International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

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Copyright c Collin Starkweather 2007. All rights reserved.

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

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3. . . . . . . . . . . . . . . . . . . . . .1 Product Life Cycles . . . . . . . . . . . . . . . .1 PERT and CPM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . .4 Determining the Project Schedule . . . . . . 5. . . . . 4. . . . . . . . . 5. . .3 Product-by-Value Analysis . . . . . . . . . . . 4. . . . 4. .1 Qualitative Forecasting Methods . . . . . . . . . . . . . .1 The Project Manager . . . . . . . . . . . .1. .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . .1. . . . . . . . . . . .3. . . . . . . . . . .2 Focus Forecasting . . 6. . . . . . . . . . . . . 5. . . . . . . .3. . . 4. 3. . . . . . . . 5. . . . Strategy Development and Implementation .6 Associative Models . . . . . . .1. . . . . . .1 Identify Critical Success Factors . . . . . . . . . . . . . . . . .1. . . . . .1 Research . . . 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. . . . . . . . . . . . . . . . . . . . .6 Variability in Activity Times . . . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . .2 Life Cycle and Strategy . . . . .4 Adjusting for Trend . . . . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . .4 3. . . 3. . .1. . . . . . . . . .5 Seasonal Variations in Data .4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. . . . . . . . . . . . . .3 Dynamics . . . . . . . . . .3. .7 Cost-Time Trade-Offs and Project Crashing . . . . . . . . . . . . .3. . . . . . . . . . .2 Build and Staff the Organization . CONTENTS . . . . . . .3. . . . . . . . . . . . . . . .3 Project Controlling .1 What is Forecasting? . . . . . . . . . . .1. . . . . . . . . . . . . .4. . . . . . .2 The Work Breakdown Structure . 3. . . . 4. . . . . . 4. . . . . . . . . . . . . 4. . . . . . . . . .6. . . . . .2. . . . . . . . .3. .1 Types of Forecasts . . . . . . . . 4. . . . .2. 5.3. . . .3 Measuring Forecast Error . . . 5. . . . . . . . . . . .1 Project Planning . . . . . 5. .5 Slack Time and Identifying the Critical Path . . . . .1. . . . . . . . .4 4 Project Management 4. . . . . . . . . . . . . . . . . . . . . . . 3. . . . . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . .2 Project Scheduling . . 6. . . . . . 5. . . .2 Quantitative Forecasting Methods . . . 5. . .2 Network Diagrams . . . . . . . 5. . . . . . . . . . . . . . . . 6. . . 4. . . . . . . 4. . . 4. . .2 The Strategic Importance of Forecasting 5. 4. . . . . . . . . . . . . . . . . . . .3. 6 Design of Goods and Services 6. . . . . . . . . . . . . .1 Goods and Services Selection . . . . . .3 3.4 Monitoring and Controlling Forecasts . .3 Forecasting Approaches .2 Preconditions . . .8 A Critique of PERT and CPM . . . . . .1 Probability of Project Completion .1 Adaptive Smooting . . . . . . . . .2 A Seven Step Forecasting System . . . . . . . . . 4. . . . . .3. . . . . . . . . . . . .

. . 12. . 12. . . . . .2 Look and Feel . . . . . . . . . . . . . . . . . .1 Product Development System . . . . . . . . . . . . .1 Importance of New Products . . . . . .4 The First Minute is the Most Important .1 What Am I Researching. . . . . . .3. . 6. .2 Know Your Outline Thoroughly . . . 111 11 The Business Plan 11. . . . .2. 101 9. . . . . . . . . . 6. . . . . . . . .2 Redefining and Expanding Your Niche .1 The Presentation . . . . .3 Generating New Products . . . . . . . . 104 9. . . . . . . . . . . . . . . . . . . . .2. . . . . 111 10. . .3. .2 Quality Function Deployment (QFD) . . . . . . . . .1 Characteristics of the Successful Entrepreneur .3 Be Familiar With All Equipment to be Used 12. . . . . . . . . . .1 You’ve Got an Idea. . .3. . . . . . . . . 6. . . . . . . . . . . . . . . . . 110 10. . . . . . . . . .2. . . . . . . . . .1. .1 Finding Your Niche . . . . . . . .2 6. .CONTENTS 6. .2 The Plan Contents . . . . . . . . . . . . . . . . . .3 The Mission Statement . . . . . . . . . . . . . . . . .3 Organizing for Product Development .2 Some Suggestions . Now What? . . . . . . . . .1 Sources of Secondary Research . . . . . . . . .3. . . . . . . . .3 Setting Goals . . . .2. . . . . . . . 99 9 Defining Your Market 101 9. . . . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . . 12. . . 11. 12 Presenting the Plan 12. . . . . . . . . . . . . 6.2. . .5 Take Notes . . . . . . . . . . . . . . . . .6 So What? . . . . . .2. . . . . . . . . . . . . . .1 Preparing to Put the Plan 11. . . . . . 92 7. 12. . . . . . . . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . .2 Are You Ready? . . . . . . . . . . 11. . . . 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 7. . . . . . . . . .1 Do It Until You Get It Right . . . . . . . . . .3 Some Style Points 11. . . . . . . . . . . . . . . . . 95 8 Finding an Idea 97 8. . . . Product Development . . . . . . . . . 6. . . . . . . . Exactly? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Manufacturability and Value Engineering . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . 104 10 Market Research 109 10. . . . . . 12. . . . . . . . . . . . . . .2 Research Methods . . .1 Your Audience . . . . . . . . . . 12. . .1.3 After the Presentation . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . 13. . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 How to Hire . . .1 Buying Inventory . . 13.4. .1.3 Computerized Inventory Control 13.4 Inventory Accounting . . . . . . . . . . . . . . .1 Inventory Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Hiring Employees 14. . . . . . . . . . . . 13. . .5. . . . . . . . .1 Job Analysis . . .1 Inventory and Cash Flow . . . . . . . . . . 13. . . . . . . . . 13. . .1. .1 Dealing with Suppliers . . . . . . . . . . . . . . . . . . . . . . .5 Suppliers . . . . . . . . .4 Finding People . . . . . . . . . 14. . . .1. . . . . . . . . . . . . . . . . .5. . . . . . . . . . 14. . . . . . . . . . . . . . . . . . . . . . . . . . . .6 13 Inventory Control 13. . .2 Payment Plans . . . . . . . . .2 Tracking Inventory . . . . . . . . . . . . . . . . . . . . . . . . 13. . . . . . 14. . . . . . . . . .3 Advertising the Job 14. . . . . . . . . 13. .3. . . . .2 Job Description . . . . . . . . . . . . . . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . .

Part I International Business Management 7 .

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such as Saudia Arabia. As multinational corporations become more prominent. 1. 9 .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. they are not allowed to drive or go out in public without covering their hair or face. For multinationals. • Homosexuality is acceptable in Scandinavia but offensive in many other parts of the world. Likewise. 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. whether they are a small business owner who runs a restaurant or a multinational corporation like Microsoft or Lenovo.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. in some Islamic nations. but as leaders in the community. they become increasingly important not only as a business entity. small business owners are leaders in their community whether they intend to be or not.1 Culture and Ethics Side Note 1.1. business ethics becomes more problematic as multinationals cross cultural boundaries. Furthermore.

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. Prison labor is also considered improper in the U.2. which are more strictly enforced in the West. .S. • Because guanxi is less important in the West. For example.S. • Because of this.1. 1. 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.S.1 (Ethics) The study of morality and standards of conduct.A. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U.2. 2. Which brings us to the subject of this lecture: Ethics. Definition 1. This is something Chinese business people should be aware of. 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.A. Easterners tend to trust people after observing a pattern of consistent behavior. • However. and Europe but a commonly accepted practice throughout the developing world. 3.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. child labor was widely used. there is a perception in the West that Chinese are hard-working and smart. Westerners rely more on contracts.2 Corporate Corruption Side Note 1.10 CHAPTER 1..A.2. • In general. Why is corruption an important business issue? • See sidenote 1. Note that during the industrialization of the U.

– The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. – A bribe is a business expense that goes to no productive purpose and decreases profits. . Side Note 1. voter. there are few if any issues which affect and infuriate so many in China as corruption.transparency. WorldCom. . China continues a battle against corruption. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. For example. and Tyco. investors in the United States had to reevaluate the risk associated with owning stock. 2006. gift. In the words of a Beijing correspondent for “The Economist” magazine.2.1. they must factor additional uncertainty into their calculations. • Of course. Source: texttthttp://www. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way. “. 2 Source: http://www.org. or other person in a position of trust. Scandinavians are typically highly trustworthy1 but Italians are less so. which requires strict monitoring and verification of financial information. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. reward. • It increases the cost of doing business. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. . 2006.org/policy research/surveys indices/cpi. – In the wake of Enron.2. these are all generalizations and individuals may differ significantly from their cultural affiliations. Definition 1. witness.1 (Bribe) A price.”[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. September 20. it is simply inefficient. September 20.dict.2 Though things are improving. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. • On a macroeconomic level.2. – 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).2 (Corruption) Corruption is of concern for business people because • It increases risk.

Qwest.bankruptcydata.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison.S. including a $2 million birthday party for his wife. • Enron – In December 2001.1. Worldcom. • Tyco – The CEO of Tyco.4 – Bernard Ebbers. 3 Source: 4 Source: http://www. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. scandals such as Enron. 2007.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. . succeeding Enron as the largest bankruptcy in U.. WorldCom declared bankruptcy in July 2002.2. Parmalat. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1. the former CEO of WorldCom. Dennis Kozlowski. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy.3 The United States The United States has recently been rocked by a number of scandals in the business community. a high value is placed on honesty and personal integrity. March 17. See sidebar 1.2 (Cultural Heritage in the U. There is currently debate as to the effectiveness of the regulations relative to the costs.bankruptcydata.3. was convicted of fraud and conspiracy and sentenced to 25 years in jail.S. • WorldCom – Following the Enron scandal. While western developed economies often cite a high ethical standard.S. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. http://www. was accused of looting the company to fund a lavish lifestyle. In Scandinavia.htm. history.htm. and Tyco make it clear that even western developed economies have significant ethical shortcomings. March 17. 2007. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U. the SarbanesOxley Act (SOX) was passed in the U.12 CHAPTER 1.com/Research/15 Largest.3.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. Side Note 1.S.com/Research/15 Largest. Side Note 1.

pdf. . Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. with many women finding their employment opportunities constrained.2 Women in the Workplace Sexual harassment has also become an issue in Japan. Moreover.S. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner.4. JAPAN 13 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. were not as highly regulated as banks. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty. the political scandals do not appear to have been fully acknowledged and addressed. • Many men do not understand why sexual harassment constitutes a problem.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals.4.1 (The U. The government was compelled to provide public money to bail out the institutions. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. Likewise. Side Note 1. 58]. Side Note 1.4. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan.. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. Hodgetts et al.4 1. Savings and loan institutions.4.4.gov/bank/analytical/banking/2000dec/brv13n2 2. This resulted in several banks being technically bankrupt [5. 5 1. Better known is the case of Japanese banks. and as a result made high risk investments in the late 1980s and early 1990s. p. with many men of the opinion that women were just biding their time until they marry and have children.fdic.1.S. also known as thrifts and which function like banks.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. women have a difficult time being taken seriously.

cite two cases in which foreign firms operating in the U. It is considered a very serious issue. This definition has been further elaborated: Sexual harassment can occur in a variety of circumstances. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States.g. • The harasser can be the victim’s supervisor. Are women with equal qualifications as men given equal pay and position? Take a show of hands.S. Hodgetts et al. or a non-employee. yes or no.edu/harassment/legal. requests for sexual favors. Side Note 1. .4. Furthermore. in the millions of dollars) to those who are successfully prosecuted. a supervisor in another area.. including but not limited to the following: • The victim as well as the harasser may be a woman or a man. • The victim does not have to be the person harassed but could be anyone affected by the offensive conduct. considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace. The victim does not have to be of the opposite sex.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim. • The harasser’s conduct must be unwelcome.psu. Definition 1. gender. have paid substantial penalties as a result of sexual harassment or discrimination based on race. hostile or offensive work environment.4.3 (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. a co-worker. sexual harassment lawsuits result in significant penalties (e. and for most public institutions and many large corporations. 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. unreasonably interferes with an individual’s work performance or creates an intimidating. an agent of the employer. or other issues.de2.

