International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

1

Copyright c Collin Starkweather 2007. All rights reserved.

2

Contents
I International Business Management
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7
9 9 10 12 13 13 13 15 15 15 15 16 18 19 20 23 23 25 28 30 30 32 34 34 34 35 37 38 38 40 42

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

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . . . . . . . . . . . . . . . . . 5. . .4 Determining the Project Schedule .3. . . . . . . . . . . . . .3. . . .3 Project Controlling . .3 Dynamics . . 5. . . . . . . . .1. . . . . . .2 Preconditions . . .3.2 Network Diagrams . . . .6 Variability in Activity Times . . . .4 Monitoring and Controlling Forecasts .3. . . . . . . . . . . . . . . . . . . . . . . . . . .1 Research .1 Types of Forecasts . . . . . . . 5. . . . . 4. . . . . . . . . . . . . . . . . . . . . . .2 Life Cycle and Strategy . . . . . . . . . . . . . 5. . . . . . .6.1 The Project Manager . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . .7 Cost-Time Trade-Offs and Project Crashing . . . . .3. . . . . 6. 5. . . 5. . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Quantitative Forecasting Methods .9 Using Microsoft Project for Managing Projects 5 Forecasting 5.1 Adaptive Smooting . . . . . . . . . . . . . . . . . 6. .1. . . . . . . . . . . . . . . .3. . . 3.3 Forecasting Approaches . 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. . . . . . 5.3 Product-by-Value Analysis . .1 Identify Critical Success Factors .4 Adjusting for Trend . .2 The Strategic Importance of Forecasting 5. . . . . .6 Associative Models . 4. . . . . . . . . . . . . . . . . . . . . . . . . . .5 Slack Time and Identifying the Critical Path . . Strategy Development and Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 The Work Breakdown Structure . . . . 5. . . . . . . . . . .2 Project Scheduling . . . . . . . . . . . .2. . 3. . . . .1. CONTENTS . . . . . . . . 4. . . . . . . . . . . . . . . . . . . .2 Build and Staff the Organization . . . . . . . . . . . 4. . . .4. . 4. . . . . . . . . . . . .3 3. . . . . . . . . . . . . . . .4. . . . . . . .3. . . . . . . . .1 PERT and CPM . . . . . . 5. . . . .1 Project Planning . . . . . . . 3. . . . . . . . . . . . . . . . . . . . . . . .1 Product Life Cycles . . 4. . . . . . . . . . .1 Goods and Services Selection . . . . . . . . . . . . . . . . .4 4 Project Management 4. . . . . . . . . . . . . . . . . . .2 Focus Forecasting . .1 What is Forecasting? . . . . . . . . . . .3. . . 3. . . . . . . . . . . . .3. . . . . . . . . . .3. . . . . . . 5. .1. . . . . . . . 4. . . .1 Qualitative Forecasting Methods . . . . . . . . . . . . . . . . . .1 Probability of Project Completion . . . . . . 4. . . . 4. . . . . . . 4.2. . . . 4. . . 4. . . . . . .4 3. .1. . .5 Seasonal Variations in Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . . . . . . . . . . . . 4. . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . 3. . . . . . .3 Measuring Forecast Error . . . 6 Design of Goods and Services 6. . . . . . . 5. . . . . . . . . .1. . . . . . . . . . . 5. . . . . . . . .8 A Critique of PERT and CPM . . . . . . . . . . . . .1. . . . .3. .2 A Seven Step Forecasting System . .

. . . . . . . . . . . . . . . . . . . . . . . . . .3. . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Importance of New Products . . . . . .2. . Now What? . . . .2 Know Your Outline Thoroughly . . .2. . . . . .2.5 Take Notes . . . . . . . . . 101 9. . . . . . . . . . . . . . . . 12 Presenting the Plan 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Are You Ready? .1 Do It Until You Get It Right . . . . .1 Finding Your Niche . . . . . . . . . 12. . . . . . .1. .2 Redefining and Expanding Your Niche . . . . . . . . . .2. 12. .2. . . . . . . . . . . . .1 Product Development System . . . . 95 8 Finding an Idea 97 8. . . . . . . . . . . . . . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . . . . . 110 10. 111 10.3. . . . . . . . .3 Be Familiar With All Equipment to be Used 12. . . . . . . . . . . . . . . . Exactly? . . . . . . . . . . . . . 12. . . . . . . .1. .1 The Presentation . . . . . 6.3 After the Presentation . . . .1. . . . . . . . . .4 The First Minute is the Most Important . . . . . . . . . . 12. . . . . . . . . . . . . . . . . . . . . 11. . . . . . . . . . 6. Product Development . 12. . .2. . . . . . 104 10 Market Research 109 10. . . . . . . . . . . . . . 92 7. . . . . . . . . .1 You’ve Got an Idea. . . . . . . . . .1 Sources of Secondary Research .1 Your Audience . . . . . . . . 6. . . . . . . . . . .3 Organizing for Product Development . . . . . . . . . . . . . . . . . . . . . . .3 Generating New Products . . . .2 Research Methods . . 12. . . 11. .6 So What? . . . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . .3 Setting Goals . .3 The Mission Statement . . . .2 Look and Feel . . . . . . . . . . .2. . . . . 111 11 The Business Plan 11. . . . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . 104 9. . . . . 94 7. 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . .2 Quality Function Deployment (QFD) . . . . . . . . . .2 Some Suggestions . . 6. .2 The Plan Contents . . . . .4 Manufacturability and Value Engineering . . .2 6. . . . .3 Some Style Points 11. . . . . . .CONTENTS 6. . . . . .1 What Am I Researching. . . . . . . . . . . . .1 Preparing to Put the Plan 11. 99 9 Defining Your Market 101 9. . . . . .1 Characteristics of the Successful Entrepreneur .

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

Part I International Business Management 7 .

.

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

A.2. Prison labor is also considered improper in the U. child labor was widely used. • Because of this. 2.2. Easterners tend to trust people after observing a pattern of consistent behavior. 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. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. • However.1.2. Westerners rely more on contracts. • In general. Note that during the industrialization of the U.S. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U.A. which are more strictly enforced in the West.A.. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. and Europe but a commonly accepted practice throughout the developing world. This is something Chinese business people should be aware of. 3.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. .10 CHAPTER 1. 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. Definition 1.2 Corporate Corruption Side Note 1. Why is corruption an important business issue? • See sidenote 1. Western business people may not initially trust their Chinese counterparts. 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. 1.S.1 (Ethics) The study of morality and standards of conduct.S. Which brings us to the subject of this lecture: Ethics. For example. there is a perception in the West that Chinese are hard-working and smart.

investors in the United States had to reevaluate the risk associated with owning stock. there are few if any issues which affect and infuriate so many in China as corruption. September 20. it is simply inefficient. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act.2 Though things are improving.2.org. • Of course.dict. September 20. these are all generalizations and individuals may differ significantly from their cultural affiliations. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.2 (Corruption) Corruption is of concern for business people because • It increases risk.2. 2006. WorldCom. reward. Side Note 1. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. . “. Definition 1. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. For example.2. China continues a battle against corruption. 2006. In the words of a Beijing correspondent for “The Economist” magazine. Scandinavians are typically highly trustworthy1 but Italians are less so.1 (Bribe) A price.1. witness. – In the wake of Enron. voter. or other person in a position of trust. 2 Source: http://www. – 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). . gift. which requires strict monitoring and verification of financial information.transparency. • On a macroeconomic level. • It increases the cost of doing business. Source: texttthttp://www. they must factor additional uncertainty into their calculations. and Tyco. – A bribe is a business expense that goes to no productive purpose and decreases profits.”[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. – 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.org/policy research/surveys indices/cpi. .

• WorldCom – Following the Enron scandal. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. and Tyco make it clear that even western developed economies have significant ethical shortcomings.2 (Cultural Heritage in the U.htm. .4 – Bernard Ebbers. Qwest. WorldCom declared bankruptcy in July 2002. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U. the former CEO of WorldCom. While western developed economies often cite a high ethical standard.2. was convicted of fraud and conspiracy and sentenced to 25 years in jail.S. succeeding Enron as the largest bankruptcy in U. See sidebar 1.com/Research/15 Largest.3. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. http://www. March 17. the SarbanesOxley Act (SOX) was passed in the U. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. scandals such as Enron.bankruptcydata.1. There is currently debate as to the effectiveness of the regulations relative to the costs. Side Note 1.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States.bankruptcydata. March 17. 2007. Worldcom.S. • Tyco – The CEO of Tyco. Side Note 1. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. Parmalat.S. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. was accused of looting the company to fund a lavish lifestyle. In Scandinavia.3 – Several Enron executives have since been sentenced to jail for fraud and other charges.com/Research/15 Largest.htm. history.12 CHAPTER 1. Dennis Kozlowski..3 The United States The United States has recently been rocked by a number of scandals in the business community.3. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. 2007.S. • Enron – In December 2001. including a $2 million birthday party for his wife. 3 Source: 4 Source: http://www. a high value is placed on honesty and personal integrity. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron.

Likewise.4. JAPAN 13 1. 58]. Side Note 1. 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. with many women finding their employment opportunities constrained.4. with many men of the opinion that women were just biding their time until they marry and have children. and as a result made high risk investments in the late 1980s and early 1990s.fdic.pdf.2 Women in the Workplace Sexual harassment has also become an issue in Japan. also known as thrifts and which function like banks. were not as highly regulated as banks.S. The government was compelled to provide public money to bail out the institutions. the political scandals do not appear to have been fully acknowledged and addressed. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion.2 (Sexual Harassment in the United States) Behavior considered socially acceptable elsewhere in the world may not be considered socially or legally 5 Source: http://www.4.gov/bank/analytical/banking/2000dec/brv13n2 2. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations.S.1.4. p. . Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. Savings and loan institutions.4 1.1 (The U.4. • Many men do not understand why sexual harassment constitutes a problem. women have a difficult time being taken seriously. This resulted in several banks being technically bankrupt [5. Moreover. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. 5 1. 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. Hodgetts et al. Side Note 1.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals.

• The harasser’s conduct must be unwelcome.psu. Furthermore. sexual harassment lawsuits result in significant penalties (e. an agent of the employer.edu/harassment/legal.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances. unreasonably interferes with an individual’s work performance or creates an intimidating. Are women with equal qualifications as men given equal pay and position? Take a show of hands. including but not limited to the following: • The victim as well as the harasser may be a woman or a man. 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. . • The victim does not have to be the person harassed but could be anyone affected by the offensive conduct. requests for sexual favors. gender. cite two cases in which foreign firms operating in the U. considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace. It is considered a very serious issue. have paid substantial penalties as a result of sexual harassment or discrimination based on race. Side Note 1. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim.g. 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. a supervisor in another area. yes or no. • The harasser can be the victim’s supervisor. or other issues.3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace.14 CHAPTER 1. 6 Source: http://www. or a non-employee.4.. and for most public institutions and many large corporations. Hodgetts et al.de2. a co-worker.4. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States. in the millions of dollars) to those who are successfully prosecuted. hostile or offensive work environment.S. Definition 1.

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.5 1.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. politicians. there seems to be a glass ceiling due to social factors.. their attitudes towards bribery when working in foreign markets differs from that of the U. is the notable exception). .dict.4.5. Definition 1.7 Note that lobbyists do not have any formal power. Although women have entered the workforce in large numbers in recent decades.5.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. 1.5.4.1. in an extended sense. EUROPE 15 1.3 Lobbying by Japan Japan spends more money lobbying in the U. 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. with the purpose to influence their votes. Side Note 1.S.5.org. Hodgetts et al. yes or no.S. They only have the power of persuasion. at 40.S. Side Note 1. 7 Source: http://www. than any other.4.2 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.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy. to try to influence decision-makers in any circumstance. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. men are disproportionately represented in management positions. particularly in upper management. with most in the top 20 among over 150 countries included in the survey.

For those students who think so.S.5. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1.1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization. • More British companies have actively sought to recruit and promote women into management.htm. 8 Side Note 1.3 (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..com/library/glossary/bldef-glassceiling. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. yes or no.16 CHAPTER 1. 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. 8 Source: http://careerplanning.5. but there is a perception that there are risks and ethical considerations.5. . though compensation is limited relative to lawsuits filed in the U.about. Side Note 1. 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. • Discrimination lawsuits are more commonplace in Great Britian.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. 1.

. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. International corporate spying problems. there are undoubtedly many others that get away with it. Prison labor.5 billion in sales annually.6. Side Note 1. Child labor. 2. 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. executives. 3. • Note that for every corporate spy that is caught. company in Boulder was stolen and sold to a Chinese company.3 (Corporate Spying) Hodgetts et al.S. Bribery and other forms of corruption.S. and • A recent history of rapid economic development. • Yet another case in which software from a U. Side Note 1.1 (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. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. Often. 4. 5. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. p. 7.6. ETHICAL CONCERNS IN CHINA 17 Side Note 1.6. Piracy and counterfeiting (see sidenote below). [5. • A relatively stable government. 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. 6.6. 64].2 (Piracy and Counterfeiting) Present sidenote at [5.1. An opaque legal system. Ethical considerations include 1. pp. An increase in crime and illegal business activities.

