from [4. “President of the United States.142 CHAPTER 14. You want the candidate to talk enough to give you a detailed impression.” Don’t ask yes-or-no questions. so much so that it is almost a clich´. First impressions are the most important.” 9 This is a very typical job interview question in the United States. Here are some suggestions for questions to ask the candidate:7 • If you could design the perfect job for yourself. and demonstrate good communication skills. 349].1. the Democratic party’s candidates for President of the United States in the 2008 election were asked what their perfect job would be. Good candidates will do their best to put their best foot forward. You should do the same. Then ask them about their skills and background. Side Note 14. Be sure to ask open-ended questions. only one of them answered. The Interview Remember that the candidate will be interviewing you as much as you will be interviewing them. He got the job. HIRING EMPLOYEES • If a worker was ever injured on the job or filed for worker’s compensation.” or “Tell me about a problem that you solved at your last job and the way you solved it.8 (Your R´sum´) Discuss with students how to put together an e e effective resume when they graduate. It is as important to get the candidate excited about your company as you want to be about them. He answered. Curiously. “bowling. Hopefully they will be neat and clean. friendly.

Most supervisors.S. 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. do not give bad references to avoid potential lawsuits.9 (The I.1. what did you look for? Things to watch out for include • A bad attitude regarding the candidate’s previous employer. such as their posture. but there references were poor.1. • 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. Be wary of answers that subtly indicate that there may have been a problem with the candidate. and general tidiness in their appearance.Q. Test) At Active. • Whether the candidate can think on their feet.. After your questions. gave a strong interview. • Have you hired people before? If so. with many companies like Google incorporating these kinds of questions into their standard interview process. test to see how employees solved problems.. HOW TO HIRE • What interest you most about this company? This position? • Describe three situations where your work was criticized. This has become popular recently in the U. • Things the candidate seems reluctant to talk about. give them time to ask you questions. how many handshakes are there? Checking References One thing that far too few employers do is check I have interviewed people who looked great on paper. 143 • The candidate’s general demeanor. Side Note 14. the CTO liked to ask questions like you would find on an I. they will have questions about the company and the position.S. Finally. attentiveness. They were not hired. after you finish the interview. at least in the U. If the candidate is really interested in the position. take a few minutes to write down your impressions. Lesonsky tells of one supervisor who was asked about .

“What can you tell me about this person. Contact their university to confirm that they graduated and that their grades were what they said they were.144 CHAPTER 14. Considering the cost of hiring someone whose resume has been fabricated or who has a criminal background.. check their educational background. who knows the candidate well.S. . Also. you can hire companies to check educational references and perform criminal background checks for about $100 per check. it is usually a good investment. in the U.” they again said. “I only give good references. rather than a human resources employee who may not.” Many larger companies will refer you to the human resources department. You should try to speak directly to the candidate’s previous employer. “I only give good references.” When asked. Although I don’t know how things work in China. HIRING EMPLOYEES a candidate who simply replied.

. Kuratko and Richard M. Start Your Own Business. Canada. Hodgetts and Jonathan Doh. Entrepreneur Press. Pearson Education. Thompson South-Western. 145 . 2005. Ltd. 7th edition. [5] Fred Luthans Richard M. Inc. New York. pages 70–83. Mason. September 2 2004. Hodgetts. The Art of the Start. 2004. Process. 2004. [6] Shooting the messenger. New Jersey.Bibliography [1] Jay Heizer and Barry Render. International Management: Culture. Inc. The Economist. 6th edition. Operations Management. [2] Guy Kawasaki. [4] Rieva Lesonsky. [3] Donald F. and Practice. Upper Saddle River. McGraw-Hill Companies. Penguin Books. Ohio.. New York. 3rd edition.. 6th edition. 2004. Strategy. 2006. New York. New York. and Behavior. Entrepreneurship: Theory.

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