4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. Although women have entered the workforce in large numbers in recent decades.4.1.5 1. than any other. Side Note 1. there seems to be a glass ceiling due to social factors. particularly in upper management. yes or no.dict.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. in an extended sense. at 40. 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.5.7 Note that lobbyists do not have any formal power.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. is the notable exception). Definition 1.S. Hodgetts et al.S. with most in the top 20 among over 150 countries included in the survey.3 Lobbying by Japan Japan spends more money lobbying in the U.4. EUROPE 15 1. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. They only have the power of persuasion.4. Side Note 1.org. their attitudes towards bribery when working in foreign markets differs from that of the U. politicians.5.S. men are disproportionately represented in management positions.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. . 7 Source: http://www.5. to try to influence decision-makers in any circumstance. 1. with the purpose to influence their votes.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.

S. • Discrimination lawsuits are more commonplace in Great Britian.5. • More British companies have actively sought to recruit and promote women into management. For those students who think so.16 CHAPTER 1.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands.com/library/glossary/bldef-glassceiling.about. 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1.5. but there is a perception that there are risks and ethical considerations.1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization. 8 Source: http://careerplanning. Side Note 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.. Companies may be able to recruit more qualified women than men at a given wage level if they promote the company as taking a proactive stance on gender. yes or no. .htm.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. 8 Side Note 1.5.3 (Why Would a Company Actively Recruit and Promote Women?) Ask the class why a company would actively recruit and promote women even if not required to do so by legislation. though compensation is limited relative to lawsuits filed in the U.

64]. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. International corporate spying problems.6. An opaque legal system. 5. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. executives. Ethical considerations include 1. Side Note 1. Child labor. Piracy and counterfeiting (see sidenote below). ETHICAL CONCERNS IN CHINA 17 Side Note 1.6. Often.6. • Note that for every corporate spy that is caught.2 (Piracy and Counterfeiting) Present sidenote at [5.1.S. pp. 2.1 (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. Side Note 1. 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. 7.5 billion in sales annually. • A relatively stable government. . • Yet another case in which software from a U. Bribery and other forms of corruption. 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. 3.S. there are undoubtedly many others that get away with it. [5. An increase in crime and illegal business activities. Prison labor. 6.6. company in Boulder was stolen and sold to a Chinese company.3 (Corporate Spying) Hodgetts et al. p. and • A recent history of rapid economic development. 4.

• CARE (promotes community development.cfm for more detail.2. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition).7. and economic issues such as poverty. health..7.2. . education.3 (Nongovernmental Organizations (NGOs)) Private. and promotion of social equity).6. . provide relief in the event of humanitarian disasters. See http://www. and the environment.benjerry.com/our company/our mission/index. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. Definition 1.S. China continues a battle against corruption. “. social justice.7. Side Note 1. . political. not-for-profit organizations that seek to serve society’s interest by focusing on social.18 CHAPTER 1. a grocery chain.2 (Nongovernmental Organizations (NGOs)) Private. education. In the words of a Beijing correspondent for “The Economist” magazine. social justice. Other companies.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. such as Whole Foods. such as education and health care. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. health.7 Corporate Social Responsibility Definition 1.1 (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.”[6] See also sidenote 1. 1.4 (Corruption) Though things are improving. and economic issues such as poverty. 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. Definition 1. and emergency relief in the event of humanitarian disasters). • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. not-for-profit organizations that seek to serve society’s interest by focusing on social.7. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. political. there are few if any issues which affect and infuriate so many in China as corruption. and the environment.

executives may actually feel that it is the right thing to do.7. In 2005. – Even socially responsible executives would consider the “bottom line” when making decisions. but does not outlaw payments to political party leaders.7. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species).S. note that while U. and • Rainforest Action Network (RAN). • To prevent a boycott or other consumer defections. last but note least.9 U. In fact.2. For example.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. with a score of 3.1. firms a reason to refuse to pay bribes.S. as executives of publicly traded companies are ultimately responsible to their shareholders. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. Hodgetts cites a case in which Citigroup (recall that Citigroup is one of the 10 largest MNCs in the world as of 2003) divested from certain financial projects identified by RAN as harmful to the environment. Side Note 1. Both political groups and businesses are influenced by NGOs. • Conservation International (promotes environmental conservation). Side Note 1. many feel that it has had a net benefit. too. China ranked 78 out of 158. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. firms are constrained by the FCPA with regards to bribery and other corrupt practices.7. as it gives the U. Executives are people. MNCs do not appear to have been significantly impacted. 1.1 Corruption and the FCPA Revisited Hodgetts et al.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. • And.7. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery.S.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.000 and $125. .

the United States and Europe have recently been rocked by corporate corruption. July 1. slightly better than Sweden. and the environment. 2. 2006. WorldCom.infoplease. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt.S.4. 1. It is a difficult problem to solve. malfeasance and diversion of corporate funds becomes increasingly difficult.html. As more state-owned businesses become privatized and the size of the middle class increases. With more disciplined corporate governance. and Parmalat resulting in investors losing billions of dollars. better than the U.6 and 8. Moreover. The government recognizes that it is an issue and is taking action.20 CHAPTER 1. Side Note 1.4 (Some Opinions) Personally. Global Compact specifies 10 principles which MNCs should abide by: 1. The government is actively addressing the issue of corruption. Singapore is number 5 with a score of 9. Support and respect the protection of international human rights. Commitments that many MNCs have signed on to. Important: Although it is widely cited. and Germany at 7. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks.7. Hong Kong is number 15. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions.N. It cannot be considered to be based on a scientific survey. 3.N. 5.3. more Chinese will own stock in companies. with scandals such as Enron.5 (Table 3-1: Principles of the Global Compact) The U. 10 http://www.10 Corruption is certainly not endemic to Asia.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. With greater financial transparency. Global Compact.2 respectively. 4. with a score of 8. and not based on hard data.com/ipa/A0781359. I think corruption will diminish as China economically develops for several reasons: 1.7. but most important first step is to recognize that there is a problem. Side Note 1.7. Tyco. such as the U. Scandinavian countries are at the top of the list. societies.0 is considered to be the borderline at which countries are considered to have a problem. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. . specify standards and codes of conduct in domestic and global operations.

21 3. Business should work against all forms of corruption. Elimination of discrimination with respect to employment and occupation. 7. Ensure that MNCs are not complicit in human rights abuses. Elimination of child labor. 8. Encourage development and dissemination of environmentally friendly technologies.e. CORPORATE SOCIAL RESPONSIBILITY 2. A precautionary approach to environmental challenges.1. and 10.7. Undertake initiatives to promote greater environmental responsibility.. Freedom of association and recognition of the right of collective bargaining (i. including extortion and bribery. 4. . the right for unions to exist). 6. Elimination of all forms of forced and compulsory labor. 9. 5.

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .22 CHAPTER 1.

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

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

2. 5]. location selection. OM decisions have been divided into ten categories by Heizer [1. p. known commonly in the U. operations managers make decisions. p. quality.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design.” • Every organization with more than a few employees has an organization chart. OM is one of the most costly aspects of an organization. To accomplish these functions. as the org chart determines executives’ authority and. place in the heirarchy.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1.2. business community as “org charts. human resources and job design. more generally. Staffing. Definition 2. Side Note 2. layout design. 2. 1. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society. process design. 7]. • They are often sources of conflict among management. . 3. Organizing.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. 2.2. pp. Controlling. scheduling. inventory.S. Planning. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions. WHAT OPERATIONS MANAGERS DO 25 4.2. 6–7]. and maintenance. supply-chain management. particularly when job titles are not clear. Side Note 2.1. and 4. 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.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1.

and human resource planning. and inventory requirements. • Mutual trust between buyers and suppliers is crucial. 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. 6. • Discuss Active. Poor location decisions may overwhelm other efficiencies. quality. • Personnel costs are a significant part of most production or service processes. 7.com’s location decisions and Matt McAdams a posteriori assessment of the choices. . innovation. 5.26 CHAPTER 2. 4. Inventory. 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. OPERATIONS AND PRODUCTIVITY 2. 3. 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. capacity needs. technology decisions. and maintenance and determine much of the cost of a product or service. 8. material requirements planning. 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. delivery. personnel use. 9. production scheduling. Layout design – How should we arrange the facility? How large must the facility be to meet our plan? • Involves materials flows. Process and capacity design – What process and what capacity will these products require? • Process decisions commit management to specific technologies. and price. personnel levels. Location – Where should we put the facility? • Location decisions are crucial. 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.

If demand rises above the historical average planning duration demand.wikipedia. . This saves warehouse space and costs. – Providing proper work methods and tools. that tell production processes to make the next part. WHAT OPERATIONS MANAGERS DO 27 10. Maintenance – Who is responsible for maintenance? When do we do maintenance? • Maintenance is one aspect of decision-making that is often overlooked and can contribute significantly to costs. – Providing the proper training. such as the presence or absence of a part on a shelf. New stock is ordered when stock reaches the re-order level. the firm could deplete inventory and cause customer service issues. which relied upon standardization and quality control. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level.2.org/wiki/Just In Time %28business%29. and efficiency. quality. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock.2. Definition 2.3 “Significant Events in Operations Management” [1. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester.1 Side Note 2. or Kanban. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. Kanban are usually simple visual signals. 2007. p. However. p. He also believed that management is responsible for – Matching employees to the right job. and 1 Source: http://en. The process is driven by a series of signals. one drawback of the JIT system is that the re-order level is determined by historical demand. 8]. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. • Frederick W. When implemented correctly. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1. February 14. • Eli Whitney (1800) is credited for popularizing interchangeable parts.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.2.2. 9].2 (A Little History) Review Heizer figure 1. • Reliability and stability of systems depends on well-planned maintenance schedules.

1 (Services) Those economic activities that typically produce an intangible product. • Insurance. average wages are below average2 in the U. In the U. Definition 2. services account for over 70% of U. 11]. the economy transitioned from agriculture to manufacturing around 1900.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. Manufacturing was dominant until about 1950 or so. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished.2.5 [1. • In most western economies. • Transportation.S. • Food and lodging. shelter. and other essentials for its citizens.3.3 (Information Sciences) The systematic processing of data to yield information.28 CHAPTER 2.S.S. for others professional occupations. services become increasingly important. such as the legal profession or computer services in the financial industry. • In some service industries. such as retail. 2 The average national private industry wage. economic output. The U. However. • Trade.. • Government.3. Bureau of Labor Statistics defines services to include [1. . major contributions have come from the field of information sciences.S. p.1 (Development of the Service Economy) Present Heizer figure 1.. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. 2. 9] • Repair and maintenance. Today. Definition 2. • Recently. Side Note 2. the services sector is by far the largest employer. p. the wages are considerably above average.

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

operations managers are increasingly responsible for innovations that move ideas.5. Operations managers are being challenged to produce biodegradable. . • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. • Supply-chain partnering – Shorter product life cycles as well as rapid changes in materials require more participation by suppliers and long-term relationship building by operations managers. or management). 2. Trends that Heizer and Render identify [1.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity.2. wherever and whenever needed.2. the next step in product development involves customizing products according to the customer’s preferences.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. p. operations managers are responding by moving decision making to the individual employee. OPERATIONS AND PRODUCTIVITY 2. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. reusable. parts. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. • Mass customization – With increases in technical capabilities and customerlevel information management. • 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. brought about in part by the internet. capital. or recyclable products or to minimize packaging and other wasteful production steps. it will continue to strongly impact the field. Globalization has been having a dramatic impact on operations management and in the future. 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.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor.30 CHAPTER 2. Definition 2. and finished goods rapidly. • Empowered employees – With the rise of services and knowledge products.

25 titles per labor-hour = 0. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.5. Consider today’s computers versus those from the 1970s.5.5. 15]. Also known as total factor productivity. p. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.5.0077 titles per labor-hour = 0. In order to improve productivity.4 (Total Factor Productivity) See definition 2.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs).5.2.4375 titles per labor-hour = 0. Definition 2. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant.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.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Side Note 2.3. THE PRODUCTIVITY CHALLENGE 31 Definition 2. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. Definition 2.5. but overhead is no $800/day. .5. Side Note 2.