18 CHAPTER 1.7. Definition 1.6. Side Note 1. and the environment. “. such as Whole Foods.S. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition).”[6] See also sidenote 1.. • CARE (promotes community development. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. provide relief in the event of humanitarian disasters.cfm for more detail.7. .benjerry.2. social justice. 1. education.2 (Nongovernmental Organizations (NGOs)) Private. health. education. and economic issues such as poverty. . and the environment. political. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. such as education and health care. See http://www. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. political. Other companies. China continues a battle against corruption.2. In the words of a Beijing correspondent for “The Economist” magazine. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. social justice. . not-for-profit organizations that seek to serve society’s interest by focusing on social. a grocery chain. and promotion of social equity). and economic issues such as poverty.3 (Nongovernmental Organizations (NGOs)) Private. not-for-profit organizations that seek to serve society’s interest by focusing on social.7. and emergency relief in the event of humanitarian disasters). health. 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.7 Corporate Social Responsibility Definition 1. there are few if any issues which affect and infuriate so many in China as corruption.4 (Corruption) Though things are improving.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. Definition 1.7.com/our company/our mission/index.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement.

• Conservation International (promotes environmental conservation). as it gives the U. 1. firms a reason to refuse to pay bribes.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. • And. too. executives may actually feel that it is the right thing to do.S.7. For example. as executives of publicly traded companies are ultimately responsible to their shareholders.7.1 Corruption and the FCPA Revisited Hodgetts et al.9 U. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). In fact. Executives are people.7. note that while U.1.S. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al.2 (Why Would a Company Listen to an NGO?) Why would a company take actions that could impact its profits to satisfy an NGO? • Good press and free advertising. • To prevent a boycott or other consumer defections. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. and • Rainforest Action Network (RAN). A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery.000 and $125. but does not outlaw payments to political party leaders. with a score of 3.7. . MNCs do not appear to have been significantly impacted. In 2005.S. – Even socially responsible executives would consider the “bottom line” when making decisions. 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. many feel that it has had a net benefit. Both political groups and businesses are influenced by NGOs.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. Side Note 1.2. Side Note 1. last but note least. China ranked 78 out of 158. firms are constrained by the FCPA with regards to bribery and other corrupt practices.

Side Note 1.7. Singapore is number 5 with a score of 9. the United States and Europe have recently been rocked by corporate corruption.7. July 1. It is a difficult problem to solve.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. Hong Kong is number 15. As more state-owned businesses become privatized and the size of the middle class increases.S.3. such as the U. Important: Although it is widely cited. malfeasance and diversion of corporate funds becomes increasingly difficult.com/ipa/A0781359.20 CHAPTER 1.0 is considered to be the borderline at which countries are considered to have a problem. Side Note 1. Global Compact specifies 10 principles which MNCs should abide by: 1.5 (Table 3-1: Principles of the Global Compact) The U.html. It cannot be considered to be based on a scientific survey. 2006. Support and respect the protection of international human rights. and not based on hard data. and the environment. 2. and Parmalat resulting in investors losing billions of dollars. The government recognizes that it is an issue and is taking action. . The government is actively addressing the issue of corruption. Commitments that many MNCs have signed on to. societies. Moreover.4. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions.2 respectively.4 (Some Opinions) Personally. Tyco. with a score of 8.10 Corruption is certainly not endemic to Asia. and Germany at 7. specify standards and codes of conduct in domestic and global operations. Scandinavian countries are at the top of the list.N. 1.7. 4. I think corruption will diminish as China economically develops for several reasons: 1. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. better than the U.infoplease. 5. 10 http://www.N. 3. more Chinese will own stock in companies. WorldCom. but most important first step is to recognize that there is a problem. Global Compact. with scandals such as Enron. slightly better than Sweden. With more disciplined corporate governance. With greater financial transparency. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk.6 and 8.

and 10. A precautionary approach to environmental challenges.. . the right for unions to exist). Freedom of association and recognition of the right of collective bargaining (i. Elimination of all forms of forced and compulsory labor. 7. including extortion and bribery.7. 4. CORPORATE SOCIAL RESPONSIBILITY 2. Elimination of child labor.1. Encourage development and dissemination of environmentally friendly technologies.e. Undertake initiatives to promote greater environmental responsibility. 9. Elimination of discrimination with respect to employment and occupation. Ensure that MNCs are not complicit in human rights abuses. 8. 21 3. 5. Business should work against all forms of corruption. 6.

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .22 CHAPTER 1.

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

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

location selection. and maintenance. Organizing. human resources and job design. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1. Planning.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.S. and 4. 2. 2. 7].2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1.2. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions.2. Side Note 2. Definition 2. p. known commonly in the U. Side Note 2. . layout design. p. • They are often sources of conflict among management.2. place in the heirarchy. To accomplish these functions. Controlling. 3. WHAT OPERATIONS MANAGERS DO 25 4. particularly when job titles are not clear.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. business community as “org charts. as the org chart determines executives’ authority and.” • Every organization with more than a few employees has an organization chart. supply-chain management. operations managers make decisions. inventory.1. more generally. scheduling. pp. process design.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. OM is one of the most costly aspects of an organization. 1. 5]. OM decisions have been divided into ten categories by Heizer [1. Staffing. quality. 6–7].

• Mutual trust between buyers and suppliers is crucial. • Discuss Active. 5. Layout design – How should we arrange the facility? How large must the facility be to meet our plan? • Involves materials flows. OPERATIONS AND PRODUCTIVITY 2. 3. Inventory. 4. production scheduling. personnel use. 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. Process and capacity design – What process and what capacity will these products require? • Process decisions commit management to specific technologies. quality. 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. 8. and maintenance and determine much of the cost of a product or service. Location – Where should we put the facility? • Location decisions are crucial.26 CHAPTER 2. technology decisions. delivery. • Personnel costs are a significant part of most production or service processes. capacity needs. material requirements planning.com’s location decisions and Matt McAdams a posteriori assessment of the choices. 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. 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. 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. . Poor location decisions may overwhelm other efficiencies. and inventory requirements. and human resource planning. 7. 9. innovation. personnel levels. 6. and price.

New stock is ordered when stock reaches the re-order level. However. Kanban are usually simple visual signals.2. WHAT OPERATIONS MANAGERS DO 27 10. that tell production processes to make the next part. He also believed that management is responsible for – Matching employees to the right job. The process is driven by a series of signals. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. This saves warehouse space and costs. • Frederick W. p. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level.1 Side Note 2. – Providing proper work methods and tools. 9]. p. and 1 Source: http://en.3 “Significant Events in Operations Management” [1. such as the presence or absence of a part on a shelf.org/wiki/Just In Time %28business%29. the firm could deplete inventory and cause customer service issues. 8]. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. If demand rises above the historical average planning duration demand. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. When implemented correctly.2 (A Little History) Review Heizer figure 1. • Reliability and stability of systems depends on well-planned maintenance schedules. or Kanban. Definition 2.2 (Just in Time) Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. 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. – Providing the proper training. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide.wikipedia. which relied upon standardization and quality control. February 14. quality.2. .2. one drawback of the JIT system is that the re-order level is determined by historical demand. and efficiency. • Eli Whitney (1800) is credited for popularizing interchangeable parts.2. 2007. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1.

such as retail.S. services account for over 70% of U. Manufacturing was dominant until about 1950 or so. the services sector is by far the largest employer.S. and other essentials for its citizens. the economy transitioned from agriculture to manufacturing around 1900. average wages are below average2 in the U. 9] • Repair and maintenance. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. shelter.28 CHAPTER 2.3 (Information Sciences) The systematic processing of data to yield information. • Recently. • Trade. Side Note 2. • Transportation. Bureau of Labor Statistics defines services to include [1. • In some service industries. economic output. Definition 2. for others professional occupations. p. services become increasingly important.S.2.5 [1. However. p.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. The U. the wages are considerably above average. Today. • In most western economies. 11]. such as the legal profession or computer services in the financial industry.3.. .1 (Development of the Service Economy) Present Heizer figure 1. In the U. • Insurance.1 (Services) Those economic activities that typically produce an intangible product.. 2 The average national private industry wage. • Food and lodging. major contributions have come from the field of information sciences. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control.3. • Government.S. 2. Definition 2.

3 Services that do not include a good as a component are called pure services. • Other professional occupations.3 That is. used in your treatment. • Real estate.2. Therefore it is difficult to automate. This is important insofar as there is no inventory. • Entertainment. Definition 2.3. when going to a restaurant. the purchase price may include installation services. • Services are often produced and consumed simultaneously. 29 Side Note 2. Note that many goods include services and many services include goods. • Services have inconsistent product definition. • Services are often knowledge-based.2. When buying a computer. you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you. Hospital care includes both health services and goods.3.2 (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. • Medical. • Services are more often unique. Legal advice is rarely identical for two clients. Consumers interact with those providing the service. Customers seek services through local intermediaries. such as pharmaceuticals or medical supplies. • Services are typically intangible. • Education.3. THE SERVICE SECTOR • Financial. a support contract in case you have problems or training to familiarize you with the features of the computer. . See definition 2.2 (Pure Service) A service that does not include a tangible product.3. • Legal. • Services have a high consumer interaction. • Services are often dispersed.

• 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. it will continue to strongly impact the field. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products.30 CHAPTER 2.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. Operations managers are being challenged to produce biodegradable. • Empowered employees – With the rise of services and knowledge products. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. capital. 2. Definition 2. Trends that Heizer and Render identify [1.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. operations managers are increasingly responsible for innovations that move ideas. the next step in product development involves customizing products according to the customer’s preferences. operations managers are responding by moving decision making to the individual employee. • Mass customization – With increases in technical capabilities and customerlevel information management. wherever and whenever needed. • 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. or management). p. reusable. parts. • 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.5. OPERATIONS AND PRODUCTIVITY 2.2. . 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. or recyclable products or to minimize packaging and other wasteful production steps. and finished goods rapidly.2.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. brought about in part by the internet.

1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company. Also known as total factor productivity. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day. Definition 2. In order to improve productivity.2. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 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 2.3.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1.5. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.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. Consider today’s computers versus those from the 1970s.0077 titles per labor-hour = 0. Side Note 2.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). Side Note 2.5.5. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant.4375 titles per labor-hour = 0. 15].4 (Total Factor Productivity) See definition 2.5.5.5. p. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. . Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. but overhead is no $800/day. Definition 2.5.25 titles per labor-hour = 0.

Definition 2.1 Productivity Variables Operations managers typically divide productivity variables into three categories: 1.. and the arts and science of management. OPERATIONS AND PRODUCTIVITY – The first computer ever used had no internal memory. – This can be a particular problem in the service industry. it may improve productivity.5. of course. 3. the public provision of electricity is highly variable. – For example. Labor productivity has increased due to • Better-educated. capital. . • Units of measure – There may not be appropriate units of measure. and was about the size of my hand.) The screen had only one color. Management. the three factors critical to productivity improvement – labor. Capital. A Toyota Corolla is a much different car than a Porsche 911 Turbo. 2. If the public electricity provision increases in quality.5 (Productivity Variables) In operations management. no word processors.32 CHAPTER 2. The electricity often goes out in the middle of the day and the current may vary in strength. If you wanted the computer to do something. – Not all cars are the same. or other commercial software available.5. 2. There were. green. • 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. about 10% of the annual improvement in productivity is due to increases in labor productivity. in Cambodia. spreadsheets. (It used audio tapes for memory storage. such as convenience or safety. where quality and other factors vary widely or the level of service provision includes items difficult to measure. you had to write a program from scratch. Labor.S. Labor In the U.

Social overhead that makes labor available. Cannot Correctly Answer Questions of This Type.2. THE PRODUCTIVITY CHALLENGE • Better-nourished. Diet of the labor force. The primary variables for improving labor productivity include 1.S. writing. draw the rectangle on the blackboard. .S. and math. In developed nations. such as transportation and sanitation.) Present Heizer figure 1. 16]. and • Healthier workers as well as • A shorter work week. maintaining and enhancing the skills of labor.” In the U.. “About Half of 17-Year-Olds in the U. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve.S.3 (The State of Education in the U.5. Which of the following is true about 84% of 100? 4 When presenting this question.5. What is the area of a 4 × 6 meter rectangle. there is considerable concern over teaching of basic skills such as mathematics to grade school children. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. Side Note 2. and 33 3. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. p. 2. Basic education appropraite for an effective labor force.8 [1. and 4. About half of 17-year-olds cannot answer the following multiple-choice questions: 1.