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

Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. Basic education appropraite for an effective labor force..” In the U. Side Note 2. “About Half of 17-Year-Olds in the U. and 4. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. draw the rectangle on the blackboard. such as transportation and sanitation. What is the area of a 4 × 6 meter rectangle. maintaining and enhancing the skills of labor.S. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. and • Healthier workers as well as • A shorter work week.2. In developed nations. Social overhead that makes labor available. THE PRODUCTIVITY CHALLENGE • Better-nourished. Which of the following is true about 84% of 100? 4 When presenting this question. 16]. Diet of the labor force.S. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. and 33 3. 2. there is considerable concern over teaching of basic skills such as mathematics to grade school children.5. p. Cannot Correctly Answer Questions of This Type.5. . The primary variables for improving labor productivity include 1. and math.8 [1.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. writing.) Present Heizer figure 1.S.3 (The State of Education in the U.

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

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

OPERATIONS AND PRODUCTIVITY .36 CHAPTER 2.

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

FedEx. competitively superior. FedEx is committed to our People-Service-Profit philosophy. an understanding of cultural differences in preferences is needed to best meet customer needs. • Provide additional insights and opportunities. positive control of each package will be maintained utilizing real time electronic tracking and tracing . Provide Better Goods and Services – For companies doing business in an international setting.1 (Mission Statements for Three Organizations) Review Heizer figure 2. time-certain delivery. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. Missions state the rationale for an organization’s existence. Equally important. and • Increase sales.1. 3.1 Developing Missions and Strategies A mission allows managers to tell employees where the company is going whereas a strategy tells them how to get there. global organizations can attract and retain better employees.38CHAPTER 3. Side Note 3. 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. France. 28] which includes mission statements for three multinational companies: 1. 5.1. global air-ground transportation of high-priority goods and documents that require rapid. 3. 6. Attract and Retain Global Talent – By offering more employment opportunities.2 [1. We will produce outstanding financial returns by providing totally reliable. I recommend that all companies draft a mission statement. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product.1.1 (Mission) The purpose or rationale for an organization’s existence. 4. Definition 3. • Perfumers tend to concentrate in Grasse. p.1 Mission Whether large or small.

distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. nationally & internationally. Our mission consists of 3 interrelated parts: • Product Mission – To make.. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. Other companies. 3. We will be helpful. 39 Side Note 3.1. The Hard Rock Caf´. contributing member of our community and offering the Hard Rock family a fun. • 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. 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. such as Whole Foods. a grocery chain. healthy. 2.S. DEVELOPING MISSIONS AND STRATEGIES systems.1. • 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. We are committed to being an important. e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. and nurturing work environment while ensuring our long-term success. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. Merck. courteous. We will strive to have a completely satisfied customer at the end of each transaction.3. natural ingredients and promoting business practices that respect the Earth and the Environment. and professional to each other and the public. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) . A complete record of each shipment and delivery will be presented with our request for payment. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees.

Side Note 3. be it • Product features. and Major Departments in an Operations Function. . Cost leadership – Providing cheaper products.3 (Sample Mission Statements) Present Heizer’s figure 2. Differentiation Producers can try to compete based on providing a product or service that is unique in some way.” Note that mission statements are used not only at the company-wide level. Responsiveness – By providing timelier. • Availability of complementary products. more responsive products or services. Differentiation can arise from anything that the customer may value about a product or a services. Differentiation – They make their product better.2 (Strategy) How an organization expects to achieve its missions and goals. • Training.1.com/our company/our mission/index. 3. 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. the Operations Function.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. but can be used at the department level and even at the project level. • The “look and feel” of the product.3 (Competitive Advantage) In operations management. the creation of a unique advantage over competitors. • Interoperability with other products.cfm for more detail. See http://www.1.1. 3.40CHAPTER 3.1. Definition 3.3: “Sample Missions for a Company. Definition 3.benjerry. 2. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.

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.

Provide competitive advantage. those activities or factors that are key to achieving competitive advantage.3. in particular. determining internal strengths and weaknesses and external opportunities and threats.3.44CHAPTER 3. These critical success factors are used to develop a competitive advantage. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. then determine whether the organization does these things well (and. then • Form a Strategy. Increase productivity. Group the necessary activities into an organizational structure.3. Side Note 3. “Strategy Development Process. and 3. Implement an OM strategy.3. 2. Definition 3. • Determine Corporate Mission. p. and 3. and Threats) analysis to develop strategies. Identify a strategy and critical success factors. 3.” The process of developing a strategy involves the following steps: • Environmental Analysis. 2.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. if the firm has a competitive advantage in these things) and where failures are most likely. Weakness.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. Staff the organization with personnel that will get the job done. . Definition 3.2 (Critical Success Factors) In operations management.6 [1. 37]. The purpose of this process is to 1. The operations manager’s job is a three-step process: 1. Opportunities.1 (SWOT Analysis) In operations management.1 (Strategy Development Process) Present Heizer figure 2.

a graphical link of competitive advantage.3.1 as a checklist to determine critical success factors. 3.5 and HR.1. Once CSFs are determined. and supporting activities.3.3.3 Integrate OM With Other Activities In order to achieve its strategy.4.6 3.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting.2.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2. Recall the “org charts” in sidenote 2. finance.3 (Activity Map) In operations management. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors. CSFs. • Red arrows – critical success factors • Blue arrows – support activities 3. an activity map can be used to link an organization’s competitive advantage to the CSFs. 39]. Southwest Airlines has a competitive advantage in providing low-cost airfares. . MIS.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. OM activities are most productive when they are integrated with other activities such as marketing.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1. Definition 3. Side Note 3.3.3. p. 5 Management 6 Human Information Systems Resources.3.2 as examples of how firms organize their activities. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.

a strategy that uses exports and licenses to penetrate the global arena. 42] Definition 3. franchises. Also one of the least profitable due to transport costs and little local responsiveness.4. Global strategy – Not characterized by local responsiveness. Although e it is legally Swiss. Definition 3. .4.4. 95% of its assets and 98% of its sales are made outside Switzerland. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. but a good strategy for cost reduction when products do not need to be adapted locally. with beer on the menu in Germany.4. 2.4.6. Definition 3. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities.4 (Multidomestic Strategy) In operations management. p. Typically characterized by subsidiaries. Its menu reflects the country in which it operates. Definition 3. • Texas Instruments is an example of a country with a global strategy. 4. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness.4. See definition 3.3 (International Strategy) In operations management. [1. and hamburgers without beef in India.4. International strategy – Often the easiest strategy.3.1 (International Business) A firm that engages in cross-border transactions. wine in France. as exports require little change in operations and licenses often leave risk with the licensee. • Nestl´ is an example of a country with a transnational strategy.46CHAPTER 3.5 (Global Strategy) In operations management. See definition 3. products do not need to be localized.4.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business.4. In the semiconductor industry. See definition 3. Usually does not confer a cost advantage.5. See definition 3. 3. Definition 3. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. or joint ventures with substantial independence.4. owning or controlling facilities in more than one country. • McDonald’s is an example of a country with a multidomestic strategy. 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. Only 10% of its work force is Swiss.

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 .S.4.3. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. Side Note 3. Note that many companies that are well-known American brands are now making more money overseas than they do in the U. p.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.4..4.6 (Transnational Strategy) In operations management. 6].

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

2. Project management involves three phases: 1.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. 49 .3 (Project Planning. money. Side Note 4. The profile highlights the importance of project management in achieving competitive advantage. and team organization. and Controlling) Present Heizer figure 3. Even Microsoft.1 [1. defining the project. Scheduling. Planning – Goal setting. and budgets.0.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. 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. and supplies are tasked to specific activities and activities are related to each other. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. Side Note 4.Chapter 4 Project Management Side Note 4. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. Scheduling – People. p. costs. quality. 46–47]. Controlling – Monitoring of resources. pp. 3. 49]. the largest software company in the world. Plans are also revised to meet changes in time and cost demands.0.0.

1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. Project organizations work best when [1. Definition 4. project managers are highly visible in a firm and have significant responsibilities. 69].1. The project is temporary but critical to the organization.1. and you will be forced to improvise.1 Project Planning While many projects are run within an existing organization. Your job is to make things go smoothly and according to plan. 4. often times. The work contains complex interrelated tasks requiring specialized skills. and/or 5.” [1.0. Side Note 4. if things go wrong. Work can be defined with a specific goal and deadline. The job is unique or somewhat unfamiliar to the existing organization.0. People will not come through with what they promised. you should always expect the unexpected.50 CHAPTER 4. PROJECT MANAGEMENT However. You may be managing resources far in excess of your individual salary. you are doing your job well if noone notices the project management.1 The Project Manager As alluded to in sidenote 4. you will be confronted with a daunting task.5 (Personal Advice on Project Management) Project management is a tricky profession. The project cuts across organizational lines. p. See also Heizer sidenote “Project Management and Software Development. 4. a temporary project organization is formed to address a specific project. However. 3. 48] 1. In a sense. Moreover.5. If you become a project manager on projects of significant complexity. it is also an area in which there will continue to be high demand for qualified people. 4. it is very obvious and can be very costly. The responsibilities of project managers are to make sure that . 2. p. things you thought were certain turn out not to be.

Approve graphic design for user account input web page 4. a task that should only take a day or so.2 The Work Breakdown Structure One of the first tasks involved in project management is to figure out how to divide the project into parts with a work breakdown structure (WBS). and 4. dividing a project into more and more detailed components. Definition 4. When dividing a project into tasks. Approve software architecture for user account input web page functionality . The project meets its quality goals. Complete graphic design for user account input web page 2. PROJECT PLANNING 1. 2.1 (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. In a project that includes allowing a user to enter personal information on a web page.1. 51 4. Review graphic design for user account input web page 3. Complete software architecture for user account input web page functionality 5.1. Review software architecture for user account input web page functionality 6. 3. • Build the user account input web page is a much better task division than 1. The project is on or under budget. a web page takes about a day to build for an experienced team. Side Note 4. you have divided the tasks too finely. For example. People receive motivation and information necessary to do their jobs. All projects come in on time.1. in a software engineering project.2 (Work Breakdown Structure (WBS)) In operations management.1. 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.4.

Project 2. of course. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP.2 (Work Breakdown Structure) Present Heizer figure 3. Scheduling serves to 1.52 CHAPTER 4. Major tasks in the project 3. 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. p. Subtasks in major tasks 4. Write software for user account input web page functionality 8. PROJECT MANAGEMENT 7.2. At the time you are creating the work breakdown structure.3 (Reality Check: WBS) In reality. Show the relationship between each activity to others and to the whole project 2. 4. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. Side Note 4.1. The actual WBS for Windows XP would. Identify precedence relationships among activities 3. Activities (also known as “work packages”) to be completed Side Note 4. They will be useful for project scheduling. fill hundreds if not thousands of pages.3 [1.1. you should also take note of time and cost estimates given by your technical staff. Encourage realistic time and cost estimates for each activity . the work breakdown structure is not something you go to your office to do in isolation. Write software for user account input confirmation page functionality 9. which we will discuss next in section 4.2 Project Scheduling After dividing activities into a work breakdown structure (WBS).

1 (Gantt Charts) Planning charts used to schedule resources and allocate time. Perhaps they imagine that they are not doing their jobs professionally if they are not.2 (Using Gantt. – said of roads.” This will give the class an idea of the look and feel of a typical Gantt chart. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. The order of performance is accounted for.2. and 4. the road bottlenecks. Definition 4. these should be considered merely tools to be used when they are useful by saving time or energy. Activity time estimates are recorded.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. p. and CPM tools for every project management activity. Side Note 4. Gantt charts are perhaps the most widely used tool for ensuring that 1. PERT. as.2. 3. PERT and CPM help answer questions such as • When will the entire project be completed? .2. All activities are planned for. which becomes narrower as one approaches the neck of the bottle. PERT and other formal documents. PERT.4 [1. Overall project time is developed.2. It can actually be quite time consuming to create and maintain Gantt charts. Derives from the typical shape of a bottle. 2. PROJECT SCHEDULING 53 4. MS Project’s Gantt chart functions demand you assign employees. and material resources by identifying critical bottlenecks in the project Side Note 4.4. moeny. Make better use of people. Definition 4. cost estimates. and other values to each activity. and CPM) Inexperienced project managers often feel the need to use Gantt. For smaller projects. I have found that simple spreadsheets or even just writing things down on a notepad (I typically use a separate notepad for each project to keep organized) is more productive than using Gantt . 51].1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3.2. However. right by the bridge.

3. 7. Functional cost and hour summaries.54 CHAPTER 4. 2.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. Raw material and expenditure forecasts.3. PERT and CPM. quality. what is the best way to accomplish this goal at the least cost? 4. behind schedule. 4. Definition 4.1 PERT and CPM Two methods. is the project on schedule. Control programs typically produce reports detailing 1. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. Time analysis reports. Cost breakdowns for each task. Work status reports.3. 6. 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. Variance reports. less than. 4. were developed in the 1950s for project control. costs.3 Project Controlling Project control involves monitoring resources. 5. Cost distribution tables. and budgets of projects. is the money spent equal to. Total program labor curves. 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. . or ahead of schedule? • On any given date. and 8.

2. and ontrol the project.3. Use the network to help plan. Activity on Arrow (AOA). Draw the network connecting all of the activities. p. Side Note 4. in my experience. Activity on Node (AON) and 2. Moreover. or the critical path. See also definition 4. .3. PROJECT CONTROLLING 55 Definition 4. it will do for you automatically much of what we will go through manually in this class. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. 2. Side Note 4. Definition 4. schedule.4. 53]. 5.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. As the names describe. Assign time and/or cost estimates to each activity. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts.3 (Critical Path) The computed longest time path through a network.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. 6. Also. Personally. 4. See also definition 4. Compute the longest time path. through the network. Develop the relationships among activities. Gantt charts are the “go to” visualization method for even very complex projects. monitor. They both follow six steps: 1. Define the project and prepare the WBS. 3.3.3. AON associates the activity with the node whereas AOA associates the activity with the arrow.3.2 Network Diagrams There are two approaches to visualizing activity networks: 1.3.2 (Example: AON and AOA) Present Heizer’s figure 3.5 [1. 4.3.

3. We do this with a critical path analysis with involves a 2-step procedure.56 CHAPTER 4.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. 2. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. that is. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed.6–3.8 [1.9 [1. p. LF = min{LS of all immediate following activities}. 4. .1 (Critical Path Analysis) In project management. that is. In other words. its LF equals its LS of the activity that immediately follows it. their dependencies. PROJECT MANAGEMENT Side Note 4. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. that is. 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.1 gives sufficient information to describe the network.4. 54–55]. – If an activity is an immediate predecessor to more than one activity.4 Determining the Project Schedule Once we have identified all of our activities. 1.3. its ES is the maximum of all EF values of its predecessors. analysis used to determine the project schedule. See also definition 4. pp. EF = ES + Activity time. we must use time estimates of each activity to determine the overall schedule for the project. Definition 4. 56]. • Table 3. ES = max{EF of all immediate predecessors}. – If an activity has multiple immediate predecessors. its LF is the minimum of all LS values of all activities that immediately follow it. Follow with example 3 and figure 3. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity.3. LS = LF − Activity time.

or the amount of time an activity can be delayed without delaying the entire project.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.3.2 (Forward Pass) In project management scheduling.5. and • Includes only critical activities (see sidenote 4.4.5.3 (Free Slack) In project scheduling.3 [1. Definition 4. we may delay the project as a whole. Slack time is just Slack = LS − ES or Slack = LF − EF .13 [1.1. the time shared among more than one activity.1). activity F in sidenote 4.3 and Heizer figure 3. the time associated with a single activity.4.2 (Total Slack) In project scheduling. . Definition 4.” Then complete Heizer example 7 figure 3. C. 2 For example.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity.1 When several noncritical activities appear successively in a path. 4.10 [1. p. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.4. 61] based on table 3.1. the step that identifies all the earliest times that activities can be completed.5. the time devoted to one of these activities must also be reduced. Definition 4. it is said to have free slack. Side Note 4. p. the free time for an activity. “Notation Used in Nodes for Forward and Backward Pass. These are called critical activities.5. If an activity2 does not impact the slack time of any other activity. we cannot complete the project in 15 weeks.4. Note also that if we delay each activity by the amount of slack that activity has. E. • Terminates at the last. 60].4. in the example in sidenote 4. The critical path is one that • Begins at the first activity in the project. and H have no slack time and cannot be delayed without delaying the entire project. G. p. if we delay activities B and D by one week each. they share total slack. Note that activities A.4.1 (Slack Time) In project scheduling. 1 For example. Also notable is that if the total time of the project needs to be reduced. 57].

and the other uses β = β − 1 and α = α − 1 . unexpected complexities. the most probable activity completion time that could be obtained in a PERT network.6. three time estimates are used: 1.1 and 4. Definition 4. In PERT.1 and 4. Definition 4. Definition 4.3 (Most Likely Time) In project scheduling.2 (Pessimistic Time) In project scheduling. we do not.6. See also definitions 4. the “best” activity completion time that could be obtained in a PERT network.6.. etc.6. The beta distribution is used as a prior distribution for binomial proportions in .3. The usual definition calls these alpha and beta. Effectively.6.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. In reality.6. technical considerations that were unknown at the time the project schedule was drawn up. which are labeled according to one of two notational conventions. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. See also definitions 4. Beta distributions have two free parameters.1 (Optimistic Time) In project scheduling. the time required to complete an activity is often uncertain due to supply problems.6.2 and 4.6.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time. the project manager pulls the number “out of the air” based on their experience managing related activities. in most cases. Side Note 4. the “worst” activity completion time that could be obtained in a PERT network. Definition 4.6.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. Most likely time – The most realistic estimate of the time required to complete an activity. See also definitions 4.2. However.6.3.6.58 CHAPTER 4. PROJECT MANAGEMENT 4. Optimistic time – The shortest amount of time an activity will take 1% of the time 2.

and pessimistic times of 1.6.wolfram.6.78 weeks.4. most likely. The variance of the activity time is Variance = [(b − a)/6]2 . q) = (4. and pessimistic times of 1.wolfram.1 Probability of Project Completion If we assume that 1.78 6 6 36 7 4 weeks. 2. Side Note 4. 62]. 4 See definition 4. 4. Activity times are statistically independent 3 Source: http://mathworld. February 21.1]. 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. 8 1.html http://mathworld. and 9 weeks.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. most likely. and 7. p.6. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. β) Γ(α)Γ(β) P (x) = (4.25 to 3.com/BetaDistribution.00. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6.00 week. 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. The expected activity time for activity F is 3 weeks5 and the variance is 1.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. Total project completion times follow a normal probability distribution and 2. and . 2007. 63] for activity F based on optimistic.4.3 The domain is [0.html.1) where B(p. p.β) with α = 1 and β ranging from 0.6. 4. The above plots are for various values of (α.com/BetaFunction.

commonly also N written σ 2 . p. 64].7% of the time.5. See also 4. Side Note 4.6.6.16.6.6. pp. 65] and figure 3. 9 For 10 See more information.60 CHAPTER 4. A2– A3] “Normal Curve Areas.10 Determining Project Completion Time for a Given Confidence Interval A common question is. see http://mathworld. See definition 4. Definition 4. Side Note 4. the population variance var(X).6. “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 4.76 weeks implies that the project will exceed the expected completion time by more than 1. Note that the standard deviation of 1.6 (Standard Deviation) The standard deviation is the square root of the variance. 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) (4.1. definition 4.com/StandardDeviation.6.html. p.6.3 (Example: Project Variance) Review Heizer example 9 [1.” Review Heizer example 10 [1. is defined as σ 2 ≡ i=1 P (xi )(xi − µ)2 for a discrete distribution with 2 N possible values of xi and σ ≡ P (x)(x − µ)2 dx for a continuous distribution.wolfram.4 (Using the Normal Table) Pass out Heizer Appendix I [1.76 weeks approximately 16% of the time. and within 3 standard deviations approximately 99.6.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.3) Definition 4. two standard deviations approximately 95% of the time. .5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.6.6.

1 (Crashing) In project management. crash time is the shortest duration of an activity.4) 11 Since crashing a project often involves adding additional resources to activities.7. See definition 4. Since activity completion times are typically shortened by adding resources. in fact.7.11 Definition 4. it may result in the project being delayed. you will doubtless experience one or both of these eventualities many times in your career. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. . Step 1 – Compute the crash cost per week.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. 4. we need to ensure • The amount by which an activity is crashed is.4.1.3 (Crash Cost) In project management. When crashing a project. if certain activities off the critical path take the pessimistic time estimate or more to complete.2 (Crash Time) In project management. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. Definition 4.7.7. Definition 4. and if you become a project manager.7. • The shortened durations will actually enable us to finish the project on time. and • The total cost of crashing is as small as possible.7. Crashing a project involves a four step process: 1. Project crashing is the name given to the process of rushing a project to completion. Assuming linear costs. permissible and realistic. crash cost is the cost required to complete an activity in the shortest time possible. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. See definition 4. we want to do so in the least cost mannger possible.1. the crash cost is typically higher than the normal cost.

At times this may be politically infeasible. you should be very wary of such pressure.2 (Example: Crashing a Project) Present Heizer example 12 [1. • Advantages – Especially useful for large projects .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. pp. 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. Side Note 4. Step 3 – If there is only one critical path. If you accept the challenge and try to rush the project to please upper management. stop. go to step 2. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic.62 CHAPTER 4. Step 2 – Find the critical path(s) in the project network. If there is more than one critical path. Crash this activity by one period. PROJECT MANAGEMENT 2. 4. As a project manager.7. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates.18–3.19. Note that one activity may be on several critical paths. 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. If the due date has been reached. 4. If you find yourself needing to rush a project. Side Note 4. Step 4 – Update all activity times. 3.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. Then crash each activity by one period. 67–69] including table 3. the advice given in this section should be helpful. If not.5 and figures 3.7.

Note that most project management textbooks refer to MS Project as the software of choice for project management. 4.gnome. Starkweather about his impression of various alternatives. Information on Planner can be found at http://live. It is perhaps the most widely known and featureful project management software available. it is relatively expensive and the features are so numerous and complex. Information on dotProject can be found at http://www. However. 70–74] with figures demonstrating MS Project functionality. including open source software that is free.net. Noncritical paths should be closely monitored as well.4.to mediumsized projects. Information on Achievo can be found at http://www. 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.org/wiki/List of project management software for a list of project management software or ask Dr.1. 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.achievo.wikipedia.9.1–3.org/Planner. independent.dotproject. 12 Recall sidenote 4. .9 Using Microsoft Project for Managing Projects Present programs 3.7. pp. You may also refer to http://en. There are a variety of alternatives.7 [1. they are often overkill for small.org.

PROJECT MANAGEMENT .64 CHAPTER 4.

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

long-term forecasts concerned with the rates of technological progress. 5. Maturity. See also definitions 5. and • Demand forecasts.2 and 5. 3. and Research and development. • Technological forecasts. See also definitions 5. Product life cycles tend to follow four stages: 1. Generally deals with more comprehensive issues than short-range forecasts.2 (Economic Forecasts) In operations management. Definition 5. Cash budgeting. housing starts.3 (Technological Forecasts) In operations management. These concern rates of technological progress.1. Definition 5.1. longer forecasts are needed. and other economic indicators. . These may include inflation rates.1.to long-range forecasts. Useful for – – – – Planning for new products. Decline.1. CHAPTER 5.3 and 5. and 4. Facility locations or expansion. Production planning and budgeting.66 – – – – Sales forecasting.4. planning indicators valuable in helping organizations prepare medium. In the first two stages. which impacts purchases of new plant and equipment as well as development of new products. and Analyzing various operating plans. Growth. 2.1 Types of Forecasts Organizations typically use • Economic forecasts.1. Capital expenditures. FORECASTING • Long-range forecasts – Generally more than 3 years. Introduction.1. money supply.4.1.

Capacity – Underestimating demand can result in • Undependable delivery. Validate and implement the results. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5.1. these drive a company’s production.2. • Training. 3. 4. and • Layoffs. Make the forecast. Determine the time horizon of the forecast. • Loss of customers. Determine the use of the forecast. 2. .1. Human resources – Anticipated demand is needed to estimate the need for • Hiring.3. 6. Select the items to be forecasted.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1.1.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1.5. Select the forecasting models. 7.2 and 5. 5. and scheduling decisions and serve as inputs to financial. and personnel planning. capacity. and • Loss of market share. See also definitions 5.4 (Demand Forecasts) In operations management. marketing. 5. Gather the data needed to make the forecast. Also called sales forecasts.1. 3. projections of a company’s sales for each time period in the planning horizon. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. 2. 5.