5. however. educated. management is not always identified separately from labor as an input.S. and because the author of the textbook is writing about operations management. and the cost of capital depends on interest rates. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. 2. According to Heizer [1. Note that there is a trade-off between capital and labor in most industries. p.5% after allowances for depreciation. as well as capital.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. U. has increased at about an average of 1.S. Developed economies (also known as post-industrial economies) require trained.4 Productivity and the Service Sector Historically.5.4 (Management as an Input) Because this is a course in business management. 2.. management is considered as a separate input.5. Note that in classic economic analysis and other areas of business. and knowledgeable employees and operations managers are responsible for ensuring that technology. Difficulties arise because service-sector work is .5. 17].5. productivity in the service sector has not increased as rapidly as with the production of goods. 2. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level.S. in the U. are utilized effectively. Side Note 2. education.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. Definition 2.34 CHAPTER 2. graduate programs and the students they produce remain the best in the world. and knowledge.2 Capital Capital investment in the U.

investment advice). • Keeping the workplace safe.5 (Service Productivity in the U.. p. Typically labor-intensive (e..g. food preparation.g. and child care. laundry service. Difficult to evaluate for quality (e. watchdog groups such as NGOs. medical diagnosis). government agencies. and 5.. but from customers.g. 35 3. 18] • Retailing in the U. Side Note 2. .S. and • The U. teaching). We will discuss this challenge in more detail throughout the course. Often difficult to automate (e.6 Social Responsibility As discussed in chapter 1.5.S. in both overall and service productivity.5 • The U.2. 2. is twice as productive as in Japan. These demands come not only from the manager’s personal ethic.S. • General ethical behavior concerning issues such as child labor and corruption. These challenges include such issues as • Maintaining a clean environment. Frequently individually processed (e. 4. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency. 5 In Japan. banking system is about 33% more productive than Germany’s.S.) Productivity is highest in the U. telephone industry is twice as productive as Germany’s... and other stakeholders. Heizer notes [1.g. Low-productivity activities. a haircut). legislation protects shopkeepers from discount retailers. the performance of a law firm). have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward.6. SOCIAL RESPONSIBILITY 1.S. such as cleaning. Often an intellectual task performed by professionals (e. 2.g.

OPERATIONS AND PRODUCTIVITY .36 CHAPTER 2.

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

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

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

Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. 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. more responsive products or services. the creation of a unique advantage over competitors. 3. Differentiation – They make their product better. See http://www. • The “look and feel” of the product. but can be used at the department level and even at the project level. Differentiation can arise from anything that the customer may value about a product or a services. and Major Departments in an Operations Function. Differentiation Producers can try to compete based on providing a product or service that is unique in some way.3: “Sample Missions for a Company. Cost leadership – Providing cheaper products.1. Definition 3.benjerry.3 (Sample Mission Statements) Present Heizer’s figure 2. Responsiveness – By providing timelier. • Interoperability with other products. Side Note 3. • Training.com/our company/our mission/index.40CHAPTER 3.1.1.2 (Strategy) How an organization expects to achieve its missions and goals.cfm for more detail. be it • Product features. Definition 3.1.” Note that mission statements are used not only at the company-wide level. .3 (Competitive Advantage) In operations management. • Availability of complementary products. 2. the Operations Function.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. 3.

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

41

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.

3.2

Issues in Operations Strategy

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

3.2. ISSUES IN OPERATIONS STRATEGY

43

3.2.1

Research

The PIMS (Profit Impact of Market Strategy) project by GE (General Electric) collected data from 3,000 cooperating organizations to identify characteristics of high ROI (Return on Investment) firms. They determined that high-impact OM decisions have the following characteristics: 1. High product quality1 2. High capacity utilization 3. High operating efficiency2 4. Low investment intensity3 5. Low direct cost per unit4

3.2.2

Preconditions

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

3.2.3

Dynamics

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

The operations manager’s job is a three-step process: 1. and 3. Provide competitive advantage.1 (SWOT Analysis) In operations management. Side Note 3.6 [1.3. 3. “Strategy Development Process. then • Form a Strategy.1 (Strategy Development Process) Present Heizer figure 2. those activities or factors that are key to achieving competitive advantage. These critical success factors are used to develop a competitive advantage. Definition 3. Staff the organization with personnel that will get the job done. in particular. Opportunities. and Threats) analysis to develop strategies. Increase productivity.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. determining internal strengths and weaknesses and external opportunities and threats. and 3.2 (Critical Success Factors) In operations management. Implement an OM strategy. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. p.” The process of developing a strategy involves the following steps: • Environmental Analysis. Definition 3. .3. Identify a strategy and critical success factors.44CHAPTER 3. then determine whether the organization does these things well (and. Group the necessary activities into an organizational structure. 2.3. if the firm has a competitive advantage in these things) and where failures are most likely.3. • Determine Corporate Mission.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. 2. The purpose of this process is to 1. 37]. Weakness.

3 Integrate OM With Other Activities In order to achieve its strategy. 3.3.2 as examples of how firms organize their activities. OM activities are most productive when they are integrated with other activities such as marketing. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. and supporting activities. Once CSFs are determined.1. • Red arrows – critical success factors • Blue arrows – support activities 3. p.4.3. Definition 3. CSFs. finance.3.3. MIS.6 3.3.1 as a checklist to determine critical success factors. 39]. 5 Management 6 Human Information Systems Resources.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.3 (Activity Map) In operations management.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2. Side Note 3. Southwest Airlines has a competitive advantage in providing low-cost airfares.3. . Recall the “org charts” in sidenote 2.2. a graphical link of competitive advantage.5 and HR.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. an activity map can be used to link an organization’s competitive advantage to the CSFs.

6.4. • Texas Instruments is an example of a country with a global strategy. or joint ventures with substantial independence.4. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization. Although e it is legally Swiss. In the semiconductor industry. . a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. • McDonald’s is an example of a country with a multidomestic strategy.3. p. Only 10% of its work force is Swiss.4. Typically characterized by subsidiaries. owning or controlling facilities in more than one country.5 (Global Strategy) In operations management. Definition 3. See definition 3. See definition 3. with beer on the menu in Germany.4 (Multidomestic Strategy) In operations management. See definition 3. Definition 3. 95% of its assets and 98% of its sales are made outside Switzerland. Multidomestic strategy – Exporting management talent and processes but not necessarily the product.4.4. but a good strategy for cost reduction when products do not need to be adapted locally.3 (International Strategy) In operations management. Its menu reflects the country in which it operates. Definition 3.5. and hamburgers without beef in India. wine in France.1 (International Business) A firm that engages in cross-border transactions.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. Usually does not confer a cost advantage. 4. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. International strategy – Often the easiest strategy. as exports require little change in operations and licenses often leave risk with the licensee. Definition 3.4.46CHAPTER 3. [1. products do not need to be localized. Global strategy – Not characterized by local responsiveness.4. Also one of the least profitable due to transport costs and little local responsiveness. See definition 3.4. 3.4. 42] Definition 3. 2. a strategy that uses exports and licenses to penetrate the global arena.4. franchises. • Nestl´ is an example of a country with a transnational strategy. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1.

4. Note that many companies that are well-known American brands are now making more money overseas than they do in the U. p. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness. 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 .. 6]. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. Side Note 3.S.4.3.6 (Transnational Strategy) In operations management.4.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

The profile highlights the importance of project management in achieving competitive advantage. Even Microsoft.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. money. and Controlling) Present Heizer figure 3.Chapter 4 Project Management Side Note 4.0. the largest software company in the world. 3.0. Scheduling – People. Project management involves three phases: 1. Scheduling. 46–47]. pp. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. defining the project.0. Controlling – Monitoring of resources. Plans are also revised to meet changes in time and cost demands. quality.3 (Project Planning.1 [1. Side Note 4. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. and budgets. 49 . and team organization.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. Side Note 4. and supplies are tasked to specific activities and activities are related to each other. 2. 49]. costs. p. Planning – Goal setting. 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.

Work can be defined with a specific goal and deadline. Project organizations work best when [1.5.0. 4. p. things you thought were certain turn out not to be. and/or 5. you are doing your job well if noone notices the project management. and you will be forced to improvise. you should always expect the unexpected. Side Note 4.1. Definition 4.1. You may be managing resources far in excess of your individual salary. 4. In a sense. if things go wrong. 3. 69]. p. Your job is to make things go smoothly and according to plan. 2. The project is temporary but critical to the organization.5 (Personal Advice on Project Management) Project management is a tricky profession.50 CHAPTER 4. Moreover. project managers are highly visible in a firm and have significant responsibilities. The project cuts across organizational lines. it is also an area in which there will continue to be high demand for qualified people. People will not come through with what they promised. The work contains complex interrelated tasks requiring specialized skills. The job is unique or somewhat unfamiliar to the existing organization. The responsibilities of project managers are to make sure that .1 Project Planning While many projects are run within an existing organization. However. you will be confronted with a daunting task. See also Heizer sidenote “Project Management and Software Development. it is very obvious and can be very costly.” [1. a temporary project organization is formed to address a specific project. 4. If you become a project manager on projects of significant complexity. PROJECT MANAGEMENT However.0. 48] 1.1 The Project Manager As alluded to in sidenote 4. often times.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention.

you have divided the tasks too finely. 3. Complete software architecture for user account input web page functionality 5.1. a web page takes about a day to build for an experienced team. Side Note 4. Approve graphic design for user account input web page 4. a task that should only take a day or so. in a software engineering project. 2. Review software architecture for user account input web page functionality 6. The project meets its quality goals. Complete graphic design for user account input web page 2.1. Approve software architecture for user account input web page functionality . Review graphic design for user account input web page 3. 51 4.2 (Work Breakdown Structure (WBS)) In operations management. All projects come in on time. dividing a project into more and more detailed components. People receive motivation and information necessary to do their jobs. For example. 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. Definition 4.4. In a project that includes allowing a user to enter personal information on a web page.1. PROJECT PLANNING 1. The project is on or under budget. and 4.2 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). • Build the user account input web page is a much better task division than 1.1 (Avoid Creating a WBS That is Too Detailed) A common error that inexperienced project managers make is to divide the project into too many tasks.1. When dividing a project into tasks.

4.52 CHAPTER 4. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. fill hundreds if not thousands of pages. Identify precedence relationships among activities 3. Encourage realistic time and cost estimates for each activity . you should also take note of time and cost estimates given by your technical staff. Major tasks in the project 3. Write software for user account input web page functionality 8.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). It arises from meeting and discussing the activities with engineering and technical staff as well as senior management.3 (Reality Check: WBS) In reality. Show the relationship between each activity to others and to the whole project 2. PROJECT MANAGEMENT 7. Activities (also known as “work packages”) to be completed Side Note 4. Scheduling serves to 1.2 (Work Breakdown Structure) Present Heizer figure 3. Subtasks in major tasks 4.2. Write software for user account input confirmation page functionality 9. the work breakdown structure is not something you go to your office to do in isolation. Side Note 4. p. At the time you are creating the work breakdown structure. The actual WBS for Windows XP would.1. They will be useful for project scheduling.3 [1. Project 2. which we will discuss next in section 4.1. 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. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. of course.

3. Activity time estimates are recorded. and CPM) Inexperienced project managers often feel the need to use Gantt. and 4.” This will give the class an idea of the look and feel of a typical Gantt chart. Definition 4. – said of roads.4.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. For smaller projects. PERT. cost estimates. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover.2. Derives from the typical shape of a bottle. moeny. PROJECT SCHEDULING 53 4. The order of performance is accounted for. and CPM tools for every project management activity. PERT and CPM help answer questions such as • When will the entire project be completed? . and other values to each activity.1 (Gantt Charts) Planning charts used to schedule resources and allocate time.2. Definition 4. All activities are planned for. MS Project’s Gantt chart functions demand you assign employees.4 [1. However. Perhaps they imagine that they are not doing their jobs professionally if they are not. It can actually be quite time consuming to create and maintain Gantt charts. 2. Side Note 4.2. 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 . which becomes narrower as one approaches the neck of the bottle. these should be considered merely tools to be used when they are useful by saving time or energy. and material resources by identifying critical bottlenecks in the project Side Note 4. PERT.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. the road bottlenecks. as. p. Make better use of people. PERT and other formal documents.2.2.2 (Using Gantt. right by the bridge. Overall project time is developed. Gantt charts are perhaps the most widely used tool for ensuring that 1. 51].

and 8. Definition 4. Raw material and expenditure forecasts.54 CHAPTER 4. 2.3 Project Controlling Project control involves monitoring resources. Total program labor curves. costs. what is the best way to accomplish this goal at the least cost? 4. Cost distribution tables. less than. Work status reports. PERT and CPM. and budgets of projects. 7. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. Control programs typically produce reports detailing 1. Functional cost and hour summaries. were developed in the 1950s for project control. 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.1 PERT and CPM Two methods. 3. 5.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. 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. or ahead of schedule? • On any given date. 4. 6. is the money spent equal to. 4. Cost breakdowns for each task. behind schedule. quality. Time analysis reports. Variance reports. is the project on schedule.3.3. .