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

· The simplest and easiest way to estimate demand. the more likely it is your results will be accurate. · Staff personnel. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. ∗ Moving averages · Simple.3. · See definition 5. say.9. ∗ However. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. – Sales force composite ∗ You would be surprised how accurate your sales force can be. . Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. the naive approach. useful method if we can assume that market demands will stay fairly steady over time. 2. · Requires less past data than moving averages.5. they may want you to think that they will be doing more business with you in the future to obtain price concessions today. they will do so. or other incentives to over or understate demand. · Useful as a starting point or sanity check for more sophisticated methods. and if they perceive there is an incentive to exaggerate. · There are three problems with moving averages 1. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. and · Respondents. · See definition 5. Moving averages require more past data to work with than. Sales people typically respond to incentives. ∗ The more independent your decision makers are from economic. 3. for example. be sure that the sales force is clear that their incentive is to be as accurate as possible. political. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages.3. Moving averages cannot pick out trends very well.8.3.

3.3. See also definitions 5.3.3. See also definitions 5. and value system.5. See also definition 5. and 5.3.2. 5.1.3 (Jury of Executive Opinion) In operations management.3.4. 5.3. · See definition 5. . Definition 5. and 5. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.6 (Consumer Market Survey) In operations management.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.6.3. See also definitions 5.3. See also definition 5.3.70 CHAPTER 5.3.5. Definition 5.3.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.5. emotions.3.5 (Sales Force Composite) In operations management.3. and 5.10. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.4.3.3. and 5.3.3.3.3.4 (Delphi Method) In operations management.3. 5. Definition 5. See also definitions 5. personal experiences.3. Definition 5.3.1 Qualitative Forecasting Methods Definition 5.4. 5.6. a forecasting technique using a group process that allows experts to make forecasts. 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. a forecasting technique based on salespersons estimates of expected sales.6. 5.3.

8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.5. Mathematically.3. That is. 5. Higher values give more weight to recent data.8.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function. a simple moving average is given by demand in previous n periods Moving average = (5.3.7.3.3. α.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.3. See also definition 5.3. • Simple Moving Average – Mathematically. Definition 5.3) The smoothing constant.3. Definition 5. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.9. FORECASTING APPROACHES 71 5.2 Quantitative Forecasting Methods Definition 5.2) See also definition 5.7.10. Moving averages can be either simple or weighted.05 to 0.3.1) n • Weighted Moving Average – Mathematically.3.3. and are appropriate to use when the underlying average .11.3. Definition 5. and 5. 5. See also definitions 5. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. 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 (5.5.3. generally ranges from 0.

Mean absolute percent error (MAPE).3.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.12.7.15.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5. See also definition 5.13.3.3. 2. Definition 5. 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. When α = 1.3 Measuring Forecast Error Once a forecast is made.3.3. Three popular measures are 1. .8. while lower values give more weight to past data.3.0. 3. 1 See |actual − forecast| n (5.3.3.12). it is good practice to compare the estimated value with the actual value as actual values become available. and are appropriate to use when the underlying average is relatively stable. exponential smoothing is equivalent to naive forecasting. such as the mean absolute deviation (see definition 5.13). 5. and 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. Mean squared error (MSE).3.3.7. 5. FORECASTING is likely to change.4) definition 5.14.3.3.11 (Trend Projections) A time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts. Definition 5.72 CHAPTER 5. See also definition 5. Mean absolute deviation (MAD).

FORECASTING APPROACHES 73 Definition 5.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5. MSE is given by MSE = See also definition 5.3.12.8) With smoothing constants α for the average and β for the trend.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.3.11) . Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.7) or F ITt = Ft + Tt (5. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend. Mathematically. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.3.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends. Mathematically.3. expressed as a percent of actual values.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.3.3.5. 100 n i=1 (forecast errors)2 n (5. MAPE is given by MAPE = See also definition 5.5) |actuali − forecasti |/actuali n (5. Definition 5.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.3.6) 5.12.

14) .13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5.74 or CHAPTER 5. 1. It is also commonly called linear regression analysis. 2.10. 3. F ITt . Ordinary Least Squares Regression analysis is also useful for predicting trends. Calculate the forecast including trend. time) (5.12. Tt with equation 5. by the formula F ITt = Ft + Tt .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. Compute Ft . y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case. the emponentially smoothed forecast for period t using equation 5. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. Compute the smoothed trend. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables.

It cannot be used to predict too many periods into the future as the further into the future the prediction is made. to account for seasonal changes in demand in our forecasting. 5.3.3. In the U. the multiplicative seasonal model. ¯ x The least squares method has several drawbacks.S. demand is seasonal. during the summer months when it is common to take a vacation.5. 5. 2. Most businesses experience a surge in sales around Christmas. We do that with a 5-step process. Estimate next year’s total annual demand. Recall that the equation 5. The first step is to calculate the seasonal forecast. 2. Deviations around the least squares line are assumed to be random. the more uncertain it is.5 Seasonal Variations in Data In most businesses.. 3. 3. 4. 1. we will examine one model. Find the average historical demand for each season. 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. Compute a seasonal index for each season by dividing the historical demand by average demand. This provides the seasonal forecast. 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¯. such as cars and washing machines. then multiply it by the seasonal index for that month. . consumers often make fewer purchases of durable goods.3. 1. Although there are many methods to accomodate seasonal demand. Compute the average demand over all months. Definition 5.

3.76 CHAPTER 5.. However. 106– 107]. It is also called the standard deviation of the regression and. 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.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5.g.. if you are uncertain about predictions of x.3. mathematically.x = (5. is given by (y − yc )2 n−2 Sy.g.x = (5. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.17) .3.16 is y2 − a y − b n−2 xy Sy. but x will be something other than time.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. FORECASTING 5.. average local salary) (5. sales) = y-axis intercept = the slope of the regression line = the independent variable (e.1 (Example: Using OLS) Present Heizer example 12 [1. pp. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.g.4. If there are published estimates you can cite (e. We will use the same technique. whatever uncertainties you may have transfer to your predicition of y.15) Side Note 5. Note that making predictions of future demand involves also making predictions about the independent variable x.

3. FORECASTING APPROACHES 77 Side Note 5. Historically. the U. the note in the margin accompanying Heizer example 14 [1.1594488. “Four Values of the Correlation Coefficient. stock markets. a football game played between two football conferences in the U.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. 109].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.S.4 . changes in skirt lengths don’t cause stock market prices to rise and vice versa.S.18.S. which is divided into two “conferences.3 and the U.com/time/business/article/0. Since 1935. The correlation coefficient of variables x and y is given by r= See also definition 5.9 [1.5. Side Note 5. Other interesting correlations that have been identified over the years include banana prices and U.3.10 [1.S. Correlation Coefficients for Regression Lines Definition 5. but the relationship is coincidental.” Side Note 5.html?xid=sitecnn-partner. Even the Year of the Pig correlates strongly with the U.” Note that the regression assumes a standard normal distribution about the estimate. February 28.3. 4 Source: http://www.3. 108].time.3 (Examples of Correlation Coefficients) Present Heizer figure 4. It does not imply causation one way or the other. p. is monopolized by the NFL. Dow Jones Industrial Average and Standard and Poor 500.S. nor does it imply that they will continue to be related.S. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1.4 (Causation vs.” the AFL (American Football Conference) and the NFC (National Football Conference). 2007. has risen. leading stock indexes. the average length of a woman’s skirt and stock market prices in the U.2 (Distribution About the Point Estimate) Present Heizer figure 4.3. 107]. Certainly. stock market prices as well as the winner of the Super Bowl.3.8599. Definition 5.00. stock market. football in the U. Correlation) Correlation merely means that the values of two variables are historically related.3. or National Football League. have been correlated.S. in all but one Year of the Pig.2 with stock prices generally rising as skirts rise.18) . p. pp. “Distribution about the Point Estimate of $600 Million Payroll.

.17. b1 . often the most difficult part of building a multiple regression model is to pick the independent variables. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. 5 See definition 5. we discussed a means by which we can attempt to predict the value of one variable using the value of another. b2 .78 CHAPTER 5. . 110].) It measures the percent of variation in the dependent variable (y) explained by the regression equation. in a multiple regression analysis involves a complex formula which is beyond the scope of this class. . . . “What was the R squared of your regression?” Multiple Regression Analysis In section 5.” For example.18 and Heizer example 15 [1. (See definition 5. Side Note 5.3.g. .19 (Multiple Regression) A causal forecasting method with more than one independent variable. etc. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. p. . results in additional predictive accuracy as measured by r2 . b 2 . Adding additional independent variables as predictors. p.19) Determining the values of a.5 Definition 5. . FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient.6. = the dependent variable (e. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .3. The same technique can be applied to use several independent variables to predict the value of a dependent variable.3.3.15 is given by y = a + b1 x1 + b2 x2 + .” As the sidebar points out. 110].3. The multiple regression equivalent of equation 5. It is commonly simply called “R squared. x2 . In practice. b1 . if they are indeed related to the dependent variable.. you would use statistics software to calculate these values. .

4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.11 [1. 111].2.9% of the time. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts. MONITORING AND CONTROLLING FORECASTS 79 5.1 (A Plot of Tracking Signals) Review Heizer figure 4. and within 4 M ADs about 99.4. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual . one of the most common problems with forecasting is a lack of follow-up. These limits are typically based on M ADs. This means that the observed value should be within 2 M ADs abut 89% of the time. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).6 standard deviations. though large errors may be a problem as well even if the positive and negative errors balance.5. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.6. and 4 M ADs to 3. which correspond roughly to standard deviations.20) A good tracking signal has about as much positive as negative error. .forecast| n where M AD = (5. three M ADs about 98% of the time. Definition 5.6 One M AD is equivalent to 0.4 standard deviations. the forecasting methodology needs to be modified. In other words.4. two M ADs to 1.6. Side Note 5. 6 Recall definition 4. If the tracking signals violate upper or lower limits. Definition 5.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values.8 standard deviations.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. three M ADs to 2. The tracking signals should also be compared as they are generated against limits.1. Tracking signals are typically used monitor forecasts.2 standard deviations.4. p.4.

114]. Definition 5. Note that even with computer monitoring. “Summary of Forecasting Formulas. α in definition 5.g..4. Side Note 5.4.4. Definition 5. changes need to be check with human eyeballs to ensure that the adjustments make sense. However.10) is automatically changed to keep errors to a minimum. Sophisticated forecasting models are not always better than simple ones. p. you must make your own decision as to how you select the forecasting models that you use. there has been much criticism of the approach to using models based on thier fit to the data. you should be aware of the criticism of focus forecasting. 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 (Summary of Forecasting Forumlas) Distribute Heizer table 4.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants.4. In your career.4.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application.4. FORECASTING 5. 5.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings.2 [1. which selects a model based on goodness-of-fit to a data set. There is no single technique that should be used for all products or services.2 Focus Forecasting Focus forecasting. Side Note 5.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. is based on two principles: 1.” .80 CHAPTER 5.3. 2.

• Market share and dynamics. For example.128] • Investment and cash flow. the word “product” will refer to both goods and services. Referring to services as products is common in the service industry. is a service. Definition 6. 124. and • The organization’s capabilities.5 (Product Decision) The selection.1 . pp.1 Side Note 6. as products.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.2.0. pp. and design of products. insurance companies often refer to their policies. • Product life cycle. 1 In this chapter. They also use just-in-time production techniques. which will be discussed in detail later in the semester. which. 122–123]. 2 Recall sidenote 2. definition.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. time permitting. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. 81 . as an intangible. Product strategy2 defines the breadth of the product line and links product decisions to [1.0.

1 Product Life Cycles Product life cycles can be divided into four phases: 1..g. • Growth phase – Effective capacity forecasting is necessary. • Maturity phase – Competitors have entered or are entering the market. • Introductory phase – In the introductory phase.82 CHAPTER 6. • Decline phase – Investment needs to be minimized and resources need to be redeployed. months (e. products expenses are often high for – Research and development. often ruthlessly.2 Life Cycle and Strategy Strategies change as products move through their life cycle. or even decades.g. years (e. Product strategy involves determining the best strategy for each product based on its position in the life cycle..1. DESIGN OF GOODS AND SERVICES 6. and innovative production is appropriate. – Process modification and enhancement. 3. and – Supplier development.g. low-cost. clothing fashions). restaurants or nightclubs). 6. Introduction. YouTube videos). so high volume. . Growth.. 2.1.1 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. Maturity. and 4. Decline. Life cycles can be in the days or weeks (e.

6. GENERATING NEW PRODUCTS 83 6.2.4 Side Note 6.000 yuan. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. the development of cellular telephone technology or the internet. example. 4 For 3 For .1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. it must regularly redesign existing products or bring new products to market.3 Product-by-Value Analysis For firms with many products. as well as the total annual dollar contribution of the product.3 • Political and legal change can also bring about business opportunities.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. • Sociological and demographic change is also tied to product demand. 6.500 or 100.1.2. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. Definition 6. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. such as consumer incomes. and if a company is to survive. example. 6. Ideas are not reviewed until after the brainstorming session. are tied to product demand. Definition 6. • Technological change often drives product innovation.2.2 Generating New Products Most products have a limited life cycle.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. • Economic factors. 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.1.1 (Example: Brainstorming) Lead the class in a brainstorming session.2.

Definition 6. p.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. Determines what will satisfy the customer and 2. 6.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants. The house of quality is a graphic technique for defining the relationship between customer desires and a product.3 [1.3.3.3 6.1 (Product Development Stages) Present Heizer figure 5. the product life cycle. Each stage should have an accompanying review to determine whether to progress or not.2. Side Note 6. 128]. DuPont estimates that it takes 250 ideas to yield one marketable product [1. p. 6.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.84 CHAPTER 6. DESIGN OF GOODS AND SERVICES For example. 128].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.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. Side Note 6.3. . Many successful companies rely on sales from products introduced within the past five years. Translates customer desires into a product design.2 [1. 129].3. p. and the organization’s capabilities. Definition 6. market dynamics. 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.

2.2 (Example: House of Quality) Present Heizer example 1 [1.2.qfdcapture.3. Building the house of quality involves six steps: 1. 10 The right-hand columns of the house in sidenote 6.3 Organizing for Product Development In the West.g.3.2. Identify relationships between the firm’s hows..9 6. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6.. a research & development. 130].3.3. 2. 7 In other words.3. as was the software described in section 4.3.” 6 For example. 3. Product development is done by teams.7 4. See http://www. Note that it is not free or open source. and production departments. 6.8 5.3. identify the rows of the house in sidenote 6. In other words.10 Side Note 6. Evaluate competing products. manufacturing engineering. 8 These are given on the roof of the house in sidenote 6. An organization is divided into departments. 2. with product features. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.3. • More common in large. e. bureaucratic companies and organizations. PRODUCT DEVELOPMENT 85 Side Note 6. • Fixed duties exist. • Effective communication and coordination between separate departments can be problematic. Identify customer wants. create the columns of the house in sidenote 6. .2.com for more information. Relate customer wants to product hows. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams.2. 1. p. Identify how the good or service satisfies customer wants. design engineering.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. • Perhaps the most popular approach in the U. Develop importance ratings.9.3.6 3. which can be an advantage.6. there are three popular methods by which organizations undertake product development.S.

6. manufacturing. engineering. production. Side Note 6. Definition 6.. Definition 6. design. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used.11 In Japan. etc. and use. development. purchasing. 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. The goals of manufacturability and value engineering are 11 See definition 6. . My experience may not be indicative of management practices in general in the U.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. However.3.3. but my personal impression is that formal QFD practices are not widespread in practice. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. maintainability. will often advocate for continuation of their project past the point that it is profitable for the company.3.3.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.4 (Concurrent Engineering) In project development. Side Note 6.3. Some teams even include representatives from vendors. engineering.4.. and field service personnel.3. and production stages of product development.1) was implicitly included in the product specification phase of operations management at the companies I have worked for.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U.S. use of participating teams in design and engineering activities.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. These teams often include representatives from marketing.86 CHAPTER 6. Definition 6.3.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design.3.S. because their fate is tied to a product. production. it can also be problematic because teams. quality assurance.. organizations are less structured and typically not divided into research and development.

Standardization of components. 87 . 6. 4. Reduced complexity of the product. Cost reduction. Improvement of functional aspects of the product. Improved maintainability (serviceability) of the product.3. Improved job design and job safety. Robust design. PRODUCT DEVELOPMENT 1. 2. 3. and 7. 5.6.

DESIGN OF GOODS AND SERVICES .88 CHAPTER 6.

Part II Entrepreneurship 89 .

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then another. As a Chinese philosopher once said. difficult undertaking. If you start a small business. . ultimately. but the humor in the statement lay in the fact that there is some truth to it. fear of failure and other insecurities dissuade most people from ever starting a business. then taking another step. However. See also sidenote 7.7 (Confidence vs.0. Realism) Most people perceive those who start businesses as risk-takers. The best way to overcome that fear is to address any concerns or uncertainties by preparing as much as possible before “taking the plunge.” At its core. “None of the other CEOs respect you until you’ve driven a couple of businesses into the ground. Side Note 7. that is. must begin with a single step. studies have found that most successful entrepreneurs are actually unrealistically confident 91 .0. Most businesses fail within the first 18 months. who has started two businesses and been CEO of three startups once told me. While it is important to be realistic about risks when starting a business. .Chapter 7 Introduction to Entrepreneurship Although starting a business is usually a complex.” However. you should be confident. but also realistic. you will have to decide that you have done as much as you can do and simply take action. “Every journey .0. doing it is simple.6 (Business Failures) A friend and former colleague. Side Note 7. people who can tolerate a high degree of risk.” He was joking.7. starting a business simply involves taking the first step. In fact. taking that first step can be extremely daunting. Matt McAdams.

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

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

We didn’t. depending on the complexity of the push.” there were so many engineers sleeping at the office at Active.com that at one point the landlord threatened to evict us since the lease specified that we were being leased a business rather than residential space The demands of a startup also had a dramatic impact on the marriages of Active. and – Accomplishments that require expertise or special knowledge. the first thing you should do is look in the mirror. e e Include – Skills. 7.com management and the family life of the CEO of Absolute Performance.com than average in the population at large. INTRODUCTION TO ENTREPRENEURSHIP • Many all-nighters. 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. • Create a Personal R´sum´ – List your personal and professional experiences. – The CEO of Absolute Performance once told a customer that the company’s product could parse XML files. might last four to six hours. – Are you friendly and self-motivated? – Are you a hard worker? – Do you have common sense? . – At Active. • During one “crunch time.94 CHAPTER 7.2 Are You Ready? If you are thinking about starting your own business. There were far more divorces that occured among management at Active. The “code push” would often start at midnight and. interests. and experience match the kind of talents your business would require? • Analyze Your Personal Attributes – As yourself about yourself. This kind of event was not uncommon at Absolute Performance. for example. Try to realistically evaluate your own strengths and weaknesses. Do your skills. – Educational background. – Hobbies. we had to update the web site late at night when our customers were not using it in case something went wrong.com.

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

pp. 18–20]. • 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. 20. 21]. Have the class write down their answers and evaluate their own EQ.3. Many people want to start their own business for ego gratification. Acknowledge this fact and factor it into your decisionmaking.96 CHAPTER 7. – Hours of work.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. – Geographic location. The reasons given for adding or subtracting points are as interesting as the ultimate score. . such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. pp.3. 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. Eliminate question 1 and substract one point from the scoring given on p. and – Investment of personal assets. Side Note 7.

began1 when someone got annoyed by late charges from local video rental stores. he would be able to provide a better product than competitors who provided only software.0. 1 Explain the business concept behind Netflix. I used Netflix when I lived in Chicago. so they started a restaurant delivery business. • Active. but scratching an itch.com’s league business began with Matt. Personal time was in short supply so the convenience they provided was well worth the price. Side Note 8. but over time became the primary thrust of the business.Chapter 8 Finding an Idea The good ideas are the simple ideas. Netflix. They answer the question.D. “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. 97 . Good restaurants did not deliver and the amount of time the average American worker had for lunch was getting shorter and shorter. but has been very successful because it addressed a local need. It was neither original or complicated. a Ph. an online DVD rental business. I also used a grocery delivery service. They do not involve engineering the next great wonder of the world. California. who enjoyed handicapping sports and felt that putting tools online for sports enthusiasts to use would build a profitable online community.4 (Ideas for Businesses Friends Have Started) Discuss some of the ideas that friends have used to start businesses. physicist. Online registration for sporting events was only a part of his original game plan. • 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 require business relationships that the entrepreneur does not have. However. • The business would involve too much risk.. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online. The tube could be made unobtrusive enough that it would not need to be removed for work. It sounds silly. however.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4. • A nose piercing that consists of a small. hollow tube. 28–29]. etc. • They require expertise that the entrepreneur does not have. • They require more financing than the entrepreneur has access to. business ideas come at a rapid rate. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. Side Note 8. but it is a major complaint for female rock climbers.0. I continue to generate business ideas as a matter of habit. • 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.. most ideas are not feasible because • They would not be profitable enough. people have to remove nose piercings for work or social occasions. pp. • Etc. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. Those with nose piercings would not need to remove the piercing and risk it closing. often one or more a day.0. • The ideas are easily copied and would be quickly appropriated by more able competitors.98 CHAPTER 8. . FINDING AN IDEA • Trackvia arose because Matt felt that small businesses had the need to manage data but did not have the resources to develop expertise in database management.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. Often times. Side Note 8.

used as the title of at least 12 movies and television shows.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated.com/find?s=all&q=never+say+die. However. 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. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. His sales are now in the millions of dollars per year and the business is very profitable. p. making just enough to get by but not much more. You should be realistic about risks.1.imdb. the business took off. He ran the business as a one-man operation for years. you should have “thick skin. 2007. computer-controlled security cameras. you will be spending years of your life trying to make the idea work.2 is. or health. 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. you should not let it dissuade you.8. to be truly self-motivated and persistent in the way you need to succeed. Side Note 8. Have students come up with examples of products that meet various criteria on the checklist. Side Note 8. it is too risky.1. 35]. YOU’VE GOT AN IDEA.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. . in the wake of 9/11.” Side Note 8. 2 http://www. thinking that if he did not succeed after a couple of years. Warnings about risk are perhaps the criticism you should consider most carefully. People thought he was going nowhere and generally dimissed his business. 33]. Entrepreneurs are often told their idea is flawed. he would never succeed. Have students fill out the form on their own time. that they will never make it. home. A well-known phrase in English. p. After all. while you should listen to criticism that others give.” That is. Now What? The number one trait needed by successful entrepreneurs is perseverance. 8. February 17.1 You’ve Got an Idea. “Never say die. such as your family.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4.1. Finally. or are otherwise discouraged. And you should not risk anything you can’t afford to lose.1.

100 CHAPTER 8. FINDING AN IDEA .

go through the following 7 steps: 1.0.0. Definition 9. but you should try to target your market as specifically as possible. 101 . When trying to identify your niche market.” or business-to-consumer ventures.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. your next step is to do some market research. 9. See also 9. There are two broad categories of markets: 1.2 (B2C) Businesses whose customers are primarily consumers are called “B2C.0. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. Consumers and 2. Businesses.2.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B.” or business-to-business ventures.0. Not only do you need to decide whether you are marketing to businesses or consumers.Chapter 9 Defining Your Market After coming up with your idea. See also 9. Definition 9.1.

5. “Selling maternity clothes to executive women” is much better than “selling clothes.. That is. 6.” [4. give a seminar. (c) It’s carefully planned. • A friend in Chicago. etc. Describe the customer’s worldview – Talk to prospective customers and identify their main concerns. Synthesize – Coalesce your ideas. (e) It evolves. Falkenstein. • Don’t spend alot of money. then asked them about customer reactions. It should confirm to your long-term vision. 75] 4. p.102 CHAPTER 9. She started by making a few samples and giving them to friends with dogs. . there is not already alot of competition. By someone else. Test – Offer samples. Then she approached a few local pet stores and arranged for them to offer her products for sale at a low price. DEFINING YOUR MARKET • The types of businesses and consumers you want to target in terms of age. I mean customers. Donna. decided to start a business selling unique winter clothes for dogs. the longer it will be until you make your first profit.” To focus your search for a niche. But do test your product before you go ahead full speed. If it does not sufficiently meet the criteria. After all. (b) Somebody else wants it. (d) It’s one-of-a-kind. discard the idea and move on to the next one.000 per year. it allows you to branch off into other niches as the business grows. • If your initial test does not go well.” 2. author of Nichecraft: Using Your Specialness to Focu coined what she calls the Platinum Rule: “Do unto others as they would do unto themselves. Focus – Be specific. That is. • The rule “do unto others as you would have them do unto you” is often called the Golden Rule. 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. • 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. you need to stop and seriously reevaluate your plan. A good niche has five qualities (a) It takes you where you want to go. and other important demographics. Lynda C. Evaluation – Evaluate your niche against the criteria in step 4. earnings.