AON associates the activity with the node whereas AOA associates the activity with the arrow. As the names describe. Moreover.2 (Example: AON and AOA) Present Heizer’s figure 3.2.4. Side Note 4. 5.3. Develop the relationships among activities. it will do for you automatically much of what we will go through manually in this class.3. Personally.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. 6. Gantt charts are the “go to” visualization method for even very complex projects.3. 3.1 (Reality Check: PERT and CPM) MS Project allows you to track relationships among activities and can produce either a Gantt or PERT chart from a single project data set. p. Definition 4. 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. Side Note 4. through the network. . or the critical path.3. Activity on Node (AON) and 2.2 Network Diagrams There are two approaches to visualizing activity networks: 1. and ontrol the project.5 [1. monitor. PROJECT CONTROLLING 55 Definition 4. Also. Activity on Arrow (AOA).3. in my experience. schedule. Assign time and/or cost estimates to each activity. See also definition 4.3. Define the project and prepare the WBS. Compute the longest time path.3. They both follow six steps: 1.3 (Critical Path) The computed longest time path through a network. 4.3. 4. 2. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. 53]. Use the network to help plan. Draw the network connecting all of the activities. See also definition 4.3.

2. ES = max{EF of all immediate predecessors}. their dependencies. EF = ES + Activity time. • Table 3. that is. its ES is the maximum of all EF values of its predecessors.4 Determining the Project Schedule Once we have identified all of our activities. analysis used to determine the project schedule. LF = min{LS of all immediate following activities}.1 gives sufficient information to describe the network.3.3. pp.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. In other words. we must use time estimates of each activity to determine the overall schedule for the project. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. Definition 4. See also definition 4. that is. 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.6–3.3.8 [1. its LF equals its LS of the activity that immediately follows it.56 CHAPTER 4.1 (Critical Path Analysis) In project management. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. We do this with a critical path analysis with involves a 2-step procedure. 1. its LF is the minimum of all LS values of all activities that immediately follow it. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. that is. 4. 54–55]. – If an activity is an immediate predecessor to more than one activity. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time.4. LS = LF − Activity time. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. Follow with example 3 and figure 3. 56]. p. . PROJECT MANAGEMENT Side Note 4. – If an activity has multiple immediate predecessors.9 [1.

61] based on table 3.1.2 (Forward Pass) In project management scheduling. if we delay activities B and D by one week each. The critical path is one that • Begins at the first activity in the project. Note also that if we delay each activity by the amount of slack that activity has. Slack time is just Slack = LS − ES or Slack = LF − EF . we cannot complete the project in 15 weeks.4.3 (Free Slack) In project scheduling. p. the time associated with a single activity.5. and • Includes only critical activities (see sidenote 4. “Notation Used in Nodes for Forward and Backward Pass. 57].1 (Slack Time) In project scheduling. Definition 4. p. 4. • Terminates at the last.2 (Total Slack) In project scheduling. we may delay the project as a whole.4.1).1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. 2 For example.4. activity F in sidenote 4.4. Also notable is that if the total time of the project needs to be reduced. . G. the time devoted to one of these activities must also be reduced.4. they share total slack. Definition 4.3.4. it is said to have free slack. in the example in sidenote 4. p.3 and Heizer figure 3. the step that identifies all the earliest times that activities can be completed.5. C. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.10 [1. and H have no slack time and cannot be delayed without delaying the entire project. E.3 [1. 60].5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. Definition 4. If an activity2 does not impact the slack time of any other activity.” Then complete Heizer example 7 figure 3.1 When several noncritical activities appear successively in a path. the time shared among more than one activity. or the amount of time an activity can be delayed without delaying the entire project. These are called critical activities. the free time for an activity.5. Note that activities A.5. 1 For example.13 [1.1. Side Note 4.

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.6.6.. Definition 4.1 and 4.6. In reality. and the other uses β = β − 1 and α = α − 1 . technical considerations that were unknown at the time the project schedule was drawn up. Beta distributions have two free parameters. the “best” activity completion time that could be obtained in a PERT network. Definition 4. Optimistic time – The shortest amount of time an activity will take 1% of the time 2.6. Pessimistic time – The longest amount of time an activity will take 1% of the time 3.6. Most likely time – The most realistic estimate of the time required to complete an activity.58 CHAPTER 4.6. The beta distribution is used as a prior distribution for binomial proportions in . which are labeled according to one of two notational conventions.6.6.2 and 4. Definition 4.6. Effectively.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.2. See also definitions 4. three time estimates are used: 1. Side Note 4.3.1 and 4. the most probable activity completion time that could be obtained in a PERT network. the project manager pulls the number “out of the air” based on their experience managing related activities. unexpected complexities. etc.1 (Optimistic Time) In project scheduling.2 (Pessimistic Time) In project scheduling. See also definitions 4. However. the time required to complete an activity is often uncertain due to supply problems.6. in most cases. the “worst” activity completion time that could be obtained in a PERT network. In PERT.3 (Most Likely Time) In project scheduling.6. The usual definition calls these alpha and beta. we do not. PROJECT MANAGEMENT 4.3. See also definitions 4.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. Definition 4.

The expected activity time for activity F is 3 weeks5 and the variance is 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.6. 4. and pessimistic times of 1.3 The domain is [0.com/BetaFunction.4.wolfram. and .1]. and pessimistic times of 1. February 21.β) with α = 1 and β ranging from 0.25 to 3.78 6 6 36 7 4 weeks.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. Side Note 4. 4. 4 See definition 4.6. p. The variance of the activity time is Variance = [(b − a)/6]2 .6.00 week. 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 = 1.1 Probability of Project Completion If we assume that 1. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. q) = (4.html.6. β) Γ(α)Γ(β) P (x) = (4.1) where B(p. p. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. Activity times are statistically independent 3 Source: http://mathworld. most likely. most likely.wolfram. The above plots are for various values of (α. Total project completion times follow a normal probability distribution and 2.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1.html http://mathworld. and 7. 62].78 weeks. and 9 weeks.00. 2007.com/BetaDistribution. 63] for activity F based on optimistic. 2.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.4. 8 1.

A2– A3] “Normal Curve Areas.1. commonly also N written σ 2 .5.16. pp. Side Note 4.6. Side Note 4. and within 3 standard deviations approximately 99. “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).com/StandardDeviation.6. See also 4.3 (Example: Project Variance) Review Heizer example 9 [1.76 weeks approximately 16% of the time. two standard deviations approximately 95% of the time.6. p. see http://mathworld. p.6. See definition 4.3) Definition 4.6.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.10 Determining Project Completion Time for a Given Confidence Interval A common question is. Note that the standard deviation of 1.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. 65] and figure 3. definition 4.6 (Standard Deviation) The standard deviation is the square root of the variance.6.wolfram.6. Definition 4.4 (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.” Review Heizer example 10 [1.html.6.6. 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.6.7% of the time.60 CHAPTER 4. 64]. 9 For 10 See more information. .76 weeks implies that the project will exceed the expected completion time by more than 1.

3 (Crash Cost) In project management. Definition 4. Assuming linear costs.7. See definition 4.4. When crashing a project. if certain activities off the critical path take the pessimistic time estimate or more to complete. 4. See definition 4. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path.11 Definition 4. Definition 4.7.1.4) 11 Since crashing a project often involves adding additional resources to activities. you will doubtless experience one or both of these eventualities many times in your career. Project crashing is the name given to the process of rushing a project to completion. in fact. and • The total cost of crashing is as small as possible.1 (Crashing) In project management. the crash cost is typically higher than the normal cost. • The shortened durations will actually enable us to finish the project on time.2 (Crash Time) In project management.1.7 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. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4.7. Crashing a project involves a four step process: 1.7. Since activity completion times are typically shortened by adding resources. and if you become a project manager. shortening activity time in a network to reduce time on the critical path so total completion time is reduced.7.7. it may result in the project being delayed. crash time is the shortest duration of an activity. we want to do so in the least cost mannger possible. 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. permissible and realistic. Step 1 – Compute the crash cost per week. .

Crash this activity by one period. 4. Note that one activity may be on several critical paths.2 (Example: Crashing a Project) Present Heizer example 12 [1. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates.7. If not. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. If you find yourself needing to rush a project. Side Note 4. 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.62 CHAPTER 4. 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. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. At times this may be politically infeasible. you should be very wary of such pressure. Step 2 – Find the critical path(s) in the project network.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. Step 3 – If there is only one critical path. If there is more than one critical path. PROJECT MANAGEMENT 2. 67–69] including table 3. 3.7. the advice given in this section should be helpful. 4. go to step 2. Step 4 – Update all activity times. stop. Side Note 4. As a project manager. If you accept the challenge and try to rush the project to please upper management.19. If the due date has been reached.5 and figures 3.18–3. Then crash each activity by one period. pp. • Advantages – Especially useful for large projects .8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT.

Information on Planner can be found at http://live. You may also refer to http://en.gnome. Starkweather about his impression of various alternatives. Noncritical paths should be closely monitored as well. It is perhaps the most widely known and featureful project management software available. Note that most project management textbooks refer to MS Project as the software of choice for project management.achievo.org/Planner.org.wikipedia. 4.net. 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. .dotproject. pp. they are often overkill for small.1. it is relatively expensive and the features are so numerous and complex.org/wiki/List of project management software for a list of project management software or ask Dr. including open source software that is free.1–3. However. 70–74] with figures demonstrating MS Project functionality. Information on dotProject can be found at http://www.7 [1.9 Using Microsoft Project for Managing Projects Present programs 3. independent. Information on Achievo can be found at http://www.to mediumsized projects. 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.7.4.9. There are a variety of alternatives.

64 CHAPTER 4. PROJECT MANAGEMENT .

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

These may include inflation rates. Production planning and budgeting. • Technological forecasts. See also definitions 5. Generally deals with more comprehensive issues than short-range forecasts. and Analyzing various operating plans.66 – – – – Sales forecasting. Definition 5. and 4.2 (Economic Forecasts) In operations management.4. .to long-range forecasts. See also definitions 5. Definition 5. which impacts purchases of new plant and equipment as well as development of new products.1. longer forecasts are needed. Useful for – – – – Planning for new products. housing starts. long-term forecasts concerned with the rates of technological progress. planning indicators valuable in helping organizations prepare medium. Growth. Decline. and other economic indicators.3 and 5. In the first two stages. 5. 2.4. FORECASTING • Long-range forecasts – Generally more than 3 years. money supply. These concern rates of technological progress. 3. and Research and development. Product life cycles tend to follow four stages: 1.1.1.1 Types of Forecasts Organizations typically use • Economic forecasts. Maturity. CHAPTER 5.1.2 and 5.1. Facility locations or expansion.1. and • Demand forecasts.1. Introduction.3 (Technological Forecasts) In operations management. Capital expenditures. Cash budgeting.

1. .1. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5.1. Select the forecasting models.2.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. 2. 3. these drive a company’s production. Also called sales forecasts. 6. capacity. See also definitions 5.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1.5.4 (Demand Forecasts) In operations management. 5.2 and 5. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. Select the items to be forecasted. Validate and implement the results. Gather the data needed to make the forecast. 7.3. 4. 3. 5. Capacity – Underestimating demand can result in • Undependable delivery. 5. 2. Determine the use of the forecast. and scheduling decisions and serve as inputs to financial. Human resources – Anticipated demand is needed to estimate the need for • Hiring. and • Loss of market share. and personnel planning. and • Layoffs. • Loss of customers. Make the forecast. marketing. • Training. projections of a company’s sales for each time period in the planning horizon.1. Determine the time horizon of the forecast.

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

and if they perceive there is an incentive to exaggerate. for example.3. and · Respondents. · The simplest and easiest way to estimate demand.5. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. they may want you to think that they will be doing more business with you in the future to obtain price concessions today. useful method if we can assume that market demands will stay fairly steady over time. ∗ However. 3.3. Sales people typically respond to incentives. or other incentives to over or understate demand.3. Moving averages cannot pick out trends very well. · Requires less past data than moving averages. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. ∗ Moving averages · Simple. political. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. be sure that the sales force is clear that their incentive is to be as accurate as possible.8. · There are three problems with moving averages 1.9. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. · Useful as a starting point or sanity check for more sophisticated methods. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. ∗ The more independent your decision makers are from economic. 2. – Sales force composite ∗ You would be surprised how accurate your sales force can be. · Staff personnel. . the more likely it is your results will be accurate. they will do so. · See definition 5. the naive approach. · See definition 5. Moving averages require more past data to work with than. say.

a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.3. See also definition 5.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.3. 5. and 5.5.3. 5.3.3.3.3. See also definitions 5.10.5.3.3.3.3. 5. Definition 5.3.5. See also definitions 5. personal experiences.6. and 5. and 5.3.3. a forecasting technique based on salespersons estimates of expected sales.3.3. See also definitions 5. See also definition 5. .6.6 (Consumer Market Survey) In operations management. See also definitions 5.5 (Sales Force Composite) In operations management.3 (Jury of Executive Opinion) In operations management.4. 5.6. Definition 5.3. and 5. Definition 5.4.1. and value system.3.3.1 Qualitative Forecasting Methods Definition 5.2. Definition 5.3.70 CHAPTER 5.4.3. · See definition 5. a forecasting technique using a group process that allows experts to make forecasts. emotions.3. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.3.3.4 (Delphi Method) In operations management. 5. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.

FORECASTING APPROACHES 71 5.3.3) The smoothing constant.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. and 5.3.2) See also definition 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 (5.5. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period. and are appropriate to use when the underlying average . See also definitions 5.2 Quantitative Forecasting Methods Definition 5. Definition 5. • Simple Moving Average – Mathematically.11. Definition 5.3.10.7. Definition 5.8.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.3. That is. Moving averages can be either simple or weighted. a simple moving average is given by demand in previous n periods Moving average = (5.9. α. See also definition 5.3.3.1) n • Weighted Moving Average – Mathematically.3. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.05 to 0.3.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period. Higher values give more weight to recent data.5.3. generally ranges from 0. 5.3. Mathematically. 5.3.3.7.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.

12. Definition 5.72 CHAPTER 5.3.3.3. and are appropriate to use when the underlying average is relatively stable. See also definition 5.3. Definition 5. Definition 5. See also definition 5.3. Mean absolute deviation (MAD).7.3 Measuring Forecast Error Once a forecast is made.7.4) definition 5. while lower values give more weight to past data.3. Mean absolute percent error (MAPE). 5. FORECASTING is likely to change. 2.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. 1 See |actual − forecast| n (5. 5. .13. and 5.0. Mean squared error (MSE).14. such as the mean absolute deviation (see definition 5. 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 5.12 (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. When α = 1.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.3.13).12).3.8.11 (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.3. 3.3.3. Three popular measures are 1. exponential smoothing is equivalent to naive forecasting.15. it is good practice to compare the estimated value with the actual value as actual values become available.

Mathematically.7) or F ITt = Ft + Tt (5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.3. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5. Mathematically.6) 5.5.14 (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.12.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.11) . expressed as a percent of actual values.3.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.8) With smoothing constants α for the average and β for the trend. MAPE is given by MAPE = See also definition 5.3.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.3. MSE is given by MSE = See also definition 5. Definition 5.3. 100 n i=1 (forecast errors)2 n (5.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.12.3. FORECASTING APPROACHES 73 Definition 5.5) |actuali − forecasti |/actuali n (5.3.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.

12. Compute Ft . Calculate the forecast including trend. Compute the smoothed trend. Tt with equation 5.14) . F ITt .74 or CHAPTER 5.10. It is also commonly called linear regression analysis.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. 1. time) (5. 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. 3. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. 2. Ordinary Least Squares Regression analysis is also useful for predicting trends. by the formula F ITt = Ft + Tt . the emponentially smoothed forecast for period t using equation 5. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables.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.

. demand is seasonal. the multiplicative seasonal model. We do that with a 5-step process. 2. such as cars and washing machines. Although there are many methods to accomodate seasonal demand.5 Seasonal Variations in Data In most businesses. 5. the more uncertain it is. 5. 3. Definition 5. 3.3. Find the average historical demand for each season. during the summer months when it is common to take a vacation. then multiply it by the seasonal index for that month. 2. This provides the seasonal forecast. 1.5. ¯ x The least squares method has several drawbacks. Compute the average demand over all months. we will examine one model. Estimate next year’s total annual demand. consumers often make fewer purchases of durable goods. The first step is to calculate the seasonal forecast. Compute a seasonal index for each season by dividing the historical demand by average demand. to account for seasonal changes in demand in our forecasting. Recall that the equation 5. 4. In the U. Deviations around the least squares line are assumed to be random.3. Divide this estimate of total annual demand by the number of seasons.13 assumes a linear relationship.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events..3. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. 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¯.S. Most businesses experience a surge in sales around Christmas. 1.

. 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.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. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.x = (5. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e. is given by (y − yc )2 n−2 Sy. 106– 107]..3. sales) = y-axis intercept = the slope of the regression line = the independent variable (e.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. but x will be something other than time.4.3. average local salary) (5.g. Note that making predictions of future demand involves also making predictions about the independent variable x. However.1 (Example: Using OLS) Present Heizer example 12 [1.g..76 CHAPTER 5. if you are uncertain about predictions of x. If there are published estimates you can cite (e.17) .g. FORECASTING 5.x = (5. mathematically.16 is y2 − a y − b n−2 xy Sy.3.15) Side Note 5. It is also called the standard deviation of the regression and. whatever uncertainties you may have transfer to your predicition of y. pp. We will use the same technique.

but the relationship is coincidental. nor does it imply that they will continue to be related. the average length of a woman’s skirt and stock market prices in the U.html?xid=sitecnn-partner.S.3.3 and the U.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables.9 [1.S. Correlation Coefficients for Regression Lines Definition 5.3. or National Football League. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. February 28. The correlation coefficient of variables x and y is given by r= See also definition 5.3.3.S. have been correlated.2 with stock prices generally rising as skirts rise.3.” Side Note 5.” the AFL (American Football Conference) and the NFC (National Football Conference). stock market. the U. 4 Source: http://www. which is divided into two “conferences. Dow Jones Industrial Average and Standard and Poor 500. Side Note 5. a football game played between two football conferences in the U.” Note that the regression assumes a standard normal distribution about the estimate. Even the Year of the Pig correlates strongly with the U. changes in skirt lengths don’t cause stock market prices to rise and vice versa. p.com/time/business/article/0.3 (Examples of Correlation Coefficients) Present Heizer figure 4. the note in the margin accompanying Heizer example 14 [1.18. stock market prices as well as the winner of the Super Bowl. is monopolized by the NFL.5.1594488. football in the U.4 . has risen. 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.3. FORECASTING APPROACHES 77 Side Note 5.time.S. Certainly. stock markets. 107]. Historically.00. in all but one Year of the Pig.18) . pp.S.8599. Definition 5. 108]. 2007.S. leading stock indexes. Other interesting correlations that have been identified over the years include banana prices and U. “Four Values of the Correlation Coefficient.2 (Distribution About the Point Estimate) Present Heizer figure 4. p. It does not imply causation one way or the other. Since 1935.S. 109].10 [1.18 (Coefficient of Determination) A measure of the amount of variation in the dependent variable about its mean that is explained by the regression equation.3.4 (Causation vs. Correlation) Correlation merely means that the values of two variables are historically related.

results in additional predictive accuracy as measured by r2 . .3.3. . .78 CHAPTER 5.g.19 (Multiple Regression) A causal forecasting method with more than one independent variable. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. Side Note 5. b2 . . b1 . 5 See definition 5.18 and Heizer example 15 [1. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .15 is given by y = a + b1 x1 + b2 x2 + . = the dependent variable (e. p.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. 110].” As the sidebar points out. 110].. “Forecasting Manpower with Multiple Regression at TransAlta Utilities.3. “What was the R squared of your regression?” Multiple Regression Analysis In section 5.) It measures the percent of variation in the dependent variable (y) explained by the regression equation.6.5 Definition 5. The multiple regression equivalent of equation 5. . Adding additional independent variables as predictors. p. in a multiple regression analysis involves a complex formula which is beyond the scope of this class.17.3.” For example. if they are indeed related to the dependent variable.19) Determining the values of a.3. The same technique can be applied to use several independent variables to predict the value of a dependent variable. . In practice. you would use statistics software to calculate these values. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5. we discussed a means by which we can attempt to predict the value of one variable using the value of another. (See definition 5. . x2 . . It is commonly simply called “R squared. b 2 . etc. often the most difficult part of building a multiple regression model is to pick the independent variables. . b1 .

forecast| n where M AD = (5.4. two M ADs to 1. three M ADs to 2.4.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.5. MONITORING AND CONTROLLING FORECASTS 79 5.1 (A Plot of Tracking Signals) Review Heizer figure 4. . though large errors may be a problem as well even if the positive and negative errors balance.1.4.9% of the time.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. These limits are typically based on M ADs. which correspond roughly to standard deviations.4 standard deviations.20) A good tracking signal has about as much positive as negative error. The tracking signals should also be compared as they are generated against limits.6 One M AD is equivalent to 0. Tracking signals are typically used monitor forecasts.2 standard deviations. This means that the observed value should be within 2 M ADs abut 89% of the time.2. one of the most common problems with forecasting is a lack of follow-up. and within 4 M ADs about 99. Definition 5. three M ADs about 98% of the time. Side Note 5. and 4 M ADs to 3. 111]. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.6 standard deviations. 6 Recall definition 4.4.6. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. the forecasting methodology needs to be modified. If the tracking signals violate upper or lower limits. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).11 [1. In other words.8 standard deviations. Definition 5.6. p. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .

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.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. you should be aware of the criticism of focus forecasting. 5. p.4. 114]. Definition 5.80 CHAPTER 5. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. 2. FORECASTING 5. Side Note 5.g. changes need to be check with human eyeballs to ensure that the adjustments make sense. you must make your own decision as to how you select the forecasting models that you use..4.4. Side Note 5.4.2 Focus Forecasting Focus forecasting. Definition 5.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings.3. Sophisticated forecasting models are not always better than simple ones.4.4. is based on two principles: 1.2 [1.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application.” . However. In your career. there has been much criticism of the approach to using models based on thier fit to the data. which selects a model based on goodness-of-fit to a data set.10) is automatically changed to keep errors to a minimum.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. “Summary of Forecasting Formulas.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. Note that even with computer monitoring. There is no single technique that should be used for all products or services. α in definition 5.

For example. which will be discussed in detail later in the semester.0.1 .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.5 (Product Decision) The selection. and • The organization’s capabilities. 1 In this chapter. as products.0. the word “product” will refer to both goods and services. • Market share and dynamics. which. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. as an intangible.128] • Investment and cash flow. and design of products.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. • Product life cycle. Product strategy2 defines the breadth of the product line and links product decisions to [1. They also use just-in-time production techniques. Referring to services as products is common in the service industry. Definition 6.2. pp. 124. is a service. definition. insurance companies often refer to their policies.1 Side Note 6. pp. time permitting. 81 . 2 Recall sidenote 2. 122–123].

or even decades. • Introductory phase – In the introductory phase. Life cycles can be in the days or weeks (e. Introduction. 6.1. and – Supplier development. months (e. • Growth phase – Effective capacity forecasting is necessary.82 CHAPTER 6.g. DESIGN OF GOODS AND SERVICES 6.g. restaurants or nightclubs).. • Maturity phase – Competitors have entered or are entering the market.. and 4.. Product strategy involves determining the best strategy for each product based on its position in the life cycle.1 Product Life Cycles Product life cycles can be divided into four phases: 1. years (e. often ruthlessly. 3. Maturity. . clothing fashions).g. 2. and innovative production is appropriate. – Process modification and enhancement.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. products expenses are often high for – Research and development. YouTube videos). Growth.1. Decline. low-cost.2 Life Cycle and Strategy Strategies change as products move through their life cycle. so high volume. • Decline phase – Investment needs to be minimized and resources need to be redeployed.

Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. Definition 6.3 Product-by-Value Analysis For firms with many products. GENERATING NEW PRODUCTS 83 6.2. are tied to product demand.6. • Technological change often drives product innovation.000 yuan. 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.2.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development.2. example.2. 6.500 or 100. and if a company is to survive. it must regularly redesign existing products or bring new products to market. example.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.4 Side Note 6.2 Generating New Products Most products have a limited life cycle.1. • Economic factors.1 (Example: Brainstorming) Lead the class in a brainstorming session. the development of cellular telephone technology or the internet. such as consumer incomes. 6.1. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. Definition 6. • Sociological and demographic change is also tied to product demand. 4 For 3 For . as well as the total annual dollar contribution of the product.3 • Political and legal change can also bring about business opportunities. Ideas are not reviewed until after the brainstorming session.

3.3 [1. 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.3. 6.84 CHAPTER 6.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. 128]. the product life cycle.2. The house of quality is a graphic technique for defining the relationship between customer desires and a product.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. Definition 6. Side Note 6. Translates customer desires into a product design. and the organization’s capabilities. Many successful companies rely on sales from products introduced within the past five years.3.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. p.3. Definition 6.3 6. p. p. DESIGN OF GOODS AND SERVICES For example. 128]. DuPont estimates that it takes 250 ideas to yield one marketable product [1.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. Side Note 6.1 (Product Development Stages) Present Heizer figure 5.1 (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. 6.2 [1. . Each stage should have an accompanying review to determine whether to progress or not. market dynamics.3. 129]. Determines what will satisfy the customer and 2.