2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life.S..1. FINDING YOUR NICHE 103 7. in the U. Korean. . It is better to do just one thing well than to do many things poorly. and the narrower your focus on your target. and cohort marketing. This can be offensive and serve to alienate rather than appeal to your customer. economic.1. young adults in the Depression. If you did your homework. many are choosing to start families later in life or even have children ten years or more apart. the more likely you are to score a hit. Definition 9. many Eastern companies make the mistake of lumping together American and European customers. This marketing technique has been widely used since the early 1980s in the U.2. 9. you should be able to enter your niche market with confidence.1 (Generational Marketing) Marketing to consumers based on age as well as social.1.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups.1.) Using these new marketing techniques can allow you to narrow your market. Side Note 9. Go for it! – Implement your idea. Side Note 9... etc. For example. such as having children. and 9.1 (Smaller is Bigger) When starting a business.1. and other Asian customers together. Chinese.” That is.1. buying a home. for example.S. Definition 9. many entrepreneurs make the mistake of being “all over the map. they try to satisfy all possible customers and end up trying to do too many things well. but their behavior differs significantly due to the different influences in their youth. Marketing to demographic groups has become much more refined in the last few decades. Likewise. or retiring. the Depression-era cohort. you should practice extra caution to avoid stereotypes or other insensitive approaches.1. the World War II cohort.1.9. when many people were suffering from extreme poverty. are similar in age to those who came of age in World War II. New marketing techniques include generational. (See definitions 9. and psychological factors. As older people are more active than before. demographic. Someone who is starting a family at age 20 has much in common with someone starting a family at age 35 even though their ages may be quite different. Definition 9.1. when the country was immersed in a war effort. Many Western companies make the mistake of lumping together Japanese.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years.3. life stage.1.

create a mission statement. 28] which includes mission statements for three multinational companies: 1 See section 9. DEFINING YOUR MARKET 9.104 CHAPTER 9. you should. Falkenstein1 advises that you regularly reevaluate your niche. a few sentences at most. • 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. p. “Creating a niche is the difference between being in business and not being in business.3. Every six months or so. . 79] 9. p. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally. Falkenstein states. Side Note 9.3 The Mission Statement Once you have a niche.2 Redefining and Expanding Your Niche Lynda C.2 [1.” [4.1 (Mission Statements for Three Organizations) Review Heizer figure 2. • Convey the essence of your business’s goals and philosophies. The mission statement should • Be succinct.

competitively superior.3. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. contributing member of our community and offering the Hard Rock family a fun. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. Equally important. We are committed to being an important. time-certain delivery. Our mission consists of 3 interrelated parts: • Product Mission – To make. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. . • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. and professional to each other and the public. We will produce outstanding financial returns by providing totally reliable. healthy. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. global air-ground transportation of high-priority goods and documents that require rapid.3. FedEx FedEx is committed to our People-Service-Profit philosophy. 3. We will be helpful. natural ingredients and promoting business practices that respect the Earth and the Environment. A complete record of each shipment and delivery will be presented with our request for payment. and nurturing work environment while ensuring our long-term success. THE MISSION STATEMENT 1. 2.9. The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. We will strive to have a completely satisfied customer at the end of each transaction. 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. 105 Side Note 9. courteous.

106 CHAPTER 9. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. • What kind of relationship will you maintain with suppliers? – Remember that when you succeed. a grocery chain. challenges.S. See http://www.. 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.cfm for more detail. • How do you differ from competitors? – Why would your customers prefer your product to a competitor’s? • How will you use technology.1. . Other companies. processes. products and services to reach your goals? • What philosophies or values guided the responses to the previous questions? 2 Recall section 9. so do your partners.com/our company/our mission/index. capital.benjerry. nationally & internationally. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. and recognizes outstanding employees. such as Whole Foods. 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.

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

DEFINING YOUR MARKET .108 CHAPTER 9.

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

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.

6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.2. .10. 102–103] The questionnaire supposes that someone is going to open an interior decoration business. RESEARCH METHODS 113 Side Note 10. pp.” [4.2.

114 CHAPTER 10. MARKET RESEARCH .

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

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

including debt or equity financing required. or spendthrift.11. but should not be too lavish. 6. p. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. p. . 2 Do not underestimate the importance of this step.2 5. 1. 4.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person. you will not even get your foot in the door and be invited to present your plan to investors.1. If you cannot impress the financier with these three steps. 2. thorough and careful. They will want to see something that reflects that you are neat. Read the latest balance sheet. 3. Note that less than a minute on average is devoted to each step. Kuratko suggests the following [3. Determine the characteristics of the venture and its industry. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. Read the plan over casually. not ostentatious. Determine the quality of the entrepreneurs. bear in mind that once the plan is advanced to the next stage of financing. other financing professionals may spend more time analyzing the details of the plan.1. i. 11. 301]: • Appearance – It should look good.”1 Many venture capitalists use the following six step process to evaluate a business plan [3. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. the trash can. but not too good..e. 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. Determine the financial structure of the plan. pretentious. – Binding and printing should not be sloppy. 300]. Establish the unique details of this venture. While the initial read-through might be only a five-minute perusal.

address. • The Executive Summary – Two or three pages immediately following the title page. 6. though you should not put it in the same corner as page numbers appear.1. 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. and full contact information4 for the company. The venture’s objectives in 3 to 5 years. 3 Note that for this class.3 Some Style Points Kuratko also recommends that you [3. – 40 pages is ideal. The benefits to customers. 2. they will not read it. a number should be in a corner5 indicating the copy number. If you write to much. . 4 Phone number. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. – On the title page. – It is worth repeating: Keep it down to at most two or three pages. The company’s current status. 3. and How investors will benefit. – It should explain 1.118 CHAPTER 11. 5. the date of the plan. You should use this to keep track of who has which copy. The financial forecasts. – Inside the front cover should be a title page repeating the cover information. THE BUSINESS PLAN – It should be no more than 50 pages. e-mail address. 5 I suggest the lower-right corner. 4. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. 7. p.3 • The Cover and Title Page – The cover should have the name of the company. Its products or services. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. and/or web site. 11. The amount of financing needed.

trademarks. use “he.” “they.g. 305]. Your credibility is established in part by the credibility of your plan. 11. • Orient the Plant Toward the Future – Create an air of excitement.1 (10 Sections of a Business Plan) Present Kuratko Table 10.” or “us. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed.2 The Plan Contents Side Note 11.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems.2 [3. • Avoid Exaggeration – Your sales and revenue estimates should be well researched. Some details on each section of the business plan: 1. Business Description – Name the business. 2. copyrights. • Identify the Target Market – Market research should support a focused customer niche.11. but it is the first thing that your audience will read.. be sure to include them in the business description.2. • If there are patents. is it based on a family name? Does it include technical terms you need to identify? . • Do Not Overdiversify – Don’t try to be all things to all people. Include any pictures or designs that would be helpful. Present a focused plan.” Instead.2. Use the spell checker on your word processor to check for spelling mistakes.” or “them. or other special market advantages you have.6 Note any industry developments and describe the business thoroughly.” “we. which describes the 10 sections of a typical business plan. so be sure the writing is finely crafted. p. 6 E. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar. Executive Summary – This should be the last thing you write. • Keep the Plan Written in the Third Person – Do not use “I. The executive summary gives readers their first impression. and tell why it is named what it is.

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

Unexpected competitions.2.1 (Pro Forma) A latin term that means projected. . For example. Difficulty purchasing parts or materials. etc. Costs exceeding estimates. Signing up distributors and dealers. which investors will use to estimate debt/equity ratios. THE PLAN CONTENTS 121 (a) A pro forma balance sheet.11. 11. or more aware. working capital.. Appendix – If there are documents. What happens if the management team changes? What will happen to the company assets if ownership changes? 10. Product display at trade shows. (c) A cash-flow statement. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. Try to be honest and realistic. Critical-Risks Segment – Discuss business risks and the ways you might address them.2. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan.com) Discuss the growth of Active. of the risks than you are. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. current ratios. as opposed to actual. 8. Risks might include • • • • • Negative industry trends. (b) An income statement. Your investors are probably as aware. Definition 11. Side Note 11. 9.2. Ordering production quantities of materials.2 (The Growth of Active. Design or research difficulties. detailing projected inflows and outflows. a balance sheet containing projected balances is called a pro forma balance sheet. inventory turnover. Receipt of first orders. Completion of design and development. detailing projected profits and losses. These might include • • • • • • • • • • Incorporation of the new venture. include an appendix.com. First sales and first deliveries. and Payment of first accounts receivable. Hiring of sales representatives. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. Completion of prototypes.

THE BUSINESS PLAN .122 CHAPTER 11.

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

Most graduates get between 5 and 15 interviews when they graduate. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. the lawyer joke.” 3 Color copies! . You don’t want to try to figure out other people’s equipment. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. is. I don’t think it was quite right until somewhere between the 8th and 10th time. • Bring paper copies3 of your presentation in case all else fails.1 (The Job Talk) Every Ph. 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. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. • Bring a backup thumb drive with your presentation on it. Adobe Reader. 2 This originally comes from an American classic. Bring at least twice as many as you expect there to be people in the room.2. Most Ph. 44] Side Note 12.124 CHAPTER 12. and even if you can figure it out.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.D. 12. PRESENTING THE PLAN times. p. they may have another version of PowerPoint. “His lips are moving. 12. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers.2. There will always be glitches. Post a copy of your presentation in a secure location on your homepage just in case.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. In retrospect. of course. • Test the equipment the day before. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving. and you don’t want something as silly as a burned-out light bulb to cost you an investor.D. • Bring your own laptop. “How can you tell when a lawyer is lying?” The answer.2. Lexecon. I had given it over a dozen times. By the time I gave my job talk to my eventual employer.”2 [2. Guy Kawasaki likes to tell a different version of an old joke.

you are not presenting it well. and each investor will respond differently. • Taking notes also makes you look conscientious. it is quite the opposite. 45]. 12.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation.2.3. Many people feel as if taking notes makes them look stupid.2. where some of the smartest people in the world worked. ask yourself after every statement you make. You should be prepared for the unexpected. Stop when it goes off. 12. Ask them what your company will do. It is easy for things to get lost in the heat of the moment. • Your audience may ask you several questions at once.12. 12. “So what?” If you cannot answer this question simply and easily. Give your presentation to friends or family. 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. Much of the material required use of the internet. They may ask you something that makes you want to change your presentation.5 Take Notes Have a pen and paper ready and take notes during the pitch. Everyone. so write things down to make sure you don’t forget. They may ask you something you want to respond to in an e-mail later.2. everyone brought a pen and paper. but in reality. If they cannot explain it clearly. you need to change or eliminate the statement. and although you go into each presentation . AFTER THE PRESENTATION 125 Side Note 12. At my company in Chicago. p. Guy Kawasaki recommends you set a timer [2. 12.2.3 After the Presentation Each presentation will be different. I always bring a pen and paper to meetings.6 So What? When you are planning your presentation. In general.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics.

PRESENTING THE PLAN with only success on your mind. 321]: “What to do when a venture capitalist turns you down: Ten questions.3. Each time your are rejected improves your future opportunities. you should also realize that most most comments will be negative and most presentations are rejected.126 CHAPTER 12.” . Side Note 12.1 (What to Do When You’re Turned Down) Present Kuratko table 10. Remember that persistence is the most important character trait of entrepreneurs. p. Each negative comment gives you an opportunity to change an investor’s opinion. Be prepared for rejection and do not consider it the end of the road.5 [3.

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.

4 (Delivery Cycle) In inventory management.3 (Count Cycle) In inventory management. the count cycle is the amount of time between counting inventory. 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.3.1 Inventory Turnover Typically. such as for volume discounts for preferred customers. To improve efficiency of inventory control.2 (Order Cycle) In inventory management.1 (Turnover) When you have replaced 100% of your original inventory. work with suppliers to improve delivery times and count inventory more often. • Updating product information – At the time a sale is entered. CHAPTER 13. the order cycle is the amount of time it takes to process paperwork and place orders.3. 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. Definition 13. you have “turned over” your inventory.3. and • Improve pricing accuracy.3. • Taxes – Be sure you can support the local tax system or multiple tax rates if you deal in more than one state or on the internet. Definition 13. .130 • Maintain a sales history. INVENTORY CONTROL When considering the purchase of a POS. • Security – To prevent theft. Definition 13. be sure it’s not easy to “hack” the system. the delivery cycle is the amount of time between placing an order and receiving it. Definition 13. For example. if you perform an inventory count four times a year.3. these systems should automatically update inventory and accounting records. 13. a high inventory turnover is a mark of a well-managed inventory system. your count cycle is 12 weeks.