10 Side Note 6.6.2.S.3. Evaluate competing products.” 6 For example. e. bureaucratic companies and organizations. 7 In other words. An organization is divided into departments.2. 2. which can be an advantage.3. Building the house of quality involves six steps: 1. 3. 1.6 3.3 Organizing for Product Development In the West. Note that it is not free or open source. identify the rows of the house in sidenote 6.3. See http://www.2 (Example: House of Quality) Present Heizer example 1 [1.3.2. 2.com for more information. Identify relationships between the firm’s hows.3. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. PRODUCT DEVELOPMENT 85 Side Note 6. manufacturing engineering. create the columns of the house in sidenote 6.3. p. . as was the software described in section 4. 6. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.2. a research & development. Relate customer wants to product hows.8 5. • Perhaps the most popular approach in the U.g.3. • More common in large.7 4.3. • Effective communication and coordination between separate departments can be problematic.. 10 The right-hand columns of the house in sidenote 6. 8 These are given on the roof of the house in sidenote 6. design engineering. and production departments. Product development is done by teams. • Fixed duties exist.2. In other words. there are three popular methods by which organizations undertake product development. Identify how the good or service satisfies customer wants. 130].qfdcapture. Identify customer wants.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions.3.9 6. Develop importance ratings. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. with product features.9..

production. development.3. However.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. manufacturing. Side Note 6.3.11 In Japan. organizations are less structured and typically not divided into research and development.S. and production stages of product development..4. purchasing. but my personal impression is that formal QFD practices are not widespread in practice.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. Some teams even include representatives from vendors.3.3. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. engineering.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. etc. engineering. My experience may not be indicative of management practices in general in the U. maintainability. and use. it can also be problematic because teams.4 (Concurrent Engineering) In project development. production. and field service personnel. because their fate is tied to a product. Definition 6. 6. quality assurance. Definition 6..86 CHAPTER 6.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.3. design. The goals of manufacturability and value engineering are 11 See definition 6.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. .S. use of participating teams in design and engineering activities. 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.. These teams often include representatives from marketing.3. Side Note 6. will often advocate for continuation of their project past the point that it is profitable for the company. Definition 6.3.3.

Cost reduction. 5. Standardization of components. Improved maintainability (serviceability) of the product. Improvement of functional aspects of the product. Reduced complexity of the product. Robust design. 4.6. and 7. 2. 87 . Improved job design and job safety. 6. 3. PRODUCT DEVELOPMENT 1.3.

88 CHAPTER 6. DESIGN OF GOODS AND SERVICES .

Part II Entrepreneurship 89 .

.

.Chapter 7 Introduction to Entrepreneurship Although starting a business is usually a complex. Realism) Most people perceive those who start businesses as risk-takers. that is. difficult undertaking. As a Chinese philosopher once said.” At its core. but also realistic. “None of the other CEOs respect you until you’ve driven a couple of businesses into the ground. Side Note 7.6 (Business Failures) A friend and former colleague. then another. fear of failure and other insecurities dissuade most people from ever starting a business. See also sidenote 7.7. If you start a small business. but the humor in the statement lay in the fact that there is some truth to it. In fact. must begin with a single step.” However. Matt McAdams.” He was joking. The best way to overcome that fear is to address any concerns or uncertainties by preparing as much as possible before “taking the plunge.0. Most businesses fail within the first 18 months. taking that first step can be extremely daunting. starting a business simply involves taking the first step. people who can tolerate a high degree of risk. you will have to decide that you have done as much as you can do and simply take action. studies have found that most successful entrepreneurs are actually unrealistically confident 91 . Side Note 7. then taking another step.0. ultimately. doing it is simple. “Every journey .7 (Confidence vs. While it is important to be realistic about risks when starting a business. who has started two businesses and been CEO of three startups once told me.0. . However. you should be confident.

edu. INTRODUCTION TO ENTREPRENEURSHIP about their prospects. make lots of money quickly and with little effort. successful entrepreneurs know how to raise money. – We will discuss techniques for raising money in detail later in the course. Hopefully. And by believe in you. – Entrepreneur Magazine cites an entrepreneur who states that the time will be right when “you can honestly say ‘I’ll put my house. I mean believe in you enough to give you money. See. http://wistechnology.”’ • According to experts who have studied entrepreneurs.com/article. but a series of frustrations. – You not only have to believe in yourself. 1 There are a variety of studies that support this. pp.1 In our discussion of entrepreneurship. for example. • Entrepreneurs typically do not feel fulfilled working for others and feel the need to control their own destiny. 12–13]. and other personal collateral on the line to attain the start-up capital I need for the long-term rewards I deserve.asp?NewsID=5324.92 CHAPTER 7.ccer. They may not have a realistic assessment of the risks they are undertaking when they start their businesses. 7. If asked. March 6. it’s not usually a single incident (such as getting fired) that leads to entrepreneurship. and . 2007. we will discuss how to prepare to start a small business as well as manage a business early in its life. you have to convince others to believe in you. everyone would say that they want to be thier own boss.cn/en/ReadNews. you will maximize your chance of success. • The desire to make alot of money quickly is not one of the characteristics of the successful entrepreneur. jewelry. you will finish the course with the confidence that if you decide to start a small business.php?id=2018 http://www.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. • Finally. • Surveys and research indicates that the most common personality trait is self-confidence.

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

for example.com. interests. INTRODUCTION TO ENTREPRENEURSHIP • Many all-nighters. Try to realistically evaluate your own strengths and weaknesses. – The CEO of Absolute Performance once told a customer that the company’s product could parse XML files. and experience match the kind of talents your business would require? • Analyze Your Personal Attributes – As yourself about yourself. The “code push” would often start at midnight and. – At Active. might last four to six hours. we had to update the web site late at night when our customers were not using it in case something went wrong. • Create a Personal R´sum´ – List your personal and professional experiences. 7. – Educational background. – Hobbies.” there were so many engineers sleeping at the office at Active. e e Include – Skills.com management and the family life of the CEO of Absolute Performance. • During one “crunch time.com than average in the population at large. – Are you friendly and self-motivated? – Are you a hard worker? – Do you have common sense? . and – Accomplishments that require expertise or special knowledge. depending on the complexity of the push. so I volunteered to work a 24-hour day to complete the parser so that he would not have to admit that he stretched the truth to the customer.2 Are You Ready? If you are thinking about starting your own business.com that at one point the landlord threatened to evict us since the lease specified that we were being leased a business rather than residential space The demands of a startup also had a dramatic impact on the marriages of Active. This kind of event was not uncommon at Absolute Performance.94 CHAPTER 7. There were far more divorces that occured among management at Active. the first thing you should do is look in the mirror. Do your skills. We didn’t.

advertising. your goal may not be realistic. it is common to exchange “war stories” about the difficult times and sacrifices. if not more important.000 yuan by July 1” is a much better goal than “raise money. SETTING GOALS 95 If you are not a “people person.1 (What’s It Really Like?) If you wonder what running a business is really like.000 yuan and you’ve never had a job before. 10. When I talk to those who I know who have started businesses. ask yourself the following questions: • Income – How much do you want to earn.” • Be realistic. or 20 years to accomplish.7.000. Side Note 7. 7. such as sales.3 Setting Goals With any major endeavor. and administration. • Analyze Your Professional Attributes – Be aware of where you need help. . When setting goals. marketing. “Raise 100.” you may not want to start a business that focuses on customer relationships. – Start with small goals. although the successful ones generally view their experiences as positive on the whole. • Be specific.3. If your goal is to raise 1. than learning from success. Learning from failure is as important. If you talk to an entrepreneur who has not been successful. – Long-term goals are those that may take 5. even the successful ones will probably focus on the negative. ask other entrepreneurs. When setting goals. Move on to larger goals once the small goals have been met. • Set both short-term goals and long-term goals.” • Be optimistic. Consider at least a five-year time horizon.3. Like parents. – Short-term goals are those that can be accomplished within a year. “Achieve financial independence” is much better than “pay the bills. try to figure out why they were not successful. it helps to set goals. 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.

pp. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. and – Investment of personal assets.96 CHAPTER 7. INTRODUCTION TO ENTREPRENEURSHIP • Lifestyle – Would you be happy traveling frequently? What about your family? Are you willing to invest your personal assets? What do you want in terms of – Travel.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. Side Note 7. The reasons given for adding or subtracting points are as interesting as the ultimate score.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4.3. – Geographic location. Acknowledge this fact and factor it into your decisionmaking. 21]. 20. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. How much is your ego worth? Side Note 7. Eliminate question 1 and substract one point from the scoring given on p. Have the class write down their answers and evaluate their own EQ. Many people want to start their own business for ego gratification.3. – Hours of work. 18–20]. pp. .

an online DVD rental business.D.com’s league business began with Matt. he would be able to provide a better product than competitors who provided only software. “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. California. physicist. Personal time was in short supply so the convenience they provided was well worth the price. but has been very successful because it addressed a local need. so they started a restaurant delivery business.Chapter 8 Finding an Idea The good ideas are the simple ideas. Netflix. Online registration for sporting events was only a part of his original game plan. 97 . • Active. who enjoyed handicapping sports and felt that putting tools online for sports enthusiasts to use would build a profitable online community. began1 when someone got annoyed by late charges from local video rental stores. It was neither original or complicated. They do not involve engineering the next great wonder of the world. but scratching an itch. a Ph.0. I used Netflix when I lived in Chicago. Side Note 8.4 (Ideas for Businesses Friends Have Started) Discuss some of the ideas that friends have used to start businesses. Good restaurants did not deliver and the amount of time the average American worker had for lunch was getting shorter and shorter. • 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 answer the question. I also used a grocery delivery service. but over time became the primary thrust of the business.

however. • The ideas are easily copied and would be quickly appropriated by more able competitors. Those with nose piercings would not need to remove the piercing and risk it closing.. • An escrow service that arbitrages the differences in contract enforcement 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. business ideas come at a rapid rate. people have to remove nose piercings for work or social occasions. The tube could be made unobtrusive enough that it would not need to be removed for work. most ideas are not feasible because • They would not be profitable enough.98 CHAPTER 8. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online. pp. Often times. I continue to generate business ideas as a matter of habit. but it is a major complaint for female rock climbers. often one or more a day.0. It sounds silly. • They require more financing than the entrepreneur has access to. • They require business relationships that the entrepreneur does not have. etc. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself. Side Note 8.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. 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. • The business would involve too much risk. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. • They require expertise that the entrepreneur does not have. Side Note 8. 28–29].5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4. However. .. • A nose piercing that consists of a small. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. • Etc. hollow tube.0.

you will be spending years of your life trying to make the idea work. Entrepreneurs are often told their idea is flawed. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business.1. such as your family. Have students fill out the form on their own time.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. Now What? The number one trait needed by successful entrepreneurs is perseverance.1.1. 33]. computer-controlled security cameras. After all.1 You’ve Got an Idea.8. Warnings about risk are perhaps the criticism you should consider most carefully. it is too risky. 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. Finally. However.2 is. 2007. making just enough to get by but not much more. the business took off. or health. . You should be realistic about risks. Side Note 8. February 17. Have students come up with examples of products that meet various criteria on the checklist.” That is. you should have “thick skin.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. He ran the business as a one-man operation for years. His sales are now in the millions of dollars per year and the business is very profitable. YOU’VE GOT AN IDEA. or are otherwise discouraged. 2 http://www. used as the title of at least 12 movies and television shows.” Side Note 8. 8. to be truly self-motivated and persistent in the way you need to succeed.1.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. Side Note 8. 35]. in the wake of 9/11. that they will never make it. thinking that if he did not succeed after a couple of years. you should not let it dissuade you. And you should not risk anything you can’t afford to lose. “Never say die. A well-known phrase in English. p. p.com/find?s=all&q=never+say+die. People thought he was going nowhere and generally dimissed his business. he would never succeed. 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. while you should listen to criticism that others give. home.imdb.

FINDING AN IDEA .100 CHAPTER 8.

101 . but you should try to target your market as specifically as possible. go through the following 7 steps: 1. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. Businesses. Consumers and 2. See also 9.0.2 (B2C) Businesses whose customers are primarily consumers are called “B2C.” or business-to-consumer ventures.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. There are two broad categories of markets: 1.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B.Chapter 9 Defining Your Market After coming up with your idea. Definition 9.0.” or business-to-business ventures.0. your next step is to do some market research. 9.1. Definition 9. See also 9.0.2. When trying to identify your niche market. Not only do you need to decide whether you are marketing to businesses or consumers.

(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. 75] 4. it allows you to branch off into other niches as the business grows. By someone else. etc. give a seminar. Test – Offer samples.” [4.000 per year. there is not already alot of competition. (c) It’s carefully planned. the longer it will be until you make your first profit. 6. then asked them about customer reactions. Evaluation – Evaluate your niche against the criteria in step 4. • A friend in Chicago. She started by making a few samples and giving them to friends with dogs. • If your initial test does not go well. I mean customers. 5. decided to start a business selling unique winter clothes for dogs. It should confirm to your long-term vision. Focus – Be specific. p. Synthesize – Coalesce your ideas. • 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.” 2. That is. Donna. If it does not sufficiently meet the criteria. A good niche has five qualities (a) It takes you where you want to go. you need to stop and seriously reevaluate your plan. author of Nichecraft: Using Your Specialness to Focu coined what she calls the Platinum Rule: “Do unto others as they would do unto themselves. That is. and other important demographics. (b) Somebody else wants it. Then she approached a few local pet stores and arranged for them to offer her products for sale at a low price. discard the idea and move on to the next one. . “Selling maternity clothes to executive women” is much better than “selling clothes. DEFINING YOUR MARKET • The types of businesses and consumers you want to target in terms of age. • Don’t spend alot of money. Describe the customer’s worldview – Talk to prospective customers and identify their main concerns. Falkenstein. (e) It evolves. After all.. But do test your product before you go ahead full speed.” To focus your search for a niche. Lynda C. It is much better to target “pregnant women between 25 and 35 in households that earn more than 50. the longer you wait to go into business in earnest.102 CHAPTER 9. earnings.

3. Likewise. and other Asian customers together. FINDING YOUR NICHE 103 7. are similar in age to those who came of age in World War II. Side Note 9. for example.1 (Smaller is Bigger) When starting a business.1. and psychological factors.1.1.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life.1. you should practice extra caution to avoid stereotypes or other insensitive approaches.1. New marketing techniques include generational. economic. (See definitions 9. Definition 9.. Definition 9. such as having children.1.S. young adults in the Depression. Korean. but their behavior differs significantly due to the different influences in their youth.. .2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups. and cohort marketing.S.) Using these new marketing techniques can allow you to narrow your market. Side Note 9. Chinese. 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. If you did your homework. This marketing technique has been widely used since the early 1980s in the U.1. when the country was immersed in a war effort. or retiring.1. For example. Go for it! – Implement your idea.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. and 9. you should be able to enter your niche market with confidence. buying a home. life stage. As older people are more active than before. the World War II cohort.” That is. in the U. many entrepreneurs make the mistake of being “all over the map. many are choosing to start families later in life or even have children ten years or more apart. they try to satisfy all possible customers and end up trying to do too many things well. This can be offensive and serve to alienate rather than appeal to your customer. Definition 9.1.1.2. Many Western companies make the mistake of lumping together Japanese.1 (Generational Marketing) Marketing to consumers based on age as well as social. when many people were suffering from extreme poverty. and the narrower your focus on your target. the more likely you are to score a hit. the Depression-era cohort. It is better to do just one thing well than to do many things poorly.9. Marketing to demographic groups has become much more refined in the last few decades. demographic.. 9. etc. many Eastern companies make the mistake of lumping together American and European customers.

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

2. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. FedEx FedEx is committed to our People-Service-Profit philosophy.3. We will be helpful. and professional to each other and the public. The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. 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. global air-ground transportation of high-priority goods and documents that require rapid. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. 105 Side Note 9. contributing member of our community and offering the Hard Rock family a fun. A complete record of each shipment and delivery will be presented with our request for payment. competitively superior. courteous. Equally important.3. and nurturing work environment while ensuring our long-term success. THE MISSION STATEMENT 1. natural ingredients and promoting business practices that respect the Earth and the Environment. Our mission consists of 3 interrelated parts: • Product Mission – To make. We are committed to being an important. time-certain delivery. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. 3.9. healthy. . We will produce outstanding financial returns by providing totally reliable. We will strive to have a completely satisfied customer at the end of each transaction. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity.

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. products and services to reach your goals? • What philosophies or values guided the responses to the previous questions? 2 Recall section 9. nationally & internationally..S. so do your partners. a grocery chain.benjerry. and recognizes outstanding employees. such as Whole Foods. • How do you differ from competitors? – Why would your customers prefer your product to a competitor’s? • How will you use technology. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. 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. . challenges. See http://www. processes. Other companies. capital.106 CHAPTER 9.1.cfm for more detail. 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.com/our company/our mission/index. • What kind of relationship will you maintain with suppliers? – Remember that when you succeed.

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

108 CHAPTER 9. DEFINING YOUR MARKET .

the industry as a whole. you need to take a step back for a sanity check.Chapter 10 Market Research While the excitement of a great idea is often enough to propel an entrepreneur into business. Inc.. Donna Barson.1 (Market Research) Research into the characteristics. 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 . spending habits. But the companies that do the best are the ones that do their homework. location and needs of your business’s target market.0.” Definition 10. and the particular competitors you face. says “A lot of companies skim over the important background information because they’re so interested in getting their product to market. president of Barson Marketing.

110

CHAPTER 10. MARKET RESEARCH

10.1

What Am I Researching, Exactly?

Market research should focus on three areas: 1. Your industry. • What are the trends, such as growth and technology, in your industry? • For example, if you are opening a bookstore to sell textbooks by a 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.

10.2. RESEARCH METHODS

111

10.2

Research Methods

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

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.

112

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 http://www.surveysite.com conducts market research for other e-commerce sites. Even if you do not want to spend money on such a service, you can get ideas about what kind of questions you need to ask if you are starting an online business. Side Note 10.2.4 (Export Oriented Businesses) If you are thinking of starting a business that would involve exporting to the United States, the U.S. Department of Commerce’s International Trade Administration (ITA) publishes a variety of reports, surveys, and books about imports and exports to the United States. You can find the U.S. ITA at http://www.usatrade.com. Side Note 10.2.5 (Sample Focus Group Questionnaire) Pass out Lesonsky’s “Sample Focus Group Questionnaire.” [4, p. 101] The questionnaire supposes that someone is going to become a chocolatier.

pp.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.” [4.10.2. 102–103] The questionnaire supposes that someone is going to open an interior decoration business. RESEARCH METHODS 113 Side Note 10. .2.

MARKET RESEARCH .114 CHAPTER 10.

and so should you be. It must describe current status. Definition 11. 5. Those who provide financing are aware of these pitfalls. expected needs. Your business plan should list obstacles that may arise and what will be done to address them. Set up a timetable with specific steps to be accomplished in a specific period.0. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. 3. No realistic goals – Your business plan should help you ascertain whether your goals are realistic.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.4 (Business Plan) A business plan is a written document that details a proposed venture. 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. 2. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. including 115 . and projected results of the new business. 1. In terms of sanity checking. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture. 4. Every aspect of the venture should be covered.

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

2 5. 300]. 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. Establish the unique details of this venture. bear in mind that once the plan is advanced to the next stage of financing. pretentious. 11. p. or spendthrift. p. not ostentatious. 2. They will want to see something that reflects that you are neat. other financing professionals may spend more time analyzing the details of the plan. Determine the quality of the entrepreneurs. thorough and careful.1.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person.. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. but should not be too lavish. but not too good. the trash can.e. i. Determine the characteristics of the venture and its industry. 3. – Binding and printing should not be sloppy. Read the latest balance sheet. Kuratko suggests the following [3. 1. If you cannot impress the financier with these three steps. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk.”1 Many venture capitalists use the following six step process to evaluate a business plan [3. While the initial read-through might be only a five-minute perusal. Determine the financial structure of the plan.1. Read the plan over casually. you will not even get your foot in the door and be invited to present your plan to investors. . 4.11. Note that less than a minute on average is devoted to each step. 6. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. 301]: • Appearance – It should look good. including debt or equity financing required. 2 Do not underestimate the importance of this step.

e-mail address. 7.1. The benefits to customers. – It is worth repeating: Keep it down to at most two or three pages. 3. and full contact information4 for the company. – On the title page. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. 4. The venture’s objectives in 3 to 5 years. 5 I suggest the lower-right corner. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. – 40 pages is ideal. The amount of financing needed. 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. You should use this to keep track of who has which copy. – It should explain 1. 11. and How investors will benefit. a number should be in a corner5 indicating the copy number. 4 Phone number. 2.118 CHAPTER 11. THE BUSINESS PLAN – It should be no more than 50 pages. p. the date of the plan. though you should not put it in the same corner as page numbers appear. • The Executive Summary – Two or three pages immediately following the title page. they will not read it. – Inside the front cover should be a title page repeating the cover information. If you write to much. The financial forecasts.3 Some Style Points Kuratko also recommends that you [3. address. .3 • The Cover and Title Page – The cover should have the name of the company. The company’s current status. and/or web site. 3 Note that for this class. 6. 5. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. Its products or services.

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

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

For example. detailing projected profits and losses. or more aware. include an appendix.2 (The Growth of Active. Completion of design and development. current ratios.2. etc. Side Note 11. These might include • • • • • • • • • • Incorporation of the new venture. . including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. Product display at trade shows. as opposed to actual. Try to be honest and realistic.1 (Pro Forma) A latin term that means projected. detailing projected inflows and outflows. Unexpected competitions.2. Your investors are probably as aware. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. Appendix – If there are documents. What happens if the management team changes? What will happen to the company assets if ownership changes? 10. Ordering production quantities of materials. Critical-Risks Segment – Discuss business risks and the ways you might address them. (b) An income statement. THE PLAN CONTENTS 121 (a) A pro forma balance sheet..11. 9. Signing up distributors and dealers. Design or research difficulties. a balance sheet containing projected balances is called a pro forma balance sheet.com) Discuss the growth of Active. inventory turnover. First sales and first deliveries. 11. 8.2. Costs exceeding estimates. which investors will use to estimate debt/equity ratios. Completion of prototypes. of the risks than you are. Difficulty purchasing parts or materials. Receipt of first orders.com. Hiring of sales representatives. Definition 11. working capital. and Payment of first accounts receivable. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. Risks might include • • • • • Negative industry trends. (c) A cash-flow statement. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan.

THE BUSINESS PLAN .122 CHAPTER 11.

Do not be dismayed. not a one-time event. 12. Present it many 1 Guy Kawasaki.Chapter 12 Presenting the Plan 12.1 (What Goes Into the Presentation) Present Kawasaki’s Investor Pitch. you will probably not do a good job. The first time you present your plan.1.1 Do It Until You Get It Right This is perhaps the most important piece of advice. This means that you should not count on presenting your plan to your most critical investor for the first time. The presentation of your plan is an ongoing process. 62].2. anyone who will listen. pp. 123 .1 The Presentation Side Note 12.2 Some Suggestions These suggestions come from those who have experience both giving and listening to business pitches. p. 51–56]. author of The Art of the Start. local business associations. Your presentation should evolve over time as you listen to your audience and receive feedback.1 You will have to pitch to many medium-size fish before you are ready for the big fish. You will probably have to present it at least ten times before it is ready for the medium-sized fish. and Potential Partner Pitch [2. your business class. 12. your family. your dog. recommends twenty-five times [2. Sales Prospect Pitch. Present it to your friends.

Adobe Reader. Most Ph. • Bring paper copies3 of your presentation in case all else fails.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. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. p. • Bring a backup thumb drive with your presentation on it. • Test the equipment the day before. and you don’t want something as silly as a burned-out light bulb to cost you an investor. 12. 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. The original joke goes.2. 44] Side Note 12. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving. I had given it over a dozen times.D. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. the lawyer joke. 2 This originally comes from an American classic.D. Bring at least twice as many as you expect there to be people in the room. Most graduates get between 5 and 15 interviews when they graduate. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers.2.124 CHAPTER 12. “His lips are moving. There will always be glitches. • Bring your own laptop. Guy Kawasaki likes to tell a different version of an old joke. of course. In retrospect. they may have another version of PowerPoint.” 3 Color copies! . You don’t want to try to figure out other people’s equipment. PRESENTING THE PLAN times. “How can you tell when a lawyer is lying?” The answer. Post a copy of your presentation in a secure location on your homepage just in case. 12. I don’t think it was quite right until somewhere between the 8th and 10th time.1 (The Job Talk) Every Ph. Lexecon. is. and even if you can figure it out.2.”2 [2. By the time I gave my job talk to my eventual employer.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents.

5 Take Notes Have a pen and paper ready and take notes during the pitch. ask yourself after every statement you make. Everyone.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. 12. 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. • Taking notes also makes you look conscientious. Much of the material required use of the internet.2.6 So What? When you are planning your presentation.2. Give your presentation to friends or family. They may ask you something you want to respond to in an e-mail later. Ask them what your company will do. “So what?” If you cannot answer this question simply and easily. p. where some of the smartest people in the world worked. but in reality. It is easy for things to get lost in the heat of the moment. it is quite the opposite. I always bring a pen and paper to meetings. Stop when it goes off. They may ask you something that makes you want to change your presentation. In general. AFTER THE PRESENTATION 125 Side Note 12. Many people feel as if taking notes makes them look stupid.3. 45]. you need to change or eliminate the statement.2.3 After the Presentation Each presentation will be different. Guy Kawasaki recommends you set a timer [2. everyone brought a pen and paper.12. you are not presenting it well. 12. and each investor will respond differently. so write things down to make sure you don’t forget. If they cannot explain it clearly. and although you go into each presentation . You should be prepared for the unexpected. 12. • Your audience may ask you several questions at once. 12.2. At my company in Chicago.

Each time your are rejected improves your future opportunities. Each negative comment gives you an opportunity to change an investor’s opinion. PRESENTING THE PLAN with only success on your mind.5 [3.1 (What to Do When You’re Turned Down) Present Kuratko table 10. you should also realize that most most comments will be negative and most presentations are rejected.” . Be prepared for rejection and do not consider it the end of the road.126 CHAPTER 12. Side Note 12. p. Remember that persistence is the most important character trait of entrepreneurs.3. 321]: “What to do when a venture capitalist turns you down: Ten questions.

Chapter 13

Inventory Control
Most entrepreneurs do not know how to set up effective inventory control systems. Even more problematic, startup businesses don’t have a past sales figures or 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

128

CHAPTER 13. INVENTORY CONTROL

13.1

Inventory and Cash Flow

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

13.2

Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems

129

– “Dollar control systems” show the cost and gross 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.