1 Buying Inventory In the process of putting together your business plan.S. which may result in higher taxes. first out) assumes that you sell the most recently purchased inventory first. and 13. it values your remaining inventory based on the prices of the most recently purchased items.4. See definitions 13.1.4. and delivery cycle. Many businesses also measure turnover by measuring sales per square foot (or square meter). least this is true in the U.3. In deciding which to use. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. order cycle.S. Calculate your sales per square meter once per month.3 See also 13. If there is inflation. 2 At 3 At least this is true in the U. it values your remaining inventory based on the prices of the least recently purchased items.S. first out) assumes that you sell the least recently purchased inventory first.4.. 13.4.4. First Out)) FIFO (first in. .4. 13. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.5 (Needs Period) In inventory management. Definition 13.2 (FIFO (First In. INVENTORY ACCOUNTING 131 Definition 13.3. The author is unfamiliar with Chinese tax codes. but you should at least know about LIFO and FIFO. 13. the needs period is the sum of the count cycle.2 See also 13. LIFO and FIFO are two accounting methods used to do this. In the U. You should know how many sales per square meter per year you need to survive. Definition 13.4 Inventory Accounting Your accountant will typically handle inventory accounting.2.1 (LIFO (Last In.3. The author is unfamiliar with Chinese tax codes.2.3.4. If there is inflation. which allows you to pay less taxes on your inventory. First Out)) LIFO (last in. After you have been in business your inventory control system should give you a better idea of stocking levels. In other words. you must estimate your inventory value when you file your taxes.13.3. follow the recommendation of your accountant.

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. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . Distributors – Also known as wholesalers.” . Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. says. – The minimum may be higher for first orders to cover the cost of setting up a new account. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense.5. usually one.actual inventory . 13. Rieva Lesonsky. 13. courteous and firm with your suppliers.5 Suppliers Suppliers can be divided into four categories: 1.1 Dealing with Suppliers The most important thing about a supplier is reliability. “Be open.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. 3.132 CHAPTER 13. and they will respond in kind. Manufacturers – Note that some manufacturers refuse to fill small orders. Independent craftspeople 4.4. • Some suppliers demand a minimum number of items per order. Import sources – They operate like domestic wholesalers. Their prices are higher than a manufacturers. INVENTORY CONTROL Definition 13. brokers or jobbers. three or four months. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. author of Start Your Own Business. 2.

. and • Allowances before you make a decision. Be sure to add up • Costs. • Sometimes if an order is large enough. Side Note 13. Tips for dealing with suppliers: 1. If you are dealing with a reticent large supplier.o. SUPPLIERS 133 13. • For items being shipped. • Discounts.o. you should know who is liable for damage to goods in transit. and • The need to be firm but fair. You can also present your financial statements and prospects for success. it is considered a felony. customers may be required to pay upon receipt of goods.S.13. Suppliers sometimes try to complicate pricing to their advantage.5.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. If a supplier does not extend credit.1 (COD (or c. If a supplier is uncertain about you.5. they will put you on a c. Whatever you do.d. basis until you have proven yourself reliable. Definition 13. 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.5. I regularly had to deal with food vendors. 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. Discuss • Their negotiating technique when discussing pricing. the supplier will pay for freight. Ask about the freight policy before ordering.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. do not falsify or misrepresent your financial statements. 2.d. personal interaction can work wonders.)) Cash on delivery..5. At least in the U.

FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer.html.o. This differs from a forward order where stock is available but delivery is postponed for other reasons.o.o.5. 5. Definition 13. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point. people often say something like “f. 2007. Under this arrangement. http://www.epoi.2. INVENTORY CONTROL • Depending on whether the supplier pays frieght. See also definition 13.3. 2007. Specify a cancellation date on your order forms. May 19.com/jargon.7 4 Source: 5 Source: http://www.5.html. 6 Source: http://www.abcsmallbiz.4 Colloquially.3 (FOB Destination (or f. Definition 13. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. Seattle” to indicate that an item being shipped from Seattle is free on board.b.roadway.2 (FOB (or f. 7 Source: http://en.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. The FOB term requires the seller to clear the goods for export.org/wiki/Backorder.)) Free on board.com/shippers/glossary. May 19.5.134 CHAPTER 13.com/reference/glossary/glossary efg. May 19. As opposed to FOB. . Definition 13.html.wikipedia.b. May 19. 5 FOB Destination changes the location where title and risk pass. it may be worthwhile to cancel backorders and bundle them with a subsequent orders.5. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. 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. Be aware of your supplier’s priorities. 2007. 2007. 3.b.6 See also definition 13. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. Destination)) Free on board destination.5.

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

you’ll be grateful to have spent the time to go through a more formal process. .2 Job Description Side Note 14. Side Note 14. Not only education and skills. HIRING EMPLOYEES 14.1 Job Analysis Before creating a job description. If you call someone a Vice President but don’t compensate them as such. • You may not leave enough buffer above the employee.1.1. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed. • How the job will be done.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. 14. However.136 CHAPTER 14. 14. lifting. Cleaning. creating a job description. then want to hire someone else later at a position above them in the company.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. and recruiting. an employee with an inflated job title may expect an inflated severance package. etc..1.1 How to Hire Hiring involves analyzing the job requirements. you have nothing to offer. 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. you will likely find that they will come to you at some point to demand a vice president’s salary. they will soon expect compensation commensurate with their job title. programming. selling. writing reports. you need to consider • The physical or mental tasks involved. • If you have do terminate the employee. but personality traits. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. If you give someone a job as Vice President.1. by the time you hire your 40th employee.

then they go on to a Director position at another company.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. . Side Note 14.1.1. you may find they are tempted to leverage that job title to seek employment elsewhere. • If you give someone an inflated job title but do not offer a salary commensurate with the title. p. You may actually be doing your employee a disservice by inflating their job title. 338]. and • Any occupational hazards. • The position of that employee in the corporate heirarchy. for example.1. • Benefits.1.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. you may find it difficult to give them a promotion later. If. Like a job description.1 (Job Description) Job descriptions should include • A job title. Part of retaining quality employees is the prospect of advancement. • Who the person reports to. • A salary range.1) and should include the personal requirements expected of an employee [4. HOW TO HIRE 137 • There is little room for advancement. • Specialized skills or knowledge. • Desired experience. • Physical or other special requirements associated with the job. Definition 14. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. Definition 14. 339]. It also includes • Any educational requirements. p. it includes • The job title. you hire someone as Director who is not qualified to be a director. and • Job summary with major and minor duties. and • A summary description of the position.1. If you hire someone at the highest level of their competency.14.

– For professional positions.1. .138 CHAPTER 14. For example.1. With e-mail. • Be sure to list appropriate contact information. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. Many American companies are no longer providing phone numbers.3 Advertising the Job When you write an advertisement. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number.” or people who may not have them will just try to fake those personality traits in the interview. • Do not ask for specific personality traits. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. – For other positions. It also makes it easy to receive and process a large number of applications with a minimum of effort.4 (Using an E-mail Address) For professional positions. due to the number of applicants for competitive positions. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application.1. 2 See sidenote 14.5. 14..S. • 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. particularly those that advertise on web sites. • Do not list requirements other than educational or experience-related ones. • List the top 4 or 5 skills that are most essential to the job. HIRING EMPLOYEES 14.2 Side Note 14.1. e-mail addresses have become perhaps the most popular way to get applicant information at U. if you are looking for an accountant.4 Finding People There are many possible sources of applicants.S. companies. such as “outgoing” or “detailoriented.

Searching on Monster. 2007 turned up more than 5. 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 conduct a second round of interviews with the remaining 3 candidates. but when looking at a resume. 3.1. If you are lucky.14. Screening People Reviewing resumes and applications is an art.” .000 hits searching just the “Information Technology” search category. not a science. 4. You hire the preferred candidate.monster.S.com with the keyword Java on May 19. 159 in “Financial Services.” And 921 in “Engineering. 3 Java is a programming language. • Industry Publications – Most trade publications take ads for job openings.com or http://www..3 Generally. for professional positions. particularly in the high-tech industry. In the U. about 10 or so..dice.S. You interview the candidates. You narrow down the 10 candidates to 3. • Online – In the U. the hiring process proceeds as follows: 1. For any job. • Focus on the skills that a person can bring to your company.com with the keyword “java” will demonstrate just how widely used online tools are. You narrow the number of resumes down to about 10. To “weed out” candidates. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. many positions are being filled online. 5.314 listings in the “Computers. you will get several candidates for any job you are offering. You check references. You can evaluate their personality during the interview. most professional associations’ job banks are now online. be sure that a candidate can provide what you are looking for. There were 4. Try to perform a search on a job sites such as http://www. Software” category.” 665 in “Internet/E-Commerce. 6. 2.

4 were not experienced enough.com. • On the other hand. we tossed those that had spelling or grammatical mistakes. She simply passed along resumes that contained certain keywords that we were looking for. Side Note 14.com. including when an applicant can work and the hours they can work. that is a very good sign that they are a survivor. Of those we looked at. phone number. From the hiring process at Active. I have some personal recommendations: • Always check references. did not match our requirements closely enough. and e-mail address. so many resumes came in that an administrative assistant was asked to perform the first screening. • Rely on your intuition.com) In the hiring process at Active. pp. address. listed expertise in too many subject areas. • Don’t necessarily discard resumes with some gaps.1. . this indicated to us that the applicant was not being truthful.6 (Hiring at Active. • Special skills. Due to this. Applications should ask for things such as • Name. Side Note 14. • Work experience – As for salary information when asking about work experience • Availability. 344–345]. HIRING EMPLOYEES – Do they change jobs too quickly? • Throw out applications if someone cannot provide enough references. That typically indicates that someone cannot supply enough positive references.1.5 (Job Application) Present Lesonsky’s sample job application [4. 4 It takes time to become an expert with any sufficiently compex technology.140 • Look for patterns in their career. and • References. If an applicant indicated they were an expert with too many technologies. if a person survives downsizing or other major changes at their former employers. CHAPTER 14. • Educational background. I learned that people lie on their resumes all the time. or were too experienced.

• Whether the applicant has every been treated for drug or alcohol addiction. in the U.. race. include • Whether the applicant has children. Ever. however. • Whether the applicant has every been arrested. 6 Employers can. color. Though laws undoubtedly differ in China. religion. They were the type of people who would write software all day. However. • Ask people questions about their resume during the interview.6 Questions that are not explicitly prohibited.. • Disabilities of any kind. Several of the engineers I hired did not finish their undergraduate degree. or national origin. 347] • Age or date of birth. • Marital status. • Whether the applicant has every been treated by a psychologist or psychiatrist. Get clarification on anything that you think may be suspect. employers may not ask about anything not related to the job.1.1. HOW TO HIRE 141 • Ask the person questions they would only know if they are competent in their field. p.5 Side Note 14. • Maiden name (for female applicants). then go home and play on computers in their spare time.7 (No-nos) In the U. creed. • How many days the applicant was sick in the previous year.” .S.S. such as through a “Green Card. 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. ask prospective employees whether they can submit proof that they have the legal right to work in the United States. • Sex. 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. 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. including [4. • Do not hire people who are discovered to be lying on their resume. but which can get employers in legal trouble. or • If a person is a citizen.

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

• Have you hired people before? If so. after you finish the interview. and general tidiness in their appearance. Most supervisors. take a few minutes to write down your impressions. but there references were poor. what did you look for? Things to watch out for include • A bad attitude regarding the candidate’s previous employer. give them time to ask you questions.com. • Whether the candidate can think on their feet. Lesonsky tells of one supervisor who was asked about .14.Q. gave a strong interview. the CTO liked to ask questions like you would find on an I.S. 143 • The candidate’s general demeanor. 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.Q. do not give bad references to avoid potential lawsuits. If the candidate is really interested in the position.9 (The I. • 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. such as their posture. with many companies like Google incorporating these kinds of questions into their standard interview process.. HOW TO HIRE • What interest you most about this company? This position? • Describe three situations where your work was criticized. test to see how employees solved problems. Finally.1.1. how many handshakes are there? Checking References One thing that far too few employers do is check references. I have interviewed people who looked great on paper.S.. Test) At Active. They were not hired. This has become popular recently in the U. Side Note 14. they will have questions about the company and the position. attentiveness. at least in the U. Be wary of answers that subtly indicate that there may have been a problem with the candidate. • Things the candidate seems reluctant to talk about. After your questions.

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

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

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