13.3

Computerized Inventory Control

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

• 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. INVENTORY CONTROL When considering the purchase of a POS. For example. • Security – To prevent theft.130 • Maintain a sales history. and • Improve pricing accuracy.2 (Order Cycle) In inventory management. Definition 13. the delivery cycle is the amount of time between placing an order and receiving it.3 (Count Cycle) In inventory management.3. work with suppliers to improve delivery times and count inventory more often. Definition 13. your count cycle is 12 weeks.3. you have “turned over” your inventory.3. Definition 13. the count cycle is the amount of time between counting inventory. CHAPTER 13.1 Inventory Turnover Typically. such as for volume discounts for preferred customers. • Updating product information – At the time a sale is entered. Definition 13. 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. a high inventory turnover is a mark of a well-managed inventory system. . To improve efficiency of inventory control.3. be sure it’s not easy to “hack” the system.4 (Delivery Cycle) In inventory management. these systems should automatically update inventory and accounting records. 13.3. the order cycle is the amount of time it takes to process paperwork and place orders. 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. if you perform an inventory count four times a year.

In the U. LIFO and FIFO are two accounting methods used to do this. The author is unfamiliar with Chinese tax codes.4. In other words.3. If there is inflation.4.4. first out) assumes that you sell the least recently purchased inventory first. follow the recommendation of your accountant. 13.. Calculate your sales per square meter once per month.S. which may result in higher taxes.3.4 Inventory Accounting Your accountant will typically handle inventory accounting. You should know how many sales per square meter per year you need to survive. but you should at least know about LIFO and FIFO.3.4. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. Definition 13. least this is true in the U.1 (LIFO (Last In. first out) assumes that you sell the most recently purchased inventory first. which allows you to pay less taxes on your inventory.5 (Needs Period) In inventory management. 2 At 3 At least this is true in the U.3 See also 13. and delivery cycle. 13.1 Buying Inventory In the process of putting together your business plan.2 See also 13. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. 13. order cycle. In deciding which to use. The author is unfamiliar with Chinese tax codes.2. you must estimate your inventory value when you file your taxes. See definitions 13. and 13. the needs period is the sum of the count cycle. If there is inflation. Many businesses also measure turnover by measuring sales per square foot (or square meter).S. Definition 13.3. INVENTORY ACCOUNTING 131 Definition 13.13.1.4.4. First Out)) FIFO (first in. it values your remaining inventory based on the prices of the most recently purchased items.2 (FIFO (First In.2.4. First Out)) LIFO (last in.S. . After you have been in business your inventory control system should give you a better idea of stocking levels.3. it values your remaining inventory based on the prices of the least recently purchased items.

• Some suppliers demand a minimum number of items per order.5.132 CHAPTER 13. 3. 13. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense.” .3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. Import sources – They operate like domestic wholesalers. INVENTORY CONTROL Definition 13. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. brokers or jobbers. 13. Independent craftspeople 4. 2. says. Their prices are higher than a manufacturers.5 Suppliers Suppliers can be divided into four categories: 1. 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. author of Start Your Own Business. “Be open.actual inventory . – The minimum may be higher for first orders to cover the cost of setting up a new account. Manufacturers – Note that some manufacturers refuse to fill small orders. courteous and firm with your suppliers.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. Rieva Lesonsky. usually one.4. and they will respond in kind. Distributors – Also known as wholesalers. three or four months. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands.

Ask about the freight policy before ordering. • For items being shipped.d. 2. do not falsify or misrepresent your financial statements. You can also present your financial statements and prospects for success. Discuss • Their negotiating technique when discussing pricing. Be sure to add up • Costs. such as the occasions on which we had to send back bad food or refuse an entire shipment (and make do with what was on hand) in order to make a point about late deliveries. Tips for dealing with suppliers: 1.)) Cash on delivery. If you are dealing with a reticent large supplier.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. If a supplier does not extend credit. and • Allowances before you make a decision.5.13.d. Whatever you do. . • Discounts. 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. they will put you on a c. you should know who is liable for damage to goods in transit.S.o. Side Note 13. SUPPLIERS 133 13. the supplier will pay for freight.5. customers may be required to pay upon receipt of goods. • Sometimes if an order is large enough. If a supplier is uncertain about you..5. it is considered a felony.5. basis until you have proven yourself reliable. Definition 13.1 (COD (or c.o. personal interaction can work wonders. Suppliers sometimes try to complicate pricing to their advantage. I regularly had to deal with food vendors.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. and • The need to be firm but fair.

com/shippers/glossary.html. Definition 13.)) Free on board.abcsmallbiz. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt.b.html.6 See also definition 13.3 (FOB Destination (or f.epoi.5. 2007. May 19. Seattle” to indicate that an item being shipped from Seattle is free on board. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. The FOB term requires the seller to clear the goods for export. 3. Definition 13.7 4 Source: 5 Source: http://www.5. it may be worthwhile to cancel backorders and bundle them with a subsequent orders. .o.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.134 CHAPTER 13.com/jargon. May 19.2 (FOB (or f. people often say something like “f.roadway.2.wikipedia.5. 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.o. May 19. Definition 13. INVENTORY CONTROL • Depending on whether the supplier pays frieght.5.3. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point. May 19. 5 FOB Destination changes the location where title and risk pass. 7 Source: http://en. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract.org/wiki/Backorder.4 Colloquially. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. 2007.html. 2007.b. 5. 2007. See also definition 13. 6 Source: http://www. Specify a cancellation date on your order forms.com/reference/glossary/glossary efg. Under this arrangement.o. As opposed to FOB.5. Destination)) Free on board destination. This differs from a forward order where stock is available but delivery is postponed for other reasons.b. Be aware of your supplier’s priorities. http://www.

This chapter will cover the ins and outs of hiring • Full-time employees (FTEs).0. besides being bad for business.3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. • Part-time employees. 337]. 135 . • Temporary employees (temps). they are often emotionally draining for the manager as well as the employee involved.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. p. On the other hand.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur. a bad hire. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. 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. The benefits of finding the right person for a job cannot be overstated. Side Note 14.0. Side Note 14. and • Independent contractors.

and recruiting. writing reports. you’ll be grateful to have spent the time to go through a more formal process.1 How to Hire Hiring involves analyzing the job requirements. 14. selling.1. However. programming. you have nothing to offer. If you give someone a job as Vice President.136 CHAPTER 14. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed. • You may not leave enough buffer above the employee.1. • If you have do terminate the employee. 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. Side Note 14.2 Job Description Side Note 14. by the time you hire your 40th employee. an employee with an inflated job title may expect an inflated severance package. • How the job will be done. you need to consider • The physical or mental tasks involved. you will likely find that they will come to you at some point to demand a vice president’s salary. Cleaning. . Not only education and skills. If you call someone a Vice President but don’t compensate them as such. etc. they will soon expect compensation commensurate with their job title.. lifting. then want to hire someone else later at a position above them in the company.1 Job Analysis Before creating a job description. creating a job description.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.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.1. 14.1. but personality traits. HIRING EMPLOYEES 14.

• A salary range. Definition 14. • Desired experience. Like a job description. you may find it difficult to give them a promotion later. Side Note 14. you hire someone as Director who is not qualified to be a director. • Benefits. Part of retaining quality employees is the prospect of advancement. HOW TO HIRE 137 • There is little room for advancement. • The position of that employee in the corporate heirarchy.1. and • A summary description of the position. p. • Specialized skills or knowledge.1.1 (Job Description) Job descriptions should include • A job title. for example. it includes • The job title. If you hire someone at the highest level of their competency. • If you give someone an inflated job title but do not offer a salary commensurate with the title. p.1. 339]. If. and • Any occupational hazards. 338]. Definition 14.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. • Physical or other special requirements associated with the job.14. and • Job summary with major and minor duties. you may find they are tempted to leverage that job title to seek employment elsewhere. .2 (Job Specification) Job specifications are similar to job descriptions (see definition 14.1.1) and should include the personal requirements expected of an employee [4. then they go on to a Director position at another company. You may actually be doing your employee a disservice by inflating their job title. • Who the person reports to. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. It also includes • Any educational requirements.1.

. With e-mail.S. • Be sure to list appropriate contact information. Many American companies are no longer providing phone numbers.1.1. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. • Do not list requirements other than educational or experience-related ones. • Do not ask for specific personality traits.” or people who may not have them will just try to fake those personality traits in the interview. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job.2 Side Note 14. – For professional positions. HIRING EMPLOYEES 14. due to the number of applicants for competitive positions.138 CHAPTER 14. For example. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. e-mail addresses have become perhaps the most popular way to get applicant information at U.1.4 (Using an E-mail Address) For professional positions. – For other positions. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. It also makes it easy to receive and process a large number of applications with a minimum of effort. 14. such as “outgoing” or “detailoriented. 2 See sidenote 14.S. companies. if you are looking for an accountant.5. particularly those that advertise on web sites.1.4 Finding People There are many possible sources of applicants. . • List the top 4 or 5 skills that are most essential to the job.3 Advertising the Job When you write an advertisement. • 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.

• Focus on the skills that a person can bring to your company.com with the keyword Java on May 19. • Online – In the U. If you are lucky.14. Screening People Reviewing resumes and applications is an art. You hire the preferred candidate. There were 4.1. Searching on Monster.3 Generally. Try to perform a search on a job sites such as http://www. You narrow the number of resumes down to about 10. You check references. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. be sure that a candidate can provide what you are looking for.dice.monster. many positions are being filled online. You can evaluate their personality during the interview..com or http://www. 2007 turned up more than 5. particularly in the high-tech industry. You narrow down the 10 candidates to 3. In the U. not a science.S.000 hits searching just the “Information Technology” search category. For any job.” And 921 in “Engineering.” . but when looking at a resume. the hiring process proceeds as follows: 1.” 665 in “Internet/E-Commerce. 6. 4. for professional positions. 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. You interview the candidates. 3..S. To “weed out” candidates.314 listings in the “Computers. about 10 or so. • Industry Publications – Most trade publications take ads for job openings.com with the keyword “java” will demonstrate just how widely used online tools are. 3 Java is a programming language. Software” category. you will get several candidates for any job you are offering. 159 in “Financial Services. 5. 2. most professional associations’ job banks are now online. You conduct a second round of interviews with the remaining 3 candidates.

we tossed those that had spelling or grammatical mistakes. 4 It takes time to become an expert with any sufficiently compex technology. That typically indicates that someone cannot supply enough positive references.com. and • References. CHAPTER 14. Side Note 14.1. or were too experienced. Of those we looked at. • Educational background. I have some personal recommendations: • Always check references. did not match our requirements closely enough. • On the other hand. Due to this.140 • Look for patterns in their career. I learned that people lie on their resumes all the time. HIRING EMPLOYEES – Do they change jobs too quickly? • Throw out applications if someone cannot provide enough references. address. 344–345]. Side Note 14. phone number. • Don’t necessarily discard resumes with some gaps. pp. so many resumes came in that an administrative assistant was asked to perform the first screening.6 (Hiring at Active. . and e-mail address.5 (Job Application) Present Lesonsky’s sample job application [4. including when an applicant can work and the hours they can work. • Work experience – As for salary information when asking about work experience • Availability. • Special skills.com) In the hiring process at Active. She simply passed along resumes that contained certain keywords that we were looking for. • Rely on your intuition. if a person survives downsizing or other major changes at their former employers. If an applicant indicated they were an expert with too many technologies. listed expertise in too many subject areas. Applications should ask for things such as • Name. this indicated to us that the applicant was not being truthful.1.4 were not experienced enough. that is a very good sign that they are a survivor. From the hiring process at Active.com.

or national origin. • Do not hire people who are discovered to be lying on their resume. however. • Maiden name (for female applicants). or • If a person is a citizen. However. p. HOW TO HIRE 141 • Ask the person questions they would only know if they are competent in their field.1.S. ask prospective employees whether they can submit proof that they have the legal right to work in the United States. but which can get employers in legal trouble. 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. Ever. 6 Employers can. including [4.1. color. in the U. then go home and play on computers in their spare time. Get clarification on anything that you think may be suspect. religion. Though laws undoubtedly differ in China. employers may not ask about anything not related to the job. • How many days the applicant was sick in the previous year. Not also that many of the best people we hired were not the best on paper. there are certain things you may not discuss with a job applicant in order to avoid discrimination and other issues.S. creed. Several of the engineers I hired did not finish their undergraduate degree. • Sex. include • Whether the applicant has children.7 (No-nos) In the U. • Whether the applicant has every been arrested.5 Side Note 14. 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.14. They were the type of people who would write software all day.6 Questions that are not explicitly prohibited. • Whether the applicant has every been treated by a psychologist or psychiatrist. 347] • Age or date of birth.. • Disabilities of any kind. • Ask people questions about their resume during the interview. • Marital status.. race. such as through a “Green Card. • Whether the applicant has every been treated for drug or alcohol addiction.” .

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

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

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

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

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.